I think Mosler’s model of the current system is essentially accurate for the years of his investing lifetime/observations, albeit incomplete. I don’t think he appreciates why this is likely to be so. In my view, the primary reason why our government can print money with little adverse consequences is that the dollar is the world’s reserve currency – this is otherwise known as “The Exorbitant Privilege”. See this recent article for an explanation as to what this means practically:
http://www.mauldineconomics.com/editori ... e-us-brand
Money has essentially two conflicting functions – one being a medium of exchange and the other being a store of value. When you have the world’s reserve currency, your currency always has value because everybody needs it – that’s the privilege. Thus, you can focus on it only being a medium of exchange and pump as much of the stuff into the economy as you think you need to make it run properly.
Other currencies that are easily convertible like euros and yen get to piggy-back on the privilege so long as they don’t overdo it. But if your currency not easily convertible, printing more will give you hyper-inflation (like Zimbabwe). Or if you issue debt in someone else’s currency, you risk potential default where you and your children DO have to pay up – like Argentina. The IMF and World Bank essentially enforce this regime by limiting credit to dead-beat nations until they get their act together again.
Mosler acknowledges his ignorance when he frames things in terms of “his 60-year lifetime.” That’s not enough of a sample size! There are historical examples he could have discussed that are highly relevant, such as the experience of the U.S. with Greenbacks (our first successful fiat currency) during the 1860s - 1873 and the gold standard thereafter. In capsule, the US needed to finance the Civil War, but banks were only willing to lend at rates of 30+%. So it issued a fiat currency, the Greenback and allowed most taxes to be paid with them. Some were still payable in gold-backed currency, so the US effectively had a dual system. It was predicted that the currency would not be accepted and that there would be instant hyperinflation. These predictions were wrong. There was, however, significant inflation in the greenbacks over time as pegged against the gold standard. But it did not occur all at once or in a uniform manner. See
https://archive.org/details/sciencemoney00margoog at Chapter VII for an interesting discussion from someone who worked at Treasury at the time.
In 1873, the US went back to a hard money standard in February. This allowed better integration with the world reserve current, the pound, which was on the gold standard. A crash and depression followed from 1873-1879. Since hard money favors money “as a store of value” as opposed to fiat money’s “medium of exchange” preference, hard money usually results in deflationary pressures. If the economy grows and the money supply does not, over time the value of money will have to increase. He who had the gold to begin with rules. In the United Kingdom, the most mature economy and reserve currency-holder at the time, the depressive/slow growth period lasted for 20 years (we may be going back to this future now). The US saw more ups and downs in that period as a developing economy.
Ultimately, although there is a pretense to financial analysis and economic theories, these are political choices. This is why Bryan’s 1896 “Cross of Gold” speech remains famous to this day. Creditor classes and banks tend to favor hard money and resolving crises through defaulting or rescheduling debts. Debtors and people interested in “growth” or increasing employment tend to favor fiat currencies and soft money policies. Going too far in one direction usually ends up being a bad thing. Reinhart and Rogoff’s “This Time is Different” documents the various permutations that can occur depending on what policy is pursued and who wins and who loses in each scenario. Mosler made no attempt to look at actual historical data but only relied on his personal experience -- i.e., a sample of one.
Re Discussion Question 1, I think Mosler’s view is too simplistic. It is a big analytical mistake to treat government economic activity separate from the private sector -- its all one economy! In the case of the US it’s even more complicated, because we are not talking about just the US economy but the world dollar-based economy. Everyone who buys or sells with dollars is part of it.
While the causes of 2007/8 are many, Steve Keen’s debt-deflation theories, which grow out of the work of Irving Fisher and Hyman Minsky, are the best explanations I have seen. Essentially the amount of credit, mostly private but also public, grew much faster than the actual economy, leading to a credit bubble that popped and began contracting very quickly creating a high demand for dollars to repay debt. Since private sector credit continues to deflate, pouring public money into the system does not cause inflation. Here is a recent article by someone grown up enough to admit he and others who predicted inflation were just wrong because they did not see the whole picture:
http://azizonomics.com/2013/10/26/why-i ... inflation/ Ray Dalio’s recent video is also instructive:
http://www.youtube.com/watch?v=PHe0bXAIuk0 (Interesting to compare Mosler’s investment acumen with Dalio’s – I think it reflects a fundamental difference in the depth of thinking involved.)
Re Discussion Question 2, I didn’t believe any of them, but find that when these things are discussed, there is usually a set of assumptions being made that dictate the answers. The power of the Exorbitant Privilege is extreme. The only question is when might we lose it. Unlikely to happen any time soon, but likely to happen at some point. Moreover, even without it countries can and do default on their debts quite frequently. If I were advising Greece, I would tell them to do it and get it over with. Real economies tend to rise like phoenixes from the ashes once unpayable debts are cleared.
Some other specific notes on passages from the book:
“Creating money by issuing debt is a political choice that simply benefits a privileged class. The objective, indeed the responsibility, of money creation is to create all the money needed to operate the economy and to remove any money in excess of what is needed.” (Kindle Locations 206-208).
• I agree to the extent we are talking about money as a medium of exchange. In addition to the amount of money in the system, there is also a velocity of money to be accounted for. When the velocity is declining, the system needs more money in it to operate. HOW the money gets into the system is the political component. We currently shove it in through the banking system with mixed results and happy, wealthy bankers, but it could be shoved in just as easily through having the government buy stuff, reducing taxes or handing out cash like we saw in the early 2000s – I think everybody got $300 if I recall.
“The book advances a large number of economic proposals including making banks a public utility.”(Kindle Locations 214-215).
• I think this is a good idea – at least to the extent you are using banks to put money into the system --, but Mosler does not really explore it. The Glass-Steagal act essentially did this – when we got rid of it, we ended up with the too-big-to-fail problem and banks with conflicting purposes and bad incentives. Taleb has written a lot about this. Investment banks should be separate from the basic “utility” banking system that is there to facilitate exchanges.
“The government therefore cannot run out. Money is created by government spending (or by bank loans, which create deposits). Taxes serve to make us want that money - we need it in order to pay the taxes.” (Kindle Locations 247-248).
• This is essentially correct in a fiat system. This is also what defines money in a particular society in my view. Something you are required to have to fulfill your obligations to the community or state. If a state decided that tree bark was acceptable to pay taxes, tree bark would instantly have a high value and become money for that country/community. Note that money is also created privately whenever there is a loan made so the state does not have a monopoly on that as long as private banking is allowed and reserve requirements are loosey-goosey like they usually are.
“A government borrowing in its own currency need never default on its debts; paying them is simply a matter of adding the interest to the bank accounts of the bond holders. A government can only decide to default – an act of financial suicide – or (in the case of a government borrowing in a currency it doesn’t control) be forced to default by its bankers.” (Kindle Locations 251-254).
• Correct -- so long as you have the world's reserve currency or something easily convertible into it.
“As of the publication of this book, I am campaigning for the office of U.S. Senator from my home state of Connecticut, solely as a matter of conscience. I am running to promote my national agenda to restore American prosperity with the following three proposals.” (Kindle Locations 357-359).
• Funny, Peter Schiff, who argues the other side of this debate, ran for Senator in Connecticut, too. But I don’t think it was the same election cycle.
“To repeat: the funds to pay taxes, from inception, come from government spending (or lending). Where else can they come from?” (Kindle Locations 506-507).
• This is not necessarily true except in a fiat system. If the government simply declares something already in existence to be acceptable to pay taxes (gold, bark, shells, giant stones, bitcoins), that something becomes money in that country. And he who holds the most gold, bark, shells, giant stones or bitcoins rules. Money is also created through private lending to the extent allowed by law.
“Foreigners who hold U.S. dollars are particularly at risk. They earn those dollars from selling us real goods and services, yet they have no assurance that they will be able to buy real goods and services from us in the future. Prices could go up (inflation) and the U.S. government could legally impose all kinds of taxes on anything foreigners wish to buy from us, which reduces their spending power.” (Kindle Locations 738-741).
• However, the dollar could lose its reserve currency status if the US started in with too many shenanigans, provided there was some alternatives to go to. This is how the IMF punishes lesser countries.
“When we operate at less than our potential - at less than full employment - then we are depriving our children of the real goods and services we could be producing on their behalf. Likewise, when we cut back on our support of higher education, we are depriving our children of the knowledge they’ll need to be the very best they can be in their future. So also, when we cut back on basic research and space exploration, we are depriving our children of all the fruits of that labor that instead we are transferring to the unemployment lines.” (Kindle Locations 767-770).
• Blecch -- we can't buy everything all the time or just waste resources. And not all of these things end up being good investments in the future. There is a potential for abuse when we see everything spent on education, basic research and space exploration as a good investment.
“What happens if China says, “We don’t want to keep a checking account at the Fed anymore? Pay us in gold or some other means of exchange!” They simply do not have this option under our current “fiat currency” system6 as they would have known when they sold the uniforms to the U.S. Army and had the money put into their checking account at the Fed. If they want something other than dollars, they have to buy it from a willing seller, just like the rest of us do when we spend our dollars. Someday it will be our children changing numbers on what will be their spreadsheet, just as seamlessly as we did, and our parents did, though hopefully with a better understanding! But for now, the deadly innocent fraud of leaving the national debt to our children continues to drive policy, and keeps us from optimizing output and employment.” (Kindle Locations 833-840).
• This presupposes that we will never lose reserve currency status no matter what we do. Historically, this has not been a reasonable assumption, although I don’t currently see any change in that in the near future.
“Should our policy makers ever actually get a handle on how the monetary system functions, they would realize that the issue is social equity, and possibly inflation, but never government solvency. They would realize that if they want seniors to have more income at any time, it’s a simple matter of raising benefits, and that the real question is, what level of real resource consumption do we want to provide for our seniors? How much food do we want to allocate to them? How much housing? Clothing? Electricity? Gasoline? Medical services? These are the real issues, and yes, giving seniors more of those goods and services means less for us.” (Kindle Locations 1124-1128).
• This is a good point – but a separate point is whether we inject money at the level of people or through the banking system. You can see how this very political decision creates immediate winners. It would seem to me to be more fair if we spread the money around more. If we want to favor labor/employment, the author’s suggestion elsewhere of doing away with the payroll tax is a good one.
“I’ve heard it all, and it’s all total nonsense. We are benefiting IMMENSELY from the trade deficit. The rest of the world has been sending us hundreds of billions of dollars’ worth of real goods and services in excess of what we send to them. They get to produce and export, and we get to import and consume. Is this an unsustainable imbalance that we need to fix? Why would we want to end it? As long as they want to send us goods and services without demanding any goods and services in return, why should we not be able to take them?” (Kindle Locations 1167-1171).
• This is quite true when money is primarily used as a medium of exchange and not a store of value. Value question has to do with whether the dollars are more valuable than the goods and services consumed. When money is not a store of value, but only a medium of exchange, best to buy the stuff.
“I remember having ongoing discussions with Paul on what could be called the “theory of lending” and the “logic of banking.” The idea is that anyone can make loans so selectively that there will never be any losses. But the trick is to make loans where money might be lost, but where the odds were high enough so the interest the bank was making on the loans more than made up for the small amount of expected losses. My collections experience brought home the nuances of what made loans go bad. It also made very clear that even with very high lending standards regarding the borrower’s income, time on the job, home equity and past payment records, many other things could go wrong that could cause a borrower who looked like a very good risk at the outset to default. Job losses, illnesses, personal problems, car accidents and death all had some probability of taking place some percentage of the time . . .Yes, we could tighten standards and reduce losses, but we would make very few loans and not be profitable. If we were too lax with our standards, we would make a lot more loans but the losses would eat up the profits. The answer was somewhere in between. The right answer to running a profitable bank, in the lending arena at least, lays somewhere in the middle of the two extremes of having standards that are too high and standards that are too low.” (Kindle Locations 1325-1338).
• This has been my experience with Lending Club. You can't analyze away all uncertainty, and attempting to do so that will not result in maximizing gains. There is a happy medium.
“The “Free Lunch” possibility totally preoccupied me. The reward for turning this into a risk free spread was immense. So I started brainstorming the issue with my partners. We knew no nation had ever defaulted on its own currency when it was not legally convertible into gold or anything else. There was a time when nations issued securities that were convertible into gold. That era, however, ended for good in 1971 when President Nixon took us off the gold standard internationally (the same year I got my BA from U-Conn) and we entered the era of floating exchange rates and non-convertible currencies.” (Kindle Locations 1707-1712).
• This is the point that drives the analysis, but that the author doesn’t seem to fully appreciate is a temporal thing. We have the reserve currency. Without it, our results would be very different.
“Here was a Finance Minister who actually understood monetary operations and reserve accounting! (Note also that only recently has the U.S. Fed been allowed to pay interest on reserves as a tool for hitting their interest rate target) I said nothing, giving him more time to consider the question. A few seconds later he jumped up out of his seat proclaiming “Yes! And the International Monetary Fund is making us act pro cyclical!” My question had led to the realization that the IMF was making the Italian Government tighten policy due to a default risk that did not exist.” (Kindle Locations 1746-1751).
• The IMF wants money to have value, and not just be a means of exchange. That's why it has recommended and enforced austerity in the recent past. Smaller countries cannot borrow internationally if they do not tow the line.
“A Payroll Tax Holiday -- I recommend that an immediate “payroll tax holiday” be declared whereby the U.S. Treasury makes all FICA, Medicare and other federal payroll tax deductions for all employees and employers. This proposal will increase the take-home pay of a couple making a combined $ 100,000 per year by over $ 650 per month, restoring their ability to make their mortgage payments, meet their routine expenses, and even do a little shopping. People with money to spend will immediately lead to a pickup in business sales, which will quickly result in millions of new jobs to serve the increased demand for goods and services. And people able to make their mortgage and loan payments is exactly what the banking system needs most to quickly return to health, not government funding that can only keeps them limping along with loans that continue to default. The only difference between a good loan and a bad loan is whether or not the borrower can make his payment.” (Kindle Locations 1802-1809).
• I agree that this is preferable to quantitative easing, as it injects money at the level of working people and encourages more employment. I would do away with these taxes altogether and substitute a tax on consumption to the extent necessary later. Note that “where” to inject money is more of a philosophical/moral/political choice than an economic one.
“With the government already insuring bank deposits and making sure only solvent banks continue to function, the government is taking no additional risk by allowing the Federal Reserve to lend to its member banks on an unsecured basis. With the Federal Reserve lending unsecured to its member banks, liquidity would immediately be normalized and no longer be a factor contributing to the current financial crisis or any future financial crisis.” (Kindle Locations 1842-1845).
• This fails to recognize the abuses that are likely to occur if banks are unregulated. Creates too-big-to-fail issues, Taleb’s “agency” problems and encourages sociopathic behaviors by would-be-bankers.
“Since government securities function to support interest rates, and not to finance expenditure, they are not necessary for the operation of government. Therefore, I would instruct the Treasury to immediately cease issuing securities longer than 90 days. This will serve to lower long-term rates and support investment, including housing. Note, the Treasury issuing long term securities and the Fed subsequently buying them, as recently proposed, is functionally identical to the Treasury simply not issuing those securities in the first place.” (Kindle Locations 1918-1921).
• This kind of policy choice would likely hasten the demise of the dollar as the reserve currency, because long-term investors would go elsewhere and buy bonds from other governments.
“While this is something I’ve never seen in the U.S. in my 60-year lifetime, it is theoretically possible. But then again, this can only happen if the government doesn’t limit its spending by the prices it is willing to pay, and, instead, is willing to pay ever higher prices even as it’s spending drives up those prices, as would probably be the case.” (Kindle Locations 2014-2016).
• Mosler is displaying his ignorance here. He needs to have a much broader time frame and understand the history of U.S. Greenbacks and reserve currencies. It is not safe to assume that dollar can be reserve currency forever, especially if the controls are only political.
