Money and Unemployment

I'm not sure that the best counter narrative to “families need to tighten their belts” is that families take care of their own. Rather, I think the Fisherian “paradox of thrift” counter-narrative is more accurate: a collective shift from consuming (private credit-expansion) to saving (private debt-reduction) lowers the amount of economic activity, causing incomes to drop, and saving to increase further in a vicious deflationary circle unless countered by some offsetting stimulative force (public spending).

In my opinion, the prevalence of the mistaken government-as-household view is probably the result of a range of factors, including:

- the protestant saving/suffering ethic you mention,

-the difficulty of accepting that the logic of “fiscal discipline” that applies to individual currency users does not apply to the issuer themselves (i.e. why is it fair that I have to break my back to balance the budget when the government has a blank check?),

-the failure of conventional wisdom to fully appreciate the significance of historical developments in the evolution of our monetary system, in particular Nixon's suspension of gold convertibility in 1971,

-the economic ignorance of the mainstream media (who often just parrot the same ideas amongst themselves) and most federal politicians (many of whom rose through the ranks of revenue-constrained state governments), and

-the misleading and flat-out deceptive models and theories advocated by mainstream/orthodox economics, that tend to treat money as neutral and entirely ignore the unique role played by the banking system in expanding and shrinking the supply of money-like credit.

However, we could also get cynical about it, and view many of these factors as the result of deliberate attempts to whitewash progressive monetary reform efforts from history (Greenbacks, anyone?) as well as purge the economics profession from any voices that challenge the dominant ideology.

On the platinum coin – I question the economic logic behind your claim that “using it to pay for all debt and for social programs would be highly inflationary” on two grounds (though I agree that inflation might not be such a bad thing, particularly if there were some protection measures for middle-class savings, although general wage stickiness concerns are still an issue).

First, despite conventional wisdom to the contrary, the difference between a treasury bill or bond (i.e. government “debt”) and other forms of risk-free government liabilities (federal reserve notes and reserves) is very little – essentially, a small degree of liquidity (you can't use a bond at the local grocery store) and the rate of interest. Indeed, since the Federal Reserve began paying interest on excess reserves in 2008, even that difference has largely evaporated. To that extent, if the Treasury were to create a large platinum coin, deposit it at the Federal Reserve, and use the funds credited to its reserve account to purchase all outstanding government debt (or alternatively, to fund future spending in lieu of issuing new debt), the effect from an accounting perspective on bondholders would be very little, akin to an individual moving deposits from an interest-earning savings account to a checking account at a regular bank. As Warren Mosler explains here, it is quite possible, not withstanding the effect of such a policy on the long-term interest rate (which is already quite low!), that such a move would actually exert a net deflationary impact due to the removal of government interest income from the private sector. Of course, it is possible that there would be (irrational) expectational inflationary effects from announcing the printing of a $60T coin, but from a purely accounting perspective there is no reason for that to occur. My real goal with that suggestion was to throw a bucket of water over this ridiculous notion that governments with their own currency can “go broke,” or perhaps even more worryingly, that they need to “borrow” money they have already created in order to deficit spend.

Second, I'm not sure why you think that funding all social programs through printed money will cause very high inflation or even render it a likely outcome given the U.S.'s institutional arrangements, productive capacity and the huge demand slump we are currently living through. It is possible that we would experience a temporary increase in inflation at the point of introducing universal public education, medicare and a minimum wage job guarantee. However, given the effect such policies would have on constraining rising healthcare and college education costs, not to mention the increase in productivity that would result from a fully employed workforce working on things like infrastructure, environmental renewal and community-redevelopment (or as some have called it, a “Green New Deal”), it is unlikely that such inflation would persist beyond the initial adjustment shock. Of course, if it were to occur and become a significant problem, one could temper demand through a range of measures, including targed tax increases (which would be explicitly serving an aggregate demand-managing function rather than a revenue-raising function), increased interest rates, or higher capital requirements/reduced leverage ratios on bank lending. In short, there are plenty of ways to deal with the issue of high inflation should it occur without dismissing the unique policy freedom afforded to monetarily sovereign nations by seignorage power.

Notwithstanding all of that, the suggestion of a $60T coin has always been partially tongue in cheek, and I don't think anyone, even Constitutional Law Scholar Jack Balkin – who seems to think the idea would work – is suggesting it should form the basis of long-term economic policy. But I don't think the problem with it is that it is unconstitutional (what is your basis for this claim?), or that there is any inherent problem with giving the President power over monetary and fiscal policy (given that they are inextricably linked to the point of being “two sides of the same coin” as it were). Rather, the biggest problem with it, in my opinion, is that even the act of depositing a coin at the Federal Reserve to is unnecessarily complicated compared to a true system of functional finance, with money injected through deficit spending, removed through taxation, and interest rates set through paying interest on publicly available accounts at some form of public bank (perhaps linked to social security numbers and/or corporate tax numbers).

Of course the political issues with truly democratizing money are, as you mentioned, a crucial consideration - probably the crucial consideration, if we are to listen to Kalecki or take seriously Eben's suggestion that those things left unspoken are usually the most important. But outside of those who, like yourself, have formally studied economics, how many average people do you think are aware now that banks do not “lend deposits” as the traditional model suggests, but rather “create deposits through loans” through the process described by heterodox economists as “endogenous money?” Do you think the average person would be happy with the fact that the credit-expanding power, with all of its inflationary potential, is today wielded largely by the private banking industry under licensing regimes, rather than utilized directly for the public purpose? Personally, that revelation was shocking to me and continues to represent one of the largest cancers on our economic system, as it relies upon interest-earning debt to expand economic growth, resulting over time in an exponential transfer of wealth from debtors to creditors.

Finally, in regards to “ignoring the other branches of government” - I am not sure exactly what you mean by this. Congress still has to appropriate money before it is spent, regardless of whether it is created through a coin or through debt issuance, so i'm not sure how oversight in that sense would be undermined. Can you explain further your concern here?

P.s. Ron Paul wasn't the only one proposing getting rid of the Federal Reserve as we know it.

-- RohanGrey - 11 Jun 2012