Friday, June 22, 2012

Cease, Forever, the Practice of Calling Fiat Currency Creation a Deficit.


It's currency creation that denominates any economic growth.

In another investors interview, Warren Mosler once again explains monetary operations beautifully. Pity his audience remains so small.

Early in the interview, Warren makes an overlooked point very succinctly.

Altering his phrase slightly, I'll put it this way:

It's "deficit" spending that supports any economic growth.

Please, let's all commit to saying that in a different format. See below.

Why is it that such a simple point is not universally recognized? We can put a man on the moon, but we can't understand something as simple as a fiat currency system?

Whatever new activities we the people are capable of creating, we're free to do. Then, we're free to record and adjust to our created growth by creating fiat bookkeeping.

What is fiat bookkeeping? Fiat currency.

No population can generate more people + more activity without creating more currency to denominate the newly created & highly organized transaction chains. That couldn't be more simple, or more clear.

JIT supply chains, logistics & economies are not possible without JIT creation of bookkeeping currency. We can't run out of RFID chips unless we choose to, nor can we run out of fiat currency ... unless we choose to limit our own capabilities.

So, we're back to semantics. Why is currency creation called "deficit" or "debt," when that use conflicts profoundly with other applications of those words?  Do we get fiat from somewhere else?  Can we run out of fiat?  Do we owe fiat to someone?  No, no & no.

It's the semantics that are our stumbling point, not static vs dynamic operations.

Cease, forever, the practice of calling fiat currency creation a deficit, or a debt.
We can't ease the cognitive tensions over this as long as we keep calling currency creation a deficit.

It's fiat currency creation that allows more transaction-chains to be denominated upon demand, thereby unleashing exploration of any & all options we can imagine.

If an aggregate can do something, and benefit from it, what on earth is the problem with recording the transactions involved, so everyone can adjust accordingly?

As individuals from John Law to Warren Mosler keep hinting, fiat currency supply is just another automatic stabilizer for an organized aggregate.

Please, let's all just say so, more bluntly, more often.

It's currency creation that denominates any economic growth.

48 comments:

Mike Norman said...

"Pity his audience remains so small."

A producer from RT recently told me that my interviews ranked well below the mean when it comes to ratings. In other words, my ratings suck. That's why I don't have my own show.

On the other hand, Schiff routinely gets tens of thousands of views on Youtube (even millions) and I'm assuming his TV ratings are quite high, as are those of Jim Rogers and other Debt Doomsday idiots.

MMT does not rate well on TV. People just don't want to hear it.

Roger Erickson said...

Why aren't more people listening?

It's become certain that it's our own fault. All - and I do mean all - of the domain experts I've learned from, spout their insights in terms that cannot be absorbed by the 150 million voters that need to hear, understand & appreciate them.

It's fascinating. We've scaled up to a novel situation.

First, we accumulated physical "capital" in excess of our distributed awareness of how to use it.
(even poor people are fat, have food & housing, & iPhones)

Now, we've raced on to accumulate knowledge pockets beyond our distributed awareness of how to build situational awareness!
(HP no longer knows what HP knows, is aware of it, but can't fathom how to parse that knowledge fast enough. Go figure.)

All this is easily understood from a systems or analog-network perspective, yet that's exactly what we DON'T teach to all students by age 10.

Situational awareness that could literally take one month to build nationwide, will instead require another generation to acquire ... IF we're lucky.

And we think humans are intelligent? That begs the definition of adaptive intelligence.

Unforgiven said...

Yeah, it's tough to get the message through. When I was new to MMT, I quickly understood that we can't run out of money, but trying to extend beyond that, I really didn't have anything but old school as a reference. What was in the blogs tended to go way over my head (and often still does). I've had to take a number of runs at it just to grasp the basics.

Mike's videos tend to keep it pretty simple, invalidating old school tenets one by one. If the neoclassical autopilot tries to kick in, the system returns the error: "That destination no longer exists. Please enter new coordinates."

It's working. Slowly, but it's working.

Matt Franko said...

"People just don't want to hear it."

Makes the case for a righteous and authoritarian rule... not that I'm advocating that per se....

rsp,

y said...

"It's "deficit" spending that supports any economic growth."


Except when economic growth is driven by credit expansion. Or a trade/ current account surplus. Or redistributive government spending (spending matched by taxes).


Govt spending-driven growth can occur even if the budget is balanced or in surplus, can't it? -i.e. taxes can take money from those that hoard it whilst govt transfers give it to those that spend it.

paul said...

"People just don't want to hear it."

People just don't want to hear the truth, because the truth is scary. Most haven't been prepared to deal with it.

There is much wailing and knashing of teeth to come…

Hard to say who will be blamed.

I would be enjoying the show if I wasn't a part of it.

Mike Norman said...

Matt, I agree. I want to be dictator.

Geoff said...

It certainly says something about human psychology when the doomsday pundits rule the airwaves while those expressing a more positive message struggle for an audience. Even when the MMT message is loud and clear, it appears that Mike is right. People just don't want to hear it.

In Europe, it might be a different story if the huge crowd that turned up in Italy to hear the MMT profs is any indication.

paul said...

"Except when economic growth is driven by credit expansion"

Credit expansion is a one-shot deal - once you use it it's gone, until you've deleveraged.

we know where the deleveraging funds come from.

Mike Norman said...

Roger. I've said that a million times to our MMT "leaders." No marketing savvy whatsoever.

paul said...

"No marketing savvy whatsoever."

In all fairness, the neo-liberal PTB have hold of the system at all of the choke points. Tough to get a message out through that.

No one is going to listen until everyone's hurting.

y said...

Paul, the problem with making vague claims such as that deficit spending is absolutely necessary for growth is that it can make one silly when growth occurs without it.

What do you think of what I was saying about redistributive fiscal policy also being able to generate growth without a deficit?

Supply-siders see this the other way around - they think that if you reduce transfers to the less well off and redistribute that money to the rich in the form of tax cuts, this will generate growth through investment and spending.

paul said...

@y

"It's "deficit" spending that supports any economic growth."

This is a simplified description that assumes we aren't going to raise taxes enough to curb massive wealth creation.

You're sensibilities are correct, but I would like to point out that reversing a trade deficit is channelling previously-deficit-spent money back into the economy.

Either that or the government is creating new dollars, exchanging them for foreign currency so the new dollars can be spent back into the economy.

That sounds a lot like deficit spending too. Maybe it's a no-bonds back-door money creation solution.

paul said...

@y

Sorry, looks like we were both writing at the same time.

It looks like I may have answered your question anyway.

Personally, I don't like to criticize those that make that kind of vague claim because i know most of the people here making them know what they are talking about.

They are probably just trying to be brief.

paul said...

"…it can make one silly when growth occurs without it…"

I'm going to go out on a limb on this one and make the claim that growth can't occur in the aggregate without net creation of NFA's.

Values can grow but that's just leverage. People will also produce stuff in anticipation of increasing their wealth but in the end if NFA's aren't created to monetize gains the so-called growth will evaporate.

So, with a strict balanced-budget scenario is growth possible? Assuming we measure it in nominal dollars that is.

I suspect that financial losses will offset asset gains.

Just thinking in terms of closed-system arithmetic, that is…

Tom Hickey said...

Combining Mike (low ratings for MMT) and Roger (non-adaptive bias of a populace) above, the country is bound to get what it deserves. That's why I have been saying those in the position to do so to make provisions. If you are stuck in place or choose to stay in place, then link in to supportive networks.

Over the next several hundreds years it looks like all species are going to experience a global challenge in which only the most adaptive genetic material will survive.

Tom Hickey said...

To elaborate, I have a friend that is a theoretical physicist and extremely interested in social issues who ran for president some time ago on the platform that testsed answers already exist for the most pressing problem the US faces as nation and as a global leader. Of course he never expected to win but it got him access to most influential people in politics that he want to contact. He said that the overwhelming majority agreed with him privately but said that this wasn't politically practically.

So it's not politically practical to propose solutions that actually have a good chance of working by being scaled, but instead proposing popular ideas that are based on naive common sense that are mostly wrong.

Not hard to figure what cliff that country is marching off, and being so influential taking the world down with it.

Roger Erickson said...

@Y

You're just quibbling over financial vs non-financial definitions of growth.

Cutting through the semantics, if an aggregates generates more success, the product of it's population-X-transaction_rates must be increasing.

Only way to create more is to generate more activity, which must be denominated with more bookkeeping, i.e., fiat currency.

The rest is all semantics.

ps: In theory, we could weed out all activity that wasn't successful. However, that's a catch-22. The way biological aggregates FIND what's unpredictably successful is by trying many things.

Much of what was irrelevant to the last context is required diversity to sift through in following contexts.

Reality is that generating more options provides enough options to select from. So in practice, adaptation is always creation .... of many, novel transaction chains, and gradual selection of some.

Tom Hickey said...

@ Unforgiven

Right. Once gets beyond the basics it gets complicated really, really quickly. This is how the intelligentsia class captured at good deal of power since the beginning of history. First they were the priests who knew astronomy and geometry, so necessary for agriculture. Geometry (literally earth measurement) was especially needed in Egypt, where the fields had to be laid out yearly after the flooding of the Nile. The intelligentsia adapted to the various changes in history that has brought us the academics and professionals today that rely on their knowledge to mesmerize the rest of the people. when they are not in power themselves, those who are willing to prostitute themselves become the cronies and minons of the current rulers, whether the warriors or acquisitors, who use them as the "priesthood" of the day. The Fed is not called the "Temple" for nothing.

Tom Hickey said...

y, do the numbers. a system based on money transactions cannot grow unless money supply also grows with non-financial (real) growth, and this is only possible through inside and outside money.

Inside money is leverage and leverage is unsustainable over time due to compound interest and saving. Outside money has to be added. It's basic system dynamics.

Jim Gaddis said...

Why aren't more people listening?

Fairly new to MMT concepts, and still trying to get my head around them to the point where I can argue successfully with neocons and other political foofoos, but maybe MMT would get more public attention if the notion that Federal income and FICA taxes are not strictly necessary were emphasized more.

paul said...

"…Federal income and FICA taxes are not strictly necessary were emphasized more…"

I try to make the argument that S/S is way more likely to pay out than pension funds, which in my mind are ponzi scams.

In order for your money to get to you through your pension fund it has to go through the parasite's hands first.

In either case the government has to print it first or you won't get it.

Matt Franko said...

I vote Mike for benevolent dictator! ;)

Paul,

I think you are correct on the growth idea... we need the balances to quantify deals and transact deals, its not like we just give stuff to each other...

Getting back to the MMT messaging... Schiff/Pento/Rogers et al are ALWAYS ON OFFENSE.

We seem often to BE ON DEFENSE.

Maybe the best defense is an offense. I think what sets Mike apart wrt to this is that he goes toe-to-toe with these morons and calls them out on this garbage they spew.

The folks in the mainstream of MMT are some of the most gentlemanly and lady like folks, really great, decent, admirable, peaceful people that are out there, but this often puts them in a defensive position vs the garbage/hate mongers.

Trying to think of ways to flip the momentum around and get the MMT offense rolling, and get the crowd in the game, etc...

Resp,

paul said...

Matt,

Mike does a great job calling bullshit and I think Randy Wray does too.

Wray, however gets a lot of criticism for being strident.

Why do you think that's so? Are academics expected to be polite?

I guess that may be why Krugman gets so much criticism too.

Seems to me the squeaky wheel gets the grease so we should be making as much noise as possible.

Roger Erickson said...

There are two stages to group agility.

First, share enough info to let people discover solutions on their own.

Once everyone agrees on common agenda, THEN & only then are people able to efficiently discuss policy.

Many economists, Wray included, jump too rapidly into policy before their audiences understand their situation & existing operations.

Typical advice to MMT crowd is to carefully separate education & policy.

Spend way more time on explaining how existing operations work.

Be patient about drifting into policy, and never bother until your audience understands monetary operations.

You can't tell people what to do. They stubbornly want to do what they understand. Most only switch once they've figured out policy implications on their own. That way they own the solution.

Matt Franko said...

"Are academics expected to be polite?"

I think probably so... they have to "argue" within papers, etc.. Tom has a good view wrt this issue and how it works in academia...

But a lot of the false people arent in academia... Schiff, et al so it is up to those in the MMT boat who are not academicians probably to counter these false people to the extent we can...

resp

PG said...

"Cease, Forever, the Practice of Calling Fiat Currency Creation a Deficit."

That's a problem with people: they underestimate the effects of words.

For (in particular MMT) people to use the word "government's deficit" for "net government spending" makes as much sense as saying that your bank account is being "debited" when its absolute value augments.

Flows that COME TO the observer are positive.
Flows that GO FROM the observer are negative.

If electrical engineers wouldn't use consistently this simple rule... electrical engineering would be impossible.

No wonder it makes so much trouble in human relations.

paul said...

"…If electrical engineers wouldn't use consistently this simple rule... electrical engineering would be impossible.:"

Isn't the flow of electrons (or is it protons) backwards from what you would expect?

At least from what I can remember of EE, which for me, an ME, was fascinating. I took all of my electives in EE.

y said...

Tom

"Outside money has to be added"

At the very least enough outside money has to be added to keep the payments system ticking over, etc, but you don't necessarily need huge deficits for growth. Not that I'm against deficits, just that MMTers sometime make it sound like without a deficit no economy can ever grow.

Take Argentina for example (rough figures):

2003: 0.9% budget surplus, annual GDP growth rate of 5.4%.

2004: 3.7% budget surplus, annual GDP growth rate of 11.3%.

2005: 2.1% budget surplus, annual GDP growth rate of 8%.

2006: 1.9% budget surplus, annual GDP growth rate of 8.8%.

2007: 1.1% budget surplus, annual GDP growth rate of 8%.

2008: 1.2% budget surplus, annual GDP growth rate of 8.5%.

2009: 1.5% budget deficit, annual GDP growth rate of 2%.

2010: 1.4% deficit, annual GDP growth 6.8%.

2011:0.2% budget surplus, annual GDP growth 9.9%.

2012: 0.6% budget deficit, annual GDP growth 5.2%.


www.tradingeconomics.com/

y said...

2010 should read: 1.4% surplus, GDP growth rate 6.8%.

paul said...

@y

Is growth real if it isn't monetized?

In other words, in the US I've seen estimates of "real" wealth in the $200 Trillion range. Only $16 Trillion in financial assets (dollars) are in existence.

So I guess it's "real" wealth as long as you don't need to sell it.

Analogy alert:

My home electrical panel is rated at 200 amps but I counted the circuits and there are about 500 amps in breaker capacity.

What happens if I try to run everything at full capacity at once?

Do I have a 200 amp service or a 500 amp service?

y said...

BTW, people who watch RT programs like Capital Account and Max Keiser tend to be Austrian gold bug Fed-is-a-private-cartel conspiracy theory government haters. Just go to their youtube page and look at the comments. G. Edward Griffin is their hero.

On capital account when they show "your closing market numbers" all they show is the percentage changes in the S&P, gold, and oil - as if that's all there is of interest.

No wonder RT audiences aren't keen on MMT. It stands for everthing their dumbass ideology has taught them to instinctively hate.

y said...

"Is growth real if it isn't monetized?"

Not sure what you mean exactly. Argentina's growth appears to be real. Over the period listed above they have tended to have current account surpluses. Of course they have many problems too: high inflation for one.

paul said...

@y

"Is growth real if it isn't monetized?"

"Not sure what you mean exactly…"

In 2000, my house was worth say $100,000. By 2007 it was worth nearly $200,000. The value grew 100%.

If I had sold it in 2007 for $200,000 I would have monetized my gain and increased my cash balance by $100, 000 for more than 100% gain (because of the down payment).

Now the house is worth $100,000 again. Did I lose $100,000?

When you are talking about Argentina you are talking in terms of GDP.

GDP is output, total transactions.

GDP growth and growth in wealth are not the same.

paul said...

@y

"Over the period listed above they have tended to have current account surpluses…"

If they are running deficits and current account surpluses no wonder they have inflation.

Tom Hickey said...

y, the problem is that without enough outside money injected the economic system requires increasing inside money, which is unsustainable at a certain point, that is, the point at which debt service is not payable in aggregate and loans cease to perform. Then credit contracts and asset price plunge resulting in debt-deflation.

The other problem is that that growth is not manageable due to population growth resulting in increased demand. The money supply has to grow to accomodate the increased demand and that means increasing credit-debt. The only way for this arrangement to work is with no saving. Add saving and there is shortfall in effective demand-consumption and overproduction of supply at capacity. So the system goes into slow mode to compensate. When there is a lot of debt in the system, then asset price plummet, debt-deflation ensure, and the system goes into shutdown mode.

It's possible to construct a system without leverage, in which savings are used to fund borrowing one to one. This results in a smaller money supply and fewer transactions possible, but no as much debt overhand is created. But due to the system dynamics of saving being the driver with compound interest on savings, the demand leakage to saving permanently hobbles growth, while population, hence notional demand, continues to grow. This was the case when the savers (wealthy) dominated politically as the ownership class by controlling virtually all assets, and even government had to borrow from the wealthy to get funding.

No economic system has yet been stable and PKE and MMT explain why.

There are two solutions. One is to inject enough outside money to provide for growth at full employment given the desired rate of saving and allow the bulk to flow to the ownership class, or to inject enough outside money to provide for growth at full employment given the desired rate of saving and not permit the bulk to flow to the ownership class. The trick with both of these is ensuring price stability, too.

Tom Hickey said...

y, the question on a country like Argentina during those years is what was the private debt to GDP ratio, and what was the ratio of the rate of change of each. When nominal obligations are increasing faster than real GDP, that is a signal the the process is becoming unsustainable.

paul said...

Tom: I have to tip my hat…

You have a way with words.

Have a great weekend, everyone.

Tom Hickey said...

"No wonder RT audiences aren't keen on MMT. It stands for everything their dumbass ideology has taught them to instinctively hate."

Same with Fox, CNN and CNBC. MSNBC is a maybe. Most people that watch TV are dumb-asses. Have to be or they couldn't stand it.

Tom Hickey said...

y: "Not sure what you mean exactly. Argentina's growth appears to be real. Over the period listed above they have tended to have current account surpluses. Of course they have many problems too: high inflation for one."

What does nominal private debt (that which must be repaid contractually at that nominal amount) to real GDP look like. If the policy makers address increasing inflation rate then if private debt is elevated too, they risk creating a situation in which debts cannot be repaid on time and if asset values fall, perhaps not at all.

Tom Hickey said...

Thanks for the nice words, paul, but it was you that got me responding in terms of system dynamics in this thread.

Have a nice weekend, too.

Greg said...

MMT gets no respect....... guess its a good thing there's MMR! ; )

Tom Hickey said...

The US is at the apex of a conservative cycle at the moment and so-called Keynesian approaches are in disrepute to a relentless propaganda campaign for over three decades, as well as marginalization by mainstream economists who are predominantly New Classical or New Keynesians pushing some form of neoliberal-monetarist policy.

All cycles change direction over time. MMT and PKE will have their day in the sun.

Senexx said...

I think the marketing catch is, there can be no black hole in the budget of a federal government, a claim often made in Australia when alternative policies are presented i.e. where is the money coming from.

If MMT was widely accepted, the challenge would be this will introduce wild inflation in area x and then we would have to explain why wild inflation in area x is a bad thing (unless we are relying on inflation is always bad myth, which MMT would have told us it is not) and the path I see that leading us back to is trickle down economics.

As in you've told us inflation isn't always bad and this is only one area, it'll generate jobs elsewhere as others get out of doing that job.

y said...

"If they are running deficits and current account surpluses no wonder they have inflation."

Over the 10 year period mentioned above the Argentine governemnt was running mainly budget surpluses and mainly currenct account surpluses, and GDP growth was phenomenally high.

However, despite the budget surpluses government spending was apparently increasing at a rate of about 20-30% year on year.

Interest rates were also held well below the rate of inflation, encouraging expansion of credit.
I don't know what the ratio of private debt to GDP is however.

PG said...

@ paul

"Isn't the flow of electrons (or is it protons) backwards from what you would expect?"

A current is a flow of electrical charge. Naming the charge of an electron negative is purely conventional. The world would go absolutely unchanged if one would call the charge of electrons positive.

What is not conventional is the flow of charge (current) TO a node being considered positive.

Otherwise stock-flow inconsistency would result. One can show that considering the opposite would result in a negative flow (current) increasing a positive stock (charging positively a capacitor with one terminal being the node).

paul said...

@PG

I was just remembering some controversy when I took EE. In 1968.

Since my comment earlier it occurred to me the discussion was about the movement of "holes" rather than electrons as the mechanism and that the sign convention, whatever it was, was confusing.

Not really making an argument.

paul said...

@y

You responded to a comment I made at Moslers blog:

Paul,

“If there were no NFA creation by the government, where would the balances to pay the interest come from?”

As Warren points out, if income keeps circulating, either as a result of spending or through redistributive government policies, the system can sustain itself. It’s the leakages which seem to create the problems, not the expansion of credit itself.

I should have been more clear in my comment, but the basic idea holds…

Unless the banking systems spends every dollar it takes in without accumulating dollar assets, meaning 100% re-distribution, then the banking system is creating un-funded liabilities that float around in the non-government and can't be satisfied unless the government creates the dollars to offset the leakage.

So yes, leakages are the problem but leakages through the banking system are a special problem.

The difference between leakages created by the banking system and normal leakages aka net Saving is that normal leakages don't create unfunded liabilities that must be satisfied.

If the quantity of unfinded liabilities gets large enough it can cause a crisis in the banking system as people default at a higher rate than anticipated, as we have seen.

Assuming credit can always be expanded to roll over debt is unrealistic. There is a functional limit to how much agents can borrow before the debt service exceeds the agent's ability to re-pay.

Re-circulating money in the economy doesn't solve the problem unless no one is allowed to save. We don't live in that world.

Assuming you see this response I made it here because that thread turned into a monster with the usual trolls pointing out that everyone there but them was stupid.

Hope it has at least partially addressed your concerns.