Monday, June 25, 2012

Fiat Nonsese in an Age of Reasoned Ignorance


Who expected British fraud, US crime, Teutonic discipline, banking, reason, logic and comedy to converge in such unprecedented combinations of fiat nonsense?

Germany's finance minister Wolfgang Schaeuble is rejecting US calls on Europe to move faster in fighting its policy crisis, telling him to get the American deficit under control instead.

You really have to laugh. What's the alternative? Deficit?  Exactly what deficit is he talking about?

Herr Schauble, here's the reality. You really should try some. We have a huge world population which successfully converted - ~80 years ago - to fiat currency systems tied directly to the return on coordinated public initiative. That adjustment made currency bookkeeping serve the adaptive rate of large, rapidly growing economies.

Face it, by 1933, we transitioned from a static-value view of currency, to a dynamic-value paradigm specifically to meet an unmet demand. Dynamic contexts demand that we unleash the quality & tempo of distributed decision-making which large, educated populations are capable of producing.

When you transition fundamental variables or interdependencies in any complex system, the basic function of many tuning and control variables are fundamentally and completely changed. Often even inverted.

What are the quite obvious implications of fiat? Let us start the count. A deficit in fiat is meaningless to policy. Any dry meaning of "deficit" derived from accounting & policy under a static-value gold-std is completely orthogonal to its utility in a dynamic-value fiat-std.  The only implication of a deficit in fiat is it's eventual implications for new interdependencies.  Exceedingly few are talking about the tolerance limits, only the fiat deficit itself.

Let's put this in perspective.

A deficit in shells has implications to a snail.

The same "deficit" is completely irrelevant to army ants.

Why?  Because the army ants have traded the constraints of the shell game in order to pursue the insanely greater return on dynamic coordination, aka, fiat.

Yet here we are, 80 years after scaling up yet another milestone in the same decision process. And what are we doing? We're acting like frat brats, passed out on the curb the day after acing the big test, and then promptly getting so drunk we forgot all we'd learned up to & including the big test. Figuratively, we're retreating into our shell. The misguided actions of Luddite deficit-terrorists keep their nation slimed in a shell, while a fiat world races past and leaves them constrained in the dust. There's no morality, or adaptive strength in that, only crime and treason and, at best, ignorant fraud.

No one could have predicted this? Not per currency operations alone. The foundations of such self fraud lie outside financial operations, and are embedded in parallel institutions, notably public education.

It's a new deal, success. How do we handle it? Do we really just look around, and say "Let's do it again?" If not, how do we correct this mess and move on to even greater things, faster?

If forgetting enough to get ignorant again is the goal, then we're half way to relearning what our grandparents learned and our parents forgot. Face it, that's boring. It's worse than a clown question. It's clowns running the media, pandering to clowns in policy offices .. all applauded by a clown electorate. We can do better.

Retreading stale logic doesn't hold water in dynamic context streams.

USA, Japan, etc: tying ourselves in fiat knots over fiat limits on fiat initiative. Huh?
EMU: pegging fiat to bankster hoarding of fiat. You're kidding?
China: not talking, while party members convert fiat to static assets elsewhere. !
(Good luck with that.)
India: still undecided over casting out Brit banksters by fiat, or inviting them back. (Again, good luch with that.)

All surrounded by Luddites at the WB & IMF saying that there is no alternative! Good luck with that too!

What's the alternative to crawling back in our shell?

There are at least 10 things every 10yr old should know about the role of fiat currency in policy agility and national adaptive rate.

Insist that kids in YOUR neighborhood learn them. Otherwise, you may as well take a nap and forget the future. For your grandchildren, it'll be like you never existed.

41 comments:

y said...

Here's Marc Lavoie:


"I would put it like this: In a closed economy, the existing stock-flow consistent models show that public debt to GDP ratios are likely to stabilize endogenously, even though governments are pursuing full employment policies and let government expenditures and government deficits rise to pursue this objective, provided real after-tax interest rates are not too high. So, this would be in accord with what neo-chartalist (MMT) economists are saying: let us take care of the employment problem first, and the deficit problem will eventually take care of itself, either through growth or through the rise in interest payments by the government, which will generate higher consumption and hence more aggregate demand, as was clearly the case in Italy in the 1980s, when the Italian sovereign debt was being held by Italians.

In an open economy, with a flexible exchange rate, where the government borrows in its own currency, Wynne and I would argue that this result still roughly holds. If the government borrows in a foreign currency however, as is the case of most countries, then this in itself is likely to create all sorts of problems. In the case of a fixed exchange rate, or in the case of the euro zone, the expansionary policy of a single country will worsen the deficit of its government. So here, we clearly need cooperation. If a single country goes for austerity policies, while all the others keep expanding, that country will be successful in reducing its budget and trade deficit. However, as you mention, the fiscal compacts in Europe ask all governments to tighten their expenditures, so these concerted austerity policies will have detrimental effects on all; those running large budget and current account deficits will continue to do; and all countries will end up with a lower GDP or at best lower rates of GDP growth.

So, we might as well have stimulus policies in all countries, and mostly so in countries that currently have trade surpluses, so that all countries end up with a higher GDP or higher rates of GDP growth, that is, aim for a high equilibrium rather than a low one, thus convincing the financial markets that everyone is on the right track, and that hopefully the deficit problems will get solved endogenously, as in the closed-economy case. I don’t think there is anything extraordinary about what I am saying: even the IMF has persistently asked countries in good financial and trade positions to go for stimulus programs and delay the so-called medium-term consolidation programs."


For all the nonsense spouted by MMR types, Lavoie is clearly in broad agreement with MMT.

http://www.nakedcapitalism.com/2012/06/new-directions-in-monetary-economics-an-interview-with-marc-lavoie-part-ii.html

y said...

Can someone let them know?

y said...

Tom,

Warren posted this in response to my question. Useful to be clear on his position regarding banks "creating" reserves:


"Bank deposits are the accounting record of the liability associated with loans.

So when a bank lends you $100 they might at the same time enter the number ’100′ into your checking account.
But the loan didn’t do the entering of the 100 into your account per se. The 100 liability is the accounting record of the loan. liabilities are accounting records off assets, etc.

When you account for something you don’t exactly ‘create’ it the way the word ‘create’ is generally understood- making something out of something else, etc.

What I mean by allowing banks to create reserves is that regulation allows banks to make loans and corresponding deposits that it will accept for payment of taxes recognizing that they are allowing that bank to incur a reserve deficiency in the case of reserve requirements. Additionally, when the Fed ‘clears a check’ it’s allowing the possibility of the account debited to be overdrawn which is also the possibility of a loan from the Fed.

(bottom of comment thread on 'general theory and special cases in MMT')

paul said...

"…Useful to be clear on his position regarding banks "creating" reserves…"

Let's see, who gave the banks the power to "create" reserves?

According to MMR it's the private sector.

That doesn't parse for me.

y said...

He's simply saying that fed member banks (commercial banks) can become overdrawn on their reserve account at the fed.

I can also become overdrawn at my bank.


MMR people say something like "the monetary system is controlled by banks - that's just the way it is".

Later they then tend to say "and that's just the way it should be".

paul said...

"MMR people say something like…"

Does it shift reality when they say things?

Or is it mostly irrelevant?

y said...

mostly irrelevant.

Tom Hickey said...

What Warren is saying is that "deposits create reserves" means that deposits create reserves as an accounting record. But at the end of the settlement period, if the bank has an overdraft in its reserve account at the Fed because it hasn't obtained enough reserves in time, then the Fed as LLR loans the bank the shortfall and charges the penalty rate. The reserves for the loan to the bank obviously are obtained from the Fed.

The difference between a system with an LLR (FED) and one without (ECB) is clear. Under the LLR, the financial sector can generate liquidity to clear its obligation through the reaction of the cb, whereas with no LLR that is not the case. The financial sector has to get the funds to clear elsewhere.

y said...

"who gave the banks the power to "create" reserves?

According to MMR it's the private sector."


MMR often commits a basic category error when discussing these things.

The argument is put forward that the monetary system is a "creature of the people", given that the government/state is a "creature of the people". That's a reasonable point.

But then a basic error is committed when "the people" is equated with "the banks". A really basic, basic error.

y said...

Tom, are you saying banks in the eurozone can't get overdrawn at the ECB in the same way that US banks can at the Fed?

Tom Hickey said...

MMR is correct that under the present institutional arrangements the financial sector determines money supply and hence reserves to clear endogenously due to the non-convertible floating fx rate system and LLR policy. Note that the LLR is policy. The financial sector determines neither the institutional arrangements of banking nor policy, which are imposed exogenously by govt and maintained under law by regulation, oversight and accountability.

Everyone that subscribes to endogeneity holds this view as far as I know, including MMT. Where the differences lies is in the area of inside and outside money. This difference been the roles of inside and outside money has been at the basis of the disagreement between Steve Keen and MMT'ers for instance.

The difference between MMR, as far as I can grasp, and MMT, as expressly defined by Warren, has to do with the institutional arrangements determined by law and regulation.

Some at MMR think that they are a lot looser than they are, giving the private sector control of the banking system. Warren reply is, "Have you ever sat for a periodic FDIC exam?" As a bank principal Warren sits periodically for those exams. Which is why he claims that banking at least in the US largely public-controlled.

Tom Hickey said...

"The argument is put forward that the monetary system is a "creature of the people", given that the government/state is a "creature of the people". That's a reasonable point.

But then a basic error is committed when "the people" is equated with "the banks". A really basic, basic error."

Government is a representative democracy is the agent of the people and elected official are agents of the people authorized to act on their behalf for public purpose under the Constitution and laws to uphold which they take an oath of office. They also get to make and change laws, but not the Constitution directly. Those laws establish the the institutional arrangements of public totally and private institutions partially.

The institutional arrangements of the banking sector are chiefly public according to Warren speaking as a bank owner. Moreover, even as we speak banks are lobbying for institutional arrangements that are more favorable to them but not necessarily for the public as whole.

Tom Hickey said...

Y; "Tom, are you saying banks in the eurozone can't get overdrawn at the ECB in the same way that US banks can at the Fed?"

I hesitate to say much specific about the ECB and EZ arrangements since I am not up on this. But IIRC, the ECB was specifically created without LLR. Many of the special arrangements added due to the crisis have had to address the issues arising from this.

y said...

I think he said "sat in on a FDIC exam".


When regulations are drawn up, the views of the banking sector are also taken into account. Before the crash the banks had been arguing for looser regulation, more 'self regulation', and they got what they wanted. Now they are trying to limit new regulations, and they're also partly getting their way. New regulations are being watered down.

There's definitely a large degree of 'capture', and the central bank system works to support commercial banks and to advance the interests of the financial sector as a whole.

However, none of this actually contradicts anything in MMT. It just demonstrates that, from an MMT perspective, the government isn't doing a particularly good job of advancing 'public purpose'. Too much consideration is being given to the banks, and not enough to everyone else. The people in control are weak and don't know what they are doing. Their minds are filled with erroneous nonsense drawn from incorrect economic theories.

That should be pretty obvious already.

---

But the point I wanted to make above, is that MMR equates "the people" with "the banks" in a moral, sociopolitical sort of way.

In the MMR view, "the people" (i.e. "the banks"), exert control over government through the structure of the monetary system - and this is a GOOD thing because it limits the power of government.

Unrestrained government (which is what MMR claims MMT wants) would be a BAD thing as it would pose a threat to the freedom of "the people" (i.e. "the banks").

Thus, the story goes, the monetary system has been designed to restrain government, and thereby protect our freedom.

Thankfully, the banks protect "the people" from what would otherwise be government tyranny.

It's pretty dumb.

y said...

It's also completely incoherent as it contradicts another assertion that "the real constraint on government spending is inflation".

To marry these two views, ridiculous imaginary scenarios have to be conjured up.

So it is argued that, for example, if there were to be hyperinflation primary dealers might choose not to buy government bonds (!). I don't know whether this is actually true or not (as far as I'm aware governments that have experienced hyperinflation have still been able to spend) but quite frankly, who cares?

The next cute little story imagines some sort of righteous tax rebellion, in which "the people" take to the streets in a great tea party uprising and demand that the evil government stop taxing them so much. Again, another fantasy hypothetical to prove a totally pointless argument that achieves and illuminates nothing.

The whole fruitless exercise simply serves as a rhetorical strategy to bolster arguments against certain MMT policy ideas which MMR doesn't like for ideological reasons, such as the JG.

It's quite amusing, yet also deeply irritating, to see someone flailing around in such a clownish way, desperately trying to come up with any old argument, no matter how irrelevant, incoherent or ridiculous, just to defend an ideological position which would otherwise collapse under the force of rigorous logical interrogation.

It's like watching someone have a nervous breakdown, clutching at straws to preserve a coherent sense of self, which is on the verge of shattering to pieces.

It's what happens when people's deepseated political prejudices come up against a hard, incompatible reality. They take refuge in fantasy and nonsense, and try to convince themselves that reality is wrong.

Of course a large part of this endless nonsensical squabbling over terminology and descriptive emphasis is simply a tactical ruse to try and claim other people's work as your own - by simply changing a few words here and there - whilst chucking out the bits that you don't like. The problem with this approach, as we have seen in the case of MMR, is that you just end up with a lot of incoherent nonsense. Sigh.

Matt Franko said...

y,

"The people in control are weak and don't know what they are doing."

Seems like you have a pretty firm grasp of the current situation imo! ;)

Clonal said...

Also Paul Krugman: Europe has Made a Terrible Mistake and Republicans are Completely Mad

Interview with Krugman and video

Quote:
Krugman discusses how and why the “two great centers of world economic activity, of democracy, and of everything else are both in deep trouble.” He says, "Europe made the terrible mistake of having a single currency without a single government, and the United States has one of its two major political parties that has gone completely mad.”

Tom Hickey said...

y, I don't see it the same way. We are all trying to suss this big thing called the monetary economy out from different angles. Some of those POV's are widely divergent and even conflicting. Others are closer and more involved in nuance. But every POV makes a contribution, even if largely as a negative teaching. One of my Taoist mentors used to say that negative teachers are as important as positive ones in understanding the universe as a system. It is very useful to know the paths that lead nowhere, around in circles, or over a cliff. But some paths are adjacent or even parallel. Different but get to the desired goal. For example, one path might be faster (more efficient) whereas another more beautiful (more effective).

Tao Jonesing had an important post on this yesterday. Certainty kills knowledge. Human knowledge is always in flux and anyone who thinks that they have the ocean in their bucket is stuck in that bucket.

Matt Franko said...

Tom,

Is 2 + 2 = 4 certain? Or should it be allowed to be discussed?

rsp

paul said...

@Tom

I suppose silly POV's can get us to re-think our own views because most of us are insecure wrt 100% certainty…

… but you will never convince me that the Moon is made of green cheese.

Tom Hickey said...

Is 2 + 2 = 4 certain? Or should it be allowed to be discussed?

Mathematical truth follows from axioms that are stipulated. Part of the great mystery is how some systems of tautologies based on stipulations turn out to have application to the world. Some notations are developed for a specific purpose like Newton's calculus. Some are pure math inventions like non-Euclidian geometries that found micro and macro applications.

A great deal of philosophy is about this mystery and the debate still rages unsettled among realists, inductionists, intuitionists, nominalists, etc.

So while 2 + 2 = 4 in logically certain in terms of the axioms of decimal arithmetic, what that implies beyond this is not.

Tom Hickey said...

So to relate what I just said to the MMR v. MMT debate on banking, first get the institutional stuff right and then argue over what it implies in terms of ratio of public and private.

Instead of "Is so," and "Is not."

The institutional arrangements are defined in law and regs, which are checkable.

paul said...

"So while 2 + 2 = 4 in logically certain in terms of the axioms of decimal arithmetic, what that implies beyond this is not."

I suspect in the context of a monetary economy it can be safely taken as certain.

Matt Franko said...

"So while 2 + 2 = 4 in logically certain in terms of the axioms of decimal arithmetic, what that implies beyond this is not."

so if a hen laid 2 eggs and then laid 2 more, it would not be certain that the hen laid 4 eggs?

Or are you saying that these mathematical facts (ie hen laid 4 eggs) do not explain anything about causation or explain the process, significance, etc...

Trying to understand...

rsp

Tom Hickey said...

I suspect in the context of a monetary economy it can be safely taken as certain.

There are disagreements over how to express it.

Tom Hickey said...

I suspect in the context of a monetary economy it can be safely taken as certain.

There are disagreements over how to express it.

Tom Hickey said...

Or are you saying that these mathematical facts (ie hen laid 4 eggs) do not explain anything about causation or explain the process, significance, etc... Trying to understand...

Philosophy of math

paul said...

"There are disagreements over how to express it."

So that's why you cut FD015 (and some others) such a wide berth?

Seems to me that many of the disagrrements are due to ideological rigidity or just plain stubborn-ness.

How much time should we waste on those? Especially when their arguments are incoherent or clearly flawed.

I know, who decides that? I do, for myself. Others are free to do as they please.

It reminds me of people trying to tell me what the Bible says. How would they know? They can't read my mind.

Seriously, we tend to give honest skeptics a lot of respect here. The same is not true of other sites ()not naming any in particular).

y said...

Unfortunately the MMR discussion doesn't always occur on that level, Tom.

It's often reduced to making up nonsense about MMT and then making up some other nonsense to justify a particular ideological outlook.
And then the cracks are papered over by denouncing MMTers as liars and trumpeting MMR's honesty, truthfulness and impartiality.

Of course one person in particular is responsible for this pitiable level of pseudo-intellectual drivel.

The others are alright.

Andrew said...

According to the ideology of their high priest......MMR is apolitical.

Tom Hickey said...

I would not jump to conclusions about this, no matter how it may look on the surface. I thought MMT was bonkers when Ramanan described it in a comment somewhere. I was about to blow it off but Ramanan seemed like a reasonable person and provided references that I checked out and found that my first impression was wrong.

If things are expressed in a way that one is not used to, one may reject them as whatever. That's not always a good strategy. There are always reasons behind what people say and it is usually worthwhile pursuing them to see where they lead. May be dead end, but may not be.

It's not always a question of being right either. Everyone agrees that 2 + 2 + 4 but there is disagreement over why this is case. Then there is the interpretation of the Constitution, which seems obvious until one gets into constitutional law and court precedent. Same with so-called scripture, but here there is even a question about the text, authorship, provenance, etc. even before the arguments over interpretation and hermeneutics.

Even so-called facts are non-neutral, as Paul Volcker said, because people with different POV's see the same events differently.

Tom Hickey said...

Y: "It's often reduced to making up nonsense about MMT and then making up some other nonsense to justify a particular ideological outlook.
And then the cracks are papered over by denouncing MMTers as liars and trumpeting MMR's honesty, truthfulness and impartiality."

I agree that the objections are not always stated gracefully, but pursuing them has brought out more specific detail about what Warren and other MMT economists mean. So it is net positive.

The debate is actually not as acrimonious as it other areas.

geerussell said...

After getting sidetracked reading about complicated mathematical proofs of 2+2=4 I ran across this great quote:

We used to think that if we knew one, we knew two, because one and one are two. We are finding that we must learn a great deal more about 'and.'

—Sir Arthur Eddington

Tom Hickey said...

The ancient Greeks regarded number as real and rational. When they discovered irrationals, they were freaked. Cracks in reality! Reality is not rational?

Andrew said...

I am open to MMR......the main issue I have is with Cullen. He says that he is non political, then he takes a blatant political ideological stance on some things in MMT he doesn't agree with.

It's hard to take him seriously when he ignorantly (or sneakily) tries to hide his bias. Albeit he may score some minor points in the game of technical semantics.

Andrew said...

Besides....without a mechanism to promote full employment AND maintain price stability. MMR has nothing to add to the debate. Operationally their ideas are effectively no different to those from the neo-classical and gold standard crowds.

Tom Hickey said...

The point is to use your filters including your crap detector and learn from both positive and negative teachers.

And remember that no one has the ocean in their bucket, if only because a bucket cannot hold the ocean no matter how big it is.

Andrew said...

I hope you are not hinting my bucket is too big. My mouth maybe a bit loose but my bucket size is normal.

I do have this strange desire to deflect crap from those who might not be able to filter it very well...maybe I should just stand aside and let them cop it.

y said...

"he may score some minor points in the game of technical semantics."

Not that I know of.

paul said...

"he may score some minor points in the game of technical semantics."

Semantics is a communication property. It is a descriptive process.

Otherwise semantics is irrelevant wrt the natural behavior of a system.

At best a semantic description will be a cartoon of an actual process, depending on how a recipient parses the language.

We all have an abstract vision of processes in our head which we try to translate to language when communicating with others.

Even if we were 100% accurate in our technical descriptions there would be mis-understandings.

So I look for little "tells" in a discussion to give me hints on the direction I need to nudge the abstract concept held by the other person in my direction.

Or vice-versa.

Focusing on semantic arguments is chasing one's tail in my view.

KISS is a better approach for the masses.

PG said...

Rodger Erikson wrote...

"EMU: pegging fiat to bankster hoarding of fiat. You're kidding?"

The EMU is a case study on which bad happens if an ecology of drifting genetic vectors (nation-states) is constrained in their global diversity by imposing uniformity at something so basic to each vector social fabric as the currency.

And it will become a case study on what happens if an ecology of drifting genetic vectors (nation states) is misconceived as one only drifting genetic vector, by pushing forth the idea of a US of E as the (wrong) analogy to the US of A.

Hope that in the future politicians must explain Ashby's Law of Requisite Variety to electorates before being considered candidates...