Friday, August 24, 2012

Warren Mosler on the monetary economics of a gold standard


Must-read. 'Nuff said. Roger Erickson has already posted on it here, but I want to emphasize it is a must-read if you want to understand the MMT position on monetary systems — non-convertible, floating rate versus convertible fixed rate. This is key to grasping MMT and the MMT position.

Bonus: Contains a link to a paper Warren wrote in the '90's.

Exchange Rate Policy and Full Employment
December 1998, loosely structured lecture in Newcastle, Australia.

The Center of the Universe
Gold standard thoughts
Warren Mosler

61 comments:

Matt Franko said...

Simon just reported a CNBC on-air poll result where 62% of respondents said we SHOULD go back on the gold standard....

GITMO may not be large enough....

rsp,

Tom Hickey said...

Must be something in the water.

paul said...

Matt,

On-air polls are notoriously inaccurate. Only nuts (for lack of a better word) respond to them.

If that is a representative polling we're screwed.

I tend to believe the real folks in power understand a gold standard would be unworkable, so would never sign on.

"GITMO may not be large enough…"

We have lots of other islands. For political crooks we could create floating islands if need be.

Tom Hickey said...

In an economy dominated by rent-seeking, how long would it take the top tier to own all the gold under a gold standard?| Not very long at all, especially since the real interest rate is higher under gold due to hoarding.

Clonal said...

The gold standard, and the need to get rid of it was why the Wizard of Oz was written by Frank Baum. The Oz really stands for Troy ounces the unit by which gold is traded. Like many nursery rhymes and children's stories, the main message is very political, and very anti banker. The wicked witches were the banking conglomerates. Bill Still's movie The Secret of Ozis well worth watching. Still confuses Government Debt and private debt. But worth watching nevertheless.

money4nothingchicks4free said...

"This is key to grasping MMT and the MMT position."

Yes, and WM sure has a gift to explain It.

Dan Kervick said...

I doubt most people understand much about what they are being asked when they get a question like that. There is plenty of opportunity for better public education here.

In our country we use expressions like "Consolidated Plungers is the gold standard in toilet plungers!" The expression has an automatic positive valence for lot's of people. Who is going to oppose being on "the gold standard" if they don't have much background?

Bob Roddis said...

Historically nations suspend their gold standards in times of war, when they need their economies to function to the max. If a gold standard was so good for an economy, why suspend it when you need max economic performance? Obviously because it is not conducive of maximum real output.

Historically, nations suspend their gold standards in time of war because if the citizens were forced to pay for the war in the present time, they would revolt and there would be no war. The "gold" regime in existence after WWI was a "gold exchange" system where banks could still create loans out of nothing, although their notes were redeemable in gold. Thus, prices were still artificially bid-up but were unsustainable, leading to a crash and bank runs.

This is just the typical MMT and Keynesian fraudulent historical narrative with the usual avoidance of the central economic concept of economic calculation and its impairment via your various nefarious schemes.

Matt Franko said...

Clonal,

Our Paul here is a friend of Bill Still who produced that movie "The secrets of Oz"!

Small world. Rsp

Tom Hickey said...

Bob, like the US and allies should have just let Hitler, Mussolini and Tojo run over them because the citizenry would have resisted a higher present tax rate? Really?

Matt Franko said...

Ron "Pallagra" Paul coming up on CNBC in a few minutes to advocate for the gold standard...

This should be good

Matt Franko said...

"debt problem" "cant get rid of the debt" "present system is evil" "govt gives banks money" "too much money being created"

Matt Franko said...

"gold has been around for 6,000 years" "it is a natural money" "fed counterfeits money" "natural medium of exchange for 6000 years" "printing continues" "interest rates artificially low" "pumping in money"


What an idiot...

Bob Roddis said...

To the extent it was necessary for the US to fight WWII, WWII was created out of the madness of WWI which could not have been funded without central banks in all of the combatant countries. Further, part of the Great Depression was caused by harebrained schemes employed in an attempt to repair the financial damaged caused by the schemes which supported WWI. Calling that entire history "a failure of the gold standard" is typical MMT and Keynesian fraud.

Greg said...

"Further, part of the Great Depression was caused by harebrained schemes employed in an attempt to repair the financial damaged caused by the schemes which supported WWI. Calling that entire history "a failure of the gold standard" is typical MMT and Keynesian fraud."


Facts are facts. The financial system performed worse; it had more crises and more severe crises when we were fixed to gold .......period.

You prefer to argue that "Its not the gold its the dishonest people running it" Okay but if gold wasnt responsible for our crises its also not responsible for our increasing living standards during those times...... PEOPLE were.

Focusing on THE CURRENCY is taking your eye off the ball. It is only a tool.

PeterP said...

Paraphrasing Bob Roddis: if we had gold standard for the last 600o years not only mass warfare wouldn't still be invented, we would still travel on horseback! I agree: gold standard is assured backwardness.

Dan Kervick said...

I don't understand why Austrians aren't all aboard for floating fx. Floating a currency allows its exchange value to be determined internationally by market conditions, and countries that conduct their domestic economic policies poorly are subjected to market discipline imposed by its trading partners. The gold standard is an attempt to fix prices. What's with Austrians loving that?

miller B said...

great comments BOB, countries that stay on the gold standard can't possibly defend themselves against a fiat regime. Fiat empires will always "over spend" and in turn out manufacturer their foe. which is how all wars are won. It would be hard to imagine (using your own analysts), how a country with a gold standard could survive among the fiat empires for very long.This makes fiat superior than gold using basic game theory analysis. Unless you force every nation on gold, of course that could only be done with the "violence" of an international body of government. I guess we could give it a libertarian sounding name like the non-government, non-violent gold enforcement corporation.

money4nothingchicks4free said...

I think Bob instead of talking about freedom always, you should always state up front: "I am against democracy". That way people would understand your position better.

FDO15 said...

Bob, be thankful for what we have. If the MMTers had it their way the banking system would get nationalized and all money would come directly from the state. At least with the current arrangement you free market wing nuts get to keep the current arrangement where the banks issue most of the money without government impeding on them.

Matt Franko said...

FDO: "the current arrangement where the banks issue most of the money"

Yeah MOST of the money... too bad their broke dick model cant issue the most important balances that their success and profits depend on which are the balances to pay THE INTEREST on their loans...

Tom Hickey said...

If the MMTers had it their way the banking system would get nationalized and all money would come directly from the state.

FDO15, you are talking nonsense again. The only MMT economist who espouses bank nationalization who whom I am aware is Bill Mitchell, and he points out that while nationalized banking is consistent with MMT so are many other institutional arrangement, that MMT does not imply nationalization, and that this policy prescription reflects his own preference.

Bob Roddis said...

1. Democracy is basically two sharks and a kitten voting on what's for dinner.

2. I'm quite pleased with your responses which display your obsession with maintaining the totalist state. And yes, you are right. Fiat currency, which is based upon theft and fraud, can and does fund an aggressive warlike state which itself is based upon theft and murder. No reason to try to put a stop to that, is there?

JK said...

Bob,

I'd appreciate it if you would address a point raised by miller B….

Suppose the United States were to move to a strict gold standard, or I think you've even mentioned competing currencies. And also suppose that other countries in the world did not. And suppose further that one of those fiat currency countries, let's say a rising power like China, declared war and attacked the United States.

Honestly, do you think that the United States could properly engage in the conflict while beholden to a strict gold standard (or competing free currencies)?

Bob, you always avoid these types of questions. I'm genuinely curious about your solution to this problem.

FDO15 said...

Matt,

The money to pay interest comes from other bank deposits. See Mosler on this.

Tom,

Bill Mitchell is one of the most prominent MMTers around. I believe he's writing THE MMT textbook, isn't he? You seem to be trying to downplay his views as if they don't represent MMT even though Mitchell is one of the three most important MMTers who lives.

PS - I'll give you all some free advice about Bob Roddis. Ignore him. I don't much care for MMT and what looks like an extreme left wing agenda to me, but his views are on the exact opposite end of the spectrum from you all. Why bother?

Tom Hickey said...

Bob isn't against democracy, he is against government. Rule of law? meh.

Tom Hickey said...

Jk, Bob clarified this is a previous thread. He is for a specie standard.

Tom Hickey said...

FDO15, Bill has explicitly stated that his position on MMT is not MMT. Other MMT economists hold different positions. Connecting MMT with bank nationalization based on association with a position that someone holds personally is illogical. There is no connection. Zero.

JK said...

Tom, you're saying that Bob clarified what type of currency system he prefers?

But has he addressed practical question, like the point about responding to foreign aggression? This is the question I wanted addressed.

FDO15 said...

You're full of it Tom. Mitchell's opinions are very important. Not that it matters. Wray has been a proponent of nationalising the European banking system and Rodger Mitchell has also called for nationalising the banking system. joe Firestone, another prominent MMT voice is also in favor of nationalising the banks. This isn't just one random MMTer calling for this. It's a commonly held belief in MMT circles. Nice try though.

http://rodgermmitchell.wordpress.com/2012/03/31/the-end-of-private-banking-why-the-federal-government-should-own-all-banks/

http://www.economonitor.com/lrwray/2012/07/16/mmt-and-the-euro-current-account-imbalances-and-the-euro-crisis-part-2/

http://neweconomicperspectives.org/2012/07/a-communication-from-your-central-bank.html#comment-30754

http://bilbo.economicoutlook.net/blog/?p=12077



Tom Hickey said...

Well, I can imagine that someone like Bob could argue that the colonists were not organized as state, had no functioning monetary system, government or rule of law other than in the separate colonies and yet they managed to come together and beat the British Crown. Don't know how that would have worked with the Axis powers though, and actually, at the time Britain was occupied with other things and didn't think that committing resources to a war in the colonies are worth it. If that had not been the case, things may have turned out differently for the insurgents.

Bob Roddis said...

Gee. I thought "democracy" solved everything. But then somehow, the voters are too stupid to properly plan and pay for a defense system unless the true costs of such a system are hidden by their bureaucratic betters via fiat funny money dilution.

A society with sound money which respects individual rights and private property is going to be a prosperous society governed by sane adults. A society with a fiat system is going to be based ab intitio upon theft and fraud and plagued with boom/bust cycles. The busts will then be exacerbated even more by further Keynesian impairment via government debt spending and even more money dilution. The sane affluent nation with sound money which respects individual rights will almost always be able to rationally plan to defend itself against its aggressive Keynesian foe and will stand as a beacon to be emulated to the citizens currently condemned to live in Keynesian misery in the warlike Keynesian state.

Tom Hickey said...

FDO15, in the first place, Roger is not MMT. Nothing in the Wray post about either nationalization or resolution, which as you know are different although often conflated. Bill Black recommends resolution but not nationalization. Joe Firestone is not an economist.

Bill in the post: So this blog is about banking. Not a complete story (given I am short of time today) but an account of what I think should happen to banks and banking. Note that this account is interpretative rather than a statement of MMT principles. It reflects my preferences based on my understanding of those principles. But equally, someone with a similar understanding might choose a different policy path.
At the outset let’s cut to the chase – I would nationalise all private banks.


Bill also comments herein answer to Trixie who summarizes your argument:

bill says:
Friday, June 8, 2012 at 7:05
Dear Trixie (at 2012/06/08 at 6:53)
I think the position is clear in the post and from the section you quote (which I truncate even further):
So this blog … an account of what I think should happen to banks and banking. Note that this account is interpretative rather than a statement of MMT principles. It reflects my preferences based on my understanding of those principles. But equally, someone with a similar understanding might choose a different policy path.
I cannot help it if people (ad nauseum) cannot differentiate opinion from principle. The same people are probably those who claim the Job Guarantee is a socialist program aimed at employing all Americans. The fact that these opinions fail to even understand what socialism is is telling.
The jump in your logical train from Point 2 to Point 3 is irrational and unfounded and it is impossible to deal logically with that degree of ignorance. I realise you are just laying out what seems to be from your perception to be a train of thought held my “others … [who] … connect the dots differently”.
So I support bank nationalisation to resolve the tension within what is already a public-private partnership and to ensure that if the public is to socialise the losses then it should equally socialise the benefits.
That “opinion” is consistent with but does not define Modern Monetary Theory – as a set of logical principles.
best wishes

bill


What is so difficult to understand about this?

FDO15 said...

Further, Tom, I am surprised to see you also in favor of nationalized retail banking while also claiming that MMT doesn't advocate nationalized banking. Why do you intentionally try to misleading others about MMT's political leanings?

"I say let the govt deal with retail banking with 100% guarantee, which only govt can provide, and let commercial and investment banking do their thing without govt backstop. "

http://mikenormaneconomics.blogspot.com/2012/08/lord-keynes-simple-question-for.html?showComment=1345242311334#c579524161804919485

Tom Hickey said...

I am not an MMT economist, nor am I an economist or in finance. I am not qualified to hold an informed opinion on this. I put it out there for debate. I am willing to change my view if it doesn't fly. But, from my admittedly limited understanding of the issues, this seems like a good way to go that balance public and private and avoids moral hazard. The bulk of the lending in the US is commercial and that would be private with no govt guarantees and banks having to stand behind their decisions. If we are going to have capitalism, we shouldn't prevent failure and lack of accountability. Govt running retail banking would protect the ordinary folks who are presumed not be sophisticated about finance. Those in business are, in contrast. Of course this doesn't imply that govt should abandon all bank regulation and oversight, especially in light of systemic risk that the govt will inevitably have to get involved in to prevent collapse. But all banks involved should face the consequences — change in management and equity wiped out, with a rigorous investigation into possible wrong-doing or malfeasance. But that is just my opinion based on what I see from were I stand. It should not be confused with MMT. If this has not been clear, I am making it clear now.

FDO15 said...

Typical MMT response. When it's convenient MMTers say one thing and when it's inconvenient they say something else. You spend almost your entire day promoting and teaching MMT principles. You claim to be qualified and to understand MMT well enough to spread its message on a daily basis all over the internet. But now that your views contradict something that is inconvenient to MMT you suddenly claim ignorance.

If you don't represent MMT or are not qualified to speak on behalf of MMT then maybe you shouldn't spend every waking moment spreading MMT?

Tom Hickey said...

What I just said was that I am not qualified to talk about the details of banking and finance since I am neither an economist nor in finance, and know very little about the issues involved.

This is a view that has nothing to do with MMT. Even if it did, I am not an MMT economist not do I speak for MMT professionals. If you want to know know what MMT is ask the founder and the initial developers as well as other professionals that joined them subsequently.

paul said...

FDO15

MMT is a framework, a toolkit that uses a pure mathematical approach to solve economic problems.

There is no way one can say system math has an ideological bias one way or the other (well, obviously you can).

Just because some use the toolset to further so-called leftist policies (whatever that means) doesn't make the toolset leftist.

Your buddy CR over at MMR uses the exact same toolset and no matter what he does the math can't change. He merely re-packages the math so that it seems different than MMT, but that would be like repackaging e=mc^2 as a right-wing (or non-communist) construct.

Bill Mitchell's preferences have zero to do with system math. Art Laffer could use the same toolset with no problem.

The argument is absurd.

Cue incoherent anti-MMT rant in ...4,...3,...2...

David said...

your various nefarious schemes

Sounds like an old Sinatra number.

Bob Roddis said...

Tom Hickey wrote:

Rule of law?

Right. A society follows the rule of law when it does not violate the Constitution's purposeful omission of a power to "emit bills of credit" and does not steal purchasing power from average people via illegal fiat funny money dilution (which we all agree helps fund aggressive warlike Kleptocratic Keynesian regimes).

FDO15 said...

So now MMT is just a "pure mathematical approach to solve economic problems."

LOL. I actually don't see any math at all in the MMT research. Virtually zero. There is no mathematical model at all. Just a bunch of left wing assumptions using old economic theories. In fact, you don't even have a model that comes close to dealing with the one thing you all say we should focus on - inflation.

"mathematical approach". That was funny.

Tom Hickey said...

What don't you understand about monetary economics using the SFC sectoral balance approach developed by Wynne Godley and articulated in G & L. This is the approach that MMT uses and that's what paul is talking about, I presumem not to mention the other Post Keynesian economics that comes along, too.

BTW, Albert Einstein was a socialist, so paul is not just joking.

paul said...

"you don't even have a model that comes close to dealing with the one thing you all say we should focus on - inflation"

Doesn't take much of a model to look at inflation.

Inflation is too much money chasing too few goods and currently we have in excess of a trillion dollars of unused production sitting idle.

When do you expect inflation to kick in? Most people are concerned about deflation right now.

jrbarch said...

Dear FDO15 - you are an excellent 'chainpuller' (even managed to get Tom et al going). However, I don't think you are going to be able to simply flush MMT away - do you?

.... most blog commentary is like drawing a line in water anyways, especially at the speed that topics turn over at MNE - if you do want something to stick I find it's better to build on the vacant block next door that you own, than try to destroy your neighbour's place and build on top... just saying!!

Trixie said...
This comment has been removed by the author.
jeg3 said...

To sum up libertarian leadership & austrian economics:

They definitely have these pseudo-leadership skills down pat:
"10 Fatal Flaws That Contribute To A Leader’s Failure"
http://www.farnamstreetblog.com/2012/08/10-fatal-flaws-that-contribute-to-a-leaders-failure/

And

To sum up their economics you end up with:
"How I built a toaster -- from scratch"; Remember the real toaster shown in the beginning was created in a "Keynesian" economy.
https://www.youtube.com/watch?v=5ODzO7Lz_pw


paul said...

FDO15

Tom?? wrote: "I say let the govt deal with retail banking with 100% guarantee, which only govt can provide, and let commercial and investment banking do their thing without govt backstop."

What's wrong with this? Why should the government backstop the operations of private banks?

Tom Hickey said...

FDO, I would have govt take over responsibility for and funding of retail banking and get private banks out of it other than as contractors the govt hires for a fee to administer retail banking, should govt decide to handle it that way. I have no problem with private banks competing with the govt system, but with no govt guarantees. And with the govt's cost of capital at zero and risk to capital essentially non-existent, that competition would not be possible, it seems.

Jk said...

Paul,

I think there's more to inflation than too many dollars chasing too few goods. That's just the one kind.. demand-pull. And is there even any evidence of a direct demand-pull causation between expanding the money supply and rising prices (in the U.S.)?

Also, using FRED at the St Louis Fed, CPI seems to be much more correlated with (caused by?) increases in the price of energy… which is more like cost-push inflation caused by a collusive multi-party monopoly.

Matt Franko said...

JK,

right the energy prices go up and the govt 'ratifies' the price increase by implementing COLAs based on CPI...

rsp,

Jk said...

Matt,

That may be true… but that doesn't indiciate the typical causation that is suggested, right? That reality seems backwards: inflation causes an increase U.S. government deficit spending instead of ther other way around.

Leverage said...

FDO supports corporate welfare, where banks get the back up of state currency and are given special charters to issue similar form of money (so called credit). When they screw up then they get given free money and are able to arbitrage to keep their profits up through bribing government officials to pass oligopolistic laws.

He is delusional if he thinks we have a 'free market'.

On a more serious note, it's impossible banks can add the balances to pay interests of their own loans unless they keep growing their

FDO believes in perpetual exponential growing motion machines. He probably support some non-sense like NGDP target and right money printing going straight into banks, to solve this mathematical problem.

Bob Roddis doesn't know WWI was created by a deflationary situation in central Europe thanks to straight jackets like gold standard. Jingoists love the gold standard, period. The rest is just fairy tale propiertarianism.

paul said...

JK:

Right, I'm concerned with inflation "caused" by MMT-inspired money-printing for the argument offered by FDO15.

Or are we going to blame MMT for the rising price of oil?

The rising price of oil may have as much to do with price-fixing and speculation as it does with demand.

paul said...

I wonder if it's ever occurred to FDO15 and people that think like him that the same people that are pulling the strings of government now would be doing the same thing in his glorious free market.

Anonymous said...

most inflation is due to cost push effects, esp oil price hikes. If you were in a Bob Roddis economy every time the oil price went up unemployment would skyrocket or wages would get stamped down to keep inflation at zero.

miller B said...

"Gee. I thought "democracy" solved everything. But then somehow, the voters are too stupid to properly plan and pay for a defense system unless the true costs of such a system are hidden by their bureaucratic betters via fiat funny money dilution."

BoB evades the question by a repeating generalized definitions and passes it off as elementary fact. Bob constantly claims one of the virtues of gold is it's spending constraining properties. Or as the Austrian maxim "investment can only come from savings". Bob wants it both ways, claiming fiat money causes wars by letting governments spend ("print") more money on military than a gold standard would allow. He's made this point repeatedly. However, now that his little gold country needs military spending gold comes to the rescue. Now gold is able to build up enough military surpluses to defeat the of the war enabling fiat regimes. He's such an ideologue he can't see his own hypocrisy.

Building up defenses with a gold or even "funny money" historically has never been enough. For example WW1 and WW2 was basically a contest of who could turn raw materials into war materials the fastest.Building defenses will be short lived as those defenses will be outdated and simply too few compared to an Axis power turning newly concurred territory into military output.

Bob turns everything into a 9th grade argument over super heroes. my gold states would be e to smart and prosperous to fall to a fiat regime. as if history has not proven him wrong. Well two can play that game. I guess before I declared war I would either ally with gold surplus countries or sell exports for gold and sink you into a depression before I move my armies in.


Tom Hickey said...

I wonder if it's ever occurred to FDO15 and people that think like him that the same people that are pulling the strings of government now would be doing the same thing in his glorious free market.

Common error about MMT and constant objection.

The answer is sectoral balances and functional finance.

Tom Hickey said...

most inflation is due to cost push effects, esp oil price hikes. If you were in a Bob Roddis economy every time the oil price went up unemployment would skyrocket or wages would get stamped down to keep inflation at zero.

Right. Gold price would rise, depressing the real wage. Bob would likely say that all prices would automatically correct in a free market. But the oil price is set by a monopoly provider, since the Saudis are the swing producer.

Tom Hickey said...

From ancient times, gold was needed to pay militaries. Therefore, the group with the most gold could mount the largest and most dominant military. Therefore mercantilism and conquest were the rule of the day. this has persisted to modern times.

JK said...

It seems like the people who wholeheartedly support free market solutions have bought into the mainstream textbook world… as if there ever was or ever will be "perfect competition" and everything will find a happy and efficient equilibrium. What about market power? What about effective monopoly control? Is their no 'violence' and 'coercion' there? (particularly for necessities like energy, water, etc).

Part of the problem with their perspective is treating humans as just a commodity like anything else. But commodities, e.g. salt or corn, do not make decisions for themselves. They are not human. They do not have nervous systems. They don't love and hate. They don't go to the voting booth. …

It does not matter to salt whether or not it is used or not. If the price of salt plummets, the salt doesn't suffer hardship. It does matter to humans whether or not they can make a living. If the price of labor plummets, this can create enormous hardship on people.

I'm not sure how human/labor should be considered, but it seems inadequate to view us as mere commodities.

FDO12 said...

I think it's time to stop debating with bob. He's an extremist obsessive.. leave him to rant to himself in the corner. Don't feed him.