Business RT spoke to leading Moscow financial expert (whatever the heck that is) Chris Weafer, a senior partner at Macro-Advisory.com.
(RT is nothing but the same, misinformed ideological crap. They had a chance to be different and they blew it.)
Here we go...
RT: Why can’t they simply print more dollars and pay their debt?
There is no debt. Treasuries are dollars (reserves) with a maturity and a coupon (interest). To "pay off" the Fed debits securities accounts and credits reserve accounts. This was done to the tune of $61.5 trillion last year and interest rates didn't spike, the dollar didn't collapse, there was no hyperinflation, in short, the world didn't come to an end.
Leading Moscow Financial Expert: No economy in the world can simply turn on its printing presses and create as much cash as it wishes, as this would make its currency worthless.
Absolutely wrong. Spending by government adds to income and savings of the non-government and that income is spent and the savings are invested, creating more productive capacity and demand for more goods and services, which entrepreneurs and businesses are glad to meet. If the quantity of goods and services increases with the money supply, which it does, this does not cause the exchange value of the currency to depreciate. Why would it? In a normal, competitive economy, government spending (money printing) does not and cannot create inflation.
Leading Moscow Financial Expert:If the amount of currency in issue is not sensibly related to the strength of the economy, then foreign trade partners will … devalue the currency quickly,” Weafer explains.
He sounds very confused when he says, "if the amount of currency is not sensibly related..." The fact of the matter is, the amount of currency is always related to the economy in that the spending (which creates the money) adds to demand, which leads to an increase in output or in other words, the strength of the economy.
Leading Moscow Financial ExpertIf you have one asset and income source which allows you to issue one dollar, and then you print one more dollar, everybody else will see what you have done and will value your one dollar at only fifty cents.
I have no idea what he means when he says, "If you have one asset and one income source that allows you to issue one dollar???" Makes no sense. The U.S. gov't is a monopolist and can issue as many dollars as it wants. Like so many Austrian/hard money people he fails to understand that M does not equal P (quantity of money does not equal price). The equation is MV=PT and they're all VARIABLES! That means, if M goes up, but V goes down and T goes up, then price goes down.
Leading Moscow Financial Expert:Some countries have done that in the past, but in those cases people soon had to use suitcases just to carry enough currency to buy a loaf of bread.”
In every single one of those cases the countries either had broken economies that were unable to raise production or, they were on a gold standard or some fixed exchange regime or had debts denominated in other currencies. There is not a single example in history of a currency issuing nation that had floating FX/non-convertibility with debts denominated in its own currency, that had inflation of the kind he described.
Leading Moscow Financial Expert:Under the Bretton Woods financial system, established in 1944, the amount of currency in circulation was linked to gold reserves. But in 1971, the US abandoned this system and started to include a number of other economic factors, based on a recognized ability to service debt and prevent inflation, and maintain orderly trade with the rest of the world.
Yes, the gold standard was abandoned, just as it was abandoned by most of the world duing the Great Depression because it created repeated episodes of panics and depressions and debilitating deflation. In short, it has always been abandoned because it doesn't work.
15 comments:
Soft currency economics is easy to understand and very logical when the foreign sector is static. Federal deficits are identically equal to private savings. Inflation only occurs when the demand is increased beyond the point where capacity to produce cannot meet it. But, suppose a sizable portion of the deficits are not going into the domestic economy to allow private investors to save, but instead are going to fund wars around the world. In this case there is no productive use of these funds. They are simply used to kill people and break things or spent to build bases and repair war damage in foreign countries. What happens to these dollars that are spent in the foreign countries? How are these dollars accounted for in the sector balance. They are not a part of foreign trade. They are not put into the domestic economy to replace dollars forgone from domestic spending to allow private sector saving? (Some portion does go back into the domestic economy through spending for military goods and salaries, but not all. And these expenditures are not productive to the domestic economy.) Look at a limiting case where 99% of the deficit is for foreign adventures. Certainly at some point these dollars being spent unproductively in foreign countries will affect the health of the domestic economy, and in some way, the value of the currency. Is there some kind of bubble or black swan being created here? I'm simply asking someone to explain this, because I don't understand it. It seems likely that at some point the chickens will come home to roost. All of the simple examples used by Mosler and others to explain MMT, like the family IOUs and business card tickets out of the room apply only to a closed system. What happens when the system is opened to other competing currencies? I'm looking for an answer.
Mike, I don't understand that $61.5 trillion figure.
Looking at the Treasury statement, most of it ($54 trillion) is due to "Nonmarketable: Government Account Series", (not Bills, Notes or Bonds). What does that mean?
MN, Would you spend all your portfolio if somebody forced you to liquidate it?
That is what you are saying ;
RT: Why can’t they simply print more dollars and pay their debt?
"Spending by government adds to income and savings of the non-government and that income is spent and the savings are invested, creating more productive capacity and demand for more goods and services, which entrepreneurs and businesses are glad to meet."
Kind of spending that is on assets that are there for saving does not creadte rise in AD. Here is the talk about paying off Tsy's. Treasuries are there to satisfy demand of parking savings.
If parked savings, such as yours in your portfolio, get liquid not by your need but by need to be retired by issuer, WOULD you spend it all on productive capacity/rise AD, or park it in another asset.
Paying off the US debt would not give an inch in raising AD, it would only shift savings in a protfolio.
Elwoods,
If a country (say the US) spends money abroad, and assuming the stock of dollars that foreigners want to hold stays constant, then the dollar will drift downwards relative to other currencies, which will make exporting stuff from the US more profitable, which in turn creates jobs in the US.
I.e. the ultimate effect of the US government spending money abroad is the same as spending such money at home.
y,
Those are in the "Social Security Trust Fund" and possibly the US Federal Employee 401k-like "G Fund"...
This is like Wray's assertion that the bailout was "29T" .... roll over 1T of 1-day securities for 29 days and you get "29T"... type thing...
Its a cumulative total of all of the redemption transactions during the FY.
rsp,
Jure,
You are looking at Mike's answer to the next question about "printing money"...
rsp,
elwood,
The USDs for the warfare are typically spent into US accounts...
So like when the Iraq reconstruction started back in '03 and '04 the contractors were given USD balances to purchase plywood and drywall here which drove up the prices and created shortages here while the REAL goods were then shipped abroad...
So warfare activity accrues domestically in financial terms (ie in the USD system) and accrues externally in real terms (plywood/drywall/ordinance)...
rsp,
"So warfare activity accrues domestically in financial terms (ie in the USD system) and accrues externally in real terms (plywood/drywall/ordinance)..."
Not to mention accrual domestically and externally of dead bodies.
1) he's tracking only nominal metrics, and even then only some of them - while leaving out most real metrics
2) he's discussing mostly static value, and not dynamic value
In evolution and campaign theory and computer programming, leaving out new, indirect options = rapid decline & extinction. Why is economics always assuming that WE can ignore the bulk of unpredictable, reality?
Where would we be now if FDR during the Depression
[e.g.,
http://fraser.stlouisfed.org/docs/meltzer/ecctes33.pdf ]
or George Marshall during WWII
[ http://www.strategicstudiesinstitute.army.mil/pdffiles/pub358.pdf ]
had refused to explore options precluded by orthodoxy?
Elwood, at full employment increasing military spending that adds to the deficit is inflationary. At under full employment, the add to the deficit reduces unemployment.
Military spending abroad either requires selling dollars and buying a foreign currency or borrowing in the foreign currency, which the US does not do, or actually having dollars accepted abroad. Selling a currency theoretically depresses the value of the currency but that depends on demand and is not necessarily the case. The currency that is actually exported ("Eurodollars") does not affect the domestic money supply of the US unless it returns to the US. In the past, the USD actually exported did not return to the US but was used abroad. For example, several countries are on the dollar standard and use USD as their currency (Ecuador). Whether than would continue to be the case "in the long run" is uncertain. Many assume that in the long run all dollars come home to roost so military spending is inherently inflationary. That has not been the case for the US so far.
Mike thanks for the Discussion.
I think the RT article by Chris Weafer doesn't serve the audience or inform the audience well enough regarding economics & banking. Therefore, he does a disservice to "global economics" in the end.
I'm not really qualified to speak to banking operations. But I feel that the number #1 most important fact regarding the shut down & budget limits is... that either our leaders (congressmen) don't understand finance, banking operations, and economics... OR WORSE they are just acting like they don't understand these things in order to spin the truth and/or continue to attract big money from interest groups.
I tend to focus on Propaganda and corruption. The host of MMT Writers & Economists really do a great job of bringing the right points to any discussion. Please keep up the good work and let's hope future fiscal, monetary, and economic agendas are set by MMT Folks.
I'm still learning. Thanks, Dan
Chris Weafer — ideological flak or monetary dumbbell?
"Under the Bretton Woods financial system, established in 1944, the amount of currency in circulation was linked to gold reserves. But in 1971, the US abandoned this system and started to include a number of other economic factors, based on a recognized ability to service debt and prevent inflation, and maintain orderly trade with the rest of the world."
Actually, even that's a bald-faced mistruth.
All the various countries went off the gold std from the mid 1920's to mid 1930s. (France was last? 1936? Spain & China never even went back ON the gold std post WWI?)
Breton Woods was a negotiated agreement to use the $US as a final, clearing currency. It was a matter of trust and stability ... and superpower hegemoney. Esp re Saudi Oil.
It's far more accurate to describe Breton Woods as the world going onto the Saudi Oil Std, via the $US?
Those Breton Woods participant countries which felt their lost prestige?
They argued for a straw man to save face. They asked for, and received, the symbolic, straw olive-branch that if their GOVERNMENTS ever wanted to, their governments alone could always turn in their $US reserves and get "real" gold, at some fixed peg.
That fall-back move, back to an inter-gov only gold std, wasn't of much use. In a pinch, to buy more oil, they had to go back to $US again in order to fulfill Saudi oil contracts.
As far as I know, in 27 years, France was the ONLY country that ever tried to convert significant amounts of it's reserves to gold. When they did, our Treas Sec. (Connolly?) had Nixon close the gold window.
No wonder France tried to also be the world leader in nuclear power as well.
Not that the ongoing fixation with any specific metal mattered? The US gov & electorate have far better things to do with their time & brain cycles than procure gold for people who want to hoard it? Just another distraction from the core mission of redefining, reassessing and constantly pursuing Public Purpose.
see http://mrzine.monthlyreview.org/2010/jackson170710.html
and
"Under the gold standard, the supply of money is assumed to be a constant multiple of the monetary gold stock"
http://www.dartmouth.edu/~dirwin/Did%20France%20Cause%20the%20Great%20Depression.pdf
that's a pretty big assumption! Like the joke about a marooned economist with 1 can of food - "assume a can opener."
The brief history of the gold std reads as one big fiasco, where policy staff desperately tried to maintain NOMINAL, theoretical governance metrics despite any and all effects on REAL system outcome metrics.
It's mind boggling, in hindsight. How could we have been so dumb?
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