Monday, March 28, 2011

Plan B: Interview with Lester Brown about Collapse

Time for Plan B: Our Civilization Is on the Edge of a Systemic Breakdown

Plan A is business as usual, based on competition and control. Plan B is meeting the enormous challenge that humanity faces through cooperation and coordination.

From Scott Thill's preface to the interview with Lester Brown:

"Japan's bungled response to a mounting nuclear crisis, thanks to one of Earth’s most destabilizing earthquakes and tsunamis, has in a cosmological eyeblink reset the entire world's nuclear ambition. Uprisings in hotspots like Egypt, Libya, Bahrain, Yemen, Saudi Arabia and more, compounded by America's continuing quagmires in Iraq and Afghanistan, are squarely knitting together civilization's crappy experiments like preemptive war, biofuels and light-speed financial stratagems into one titanic mess that is demanding new theories of cleanup.

"It's no longer intellectually feasible to consider any of these events as separate, because they, like the warming climate, are interconnected nightmares that are keeping us more awake than ever, whether we like it or not. And no matter how we spin them, Plan B argues, we're eventually all going to have to work together to survive what is without a doubt an existential crisis of historical proportions. Only the depth and vigor of our mutual efforts and understanding separate us and every other failed civilization in the planet's incomprehensibly expansive history."


How does this relate to MMT? An oft-heard objection to MMT is that it reinforces Plan A — business as usual — because the central objective of MMT is full employment along with price stablity, and fiscal policy — deficits to offset demand leakage to saving — is used as the primary tool to secure this objective. The objection is that as a consequence of liberal government funding, Schumpeter's creative destruction is forestalled, and malinvestment in coddled by what is effectively a government subsidy for failure.

This is patently not the case. It generally results from the incorrect assumption that the whole of MMT is the description of monetary operations. However, MMT is much more than that. Many MMT proponents take sustainability into account, Prof. Bill Mitchell being a notable example. Warren Mosler often says that our primary problems are institutional and he has put forward proposals for institutional reform.

Prof. Randy Wray has written a paper, Government Deficits, Liquidity Preference, and Schumpeterian Innovation, in which "Wray asserts that rigorous analyses of the role played by innovation in economic development must acknowledge the contribution of Joseph Schumpeter. However, the author suggests that the current stagnation confronting most developed, capitalist economies "cannot be understood without synthesizing Schumpeter's insights with those of Kalecki and Keynes." Hence, Schumpeter's work alone is inadequate in explaining the links between government deficits in ensuring aggregate demand and corporate profits."

Prof. Wray observes elsewhere that if we are going to solve our problems, we have to recognize that the limitations we face are never financial, but always real. It is always possible to finance solutions to real problems under the current monetary system, as long as real resources are available.

Humanity's primary real resource is humanity itself and the best investment is in human recourses. Futurist Ray Kurzweil has posited the law of accelerating returns, that is, technological innovation increases exponentially. MMT would add, as long as technological advance is not stifled by false notions concerning "affordability."

Moreover, a great deal of the excess leading to malinvestment is due to lax credit, which provokes financial instability, as Hyman Minksy showed. Minsky's work is central to MMT, and MMT proponents have put forward proposals for addressing institutional arrangements conducive to financial instability. See Warren Mosler's proposals, for example.

14 comments:

Joe said...

Tom, anyone else here, I need some MMT assistance with this:

The latest narrative going around is that Japan will have to sell its treasuries in order to finance reconstruction. This is my MMT interpretation, please correct me if I'm wrong:

Japan sells its dollar-denominated assets, UST, in order to raise yen to finance its fiscal budget. Nevermind the fact that it makes no sense to raise dollars to finance a yen-denominated budget. So Japan has to sell its USD to buy back its own currency needed to "finance" reconstruction. The result is a much stronger yen and Japan not being in any better or worse position to finance reconstruction.

Is this correct?

Tom Hickey said...

I believe so. First, Japan can fund itself directly. without the need for other financing. Secondly, as you point out, selling USD and buying yen puts downward pressure on USD and upward pressure on yen, which acts against Japan's interests as a net exporter.

On the other hand, the USD is the reserve currency in which a lot of trade is denominated, so Japan could use USD to import needed materials from abroad.

So it is not straightforward. Depends on how the funds are to be used. With a nuke plant down for the foreseeable future, Japan may need to import energy resources and it could use USD for this, e.g., since oil is denominated in $, and the US is an exporter of coal. and natural gas.

Joe said...

Thanks, Tom. Like you said, the way the funds are used seems to be the big variable.

Matt Franko said...

Tom,

Per the latest US Treasury report (end Jan.) "Japan" has 885.9B of US Treasuries.

But do we know "who" in Japan owns these? Is it the govt sector or non-govt sector? This may be related to Ramanan's issue....

Now I believe for China, the Chinese govt has the Treasuries but what about Japan?

Resp,

Tom Hickey said...

Don't know where that info might be found, Matt.

The Fed just reports aggregates and keeps individual holdings private. See page 3 of
http://www.newyorkfed.org/research/current_issues/ci4-5.pdf

Maybe the BoJ breaks it down?

Matt Franko said...

Well if Japanese corporations have ownership of the Treasuries, due to their long term surpluses in trade the the US (Honda/Toyota/Canon/Toshiba, etc) why would a Japanese corporation sell their USD NFAs to "finance" Japanese rebuilding.

This gets back to Mike's encounter with Charlie. Why would any Japanese Corp sell anything for "Japan"?

I'll try to look into this.

This builds upon your "currencies stay within their currency zone" postulate.

'Currencies', or in this case if corporate trade surpluses in USD that were rolled over into Treasuries by corporations over the years, these USD denominated NFAs (ie the Treasuries) may also stay with their corporate owners.... the corporations "can't get out of them" so to speak..

The Japanese corporations HAVE (cant leave the zone) to do something with them in the USA.... and they may not have any opportunities available... so they sit in Treasuries....

Resp,

Matt Franko said...

This is a source I have found in the past:

http://www.jedh.org/

Matt Franko said...

ie it may be wrong to say:

The "US" owes "Japan". This may be a meaningless statement also from the standpoint that these USD liabilities are actually to Japanese corporations. Similar to how we keep hearing the story that US corporations have 1.2T of corporate profits still sitting overseas, if these corporations do have that much sitting out there, they are foreign liabilities "owed to the US" so to speak.

It may be that Japanese Corporations own US Treasury securities.... and they cant get out of them without converting this govt "debt" into some sort of USD equity investment. Or if they "repatriate" them they have a huge corporate tax liability back in Japan, so they do nothing.... this is interesting. I think Ramanan's issue converges with this...

This is based on your 'currencies stay within their zone' Law....

Resp,

Tom Hickey said...

The fact is that net exporters have to fund the US capital account surplus if they want the US to run a current account deficit, which is to say that they prefer to save USD instead of spending them through consumption or direct investment. Being large net exporters to the US it is no accident that Japan and China hold a pile of tsys. Their preference is to get the interest instead of spending the funds obtained from trade. The situation in Japan may make Japan indifferent to the interest, and prefer instead to buy some US stuff to meet their needs.

Matt Franko said...

Tom,

If they are in corporate hands then they would probably be retained earnings.

So when we say " instead of spending the funds" what can the the corporations spend USD retained earnings on when it HAS TO be spent in the USA?

For instance if it is Honda Motor (Japan) that has Honda Motor (USA) buy Treasuries with Honda USA retained earnings (as the amount of net USD balances that they have accumulated over the years exceeds US FDIC insurance levels)....

Then Charlie Gasparino asks: "what if the "Japanese" sell Treasuries to "finance" the reconstruction?" Why would Honda USA sell anything to rebuild a bridge in Northern Japan? Honda Japan is trapped in US Treasuries thru the US subsidiary....

I believe the whole mainstream may be confused on this.

Resp,

Matt Franko said...

The country of Japan may need more oil due to the tsunami, but Honda Japan is not going to order Honda USA to liquidate USTs to buy oil here and send it over to Japan to provide "free gas" to a bunch of Japanese people...

Matt Franko said...

Without ownership details of the "foreign owned" USTs one may not be able to figure this out....

Matt Franko said...

Tom,

This may come back to fallacy of compositon again (as usual!)

When we say "Japan" this, or, "Japan" that, etc.. we are inappropriately applying macro characteristics to what are really a bunch of micro corporate balance sheets, the disposition of the assets on these individual balance sheets is NOT coordinated or inter-related or systemic in any way.

It is not correct to think of them in this way...

Tom to perhaps build on your "Law": all currencies (or Sovereign NFAs?) stay within their currency zones. Said currencies stay in possession of the corporate entity that purchased them (Clower via Wray: "Goods buy money, money buys goods")

Resp,

Tom Hickey said...

When we say "japan," or "China," we are referring to an aggregate. Given the Fed's privacy policy, it looks to be difficult to disaggregate it.