Tuesday, November 29, 2016

Anandi Sharan — Modern Money Theory And The Demonetisation Catastrophe In India

The argument of this paper is thus that a government can never run out of money. It can rather, by definition, afford to provide full employment and all the other things mandated by the constitution in the directive principles of public poli….

Basically Modern Money Theory shows that there is no solvency risk for a government that issues its own currency. It can’t go bankrupt. It’s not possible for it to run out. You cannot spend more than tax revenue and go bust, because you can always issue more currency. But you can put your own constraints: so in (the US there is debt limit, no other country has this, the US has had it since 1913. But the debt limit has always been raised as needed, so it was a constraint that was never constraining. But sometimes there is a pressure like a political pressure recently by Republicans to try to enforce policy change. You can impose a debt limit constraint and force the government to default on its promise to pay on bonds, or social security, that is a self imposed constraint. In fact Congress can just get rid of the debt limit all together, because it is stupid.) (In India the Fiscal Reserve and Budgetary Management Act is a similar constraint that should be abolished) . There is no reason why the government cannot continue to spend simply by issuing more currency. The government debt is nothing other than private sector savings. If you have your own currency, you can always afford to spend more, so you can always afford full employment. The policy implication of modern money theory is thus that you can afford full employment and all the other things mentioned in the directive policies. There may be inflation but you cannot run out of money….

In other words the government does not understand that it can issue credit to millions of household and state government and other accounts to create demand and create work and create the money that will later come back in tax, to replace the failed global corporations, but it is in any case not the tax that is financing government spending but the money that the government has created in order for the households and small firms to be able to pay tax.
Modern Money Theory And The Demonetisation Catastrophe In India
Anandi Sharan, environmental historian and Board member of the global environmental platform CBD Alliance


Ryan Harris said...

Not just the bank runs in India making news today either.

China took the training wheel off the Yuan after the IMF inclusion this year. But has put them back on. Fifty articles tonight, and it's all about the chaos in China right now from 14 different markets and angles. Property, commodities, currency, bonds, rates... all going haywire, off the rails. And then the PBOC comes out and says, we don't have fx/capital controls after the government announced they did... crazy.

Matt Franko said...

Sounds like more "USD hegemony!" Over there in China Ryan.... the vast "neo-liberal conspiracy!" at work....

beowulf said...

Demonetization is not an inherently a bad idea, it was just terribly executed by India.

Vincent Bugliosi proposed something similar 20 years ago to combat drug/black market profits-- after a transition period, existing Federal Reserve Notes would no longer be legal tender in US, so before the cutoff, you (and Walmart, Target, etc) would have to exchange it at bank for new FRNs. However, cognizant of worldwide use of greenbacks, old FRNs would still be legal tender if turned in by foreign central banks.

If combined with his proposal for tighter controls on foreign wire exchanges, Bugliosi's dual currency (semi-demonetization, to coin a term) would indeed cripple the drug cartels but the critical thing is the phrase above "after a transition period". Its been years since I read Bugliosi's book, but I seem to recall he suggested a 30 to 60 day transition before greenbacks would lose legal tender status. That would be tight schedule even for the US, but Tsy and the Fed have the resources to print and exchange the new Federal Reserve Notes in time(especially if $1 and $5 are left alone until they're switched over to coins).

India announced its demonetization to be effective immediately, there was no transition period. Money instantly became worthless and can now only be exchanged in limited amounts at the bank till the end of the year (so less than 60 days in all to turn in the old currency with not enough new currency printed to satisfy customer demand). Just a mess really.