Home > political-economy > Marshall’s magical money machine (The Conceit)

Marshall’s magical money machine (The Conceit)

FBN's Liz Claman: Ready for soft landing (probably not a real photo ... sigh!)

Continued from here

“Every magic trick,” Caine’s character tells us, ‘has three steps’: 1) the “Pledge” which is sometimes called “the Magician’s Choice” offers audiences an option, but really tips the process, favoring one option over others. In the same way, life seems to offer everyone the same set of choices, when (in reality) the best choices are more ‘real’ in some lives than in others; 2) The next phase in the magic trick is the “Turn,” transforming one possibility into another unexpected possibility; and finally, 3) the “Prestige,” or return of the original promise in a surprising fulfillment or realization, such as the reappearance of the person who has first vanished.

Critical Vision – “The Prestige”: A Movie Review.

The facts laid out in the preceding section of this post raise the question of whether Washington’s deficits are, in reality, nothing more than the excessive accumulation of social resources in the hands of the very wealthiest members of society. But, in a brilliant example of misdirection, Marshall draws our attention to mere accounting identities: Washington must run deficits, if the rest of society is to save, i.e. if society is to produce more than it consumes. He conceals the nature of these “savings” – the massive concentration of wealth in a few hands, side by side with the relative and absolute collapse in the living standards of the great majority. Hence, the idea that Washington’s deficits only serve to maintain this massive inequality within society need never be seriously addressed by Marshall or his cronies Bill Mitchell, James Galbraith, Randall Wray, Warren Mosler and Rob Parenteau.

The accounting identity of national income to the sum of its parts is the hook intended to grab the attention of millions of desperate working families, who are drowning in debt and looking for any means to keep their heads above water. It serves the purpose of offering a seemingly costless way to increase their income sufficiently to restart the cycle of indebtedness: If Washington runs a deficit, Marshall explains, the massive accumulation of superfluous wealth in the “private sector” can be placed back into currency in the form of public consumption – generating jobs and wages for millions of unemployed.

The rubes are now set up for this performance of economic magic.

The PLEDGE, or The Magician’s Choice

In a simple example, the performer may deal two cards face down onto the table, requiring for the purposes of his trick that the card on the right be selected. He will ask the spectator to choose one of the cards. If the spectator chooses the card on the left, the performer will say something like “you keep this card, I’ll take the remaining card.” If the spectator chooses the card on the right, the performer might say “okay, let’s use the card you chose.” Thus, the choice of which card to use is really made by the magician, hence the term “Magician’s Choice.”

–Wikipedia, Equivocation (magic)

But it remains that if the US tried widespread hours-sharing arrangements, the lack of a wider social safety net would see poverty levels rise alarmingly.

— Bill Mitchell – Shorter hours or layoffs?

The federal deficit presupposes a mass of underemployed labor, underutilized productive capacity, idle capital. It might, at first, appear, that this detritus of capitalist breakdown within the US economy could be resolved in short order by attacking these underlying conditions, however, the role of the economist in this magic theater assumes greatest importance: his job is to lull the audience into the pledge, wherein the available options are not available, save the one consistent with the present situation: the massive concentration of wealth in a few hands.

Here is how the game is played in the arcane practice of economic illusion:

Were we to suggest that a mass of idle capital presupposes great inequality in society – the concentration of great wealth on one hand, and great poverty on the other – and, therefore, could be resolved by a confiscation of this capital (which is, in any case, wholly superfluous to profitable economic activity), and putting it to work to address pressing needs of society – for education, medical care, infrastructure, etc. – the role of the economist is to inform us straightaway that even the merest suggestion of this type would cause Warren Buffett to develop a sudden case of the vapors and swoon drunkenly into the conveniently positioned, and well-pillowed, embrace of Fox Business News anchor Liz Claman.

Were we to suggest that simply abrogating $12 trillion in federal debt, and an additional $42 trillion in state, local, and private debt, would solve the problem of excess capital as well, economists must make the argument that this would make it impossible for Washington to fund its deficits in the future, despite Marshall’s (and his friends’ at New Deal 2.0) insistence that Washington does not fund its expenditures through borrowing, but with those magical dancing electrons.

If, despite the preceding objections, we were to suggest that Washington might threaten to nationalize the assets and productive facilities of US companies that move their operations offshore and import back into the United States (thereby reaping super-profits by buying low wage labor in China and selling the produced goods dearly to consumers in the US) economists will label this socialism, and join in a letter writing campaign complaining that our freedom to starve is being threatened by Bolshevik impulses among the rabble.

And, please! Let us not suggest that the underemployment of labor – estimated to amount to more that 20 percent of the US workforce, or more than 30 million people! – might be addressed directly by reducing hours of work! The economist would go apoplectic, writhing in spasm in the dirt, speaking in tongues, while warning all of us that any attempt to shorten the hours of the worker’s enslavement must end in the collapse of civilization itself.

In response to each suggestion, economists must demonstrate vociferously that such choices are fraught with unintended dangerous consequences; threaten society with calamity; and, are the equivalent of slicing America’s apple pie with a chainsaw. Only with the population appropriately cowed by fear of the unknown – perhaps, society’s imminent plunge into a digital version of the dark ages, should they stray too far from the Magician’s Choice – can they safely be allowed to choose only that option which reproduces the status quo: fiscal and monetary policy; the use of government actions to directly expand public debt, and, indirectly encourage the expansion of mortgage, consumer, and other forms of debt in the private sector.

The TURN, or Debt and Taxes

This is where I take the item that you and I agree on, let’s say a deck of cards, and I do something to it or have you do something to it. You write your name across the card and then tear it up, for example. This is where the “magic” or “trickery” comes in because I brought you into the process, and you’ve bought in that what you just did is “real.”

The pledge, the turn, and the prestige…

A sovereign government is never hostage to the dictates of financial capital because it no longer faces the external constraint that was always present under a gold standard regime.

Marshall Auerback – Going Off on Rogoff

Once all other options have been marginalized in the conversation, and the public debate over employment and the economy has been reduced to Washington deficit spending, Marshall stuns the audience by demonstrating that Washington doesn’t need to run a deficit or impose taxes to finance its spending, after all. Since it has the unalloyed power to create currency at will, Washington finances its operation without borrowing from or taxing the private sector or foreigners!

Bill Mitchell, put it this way:

The Federal government has cash operating accounts – to ensure that they can spend (G) on a daily basis and receive daily receipts (T) …

When the Federal government spends it debits these accounts and credits various bank accounts within the commercial banking system. Deposits thus show up in a number of commercial banks as a reflection of the spending. It may issue a cheque and post it to someone in the private sector whereupon that person will deposit the cheque at their bank. It is the same effect as if it had have all been done electronically.

All federal spending happens like this. You will note that … the spending comes from no-where … the Federal government, as the monopoly issuer of its own currency is not revenue-constrained. This means it does not have to “finance” its spending unlike a household, which uses the fiat currency … government debt (bonds) has nothing to do with “financing” the government spending …

So, despite the angry muttering of neanderthals among a certain section of economists, and by politicians in Washington, including the Messiah, who push the absurd notion that Washington has (or might) run out of money, owing to the massive increase in budget deficits, or the unwillingness of China and other bond market participants to fund this massive increase, the reality is that it is no more possible for Washington to run out of money than it is for a computer terminal in the Federal Reserve to run out of dancing electrons.

In the same way that government does not use debt to finance is operations, Bill Mitchell informs us that Washington does not use taxation to service the debt or fund its operations either:

… the government may decide at that point that it wants to maintain the share of public goods and services in the overall real GDP mix and in this case it will have to reduce the spending capacity of the private sector by increasing tax rates. Ahh, the conservatives finally scream – you see rising tax rates will be required.

Well maybe and no! No, in the sense that taxes have to be raised to pay for anything! Maybe, if the governments decides that bringing nominal demand growth back in line with real capacity growth is to be accomplished via less private spending. The role of taxes (other than to define a demand for the currency) is to reduce nominal demand by taking capacity to spend off the private sector.

And here is another angle on this. If debt servicing was considered a problem (choking room for other public spending at full employment) then the government could easily increase taxes on interest-earned income. In a single policy stroke it could reduce the debt servicing costs by getting it all back via taxes. The only reason it would do this if the inflationary gap was approaching and they wanted the private sector to have less disposable income – that is, less spending.

None of this has anything to do with financing deficits.

Washington’s financial capacity to spend is unlimited, it may run into “resource” limits, but it does not run into a fiscal constraint – it is a true sovereign in this regard. The decision to issue debt is completely independent of its need to finance its operations. The decision to impose taxes is likewise independent of its need to finance its operations, and it is also independent of its need to service its debt obligations.

Compare this to your own finances: Your ability to consume is limited by your income. You can, of course, borrow against future earnings, and, therefore, increase your present consumption, but this requires a reduction in your future consumption as some increment of your future income must now be diverted to service the debt you incurred.

As Greece, California, Illinois, and others are now coming to understand, what is true for you is, in effect, true for them as well: They borrowed from Wall Street to fund their operations, and must either reduce current operations to pay for that debt with future tax revenue, or they must raise taxes – reduce the consumption of the “private sector” – to pay it. They have no choice in this matter, any more than you do, because they are not sovereign issuers of their currencies. Like you, they can either engage in counterfeiting money, or accept that public service will be reduced, or taxes must be increased.

While several other countries enjoy this particular freedom owing to their foreign trade surpluses, Washington is the only country able to spend without fiscal limits AND run a trade deficit. It is, therefore, the only true sovereign and an economic empire. Washington will never run out of money; it will never default, it will never be unable to pay its bills. The federal government can spend whatever it wants, on whatever it wants, as long as it wants, and the statement by the Messiah that Washington is running out of money is not simply, nor even actually, evidence of his ignorance in matters of economics, but a deliberate fraud  – playing on your own ignorance of how these things work – designed to fan your fears and panic you into accepting massive unemployment and poverty because Uncle Sam has only lint in his pockets.

With his Magician’s Choice Marshall narrowed the discussion of potential options to the current crisis to Washington’s deficit spending; he follows this up by his special Turn showing that taxation and deficit spending is not in any way related to the way Washington finances its own spending; he has now set up his audience for the final act of his illusion – the reestablishment of the previously existing process.

To be continued

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