Posts Tagged ‘Modern Monetary Theory’

Trillion Dollar Baby?

July 31, 2011 1 comment

There is a deep flaw in the $1 trillion coin scheme of the modern monetary theorists: and I think the flaw dooms modern monetary theory (MMT) entirely. For those who are unfamiliar with the $1 trillion coin scheme, this is a brief statement of the logic:

— Congress has provided the authority, in legislation passed during the 1990s, for the US Mint to create platinum proof coins with arbitrary fiat face value having no relationship to the value of the platinum used in these coins. The US code also provides for the Treasury periodically sweeping the Mint’s account at the Federal Reserve Bank for profits earned from coin seigniorage generally. These profits are then booked as miscellaneous receipts (revenue) to the Treasury and go into the TGA, closing the revenue gap between spending and tax revenues. Platinum coins with huge face values e.g. $2 Trillion, would close the revenue gap entirely, and technically end deficit spending, while still retaining the gap between tax revenues and spending. If used routinely to close the revenue gap, such jumbo coin seigniorage would reduce the national debt to zero, and remove it as an issue in US politics. In addition, the existence of jumbo coin seigniorage as an option, removes the tension between the mandated debt ceiling and the 14th Amendment. It is the countervailing factor I mentioned earlier, because it provides a way to spend Congressional appropriations without issuing further debt.

The post provides lots of additional links to the thinking of the small group of non-mainstream economists who support the idea and are actively trying to educate the public on its implications.

The implications of this scheme appear to be truly significant: if the reasoning outlined in their writings are correct, the theorists of the modern monetary school have shown, not just in theory, but as a simple practical operation, that the Fascist State effectively has nearly unlimited capacity to fund its operations without taxes or other sources of revenue, and without driving the nation deeper into debt.

While some on the Left will welcome this argument as a solution to funding social safety net programs in a time of increasingly fiscally conservative public opinion, those who are committed to an anti-statist program will immediately recognize the grave implications of this argument: MMTers are arguing that the state has almost unlimited money capacity to divert social resources to wholly unproductive uses, like wars of aggression and global dominance, through its monopoly over the issue of currency.

The MMTers, however, are trying to solve the wrong problem: they are trying to figure out how to finance the Fascist State at a time when there is growing concern about deficit spending. But, the problem of Fascist State deficits has nothing to do with financing state expenditures; rather, the expenditures themselves are driven by the need to stabilize a world economy suffering chronic global overproduction. And, those expenditures necessary for stabilizing interventions are entirely financed by capital itself out of the surplus value it squeezes from the working class.

Simply stated: the problem is not lack of means for Fascist State spending, it is lack of outlets for profitable investment — a surfeit of capital. Fascist State expenditures don’t inject “money-demand” into the economy, the spending removes excess capital from the economy. This excess capital is squandered, consumed unproductively on things like military build-ups, etc. It really does not matter what the capital is wasted on, so long as it does not increase wages or investment.

MMT provides an answer to Fascist State revenue by creating money ex nihilo, but this leaves the excess capital in circulation. Over-investment is not curtailed, but additional money-demand appears out of nowhere — this actually exacerbates the over-production.

The result: the excess money-demand causes inflation, while the over-production creates a deepening stagnation. Much like the Great Stagflation of the 1970s depression, you end up with excess money-demand side by side with excess capital, generating both rising prices and falling investment.

MMT only looks at the consumption side, while ignoring excess capital. And, superficially, this appears to makes sense, because there is no excess capital in an absolute sense — that is, there is need for more investment to satisfy human needs. There is poverty, and this poverty implies a shortage of all the things society needs to meet its basic needs. There is unemployment, and a mass of labor power made idle through no fault of its own.

The problem, however, is not the excess means of production, and means of consumption, nor even the surplus population of workers, but that this surfeit of means and labor power cannot function as capital — cannot be employed profitably, hence the excess is absolute only in relation to profitable investment opportunities.

My hypothesis suggests stagflation of the 1970s was suppressed by the Reagan deficits of the 1980s — which began the Great Moderation. The Reagan deficits added the missing component to money printing, by removing much of the excess capital and consuming it unproductively.

More significantly, my hypothesis suggests, and reinforces my belief, that, from the standpoint of the capitalist mode of production there is not too much debt, but too little. That, to “fix” the current crisis and depression, more, not less debt is necessary.

Moreover, this new debt must be in dollars, and can only take this form, because it is the only currency universally recognized as money. This hypothesis predicts, in other words, an oncoming global currency crisis and the eventual replacement of all currencies by the dollar.

If the Tea Party is successful in capping or significantly slowing federal deficit, and consumer debt does not significantly increase, the result will be a collapse in more or less rapid succession of existing currencies and a rescue attempt by the Federal Reserve. The Fed will have to begin purchasing non-dollar denominated assets in some new “Mother of all QEs”.

The key to realizing this problem with MMT was the acknowledgement by its theorists that some form of sterilization had to happen. Money had to be removed from the system even as it was being pumped in by government spending. They proposed a reverse QE program where the Fed would sell the assets it has already purchased in QE and QE2.

The problem with this is:

  1. these assets are limited, and,
  2. these assets were bought at prices well above mark to market.

The Fed could sell the assets, but it would have to take a massive haircut on them, and interest rates would rise, I think. Moreover, that would only solve the problem until 2013 or so.

There was always an inherent danger in quantitative easing that the Fed had to exit sooner or later and would take a loss on these assets. QE was a gamble that the value of the assets would recover with improving economic conditions, particularly home prices. The assets themselves are entirely fictitious — they are claims on profits which may never materialize. Without a genuine recovery of profits, these claims are worthless.

So, from the standpoint of the Fascist State and the need to prop up the existing relations of production, not only must the debt ceiling be raised, there can be no significant slowing of Washington deficits — and even these two are not enough. There is a crying need for dollar denominated debt over that which is currently being created by Washington. The more Washington debt creation is slowed, the more urgent dollar denominated debt creation elsewhere becomes.

Quantitative easing may be a dead end for the Federal Reserve … So, Washington will be coming for you to foot the bill

November 24, 2010 Leave a comment

According to James Rickards, the Federal Reserve Bank likely has no way to exit from its money printing effort known as quantitative easing:

Disasters sometimes sneak up in small steps, each of which appears unthreatening at the time but which cumulatively spell collapse.  The Fed is leading the United States to ruin in ways that are claimed to be well intentioned and benign viewed in isolation but which take us finally into a locked room reminiscent of the Sartre play “No Exit.”

He takes us through the steps of the process by which the Federal Reserve has already found itself in a quagmire, and insists on pushing deeper into it:

How does the Fed print money? It’s easy; they simply buy bonds from the market and credit the seller’s bank account with electronic cash that comes out of thin air.  When they want to reduce the money supply, they do the opposite; that is, they sell bonds and the buyer’s bank account is reduced by the sale price and that money disappears.  So, printing money is just a massive program of bond purchases.  The Fed intends to concentrate the current bond buying program in the intermediate sector of 5 to 10-year maturities.

A massive program of bond purchases, yes. But, more important, a program of swapping fictitious assets for fictitious money in a series of fictitious transactions that superficially resemble real transactions but result in the exchange of no real economic values. There are, for instance, the utterly worthless purchases of mortgage backed securities and various junk from the failed financial sector. The intricacies of this garbage need not be understood in order to understand Rickards’ point: it is all junk, worthless, pieces of paper that have not an iota of value, and which will never be worth anything ever into the distant future beyond the point where the planet itself is no longer habitable.

The point is, none of this crap will ever be sold again for more than a fraction of its face value. It is toxic. You could back a truckload of it up to a recycling plant and walk away with no more than a week’s worth of groceries. And, the Fed has so much of this crap on its books, if it actually had to state its market value, the bank’s balance sheet would implode:

As a result, the Fed is coming to resemble a highly leveraged hedge fund with an inverted pyramid of risky, volatile and junk debt balanced on a slim layer of capital.  Recall the Fed owns the Maiden Lane portfolio of junk from Bear Stearns and $1.4 trillion of mortgages whose value is in serious doubt because of strategic defaults, lost notes and halted foreclosures.  Treasury notes may be of good credit quality if you don’t mind getting paid back in debased dollars but even Treasury notes have market risk.  If interest rates go up, the value of Treasury notes goes down; it’s that simple.  The Fed is taking both credit risk and market risk on its balance sheet in unprecedented amounts.

Under QE2, the Federal Reserve hopes to double down by adding Washington debt to its mix of toxic sludge. And, this is where the game gets really interesting.

To buy Washington’s debt, and force down interest rates, the Federal Reserve essentially has to outbid all other players in the public debt market. It can do this simply by entering the required digits at a computer terminal — and keep entering them until every other bid is taken out. At the end of the day, the Fed has pushed everyone else out of the market by paying more for Washington’s debt than anyone else in their right mind would be willing to pay.

When people say the action of the Federal Reserve is nuts — because the Fed is deliberately paying more for the debt than it is worth, and because the Fed is inundating the economy with worthless currency — the Fed has two responses:

When critics raise the issue of mark-to market losses, the Fed has a simple answer, which is that they will hold to maturity.  The Fed does not have to mark to market; they can simply hold the assets to maturity and collect the full proceeds from the Treasury or other issuers.  Just ignore for the moment the fact that some of the junkier assets and mortgages will not pay off, ever.  That’s years away; for now, let’s just give the Fed the benefit of the doubt and say that mark-to-market losses don’t matter because they don’t have to sell.

Critics also raise the issue that this much money printing will result in inflation at best and maybe hyperinflation if velocity takes off due to behavioral shifts.  The Fed is also very reassuring on this point.  They say not to worry because at the first signs of sustained and rising inflation they will reverse course and reduce the money supply by selling bonds and nip inflation in the bud.  But also note that the world in which the Fed wants to sell the bonds is also a world of rising inflation and therefore rising interest rates.  This is the world of huge mark to market losses on the bonds themselves.

To the first concern the Fed says, “Oh, sure we’re paying too much for this debt, but we will just hold onto it until we can sell it without taking a loss.”

To the second concern the Fed says. “Oh, sure this will cause inflation, but we can fix that by selling this debt and soaking up the excess money.”

Rickards isn’t buying this bullshit. If the Fed is successful and inflation takes hold, he points out, interest rates will be rising — and if interest rates are rising, the price of Washington’s debt will be collapsing. The Fed will suffer massive losses if it tries to sell the debt to siphon off the excess money in the economy that is driving up prices:

The Fed is saying don’t worry about mark to market losses because we will hold the bonds.  The Fed is saying don’t worry about inflation because we will sell the bonds.  Both of those statements cannot be true at the same time.  You can hold bonds and you can sell bonds but you can’t do both at once.  You will want to sell when rates are going up but that’s when losses will be the greatest.   So the time when you most want to sell is the time when you will most want to hold. The Fed may say they can finesse this by selling shorter maturities only to reduce money supply and holding onto longer maturities.  But that just further degrades the quality of the Fed’s balance sheet and turns it into a one-way roach motel for highly volatile and junk assets.

Monetary policy is dead — stick a fork in it — and so is the Fed:

So, here’s the bottom line on money printing, or QE if you prefer.  If nothing happens, the whole thing was a waste of time.  If inflation takes off, the Fed will have to choose between holding bonds and letting inflation get worse or selling bonds and going bankrupt in the process.  Since no entity goes down without a fight, the Fed will naturally hold the bonds and let inflation take off.  Do not ask about the exit strategy from QE; there is no exit.

End of story, right?

No! Not by a long shot. We’re just getting to the really really interesting part — the part where you get royally screwed.

You see, even if the Fed cannot exit from its quantitative easing program, there is still all this fictitious money sloshing around the economy, driving up prices, and bidding up everything that isn’t locked down. The Fed may be effectively frozen, but there is still a way to drain the economy of all that excess money.

Washington simply takes it from you. Your elected officials down in Washington can perform a type of monetary policy to drain all the excess liquidity from the system by raising your taxes and cutting the programs you rely on. According to Billy Mitchell, a prolific modern monetary economist who writes at Billy’s blog:

It is a good practice to think of taxes as just draining liquidity from the non-government sector reflecting the Government’s desire for that sector to have less spending capacity.

Now, you know why Washington is debating deficit reduction in the middle of the worst recession since the Great Depression: if the Federal Reserve is able to get the debt creation process moving again, and the economy starts to expand, they intend to withdraw the excess liquidity in the economy by taking it from you.

You will pay more taxes.

You will pay higher prices for everything.

You will retire when you are dead.

The bottom line for you: you will be forced to work longer hours for less pay just to keep the same standard of living, because inflation will be rampant, and your after tax income will be plummeting.

They assume that by the time you figure this out it will already be too late for you to do anything about it.

If Washington gets its way, you are going to suffer the most massive wage income collapse in human history.

How quantitative easing works — or doesn’t (Part Seven: The contradictions inherent in QE2)

November 12, 2010 Leave a comment

Quantitative easing embodies a number of insoluble contradictions. First, that too much work expresses itself as too little employment; second, that unprecedented abundance expresses itself as scarcity; third that the capacity to produce far in excess of human needs expresses itself as poverty; fourth that too much debt expresses itself as too little money.

There is not too little employment, but too much of the labor employed is wasted on unproductive and superfluous activity. There is not a scarcity of goods, but a scarcity of profitable demand for those goods. There is not too few means of production, but too little of it is employed to meet human needs. There is not too little money, but too little of it is created in the form of dollar denominated debt.

Quantitative easing, allegedly undertaken to eliminate unemployment, poverty, scarcity, and debt, must result not in the diminution of these evils, but in their aggressive expansion.

Since, in the simple-minded world of economists, economic growth is induced by the expansion of the quantity of money in circulation — and since this new money enters circulation only as a reflex of the same process by which it is created, i.e., by the creation of new debts — the elimination of poverty is irrationally predicated on its further expansion; on the further indebtedness of the mass of society.

In the same Orwellian fashion, the economist explains that poverty can be eliminated by progressively diverting present public and private income to the servicing of previously accumulated debts; and, that the scarcity of goods can be eliminated so long as companies relentlessly shutter their factories and eviscerate their workforces.

The stupidity of economic policy reaches its logical expression in the mind-numbing, logic defeating, assertion by Saint Paul Krugman that these social evils can be remedied only if the money held by the great mass of society is relentlessly devalued by Washington:

The Case For Higher Inflation

Olivier Blanchard, normally at MIT but currently the chief economist at the IMF, has released an interesting and important paper on how the crisis has changed, or should have changed, how we think about macroeconomic policy. The most surprising conclusion, presumably, is the idea that central banks have been setting their inflation targets too low:

Higher average inflation, and thus higher nominal interest rates to start with, would have made it possible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions.

To be a bit more precise, I’m not that surprised that Olivier should think that; I am, however, somewhat surprised that the IMF is letting him say that under its auspices. In any case, I very much agree.

I would add, however, that there’s another case for a higher inflation rate — an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.

The irrationality of the post-war capitalist economic system is presented in its unvarnished form by our Saint Paul in this excerpt: Employment can only increase under conditions of exchange whereby workers receive nothing for their additional hours of work; output can only rise if this output does not result in any additional consumption by the great mass of society; economic growth can be achieved through a massive infusion of new money into the economy only if that new money reduces the purchasing power of the existing money in circulation.

Quantitative easing meets these three conditions. Washington injects billions of new dollars into the economy which does not create any new output but only drives up money demand for the existing output — thereby reducing the purchasing power of money already in circulation. To the extent this new money actually increases employment, the new wages paid out are only money or nominal wages, since this money does not imply the creation of any new goods. Since no new output accompanies the creation of this new money, and since the successful injection of money into the economy presupposes the expansion of new debt, whatever new output emerges from this new employment rests on the absolute capacity of the worker to convert an increasing portion of his wages into a mere income stream to service this new debt.

Quantitative easing, therefore, is not a new policy, but the expression of the failure of the existing policy whereby the  value of wages is continuously depreciated as capitals seek to forestall the fall in the rate of profit. It presupposes the debt saturation of the existing labor force, whose wages have already been exhausted by debt service. It is no longer merely the expansion of debt that Washington seeks, it is the expansion of debt denominated in dollars — to the exclusion of the debt, and, therefore, of the creation of monies, denominated in all other currencies.

Thus, from Tim Duy at the blog Fed Watch, we read this:

The Final End of Bretton Woods 2?

The inability of global leaders to address global current account imbalances now truly threatens global financial stability.  Perhaps this was inevitable – the dollar has not depreciated to a degree commensurate with the financial crisis.  Moreover, as the global economy stabilized the old imbalances made a comeback, sucking stimulus from the US economy and leaving US labor markets crippled.  The latter prompts the US Federal Reserve to initiate a policy stance that will undoubtedly resonate throughout the  globe.  As a result we could now be standing witness to the final end of Bretton Woods 2.  And a bloody end it may be.

Rather than a reliance on US financial institutions to intermediate the channel between foreign savers and US households, a modified Bretton Woods 2 – Bretton Woods 2.1 – relied on the US government to step into the void created by the financial mess and become the intermediary, either by propping up mortgage markets via the takeover of Freddie and Fannie, or the fiscal stimulus, or a dozen of other programs initiated during the financial crisis.

In essence, a nasty surprise awaited US policymakers – after two years of scrambling to find the right mix of policies, including an all out effort to prevent a devastating collapse of financial markets and a what Administration officials believed to be a substantial fiscal stimulus, the US economy remains mired at a suboptimal level as stimulus flows out beyond US borders.  The opportunity for a smooth transition out of Bretton Woods 2 was lost.

How has it come to this?  To understand the challenge ahead, we need to begin with two points of general agreement.  The first is that the US has a significant and persistent current account deficit, which implies that domestic absorption of goods and services, by all sectors, exceeds potential output.  In other words, we rely on a steady inflow of goods and services to satisfy our excess demand, a situation we typically find acceptable during a high growth phase when domestic investment exceeds domestic saving.  The second point of agreement is that high unemployment implies that actual output is far below potential output.  We clearly have unused capacity.

The collapse of Bretton Woods 2 was predictable once American workers became saturated with debt, and were unable to service existing obligations, much less expand them. But, this debt sustained the off-shoring of American industry to the low wage exports platforms of China, Brazil and Asia — which, in turn, created the trade deficit. With the debt saturation of the American worker, the entire underpinning of the system, whereby American companies moved their facilities overseas and imported their goods back to the United States to sell to an increasingly impoverished population, is now threatened by the ever declining consumption power of now jobless Americans.

The breathtaking absurdity of the systematic impoverishment of the very population whose consumption is essential to the functioning of the economy — wherein the worker is let go, his job is moved to China, yet he is expected to have the means to then purchase the product he now no longer makes — which rest on conditions that are clearly the product of a psychotic mind — that his wages are to be substituted by extension of easy credit — can only be explained by the incomprehensible delegation of the management of the process of social production to madmen who believe real wealth can be created by changing the quantity of dancing electrons at a computer terminal.

But, this is where the madmen have their last laugh: “Who,” they respond, “is talking about real wealth? We are not talking about real wealth, but social wealth, and this social wealth — this power over billions, expressed as the power to command labor — is denominated in many different currencies. It is not our intention to create real wealth, but merely social wealth!”

We are, it appears, not in the real world, but trapped in the nightmarish world of the insane, the sociopath:

Put simply, the Federal Reserve is positioned to declare war on Bretton Woods 2.  November 3, 2010.  Mark it on your calendars.

So perhaps Bretton Woods does not end because foreign governments are unwilling to bear ever increasing levels of currency and interest rate risk or due to the collapse of private intermediaries in the US, but because it has delivered the threat of deflation to the US, and that provokes a substantial response from the Federal Reserve.  A side effect of the next round of quantitative easing is an attack on the strong dollar policy.

The rest of the world is howling.  The Chinese are not alone; no one wants it to end.  From Bloomberg:

Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism….

….Days after Brazilian Finance Minister Guido Mantega set the tone for the gathering by declaring a “currency war” was underway, officials held their traditional battle lines. U.S. Treasury Secretary Timothy F. Geithner and European Central Bank President Jean-Claude Trichet were among those to signal irritation that China is restraining the yuan to aid exports even as its economy outpaces those of other G-20 members.

“Global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery,” Geithner said. “Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand- led growth in countries running external surpluses and by the extent of foreign-exchange intervention as countries with undervalued currencies lean against appreciation.”

At the same time, officials from emerging economies including China complained that low interest rates in the U.S. and its developed-world counterparts mean investors are pouring capital into their markets, threatening growth by forcing up currencies and inflating asset bubbles. The MSCI Emerging Markets Index of stocks has soared 13 percent since the start of September…

…“Near-zero interest rates and rapid monetary expansion are geared at stimulating domestic demand but also tend to produce a weakening of their currencies,” Mantega said Oct. 9. As a result, developing countries will continue to build up reserves in foreign currency to avoid “volatility and appreciation.”

Consider the enormity of the situation at hand.  The Federal Reserve is poised to crank up the printing press for the sake of satisfying their domestic mandate.  One mechanism, perhaps the only mechanism, by which we can expect meaningful, sustained reversal from the current set of imbalances is via a significant depreciation of the dollar.  The rest of the world appears prepared to fight the Fed because they know no other path.

Bad things happen when you fight the Fed.  You find yourself on the wrong side of a whole bunch of trades.  In this case, I suspect it means that Bretton Woods 2 finally collapses in a disorderly mess.  There may really be no other way for it to end, because its end yields clear winners and losers.  And the losers, in this case largely emerging markets, [are] not prepared to accept their fate.

Stated simply, the collapse of all other currencies is being engineered by Washington, because Washington has no other choice. If it is to continue feeding off the unpaid labor of others, the cartel in Washington must expand the pool of potential debtors. The inherent contradiction expressed in QE can be temporarily held at bay only by the collapse of the dollar’s competitors.

Bottom Line:  The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder.  The collapse is coming via an unexpected channel; rather than originating from abroad, the shock that sets it in motion comes from the inside, a blast of stimulus from the US Federal Reserve.  And at the moment, the collapse looks likely to turn disorderly quickly.  If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US.  Yet much of the world does not want to accept the inevitable, and there appears to be no agreement on what comes next.  Call me pessimistic, but right now I don’t see how this situation gets anything but more ugly.

If we are generally accurate in the analysis presented above, the coming period will see a series of currency crises sweeping the globe, as one currency after another falls victim to the Federal Reserve Bank’s quantitative easing program. The unsustainable trade deficits of Bretton Woods 2, which were only made possible by the now unsustainable debts borne by American working people, can only be resolved one of two ways: either these imbalances must give way to a global depression centered in China and other surplus generating exporters and the accompanying devaluation of their dollar denominated assets. Or, they must accept the increasing dollarization of their economies.

They do not have much time to decide.

How quantitative easing works — or doesn’t (Part Two: Debt and growth)

October 31, 2010 Leave a comment

In the first part of this mental exercise we followed the wiki through the logic of Federal Reserve quantitative easing (QE) action up until the moment the authors of the entry embarked on a journey of patent misinformation. The authors of the wiki entry would have us believe that the banking cartel cannot create money unless it has sufficient reserves from which it can “grow” this money by lending some multiple of the currency it has on hand.

The wiki is absolutely wrong on this point: the banking cartel can create any amount of currency it needs, provided there is a demand for it, simply by making an entry into the account of the borrower, or in the account of the person from whom the borrower is making a purchase. In return for this entry, the borrower promises to pay the bank the amount of the loan with interest over some period of time.

Assuming our bare sketch of the “money creation process” is correct, this fictional money only comes into existence as a reflex of the same act by which it enters circulation, i.e., as the byproduct of an actual transaction. For example, it is the purchase and sale of a house that, simultaneously, brings about the creation of the fictional currency and puts it into circulation. Since, the banking cartel plays only a passive role in the transaction between the seller and the buyer of the house, its capacity to create money by entering a notation into the account of the seller cannot in any way increase economic activity.

Even a trillion dollars of excess reserves in the banking system cannot create home buyers; and, as Steve Keen has observed in a recent post, Deleveraging, Deceleration and the Double Dip, the increase in debt accounts for almost all economic growth in the post-war period.

For a long time I’ve focused on the contribution that the change in debt makes to aggregate demand, in the relation that “aggregate demand equals the sum of GDP plus the change in debt”. An obvious extension of that was that “change in aggregate demand equals change in GDP plus acceleration in the level of debt”—which would imply that change in unemployment is driven by changes in the rate of growth of debt.

Though I was aware of this implication of my analysis, I held off from testing it because I was concerned that this was pushing the data one step too far.

It turns out that I shouldn’t have been so cautious: the data well and truly supports this, on the surface, weird causal relation: the change in employment is strongly affected by the acceleration or deceleration of debt. This can give the paradoxical result that the level of employment can rise, even when the economy is deleveraging, if the rate of deleveraging slows. This phenomenon has driven the apparent stabilisation of the US unemployment rate (though of course the more meaningful U-6 measure has risen to 17 percent, and Shadowstats puts the actual unemployment level at 22.5 percent–well and truly in Depression territory), and it is highly unlikely that it will last.

My uncharacteristic timidity means that I have to doff my cap in the direction of the three economists who first published on this topic: Biggs, Mayer and Pick. They first showed the correlation between what they called “the credit impulse”—the rate of change of the rate of change of debt, divided by GDP—and both GDP and employment …

The chart below shows my confirmation of the relationship with the data on the annual change in unemployment in the USA and the annual rate of acceleration of private debt since 1955. The correlation is -0.67: a staggering correlation of a first and a second order variable over such a period, and across both booms and busts.

So, let’s step back and review:

The banking cartel can “create” money, and, then, use this fictional money to purchase something itself — the worthless fictional assets on its own books.  Thus, quantitative easing, despite all the rather dense and complex literature produced by simpleton economists, consist simply in an exchange of unsellable worthless assets for equally worthless currency. On the one hand, it is merely the accumulation of these fictional assets in the hands of the State — the socialization of the toxic product of fictitious capitals. And, on the other, the replacement of these worthless assets on the books of fictitious capitals by equally worthless, but always spendable, currency. The entire point of the exercise, therefore, is not the increase of the “supply of money” or “lowering the rate of interest”, but, rather, purging bank losses resulting from the collapse of fictitious assets. These losses are transferred to the State and the scam is euphemistically renamed quantitative easing.

However, even with this outrageous scam the newly created fictional currency could not enter circulation without some mass of sheeple willing to bury themselves beneath an ever higher mountain of debt. It was for this reason that the first round of quantitative easing was accompanied by a number of so-called stimulative fiscal programs like “Cash for Clunkers” and the “First Time Home Buyers Tax Credit”.

The scam failed — miserably. Even with the transfer of fictional assets to Washington, and replacement of these fictional assets with newly printed fictional money, the accumulation of new debt encouraged by the banking cartel and the Messiah petered out as soon as the programs did.

As we will show next, the second round of quantitative easing by Washington and the banking cartel, dubbed QE2, will not be directed at the impossible goal of encouraging Americans to increase their debt burden when they are already incapable of servicing the debts they currently have. The logic of the current circumstances suggests that pool of potential borrowers must be expanded.

Quantitative easing version 2, we believe, has to result in the replacement of all other currencies by the dollar.

How quantitative easing works — or doesn’t (Part One)

October 29, 2010 1 comment

From the wiki we get a definition of Quantitative Easing:

The term quantitative easing (QE) describes a monetary policy used by some central banks to increase the supply of money by increasing the excess reserves of the banking system. This policy is usually invoked when the normal methods to control the money supply have failed, i.e the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero.

In this excerpt from the wiki, we see that quantitative easing is a method of flooding the economy with money when other, more traditional, methods have already failed. QE is an acknowledgment that the amount of currency in circulation in the economy is probably still contracting, which implies the economy is contracting as well.

QE is undertaken on the assumption that the amount of economic activity can be increased by increasing the amount of currency in circulation. This is because, in times of economic contraction (i.e., a depression), as the economy contracts, money is withdrawn from circulation in order to satisfy (payoff) debts, and no new opportunities for productive investment exists. As money is withdrawn from circulation, this withdrawal is felt as a shortage of credit like the one we are currently experiencing.

This is the rub, however: for reasons we will explain below, QE cannot increase the amount of currency in circulation by itself.

For now, let’s look at how the policy is implemented:

A central bank implements QE by first crediting its own account with money it creates ex nihilo (“out of nothing”).

From this excerpt it is possible to conclude that QE is only possible in an economy with a debased fiat currency. Why? Because, of course, government cannot simply create more gold or other metal money “out of nothing”. Gold requires rather arduous physical exertion in comparison to merely entering the number 1,000,000,000,000 into a computer terminal.

The money created “out of nothing” can itself only be a fiction. It is a fiction of money, since, unlike metal money, it requires no meaningful exertion of human effort, and, hence, has no value.

Most writers — even those who understand that this currency is not really money — still consider it some sort of token representation of money — akin, in some fashion, to the paper money that circulated in the economy prior to the Great Depression. Because of this mistake, their analysis of the economy must be defective. The paper currency that circulated before the Great Depression was token money precisely because it could be exchanged for gold in some fixed proportion. Gold circulated alongside these tokens in the economy — you could walk into a store and use a gold coin to buy groceries.

In short, token money was converted into fictitious money not because it replaced real money in circulation, but because gold was withdrawn by law from circulation as money. This withdrawal removed the token character of the token.

And, why would gold be removed from circulation? Remember our earlier statement: money is withdrawn from circulation leading to a contraction of credit, because economic activity itself is contracting. When the Great Depression hit, gold was pulled from circulation to satisfy debts, and because the amount of profitable investment outlets for which it could be used suddenly shrank. All over the economy, gold fell out of circulation and into lifeless hoards. At the same time, like a game of musical chairs, when the music stopped, everyone without gold suddenly found themselves in dire need of cold hard cash, yet none could be found.

The implication of the above for QE is obvious. During the Great Depression gold did not disappear; it simply reverted to a dead hoard of metal. On the one hand, there was no shortage of money, but an excess of money. On the other hand, however, this money could not actually circulate in the economy since it could serve no productive purpose as capital — just as there were no shortage of workers, or shortage of factories to turn out product, millions of workers and thousands of factories stood idle because no profitable use for them existed as capital.

It is the same for the Federal Reserve’s QE program. It is not enough simply to create a trillion fictitious dollars, having created this fictitious money “out of nothing”, the Federal Reserve now has to get this new fiction to circulate in the economy. This first step is to hand it out to the agents of the Federal Reserve:

It then purchases financial assets, including government bonds, agency debt, mortgage-backed securities and corporate bonds, from banks and other financial institutions in a process referred to as open market operations.

Did you see what just happened? According to the wiki, the Federal Reserve created fictitious money — something absent any value at all — and then used it to purchase some other things: government bonds, agency debt, mortgage-backed securities. These financial instruments, which are in the possession of banks and other financial institutions, are voluntarily sold to the Federal Reserve for a sum of fictional money having no value at all!

It may appear at first that the Federal Reserve is systematically stripping the banks and financial institutions of their assets in return for worthless dancing electrons, but the situation is just the opposite. This is not robbery, folks. There is no coercion involved in the transaction, yet banks and other financial institutions voluntarily hand over their assets to the Federal Reserve in exchange for a fiction that doesn’t exist until the Federal Reserve creates it. Assuming that the CEOs of these financial institutions are not insane, this transaction amounts to an admission that the bonds, debt paper and securities sold have no value — that the face value of the assets are as fictional as the dancing electrons for which they are being exchanged.

There is, of course, this difference between the two fictional objects: at least so far as toxic mortgage-backed securities are concerned: there is no market for them, while currency is currency and can always be spent — especially when the currency in question are dollars.

Also, it should be acknowledged, since the object of the exercise is alleged to be a lowering of interest rates generally, the Federal Reserve will likely be paying more than the original price of the bonds, agency debt, and mortgage-backed securities. In this way, the Fed can push interest rates down still further. (This is because, the higher the price paid for a bond, or like asset, the lower is the interest rate accruing to it.)

So, according to the wiki, the Federal Reserve implements QE by purchasing certain assets from banks for more than the banks paid for them originally — and, this it does in order to push interest rates as low as it can. Rather than stripping banks of their assets with worthless dancing electrons, the Fed actually absorbs worthless assets from them — assets the banks could not sell since there is no market for them — and hands out more currency than the banks initially paid to purchase the assets.

Since, the Federal Reserve is only an oligarchy of private banks, ruling behind the fig leaf of laws which give them “responsibility” (read: control) of the world reserve currency, it is unimaginable that the situation could be otherwise. This much is revealed in the next silly statement by the wiki:

The purchases, by way of account deposits, give banks the excess reserves required for them to create new money, and thus hopefully induce a stimulation of the economy, by the process of deposit multiplication from increased lending in the fractional reserve banking system.

The authors of the wiki entry invite us to believe that the banking cartel, which already has the legal capacity to create currency out of nothing, now needs currency on hand to create this currency out of nothing! In fact, the actual mechanism of currency creation differs drastically from this scenario: Banks create currency simply by creating a balance in your account whenever you borrow — or in the account of the person from whom you purchase something. They do not need to have any excess reserve in place to create this money, since all of this is done at a computer terminal.

Excess reserves, therefore, do not stimulate lending at all. And, the wiki, in this particular explanation, gets us no closer to understanding how QE actually works.

In part two, we will try to get closer to a real explanation.

Don’t seed the clouds, or open the faucet: Just go to the beach!

July 10, 2010 Leave a comment

Paul deLespinasse proposes to eliminate unemployment once and for all. And, to accomplish this he is advocating a variant of the government funded employment schemes making the rounds among progressive circles these days.

Paul begins by noting that the most recent employment numbers had an interesting solution buried in the otherwise ugly data:

The private sector of the economy created 83,000 additional jobs in June, but total employment fell because 225,000 temporary census workers were let go.

The census workers had real jobs and these were additional jobs that reduced unemployment. They demonstrate that there are two possible ways to reduce unemployment, not just one.

The government has been trying to reduce unemployment by “stimulating” the economy so that private employers would become willing and able to put more people to work. But it is unclear how well this strategy has worked.

The alternative is for government itself to hire the unemployed and put them to doing useful things. This is what the Census Bureau did, and back during the Great Depression this is what the WPA and other government programs did.

Based on his insight, Paul imagines quite a number of things government might pay people to do. It would, he argues, be possible for the government to provide a job for everyone who is willing and able for less than the total cost of last year’s Obama stimulus program:

If all 14.6 million currently unemployed took such government jobs, and if on top of minimum wages the government paid $400 per month towards medical insurance for each employee, it would cost about $24 billion per month, or $289 billion per year, not including administrative costs.

The newly minted government workers would be paid minimum wages of $7.25 per hour for a 40 hour work week.

Paul makes the reasonable argument that this approach to the unemployment problem is superior to the one currently pursued by the Messiah’s administration. Obama is trying to stimulate businesses to hire the unemployed, but has seen little visible results for his massive deficit spending. Paul compares what Obama is trying to do to filling up a pool by seeding the clouds and hoping for rain.

If we have a pool we want to fill with water, does it make more sense to turn on a faucet and fill it up, or to hire pilots to seed the clouds and try to make it rain? Cloud-seeding, like our current approach to dealing with unemployment, would be discredited “trickle down” theory with a vengeance!

Why not go with a straightforward approach whose costs and results are measurable, which has worked in the past, and which could put a total end to unemployment rather than just reducing it?

We agree! There is no reason to pay people not to work, while providing massive incentives to companies to hire them. Where we disagree with Paul is on his insistence that this ineffective system should be replaced by millions of minimum wage workers performing what passes for necessary work only in the minds of progressives. If there are important public work projects to be undertaken, workers should be employed at wages consistent with the value of their labor power, i.e., the average hourly wage for the country.

Public projects of importance to all of us, such as roads, bridges, water and sewer reconstruction, education, etc., should be undertaken as serious endeavors and not simply as make-work activities to employ otherwise unemployable members of our communities. These things are far too important to use as busy work, and people are far too important to waste their time and effort on activities of no significant economic value – like chiseling statues into mountains.

However, if the intent is to actually reduce unemployment, we have solution that doesn’t cost a dime, and requires no administrative overhead:

Just reduce hours of work, and keep reducing them until there is no unemployment left.

This way, Washington isn’t engaged in filling pools by seeding clouds OR turning on faucets – if we want to spend time in the water, the beach is already there waiting for us.