this could change everything
TRANSCRIPT
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This Could Change Everything
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Dick Wagner, JD, CFP and Don St. Clair, CFP, EA
23rd Annual Far West Roundup August 9-12, 2012
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"Money is the most powerful and pervasive secular force on the planet. Yet for most, it's a source of mysticism and mystery."
- Dick Wagner, JD, CFP
What is Money?
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Textbook ExplanationMoney derived from barter
Spontaneously originates in Private Sector
Replaces clumsy barter
Eliminates "double-coincidence of wants"
Reduces transaction costs
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Evolution of MoneyPrimitive monies
Stones, beads, shells, feathers, fish, cattle, etc.
Precious metals - coins
Paper with metal backing
Fiat money - based on Trust?
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Textbooks Conclude
Money is what money does
Unimportant in its own right
Largely ignored in many economic models
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Graeber: Not So Fast
No archeological evidence
All money is debt
Roots in penal system
Unit of measurement
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Credit & State Theories
Anthropologists, Sociologists, & Numismatists find origins in credit/debt relations
Palace communities, Mesopotamia, ancient Egypt
State/Temple/Authority plays central role
Chartalist/Cartalist
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John Maynard Keynes
"The age of Chartalist or State Money was reached
when the State claimed the right to declare what thing should answer as money to
the current money-of-account.... To-day, all
civilized money is, beyond the possibility of dispute,
chartalist."
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Regardless of OriginToday, all money exists as an IOU, representing a social debt relationship
It is abstract, and like an "inch" or a "yard," it can be measured, but not seen or felt
In any modern nation, the money of account is chosen by the national government
A nation's IOUs are recorded in this money of account (e.g. US Dollar, British Pound, Japanese Yen)
Money is not an object. It exists as credit/debit entries. Coins and paper are representations of money, not vice versa
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Today, Sovereign Governments
Define the money-of-account
Impose taxes, fees, obligations
Decide what they will accept as payment
Choose how they will make their own payments
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Taxes Drive Acceptance
Government defines money/what it will accept as payment
Makes payment (spends) in that same money-of-account
Requires taxes be paid in the money-of-account it defines
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But Taxes Do Not Fund Spending
Government does not "need" our money
Not to raise revenue per se
Taxes function to regulate the economy by regulating aggregate demand
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How a Currency Issuer Spends
By directing its bank (usually the central bank) to credit someone's account
This frequently (and increasingly) happens without even writing a check
In the "modern money" era, government spending is accomplished through electronic keystrokes (Bernanke)
The government neither has, nor doesn't have dollars in an account somewhere
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Modern MoneyPelley: "Is that tax money that the Fed is spending?"
Bernanke: "It's not tax money. [W]e simply use the computer to mark up the
size of the account."
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Hierarchy of Money
Government
Banks
Non-Financial Business
Households
Anyone can create money (social debt relationship)
Trick is to have it accepted (Minsky)
But private sector cannot create net financial assets
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The US Hierarchy
US $
Issues the currency at the top of the pyramid
Taxes and spends in dollars
Non-convertible, fiat money
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On Gold Standard
US $
Gold
Pre-1973, Bretton Woods
Promised to convert US$ to gold at a fixed price
Dollars were subordinate
Had to limit spending to protect gold reserves
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Other CountriesDid not issue currency at the top of the pyramid
Had to limit spending to protect (US$) reserves
Sacrificed control of interest rates
Heavily dependent on trade surpluses
US $
Ruble, Peso, etc.
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Look familiar?
The Euro is effectively a foreign country from the perspective of the individual nations
Currency is divorced from the nation ("One Market, One Money")
"Euro"
Greece, Spain, etc.
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The EurozoneNo EMU nation issues the currency that sits at the top of the pyramid
Governments can "run out" of Euros
Must pay market interest rates
Heavily dependent on trade surpluses
"Euro"
Italy, Portugal, etc.
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Under Bretton Woods
US $
GoldPromised to convert US$ to gold at a fixed price
Dollars were subordinate
Had to limit spending to protect gold reserves
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Everything Changed!
Except the textbooks
Nobody rang the bell
Dollars no longer subordinate
Money no longer the object
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Sovereign Money MattersA sovereign currency ISSUER that does not peg to another's or offer to convert, can never "go broke," or "run out of money"
It can afford anything for sale in the domestic unit of account
It does not need to borrow its own currency
It can set the policy interest rate at any level
It has expanded policy space
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But isn't the US Broke?
"We're out of money"
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Within Our Means
"The government, just like every American
household, has to live within its means"
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Is the Government Like a Household?
No - not anymore
Not since we abandoned the gold standard
We ended Bretton Woods
We have "modern money" created by keystrokes on a computer
But... we act as if we're still stuck in a fixed exchange rate world
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The ISSUER of the currency can always pay
"[A] government cannot become insolvent with
respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such
claims without limit"
-Alan Greenspan 1997
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Deficit Hawks want Immediate Cuts
Opposes deficit spending on principle
Often favors "sound money" (e.g. gold standard or 100% reserve backing)
Would legislate rules to mandate balanced budgets
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Deficit Doves want Eventual Cuts
Supports limited deficit spending in tough economic times
Want the budget balanced over the business cycle
Support rules to limit the size of the deficit
Prefer to wait until after the economy begins to recover before imposing austerity
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More Deficit Aviary
New bird in town, the Deficit Owl
Modern Monetary Theory (MMT)
Exposes the fallacies in conventional economic theories
Views unemployment as socially harmful and economically inefficient
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Within Our Means?
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Unused energies. Unmet needs.
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The MMT Deficit OwlAssigns no arbitrary limit to the size or duration of the deficit
Uses a sectoral balance sheet approach to relate deficit to the rest of the economy
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Sectoral Balances
Spending more than its income (deficit)
Spending less than its income (surplus)
Spending just equal to its income (balanced budget)
In any given period, sectoral balances show whether a particular part of the economy is:
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Accounting for DeficitsThe laws of double-entry accounting apply
All sectors cannot take in more than they spend (i.e. be in surplus)
All sectors cannot spend more than they take in (i.e. be in deficit)
Unless all 3 sectors are in balance, at least one sector will be on deficit
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Private Sector BalanceAs a general rule, the private sector needs to be in surplus
Households and firms cannot continually borrow more than their income
At some point, lenders will run out of credit worthy borrowers who are willing to spend
Private debt levels may become unsustainable (Minsky's Financial Instability Hypothesis)
When an expansion driven by private sector debt reaches an end, sales soften, jobless claims trend higher, and economic activity falters
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Private Sector Debt
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Unemployment Follows
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Achieving a Private Sector Surplus
Unless/until we run a trade surplus, the government must run a deficit
Only countries with trade surpluses can avoid running government deficits
Not everyone can be a net exporter!
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But We're Terrified of Deficits
What if people lose trust in the dollar?
What if China refuses to buy our bonds?
What if interest rates skyrocket?
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What About Inflation?
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Japan is Instructive
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Bond Vigilantes?
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Devaluation?
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Quantitative Easing
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Inflation in Japan is non-existent
Despite decades of it's own QE
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What Have We Learned?The government's deficit is equal to the non-government sector's surplus
The US can never go broke or forced into bankruptcy
Sovereign constraints are Real, not Monetary
Deficits do matter
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So What?
Observations
Entitlements
Our Own Theory
Current Policy Options
What's Next?
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Observations
Money is No Object
Constraints are never Monetary
Views Full Employment as Socially Desirable
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Money is Not the Object
Constraints are often Imagined
Prioritizes Numerators over Denominators
MMT CFP
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Entitlements
Payroll tax creates new Government "Debt"
Constraints are Self-imposed
Medicare Parts B & D "adequately financed into the indefinite future"
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A Borrowed TheoryCost of Capital
Infinite Time Horizons
Lack of Spending Opportunity
No Spending Imperative
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LifeCycle of Household
Learn, Earn & Borrow
Earn, Invest & Deleverage
Divest, Spend-down & Consume
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Policy Choices
Raise taxes, cut spending - or both
Prudent advice for an OVERheated economy
Why then, are these the only policy options on the table?
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What's Our Role?In the National Debate?
In macro-economics?
In educating our clients?
Our community(s)?
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Want More?
WWW.NewEconomicPerspectives.org!54
@DeficitOwl
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Complemetary Currencies?
Time Banking
UMKC Buckaroo
Denison Volunteer Dollars
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So Why the Weak Recovery?
Policy makers significantly underestimated the severity of the crisis
They don't understand banking
They think deficits are under the government's control
They think "confidence" will improve if we shrink the deficit
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Owls Doves Hawks
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