This Could Change Everything
Dick Wagner, JD, CFP and Don St. Clair, CFP, EA 23rd Annual Far Wes Westt Roundu Roundupp Augus Augustt 9-12, 2012
What is Money? "Money is the most powerful and pervasive pervasive secular force on the planet. Yet for most, it's a source of mysticism mys ticism and mystery mys tery." ."
- Dick Wagner, JD, CFP
Textbook Explanation Money derived from barter Spontaneously originates in Private Sector Replaces clumsy clumsy barter barter Elim inates Elimina tes "dou doubleblecoincidence coincide nce of wants wants"" Reduces transaction costs
Evolu Evo lution tion of Mone Moneyy Primitivee monies Primitiv Stones, beads, shells, feathers, fish, cattle, etc. Precious meta m etals ls - coins Paper with w ith meta metall backing Fiat money - based Fiat base d on Trust?
Textbooks Conclude Money is what money does Unimportant in its own right Largely ignored Largely ignored in many economic models
Graeber: Not So Fast No archeologi rcheologica call evidence All money is debt Roots in penal system Unit of measurement
Creedit & Sta Cr State te Theor Theorie iess Anthropologists, Sociologists, & Numismatists find origins in cred credit it//debt rela relatio tions ns Pal alac acee commu communit nities, ies, Mesopotamia, ancient Egypt State/Temple/Aut State/Temple/ Author hority ity plays central rol role Chartalist/Cartalist
John Maynard Keynes "The age of Chartalist or State Sta te Money Mo ney was rea reached ched when the State claimed the right to declare what thing should answer as money to the current cu rrent money-ofaccount accou nt..... To To-da day, y, all civilized money mon ey is, beyond beyond the possibility of dispute, chartalist."
Regardless of Origin Today, 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, measure d, but not seen or fel f eltt In any modern mo dern nation, the money of account account is chosen chose n 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
Today, Sovereign Governments Define the money-ofaccount Impose taxes, fees, obligations Decide what they will accept as payment Cho ose how they will Choose make ma ke their own o wn payments paym ents
Taxe axess Dr Drive ive Ac Accep ceptan tance ce Government defines money/ Government money / whatt it wi wha will ll accept accept as payment paym ent Makes payment (spends) in that same money-of-account Requires taxes be paid in the money-of-acc money-of-a ccou ount nt it defines
But Taxe axess Do Not Fund Spending Government does not "need" our money Not to raise revenue revenue per p er se Taxes functio functionn to regulate regulate the t he economy econo my by regulating regulating agg ggrega regate te demand
How a Curr Cur rency Issue Is suerr Spends Spends By directing its bank (usually the central bank) to credit someo someone's ne's account account This frequentl frequentlyy (and increasingly increasingly)) happens wi witho thout ut even writing writ ing a check In the "modern money" era, government spending is accomplished ac complished throug throughh electronic electronic ke keystrokes ystrokes (Bernanke) The government neither has, nor doesn't have dollars in an account somewhere
Mode Mo dern rn Mone Moneyy Pelley: "Is tha Pelley: t hatt tax mon money ey thatt the tha t he Fed is spending?" spe nding?"
Bernanke: "It's not tax money. [W]e simply use the computer to mark up the size of the t he accou account nt." ."
Hierarchy of Money Anyone can crea Anyone create te money (social debt relationship) Trick is to have it accepted (Minsky) But private sector cannot create net financial assets
Government Banks Non-Fin No n-Financia anciall Business Bu siness Households
The US Hierarchy Issues the Issues t he currency cur rency at at the t he top of the pyramid Taxes and spends in dollars Non-convertible, fiat money
US $
On Gold Go ld Standard Standard Pre-1973 Pre-1 973,, Brett Bretton on Woods Woo ds Promised to convert US$ to gold go ld at at a fixed fixe d price Dollars were subordinate Had to to limit lim it spend sp ending ing to to protect gold reserves
Gold US $
Other Coun Countrie triess Did not issue currency at the t he top of the pyramid Had to to limit limi t spending spend ing to protect (US$) reserves Sacrificed con Sacrificed control trol of interest rates Heavily dependent on trade surpluses
US $ Ruble, Peso, etc.
Look familiar? The Euro is effectively a foreign country coun try from f rom the perspective of the individual nations Currency is divorced from the nationn (" natio ("On Onee Market Market,, One Money" Mo ney"))
"Euro" Greece, Spain, etc.
The Eurozone No EMU nation nation issues the currency that sits at the top of the pyramid Governm ents can Governments can "run out" of Euros Mus t pay market Must market interest rates Heavily dependent on trade surpluses
"Euro" Italy, Portugal, etc.
Under Bre Brettton Woo ds Promised to convert US$ to gold go ld at at a fixed price Dollars were subordinate Had to limit spending to protect gold reserves
Gold US $
Everything Changed! Except Ex cept the t he textbooks Nobody rang the bell Dollars no longer subordinate Money no longer the object
Sovereign Money Matters A 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 aff afford ord anything anyth ing for for sale sale in the domes do mestic tic unit un it 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
But isn't the US Broke? "We're out of money"
Within Our Means "The government, just like every American household, has to live within wit hin its means" means"
Is the Gove Goverrnm nmen entt Likee a Hou Lik Househ sehoold? No - not anymore Not since we abandoned the gold standard We ended Bret Bretton ton Woo oods ds 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
The ISSUER of the currency can always pay "[A] government cannot become insolvent with respect to obligations in its ow ownn curre cu rrency ncy.. A fiat money system, like the oness we have one have today, can produce such claims without limit" -Alan Greenspan 1997
Deficit Hawks want Immediate Cuts Opposes deficit spending spend ing on principle principle Often favors favors "sound "sou nd money" (e.g. gold standard or 100% reserve backing) Would legislate rules to mandate balanced budgets
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 recover before imposing austerity
More Deficit Avia Aviarry New bird in town, the Deficit Owl Modern Mo dern Monetary Monetary Theory Theory (MMT) (MMT ) Exposes the fa falla llacies cies in conventional economic theories Views unemployment as socially harmful and economically inefficient
Within Our Means?
Unused Unu sed ener energie gies. s. Unmet needs. need s.
The MMT Deficit Owl Assigns no arbitrary limit to the siz sizee or duration of the deficit Uses a sectoral balance ba lance sheet sheet approach to relate deficit to the rest of the economy
Secctora Se rall Ba Balance lancess In any given g iven period, perio d, sectoral sectoral balanc balances es show s how whether a particular particular part of the t he economy is: Spending more than its income (deficit (deficit)) Spending less than its income (surplus (surplu s) Spending just equal to its income incom e (balanced (balanced budget)
Accounting for Deficits The laws of double-en do uble-entry try accounting apply All sectors sectors cannot 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, balance, at least one sect sector or will w ill be on deficit
Private Sector Balance As a general ge neral rule, rule, the priv pr ivaate sector sector needs need s to be in surplus surplu s Hou seholdss and firms Household fir ms cannot cannot continuall continuallyy borrow bor row more than their income At some point, lenders will run out of credit worthy borrowers who w ho are are willing wi lling to to spend Private debt levels may become unsus Private unsustainable tainable (Minsky's (Minsky's Financial Instability Hypothesis) Hyp othesis) When an expansion driven by private sector debt reaches an end, sales soften, jobless claims trend higher, and economic econom ic activity fal falters ters
Private Sector Debt
Unempl Un emplooym ymen entt Foll lloows
Achieving a Private Sector Surplus Unless/until we run a trade surplus,, the surplus t he governmen go vernmentt must run r un a deficit Only countries with trade surpluses can avoid running government deficits Not everyone can be a net exporter!
But We're We're Ter Terrrifie ified d of Deficits What if peopl people lose trustt in the dollar? trus dollar? What if if C China hina refuses to buy our bonds? What if interest rates skyrocket?
Wha hatt Abo bout ut Infla Inflatio tion? n?
Japan is Instr Ins truc uctive tive
Bond Vigilan Vigilantes tes??
Devaluation?
Quantitative Easing Despite decades of it's own QE
Inflation in Japan is non-existent
Wha hatt Ha Have ve We Lea Learrned? The government's deficit is equal to the non-government sector's sect or's surplus sur plus The US can never go broke or forced into bankruptcy Sovereign constraints are Real, nott Monetary no M onetary Deficits do matter
So Wha What? t? Observations Entitlements Our Own Theory Current Policy Options What's Next?
Observations MMT
CFP
Money is No Object
Money is Not the Object
Constraints are never Monetary
Constraints are often Imagined
Views Full Employme Empl oyment nt as Socially Desirable
Prioritizes Numerators Numerat ors over o ver Denominators
Entitlements Payroll tax creates new Government "Debt" Cons traints are Constraints are Selfimposed Medicare Parts B & D "adequatel adequatelyy finan financed ced intoo the indefinite int future"
A Borrowed Th Theory eory Cost of Capital Infinite Time Horizons Lack of Spending Opportunity No Spendin Spend ingg Imperative
LifeCycle of Household Learn, Earn & Borrow Earn, Invest & Earn, Deleverage Divest, Spend-down & Consume
Policy Cho Choic ices es Raise taxes, cut spending - or both Pru dent advice Prudent advice for an OVERheated economy Why then, the n, are are these the only only policy po licy options on the table?
What's Our Role? In the National Debate? In mac macro-econom ro-economics? ics? In educating our clients? Our community(s)?
Want More?
@DeficitOwl WWW.NewEconomicPerspectives.org
Complemetary Currencies? Time Banking UMKC Buckaroo Denison Volunt lunteer eer Dollars
So Why the Wea eak k Recovery? Pol olicy icy mak makers ers significantl sig nificantlyy underestimated the severity of the crisis They don't understand banking They think deficits are are under the government's g overnment's control control They think "confidence confidence"" will w ill improve if we shrink the deficit
Owls
Doves
Hawks
