Friday, April 2, 2021

Think of a Household!

(Slightly updated 3 April)

Chapter 1 heading, "Don't Think of a Household", from Stephanie Kelton's 2020 The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy:

President Obama was being pretty pathetic when he said that, at one of many low points in the course of his endless struggle to make Republicans believe he wasn't a Communist (spoiler: they knew perfectly well he wasn't a Communist—they pretended to think he was because they thought it would advantage them politically to do so), but the fact is that families are a lot more like federal governments than the conventional wisdom tells you, though not for the reasons Obama was suggesting: namely,

  • A successful household in a typical American scenario is one that gets its start on success by acquiring a massive debt, in the form of a home mortgage, and uses that debt for the rest of its existence, except as and when it moves and exchanges the debt for a better one—refinancing when interest rates are favorable, instead of paying it off, to raise cash for increasing their investment's value—as its primary means of access to credit and the ability to stay a little ahead of the limits of its income; and
  • The US federal government began its successful existence by acquiring a massive debt in the form of all the debts that were acquired by all 13 states during the Revolutionary War, on Alexander Hamilton's brilliant Whiggish insight that this apparent liability would be the key to ensuring the perpetual growth of the new nation and helpless dependence of the states, whose access to credit would forever be correspondingly limited. 

Debt, properly undertaken, is good for us. It is the classical form of capital in all its productive majesty.

So what Obama really should have said is, "Families across America are sitting at their kitchen tables and looking at what's happened to mortgage interest rates since the 2008 crash and telling themselves, these suckers are down below 5% and why won't the bank let us refinance the house and get a piece of that? So we should pass Dodd-Frank and get the Consumer Financial Protection Bureau going, but we should also do something to get those banks lending more, and in the meantime, the federal government should do the same thing, and refinance some more of that gigantic national debt while we can, folks, because we could really use the money and we can get it practically for free."

That's the way to use the kitchen table analogy, but nobody ever does.

But Obama would have been wrong to say, "Don't worry, guys, we are not a household so if I just write a check I don't need to worry about it," because that isn't true.

Also, there's a much bigger error in there:

the federal government doesn't spend currency (banknotes and coins), but money, and issues none of the money it spends, which is in fact generally created by private banks, every time they issue a loan:

Commercial banks play a role in the process of money creation, especially under the fractional-reserve banking system used throughout the world. In this system, CREDIT is created whenever a bank gives out a new loan. This is because the loan, when drawn on and spent, mostly finishes up as a deposit in the banking system (an asset), which is counted as part of money supply (and offsets the LOAN - which has yet to be repaid). After putting aside a part of these deposits as mandated bank reserves, the balance is available for the making of further loans by the bank. This process continues multiple times, and is called the multiplier effect.

It's true that the Federal Reserve Bank creates physical currency (Federal Reserve Notes, since 1913, supplementing and ultimately replacing the United States notes issued by the Treasury from 1862 to 1971), to the amount of $1.705 trillion in November 2019, or just under 9% of the total M2 money supply of $15.327 trillion.

And it also creates money issued around the edges by fiat, through the minuet of buying federal paper from private holders, in order to maintain inflation and interest rates at whatever they feel the sweet spot is, but they're specifically not allowed to buy bonds directly from the Treasury, and the Treasury itself is able to produce only coins, which they are really not going to do by the billions of dollars worth and cart over to the Pentagon or Housing and Urban Development to help them pay their bills (the famous Trillion-Dollar Coin strategy of 2011 wasn't meant to provide the government with spending money but to help the government evade the debt limit when idiots Boehner and McConnell were refusing to raise it). But the real money comes from the public; all the government can do is to try to exercise some control over how much of it there is, which, as I say, they actually do very well.

No! The US Constitution, article 1, section 8, says, 

The Congress shall have Power... Clause 5. To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.

Not "exclusive power", because when you think about it it couldn't possibly have been exclusive, because the country didn't even have a mint yet, and paper money was all issued by private banks (hard as Hamilton and his Whig followers tried to get the federal government into the business through the First and Second National Banks), until 1862, as mentioned above. And currency is only an extremely small part of the money supply.

And what Brett W. Fawley and Luciana Juvenal writing for the St. Louis Federal Reserve* meant with their claim, quoted by Kelton, that the US government is "the sole manufacturer of dollars" 

As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills.

was clearly about something else, as they clarify in a footnote:

Technically, the debt ceiling could render the government unable to pay its bills, but the law has little credibility because enforcing it would almost certainly cause more harm than good.

They mean the US could find its way out of such a difficulty by manufacturing physical dollars (against bank runs, maybe?) and borrowing (see also). They really couldn't possibly mean anything else, because it wouldn't be true. This quote, decontextualized, gets quoted around MMT circles as if it was a divine revelation, a Hogwarts prophecy from Professor Sybill Trelawney, but it's plainly not meant to say what they think, or would be ridiculously wrong if it did.

It's only because your fancy-ass economists wouldn't lower themselves to look at a pop book like The Deficit Myth that somebody like me would have to come out and refute it. The wrongness is just obvious.

I am delighted by the deficits the US has been occurring to combat the Covid-19 pandemic, which seem to me completely well-taken—but even more by the tax hikes in the American Jobs Plan, which put (some of) what needs to be done on a solid financial footing. I don't see any percentage in being lectured on monetary policy by people as poorly informed as Stephanie Kelton and Warren Mosler, who literally have no idea what money is or where it comes from.

(I mean, I had no idea either a few days ago, as I keep saying I am not an economist, but when I realized I didn't know it was pretty easy to find out.)

*Incidentally, what Fawley and Juvenal were doing in this 2011 post was to argue that increased health care spending under the ACA must be offset by increased tax revenue, not because it might cause inflation, but on the normal economist ground that borrowing will crowd out investment. In direct disagreement with MMT "principles" according to which tax revenues are irrelevant to government spending and government spending never needs to be limited by anything other than inflation fear. MMT propagandists keep citing the post without seemingly realizing that it offers a cogent example of why they are wrong about everything.

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