SteveG


Treasury Bonds Are Not Money

Modern Money Theory (MMT) is a description of how money works in a modern economy. A modern economy is one that is less than 6,000 years old. Before 6,000 years ago MMT does not claim to know how money, if there was the concept, worked.

To clarify the description, MMT introduces the concept of sector balances. The way to think about sector balances is to think of three sectors of the economy as pots of money as shown in Figure 1.


Figure 1. Three Pots representing the Sectors

Figure 1, as I have drawn it here, is a description of the situation in the USA. That is why one of the pots is labeled US Federal Government. The other two pots represent all other parts of the domestic economy and all other parts of economies in the rest of the world.

When talking about USA Treasury bonds, the MMT founders get loose with the sector balances by saying that treasury bonds are another form of money. Doing this confuses the situation that MMT is trying to explain. Let us admit that US Treasury securities (bonds) are not exactly the same as money. If they were exactly the same, why would there be two words for them? A USA treasury security is a promise to pay money, but it is not money. What makes the economy go round is money, not USA Treasury securities.

Now I can talk about money flows in the economy according to MMT, but applying a strict definition of sector balances. The pots are only accounting for deposits of money and its flow among the pots as signified by the labels on the flow arrows.

By the laws currently in effect in the USA, if the federal government wants to run a deficit, it must sell treasury securities to the non-government sectors. When this happens, money is taken from the non-government pots and flows into the the government pot. In exchange the entities that the pots represent are given Treasury Securities. When government spends the money, money flows back from the government pot into the non-government pots. When the government spends money that is called a deficit, no new net money is in the non-government pots. The money that is spent came from those pots.

If the Federal Reserve Bank (which is part of the government) buys bonds from the non-government sector, it is putting money into the non-government pots in exchange for the bonds that it has bought. If someone in the non-government sector buys bonds from someone else in a non-government sector, then no money flows from the government sector pot. The money is either just stirred around in the same non-government pot, or it flows from one non-government pot to the other non-government pot.

When the federal government spends money (except for the Federal Reserve Bank), it can only spend money it has taken in from taxes or from selling bonds. It does not create new money to put into the non-government sector. It only spends money it first took out of the non-government sector.

How does new money get into the non-government sector pots? The Federal Reserve Bank is the only entity in this economic universe that creates money. It can put the money into the non-government pots by lending it to the non-government banks, who then lend it to the people. The Federal Reserve Bank can also put money into the non-government pots by exchanging the money for USA Treasury securities owned by the non-government sectors.

The net growth of the non-government economy comes from the net amount of money flowing into (and out of) the non-government pots out of (and into) the Federal Government pot. The non-government pots have no way to tell if they contain new money or old money or what mixture of the two that they have. The technical term is that money is fungible.

With this description in mind, you can now judge whether a particular government action stimulates growth of the non-government economy or does the opposite.


Why Are Rich People So Mean?

Wired has published the article Why Are Rich People So Mean?

Decades of “greed is good” messaging has sought to remove a sense of shame from being a beneficiary of outrageous extremes of wealth inequality. Still, the shame lingers, because the messaging runs up against one of our species’ deepest innate values. Institutions seeking to justify a fundamentally anti-human economic system constantly rebroadcast the message that winning the money game will bring satisfaction and happiness. But we’ve got around 300,000 years of ancestral experience telling us it just isn’t so. Selfishness may be essential to civilization, but that only raises the question of whether a civilization so out of step with our evolved nature makes sense for the human beings within it.

The corruption of mind is what I believe caused people like Ayn Rand and Milton Friedman to be so blind to why poor people stay poor and rich people stay rich. Rand’s books like Atlas Shrugged and The Fountainhead completely ignored these factors. Then there is the book Capitalism and Freedom by Milton Friedman.

Friedman argues for economic freedom as a precondition for political freedom. He defines “liberal” in European Enlightenment terms, contrasting with an American usage that he believes has been corrupted since the Great Depression. His views are especially popular among American conservatives and libertarians.

Are the people struggling under crushing student debt really free? How about the people who lost their homes to corrupt mortgage lenders? Are they really free? Then there is the crushing medical bill debt. Does that make people free?


Is A Wealth Tax Practical?

It makes sense to discuss whether a national wealth tax will be able to accomplish its goal. Andrew Yang is worried that there will be a flight of wealthy people out of the USA if a wealth tax is implemented.

YouTube has the video Panel: Yang vs Warren on Wealth Tax.


Sophia Loren and Carlo Ponti may be the most famous example of people who fled their country, Italy, and did not dare to return because of the wealth tax they refused to pay. Forbes has the article Sophia Loren Jailed In 1974 Tax Evasion, Finally Wins Case to catch you up on the details if you don;t know this story.

On the controversy over whether a wealth tax would drive wealthy people out of the USA, there is an important element missing from the discussion. It is not true that there is nothing that can be done about the possibility of the flight of wealthy people. There has been international cooperation among countries to come to agreement on synchronizing tax policy to prevent flight to tax havens. True that George Bush took us out of those discussions, but those discussions can be restarted by a new administration. The candidates ought to address this issue before they lose the debate on Yang’s false premise that nothing can be done.

The wealth tax is just one example of the need for international cooperatioin in solving the problem of wealth and income inequality. This issue is just one of many issues that could stand a good dose of international cooperation. We need a President that can help lead the world into an era of international cooperation. We also need a person to lead us who knows when to stand up for the sovereignty of the USA. Unlike Bill Clinton and Barack Obama who were willing to cede our sovereignty to get trade deals the multinational corporations wanted.

See the conservative National Review article Don’t Overstate the TPP’s Infringement on American Sovereignty.

The expansion of trade agreements into new policy areas has been controversial, but it is now firmly entrenched. Labor, the environment, intellectual property, and other policies have all become core parts of trade deals. As with tariff commitments, these rules are enforceable, which means that if one country believes another is not complying with its obligations, it can bring a complaint.

The loss of sovereignty in such instances is greater than that inherent in tariff commitments, as it affects domestic policymaking more broadly. We need to be careful, however, not to exaggerate the scope of the power of trade agreements and their accompanying institutions.

Of course, this loss of sovereignty is much more severe than this article admits to. I just couldn’t quickly find an article that gave examples of the harm this sort of agreement has already done.

Upon further search, I did find an article. This isn’t the specific example I was thinking of, but perhaps it will do. See the article in The Dreaded New York Times First a Gold Rush, Then the Lawyers.

But when the government of El Salvador, facing mounting public concern over the consequences of mining, failed to grant the company the final permit it needed, Pacific Rim sought to extract a different kind of green: $77 million from the nation’s treasury as compensation for lost profits.

Pacific Rim is suing the Salvadoran government in an international investment court, one of scores of cases in recent years in which frustrated oil, gas and mining investors, using provisions of trade agreements, have sought to recoup losses from mostly developing countries.

Here is an example where cooperation among countries can make things worse. However, if countries cooperate on progressive ideas, I believe they can make things better. It all depends on what the citizens of these countries will allow their governments to do. Participating in politics cannot begin and end at the ballot box. Political vigilance is a full-time necessity.


Tulsi, Be Careful With Your Plans For Medicare For All

Here is a potentially very dangerous statement from Tulsi Gabbard’s web page.

“If you look at other countries in the world who have universal health care, every one of them has some form of a role for private insurance.”

As I have mentioned before, any role for private insurance has to be very carefully structured. There is a well known insurance industry problem called adverse selection. It is a situation that private insurance companies try to prevent happening to them. They would love to use it against any government insurance plan (against any government plan of any sort, really)

Unless severely constrained, this is how it could work in competition with Medicare For All. The private insurance company would provide plans similar to medicare, but for much lower prices. The private insurance companies could afford to do this because they would only insure healthy people. As soon as one of their customers were to get sick, the private insurer would cancel the policy and force the sick person to “opt” for Medicare. Soon Medicare would be the insurer of all the sick people, and the private insurers would insure all the healthy people.

After this shift in customer base, Medicare would be paying much more in benefits per person than the private insurers would have to pay. The people who favor privatizing of government services would point to this disparity to explain that private business is much more cost-effective at providing services than the government is. How do you think so many government services have been privatized over the last 40 or 50 years?

Private companies pay massive amounts of money to their executives and shareholders that government run enterprises do not pay. How can private corporations possibly do things at lower cost than highly efficient government programs like Social Security and Medicare? Private companies make profits by abusing employees, suppliers, and their own customers.

Progressive politicians had better learn about and start talking about adverse selection – ASAP.


Biden’s Wacky Medicare For Some Plan

In 13 seconds, Joe Biden discloses a detail of his Medicare for Some Plan, that shows exactly how wacky it is. You only have to watch up to 32:34. Unfortunately, YouTube will not allow me to specify a stop time.

This is how to specify a stop time, but ABC news won’t let you play it.

If the Medicare for Some or Medicare for Those Who Want It plan is anything like Joe Biden’s detailed description of it at the debate, then it is a plan to kill Medicare. Biden went so far in describing the flexibility of his plan that he explained if you decide to choose Medicare later after you have chosen a private plan, you can switch to Medicare whenever you like. So here is the scenario his plan sets up. Private plans are made up to give insurance that is much cheaper than Medicare. These plans will sound good, and they will be “good” as long as you are healthy. As soon as you get sick, the private plan will deny you coverage, and you will switch to Medicare. Medicare gets to insure all the sick people, and the private plans only insure people who have not gotten sick yet. That would be an “insurance” system where you only have to buy insurance to cover a loss you have just experienced. You buy the collision insurance after you have had the collision. Or you buy flood insurance only after you have been flooded out. Sounds nice, but no insurance company would sell you a policy under those conditions. Yet Biden wants the government “insurance” to behave exactly that way. Since Buttigieg has not described his version of a flexible plan, are we supposed to bet this his plan is more realistic? I don’t know how he can have a more “realistic” flexible plan that won’t land us right back in the mess we already have. If he’s got one, he needs to explain it.


To Take on Big Tech, a Professor Challenges His Own ‘Chicago School’

The Dreaded New York Times has the article To Take on Big Tech, a Professor Challenges His Own ‘Chicago School’.

The University of Chicago is the intellectual birthplace of the consensus in antitrust thinking over the last four decades — that monopoly law should place consumer interests, usually in the form of lower prices, above the concerns of smaller business rivals.
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Kevin Murphy, who teaches at the Booth Business School with Mr. Zingales, said he still didn’t see a serious alternative to the Chicago School for formulating antitrust policy. He also said there was little evidence that more regulation led to better outcomes for consumers.

These two snippets characterize what I have felt was the utter idiocy of the courts and academia over their interpretation of anti-trust law for the last several decades. The courts have been saying that as long as the consumer isn’t harmed by a trust or near monopoly that there was no violation of the law that needed to be corrected. The corporations took note of this loophole that was big enough to drive an Amazon or Walmart through.

Amazon and Walmart were careful to keep consumer prices low to pass muster with the courts. These near monopolies used their power to abuse employees and the company’s suppliers That’s how these near monopolies were able to drive their competitors out of business in order to make monopoly sized profits. Employee, suppliers, and supplier’s workers were people just like consumers. They deserved protection from societally harmful predators. How the courts could ignore the damage that near monopolies were doing, staggers the imagination.


Keiser Report: A Black September? (E1436)

RT (Russian Television or Russia Today) has this video Keiser Report: A Black September? (E1436).

In this episode of the Keiser Report, Max and Stacy discuss the odd similarity between protesters in Hong Kong and in France having their eyes targeted by ‘sub-lethal’ stun grenades. They review the article in GQ Magazine by Robert Chalmers exploring the ‘real victims’ of the ‘Yellow Vest revolution’ and note the connection between the dozens of protesters who have lost an eye, while the online surveillance state also seeks to control what we see and read. In the second half, Max interviews independent journalist Paul Moreira about the Yellow Vest movement in France. What did he see during his many weeks on the frontline with his journalism? They discuss the economic and political demands of the protesters and the violence with which those demands have been met. They also analyze the protests in the context of other protests taking place in various regions of the world.


Give some thought as to whether this is just Russian propaganda or real reporting on real events. The USA government and the oligarchs’ news media would prefer you to think of this as Russian propaganda.


How Liberals Normalized Conservative Ideas

Andreas Bimba posted How Liberals Normalized Conservative Ideas on Facebook. He included this introduction whose source I have not determined yet.

THE ECONOMIST’S HOUR – False Prophets, Free Markets, and the Fracture of Society

The author of this newly released book – Binyamin Appelbaum, who is an editorial board member of the New York Times, reveals many interesting observations about the rise of the Keynesian era, its supplanting by the free market monetarists starting in the late 1960’s and where to now for the world given the clear failure of the neoliberal era, especially of the last few decades.

One interesting comment was that the Rockefeller Foundation funded the rise of neoliberal thought at the Chicago school of economics that proved to have such a decisive influence on the economic policies of conservative and the nominally progressive political parties and governments throughout the world. The Chicago School’s most prominent alumni was Nobel Laureate Milton Friedman.

The Chicago school became one of the most influential schools of thought after Friedman joined the economics faculty in 1946 and then was joined by his long time friend George J. Stigler in 1958.

Friedman altered the direction of macroeconomics, while Stigler helped to do the same in microeconomics. Friedman challenged the dominance of Keynesian economics in the postwar period, and Stigler’s writings undermined many of the rationales for government regulation of business.

The ‘salesmen’ of neoliberalism may have had something to sell for a decade or two and then only under the right circumstances but the neoliberal world has over the last few decades become even more greedy, arrogant and desperate and has degenerated into crony and predatory capitalism that no longer even pretends to deliver for the majority.

It is now clear that the neoliberal carcass will be cut down at some point. The question is will it be soon enough to save ourselves from environmental catastrophe, further social trauma and dislocation and even from some form of increasingly authoritarian global corporate oligarchic rule that acts through a co-opted militarised state, that supplants the last vestiges of post war liberal democracy?

The post has a link to the interview from the Institute for New Economic Thinking.


Finally, in the post is a link to the book The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society by Binyamin Appelbaum


Kalecki, Minsky, and “Old Keynesianism” Vs. “New Keynesianism” on the Effect of Monetary Policy

Naked Capitalism has a reprint of the article Kalecki, Minsky, and “Old Keynesianism” Vs. “New Keynesianism” on the Effect of Monetary Policy. The original (with better typography) is from the Institute For New Economic Thinking.

In a post co-authored with Anna Stansbury, Larry Summers repudiates economic orthodoxy in regard to whether interest rate cuts suffice to restore full employment and looks at a more “original” Keynesianism to find adequate responses to secular stagnation. Tracy Mott walks us through answers many careful readers of Kalecki, Keynes, Steindl, and Minsky knew all along.

In the original publication of this article, there was a criticism for lack of any reference to Modern Monetary Theory (called by one of they key authors of that theory as Modern Money Theory). As a reader of Modern Money Theory, I find the criticism is misplaced. My question to the authoer of the criticism was:

Can you give me examples of writings on MMT that reference the insufficiency of demand as a hindrance to the effectiveness of monetary policy? I think this article adds the emphasis that is missing from most MMT writings.

I learned “Old Keynesianism” when I took an economics course back in the early 1960s. I avoided the taint of “New Keynesianism” in all of what I read since I took that initial course. As the article says, Larry Summers is now revealing what I knew all along. Also, some of the authors of Modern Money Theory were heavily influenced by studying under Minsky. Talk of Minsky is going back to original sources for much of MMT.