The money that is created by the government of the USA is called fiat money because it is created by a decree. Modern money theory (MMT) gives the theoretical underpinnings of how such money works. The theory does discuss the possibility of inflation and deflation of the money in such a system. If the government puts too much money into circulation, then a unit of money will buy fewer and fewer real assets. To counteract inflation the government merely needs to take money out of circulation.

The theory is just so simple, but looking at practice, we see that the means pf putting money into circulation is easier than taking money out of circulation.

To put money into circulation, the government merely has to buy stuff and credit the supplier of the stuff with some fiat money. Some of that stuff that gets bought, could be bought by the Fed in the form of paper assets of the private sector (this has recently been called quantitative easing) Quite a bit of putting money into circulation can be completely controlled by the Fed without any possibility of interference from Congress or the USA President.

To take money out of circulation the government can raise taxes which is politically difficult to do. It can also sell government bonds. The raising of taxes or the selling of newly issued bonds is not something the Fed has control of. The bond, when sold by the government, takes a large amount of money out of immediate circulation, with the promise to pay you smaller amounts of interest for immediate circulation, and the full principle at a later time, also for full circulation.

If inflation is already stating to get out of control, the government may have to pay you a lot of interest in order to get you to give up immediate spending of your money. Suppose that they had to pay you 20% per year interest. Then in five years the government interest would put as much money back in circulation as the bond had taken out. After that, and particularly when the bond matured, there would be more money in circulation than when they sold you the bond and took some money out of circulation. Depending on how circumstances may have changed over that period of time, this putting the money back in circulation could be counter productive to controlling inflation.

Taxing the money out of circulation and running a budget surplus (meaning taking in more taxes than the government spends) would not have the consequences that bond buying and selling would have, but it would require much more political will than the government could muster.

It is too easy to explain MMT theory without also explaining the practical limitations. In the long run, this is a very bad way to introduce the ideas of MMT to the novice. In the long run, that novice may find out about the practical aspects and feel bamboozled by the initial simple explanation. If MMT is taught and explained without seeming to be hiding anything, then the long term acceptance of the ideas of MMT is more likely.

What the political system needs to remember is that when a concept is introduced to the public with proper explanation and it gets accepted, then over time, new people come into the system who have not been taught the explanation. You can’t assume they understand the purpose of the fiat monetary system if it is not adequately explained to the newcomers.

New Economic Perspectives has the article THE SHIFT: Understanding and Using America’s Fiat Money.

President Obama proposed a Universal Pre-school Day Care program in his 2013 State of the Union Address. He then effectively killed it—pre-SHIFT—by explaining that his program would “cost” tax-payers ten billion dollars a year. But now, post-SHIFT, we don’t have to explain things that way anymore. Now, we explain it like this: Our democratically elected sovereign government is going to issue and spend its Federal Reserve Promissory Notes to pay American citizens to establish, staff, and operate the pre-school education centers American families—and American preschoolers—desperately need. It doesn’t “cost” anybody anything. The American citizens are going to get paid for building and operating something they need to have—provided, of course, they’re willing to be paid with the government’s Promissory Notes.

Generally, I buy the story this article is selling, but I don’t want this story to be oversold.

With regard to the final paragraph as excerpted above, I have this cautionary note.

“The American citizens are going to get paid for building and operating something they need to have—provided, of course, they’re willing to be paid with the government’s Promissory Notes.”

You mean provided, of course, they’re willing to be paid the amount of Promissory Notes that the government will pay for these services.

If the government makes too many promissory notes, people may expect huge amounts of them as payment for their services. When all those promissory notes that have been made by the government come out from under the mattresses of the oligarchs who have not been spending them, then there may be a real problem. The government may find it politically impossible to take enough of those promissory notes out of circulation fast enough to keep up the value of the ones remaining in circulation.

RT has this Keiser Report episode.

The ‘Mnuchin massacre’ and one-way bets on the dollar are among the topics for Max and Stacy in this episode. In the second half, Max interviews Nomi Prins, author of the soon-to-be-released book, ‘COLLUSION: How Central Bankers Rigged the World’. They also discuss the current market situation and how a new Fed chairman may approach a crash.

I may have a few long term philosophical differences with what is being said here, but in the short term, I agree with their outlook as to what may be most likely to happen. Mnuchin is actually right that it is better for us for the dollar to decline relative to the rest of the world’s currencies, for, as this report says, it was inevitable anyway. Yes, there will be pain in this country during the transition. At least some of the pain will be felt among the oligarchy that has wealth denominated in dollars (of course they can shift a lot of that wealth into other currencies or into gold.) In the short term, we don’t have the manufacturing capacity to replace everything we buy from other countries, but if managed well (and there is certainly no quarantee on that) our employment level in the manufacturing sector will rise to adjust.

As for the conversation with Naomi Prins, I have to also agree with her analysis of what is happening. Philosophically, I understand the fiat monetary system we have and how it can be managed well. In actuality, it is not being managed well, and it is not being used for the best purpose for all of society. I think that to some degree the Fed was forced to take the actions it did in a futile attempt to compensate for what the rest of our government refused to do. The Fed didn’t have all the right tools, so they had to use the tools that they had.

As I have been saying all along, the tremendous infusion of liquidity that the Fed has created has not caused inflation yet, except in the stock market. There was no place else for the oligarchs to put that liquidity. If and when the economy turns around so that investing this liquidity actually makes sense, then we could have a terrific inflation problem. To offset this possibility, the Fed and the rest of the government needs to have an emergency plan on how to reduce the Fed’s flooding of the economy with liquidity. The trouble is, that I don’t see the practical way to do this.

The real solution is to suck the liquidity out of the economy with much higher taxes on a stiffly graduated basis so that large incomes and great wealth bear most of the burden. Then the liquidity needs to be put back into the economy by the government by its purchase of goods that are truly useful to the economy (infrastructure, education, research, health care, etc.). It is just that in this political environment, it is impossible to get such a policy enacted.

Naked Capitalism has the article Crash of Outsourcing Giant Capita with 70,000 Employees Globally Sparks New Panic.

Since the sudden downfall of the British infrastructure giant Carillion two weeks ago, investors’ nerves in London are frayed. And short-sellers, scanning the horizon for their next prey, seem to have found it.

Its name is Capita. It is one of the UK government’s biggest outsourcing firms with contracts to provide services to government entities, such as NHS cleaning, school dinners, and prison maintenance. It has 70,000 employees in the UK, Europe, South Africa, and India.

I have been expecting a huge market correction for a few years now. I also figured that the recent surge of the stock market was a bubble based on corrupt practices in the world financial system. I just didn’t know exactly where the corruption would be exposed. I was unaware of this particular situation in England.

I can hardly wait for the US stock market opening on Monday.

Naked Capitalism has the article Nomi Prins: Trump’s Financial Arsonists.

Here is the conclusion of the article.

Nearly every regulatory institution in Trumpville tasked with monitoring the financial system is now run by someone who once profited from bending or breaking its rules. Historically, severe financial crises tend to erupt after periods of lax oversight and loose banking regulations. By filling America’s key institutions with representatives of just such negligence, Trump has effectively hired a team of financial arsonists.

Naturally, Wall Street views Trump’s chosen ones with glee. Amid the present financial euphoria of the stock market, big bank stock prices have soared. But one thing is certain: when the next crisis comes, it will leave the last meltdown in the shade because our financial system is, at its core, unreformed and without adult supervision. Banks not only remain too big to fail but are still growing, while this government pushes policies guaranteed to put us all at risk again.

There’s a pattern to this: first, there’s a crash; then comes a period of remorse and talk of reform; and eventually comes the great forgetting. As time passes, markets rise, greed becomes good, and Wall Street begins to champion more deregulation. The government attracts deregulatory enthusiasts and then, of course, there’s another crash, millions suffer, and remorse returns.

Ominously, we’re now in the deregulation stage following the bull run. We know what comes next, just not when. Count on one thing: it won’t be pretty.

I am still invested in the stock market, but I have some cash protection to tide me through the next crash. The pundits are claiming that “cash is trash” at this juncture because cash won’t make money like stocks will. On the other hand, cash won’t lose money like stocks will (unless of course we have rapid inflation).

To offset Elizabeth Warren’s bragging, Yves Smith wrote an introduction to the article part of which had the following to say:

The CFPB has also been underwhelming under Obama. Obama chose Richard Cordray, who from his days as Ohio attorney general was a known “all hat, no cattle” type. He was late to implement a payday lending rule, and by virtue of it not becoming effective until after Trump took office, it was reversed. The CFPB’s biggest accomplishment is arguably its complaints database, but even then, it did not use it to maximum advantage. The Los Angeles Times, and following them, the Los Angeles prosecutor, identified the Wells Fargo fake account abuses. As regular readers know, when the press reported on the scale of the violations, the CFPB, which acted as the lead regulator on the sanctions, was criticized for not going after Wells executives.

Politicususa has the article Adam Schiff Just Ripped Paul Ryan And Devin Nunes A New One Over Memo.

The Republican document mischaracterizes highly sensitive classified information that few Members of Congress have seen, and which Chairman Nunes himself chose not to review. It fails to provide vital context and information contained in DOJ’s FISA application and renewals, and ignores why and how the FBI initiated, and the Special Counsel has continued, its counterintelligence investigation into Russia’s election interference and links to the Trump campaign.

This is the way to discuss this controversy as opposed to trying to suppress information.

Here is another side to the story. I am not going to call it “the other side” as if there were only two ways to think about this Russiagate obsession.

The Real News Network has the interview Russiagate is Dangerous, Will Washington Get the Memo?

The partisan fight over Rep. Devin Nunes’ memo is consuming Washington and even leading prominent liberals to question if Nunes is a Russian agent. Russia scholar Stephen F. Cohen of Princeton University says Russiagate has now become “much more than McCarthyism.”

This is not the first time I have posted items from Stephen Cohen. See my previous post Rethinking Putin: A Talk by Professor Stephen F. Cohen.

NPR has the article Worker Who Sent Hawaii False Alert Thought Missile Attack Was Imminent.

The midnight shift supervisor played a recording over the phone that includes the correct drill language “EXERCISE, EXERCISE, EXERCISE” — but also erroneously contained the text of an Emergency Alert System message for a live ballistic missile alert, including the language “THIS IS NOT A DRILL.” The recording ended by saying “EXERCISE, EXERCISE, EXERCISE.”

This could have been an episode of the old Art Linkletter show “People Do the Funniest Things”. (I know that wasn’t the real name of that show, look it up.)

Imagine what would happen if the system got completely automated, and a robot had to decide what to do with the conflicts in the recorded message. Do you think the people programming the robot would have thought about this possibility?

Kids Say the Darndest Things.

The show’s best-remembered segment was “Kids Say the Darndest Things”, in which Linkletter interviewed schoolchildren between the ages of five and ten. During the segment’s 27-year run, Linkletter interviewed an estimated 23,000 children.[3] The popularity of the segment led to a TV series with the same title hosted by Bill Cosby on CBS-TV from January 1998 to June 2000.

Just think about the midnight shift supervisor who wanted to do a training exercise. The proper response to an exercise was to not send a message to the public. So did the supervisor expect that the workers were supposed to do nothing in response to the exercise? Would the workers pass the tests by ignoring the exercise? Would the workers have failed the test by sending a false message to the public? What was the supervisor prepared to do in case the workers failed the test?

In my reading of Pentagon Papers up to this point it has been all about the blunders of the French and Americans. However, I have now come to a reference to some problems on the North Vietnam side.

It starts with something that Eisenhower said.

President Eisenhower is widely quoted to the effect that in 1954 as many as 80% of the Vietnamese people would have voted for Ho Chi Minh, as the popular hero of their liberation, in an election against Bao Dai. In October 1955, Diem ran against Bao Dai in a referendum and won—by a dubiously overwhelming vote, but he plainly won nevertheless. It is almost certain that by 1956 the proportion which might have voted for Ho—in a free election against Diem—would have been much smaller than 80%.

The explanation for the smaller vote for Ho Chi Minh comes in this excerpt.

The North Vietnamese themselves furnished damning descriptions of conditions within the DRV in 1955 and 1956. Vo Nguyen Giap, in a public statement to his communist party colleagues, admitted in autumn, 1956, that:

“We made too many deviations and executed too many honest people. We attacked on too large a front and, seeing enemies everywhere, resorted to terror, which became far too widespread. . . . Whilst carrying out our land reform program we failed to respect the principles of freedom of faith and worship in many areas . . . in regions inhabited by minority tribes we have attacked tribal chiefs too strongly, thus injuring, instead of respecting, local customs and manners. . . . When reorganizing the party, we paid too much importance to the notion of social class instead of adhering firmly to political qualifications alone. Instead of recognizing education to be the first essential, we resorted exclusively to organizational measures such as disciplinary punishments, expulsion from the party, executions, dissolution of party branches and calls. Worse still, torture came to be regarded as a normal practice during party reorganization.”

I remember back to a book that I had read around 2009. (See my previous post War Fever at the Times: A Five-Day Log). In this post, I talk about the book Perfect Spy: The Incredible Double Life of Pham Xuan An, Time Magazine Reporter and Vietnamese Communist Agent.

Another thing that I learned from this book. When you see a local government figure carrying out policies that are clearly antithetical to the cause, maybe you don’t understand what cause the person is working for.

On page 148, “… Thao operated as one of the most trusted aides to Diem and was generally hailed as one of the South’s most successful anti-Communist crusaders. …”

On page 149, “Thao became one of the strongest advocates for agrovilles, self-contained modern villages aimed at separating insurgents from the rural population by moving peasants into large, well-defended villages that would allow the government to protect them. Thao knew the program would alienate peasants, and that is why he became its strongest proponent. The peasants hated agrovilles for many reasons, beginning with the fact that they were required to help build them and then move from their homes. The program produced protests and alienation toward Diem. When it was disbanded, Thao focused on strategic hamlets, convincing Diem to move quickly rather than slowly, which would elevate hostility and alienate the peasants. …”

How could Thao do that, you ask? Here is the part that I left out. On page 148, “Perhaps the most intriguing case of espionage involved Colonel Pham Ngoc Thao, whose mission was to destabilize the anti-Communist government of South Vietnam. …”

What I didn’t know about when I read this book was the quote above from General Giap from the Pentagon Papers. Perhaps the idea for the use of agrovilles by Diem in the south was born of what the spy learned from mistakes that were made in the north. By the way, I do not think that the authors of the Pentagon Papers had access to the information about the spy Colonel Pham Ngoc Thao.

YouTube has the video Senator Elizabeth Warren Interview with Cenk Uygur on The Young Turks. Let me cut to the chase, and start you off with her most maddening evasion.

Cenk never puts it to her directly by mentioning that she could have changed the course of history, but she decided not to take a stand when it mattered.

By the way, here is the link to the TYT Network’s original posting Cenk Uygur hosts an interview with Senator Elizabeth Warren to discuss her new book. Buy Sen. Warren’s new book.