Steve's Politics Blog

Back to the original purpose of this blog – education about money and economics – Critical Finance has the article Full Reserve Banking: The Wrong Cure for the Wrong Disease.

As J. K. Galbraith famously observed: ‘The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.’

I’ll use this article as an excuse to put forward a related idea that I have had recently.

One of the limitations on Quantitative Easing (QE) is that the Fed only buys paper assets. This is the closest the Fed thinks it can get legally to fiscal policy maneuvers. However, this is like pushing on the proverbial string. They can put money back into the hands of the banks, but if there is nothing to invest in, then it just creates asset bubbles, and puts very few people back to work. If instead the Fed could buy infrastructure, they could put people to work, and this would be real fiscal policy.

Imagine if the new QE had the Fed buying state and local infrastructure bonds. The money would have to be used to build the infrastructure for which the states and localities issued the bonds. This would put people to work, replace the lost consumer demand in the economy, and get the economy moving again with a fairer distribution of wealth and income. It would eliminate the legislative and executive branches of the federal government from interfering with the growth of the economy.

What if states and localities were able to have reserve accounts at the Fed, so that they could borrow directly at the same interest rates as the banks do? My idea of the Fed buying state and local bonds is one step removed from the direct access. What would happen if we did away with the one step removal? The states would not have to issue bonds and the banks and other private financial institutions would not be raking off profits from running this bond trading system.

Yes, I am only talking about the good aspects of this change in policy. Of course there are some bad aspects that would have to be controlled. I am just not featuring that aspect in what I have written here. I fully admit that. You can nitpick away with all these other issues, but first, I would like you to examine the idea for its positive possibilities.

If you don’t like the idea of the Fed having control of part of the fiscal policy, there is the idea of creating an infrastructure bank to handle it. The trouble with that is that we would have two federal entities creating high-power money, and that would not be good. If the Infrastructure Bank could borrow from the Fed to fund its operations, then that might be a good way to handle it.

I have read many of Joe Firestone’s posts on New Economic Perspectives. This is the first time I have seen a live interview with him. It is especially good interview because the interviewer, Steven D. Grumbine, is very well versed in the topic at hand.

This is a heavy duty session on US money, US debt and deficits, US taxes, and economic policy help for the bottom 90%.

If there is one thing to learn it is that in the United States of America

Taxes Are Not Needed To and Do Not Fund Federal Government Spending..

This is a hard concept to believe, but you need to learn enough about it to understand why this is true, Any Progressive that gets into a debate with a Republican, a Conservative, a Neo-Liberal, or a Libertarian will surely lose the argument if you are arguing from their erroneous frame of reference. You have to be like Steven D, Grumbine and me who start screaming when any Progressive who doesn’t know the above concept and gets into an argument about how any government program will be paid for. It will be paid by the Federal Government creating the money to pay for it. That is how all Federal government spending is paid for. This only applies to Federal government spending.

In the video, there is an important discussion of sector balances. It might help to have the following picture in mind:

This comes from my previous post When Will the White House and OMB Ever Learn About Sector Financial Balances?

CNBC has the article and video Chinese billionaire Jack Ma says the US wasted trillions on warfare instead of investing in infrastructure.

“The world needs new leadership, but the new leadership is about working together,” Ma said. “As a business person, I want the world to share the prosperity together.”

he says ironically as he amasses billions for himself. Well, I suppose I have defeated my purpose by starting with that quote and the snide remark. Actually he had some excellent things to say in this short video.

Ma says blaming China for any economic issues in the U.S. is misguided. If America is looking to blame anyone, Ma said, it should blame itself.

“It’s not that other countries steal jobs from you guys,” Ma said. “It’s your strategy. Distribute the money and things in a proper way.”

It took me a few readings to understand what he was trying to say. It is our strategy that is causing us job loss, not the stealing of jobs by other countries. If we had distributed money and things in a proper way, we wouldn’t find ourselves in the fix that we are in.

YouTube has the video Stephanie Kelton Destroys Peter Schiff’s Economic Myths On Sam Seder Show.

This may be the most important interview you will ever see. Stephanie Kelton should run for President. If you are at all confused by economics, taxes, deficits, and all the rest, this is the clearest and the simplest explanation I have ever heard of this topic.

I am a big fan of MMT of which Stephanie Kelton is a major proponent. Nevertheless, she even clears up some questions about it that I had.

See my previous post Bill Black: Obama Loved Austerity and the New Democrats Remain Addicted to It for an appreciation of the harm that ignorance of economics causes for our country. Bill Black is a colleague of Stephanie Kelton.

Naked Capitalism has the article Finance and Growth: The Direction of Causality.

Our findings also have an implication for the presumption after the start of the Great Recession that resuming credit flows was essential for economic recovery. In the Eurozone, where the recovery has lagged, efforts to create a greater supply of credit have been an important policy focus. Recapitalisation of banks, in particular, has been seen as crucial to the recovery of both the banking system and the economy. But where in the past the financial sector served a primarily wealth-preserving function, and where substantial wealth has now been destroyed, pushing more credit in the hope that this will generate growth could be counterproductive. This attempt to push more credit into the economy would be particularly harmful if growth potential is low. The risk is that zombie banks will be propped up, and the costs of cleaning them up and closing them down will only increase over time.

True conclusions, but a slightly misdirected search for the cause.

It seems to me that the key variable is the transfer of wealth from the bottom tiers of wealth holders to the upper tiers. All this analysis of credit to gdp ratio, and advanced economies versus developing economies, and pre 1990 versus post 1990, all point to the the possibility that transfer of wealth is the issue. Measuring the growth of the financial sector as this article does, we see scatter plots with dots all over the place. That means that there are huge exceptions to the rules being gleaned. As an electrical engineer, I would call this a large noise to signal ratio. If we plotted all of the growth data against the axis of wealth disparity we would get smaller noise and larger signal. Then we could talk about large signal to noise ratios, and fewer and smaller exceptions to the rules.

Consortium News has published A Demand for Russian ‘Hacking’ Proof,

More than 20 U.S. intelligence, military and diplomatic veterans are calling on President Obama to release the evidence backing up allegations that Russia aided the Trump campaign – or admit that the proof is lacking.
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Alleged Russian interference has been labeled “an act of war” and Mr. Trump a “traitor.” But the “intelligence” served up to support those charges does not pass the smell test. Your press conference on Wednesday will give you a chance to respond more persuasively to NBC’s Peter Alexander’s challenge at the last one (on Dec. 16) “to show the proof [and], as they say, put your money where your mouth is and declassify some of the intelligence. …”

Obama doesn’t have to reveal sources and methods. All he has to do is respond to this non-clasified report by civilian computer security experts. as indicated in my previous post US Govt Data Shows “Russia” Used Outdated Ukrainian PHP Malware.

The Observer has the article Democrats Split Between Wealthy Donors vs. Sanders Progressives.

Despite the Democratic Party’s failures, mainstream Democrats are calling for blind loyalty under the false pretense of unity. “The party can’t win if it’s not inclusive, and the way to be inclusive is not to re-litigate the old battle. And there’s obviously some attempt to do that” corporate lobbyist and Clinton super delegate Howard Dean said in a recent interview. This misdiagnosis of the Democratic Party’s essential problem illuminates why it is in such a dire state.

This call for blind loyalty is what finally drove me out of the Democratic Party. I am just not the type to knuckle under. It should be an interesting race to see which party, The Green Party or the Democratic Party, is more successful in addressing the issues that ordinary US Americans face in their daily lives. It is not a matter of being Progressive, Neo-liberal, Conservative, or Libertarian. What matters is whether or not you can address and solve the problems that the bottom economic 90% of this country and the world face in their daily lives. If you don’t even address these issues, they just don’t have the time to even consider you, let alone vote for you. That’s a pretty big constituency to ignore.

Apparently I have never put this on this blog. This is the kind of priceless information that I use this blog to store.

I remember the first half of this, and it is the essential part. I don’t remember having seen the second part.

I had expected the second half to be about letting the loose end hang in front of the roll. I was disappointed.

Naked Capitalism has the article Bill Black: Obama Loved Austerity and the New Democrats Remain Addicted to It which you can also find on New Economic Perspectives as The New Democrats’ Addiction to Austerity Will Not Die.

People tell me that they cannot understand economics. So here is the essential lesson that you have to know boiled down to three paragraphs. If you cannot understand this, please let’s discuss it. This is essential to understand. If you can’t get it, you cannot understand how our Federal Government is supposed to operate. If you can’t understand that, how can you decide whom to vote for?

In a serious contraction, particularly one following a credit-driven bubble, consumers are worried about losing their jobs. They begin to repay their debts and reducing consumption. This is perfectly rational from their perspective. CEOs react to the fall in consumer demand in an equally rational manner – they reduce output and spending on investments. Banks are likely to constrain credit and try to build capital. This too is rational. The result is that there is inadequate demand and unemployment and business failures rise. At the very time that demand is most inadequate and the need for spending on consumption and investment would be most helpful to the economic recovery, consumers and CEOs are likely to do the opposite. Economists call this “the paradox of thrift.”

There is one entity that is an ideal position to do the opposite – to increase demand in response to a recession or depression. This entity is not credit-constrained by bankers. The entity is a government with a sovereign currency that borrows only in that currency and allows that currency to freely float. The U.S. is such a nation. It is critical that our federal government provide fiscal stimulus, in addition to the automatic stabilizers, to counter the recession or depression.

Obama’s metaphor is exactly the opposite of economic literacy. If “families across the country are tightening their belts” then it is particularly essential that the federal government do the opposite – not “the same” – to counter the effects of the sharp fall in effective demand.

Bill Black is just telling us what economists have known since 1930s and 1940s, and was taught in college economics courses in the 1960s. It is so very unfortunate that propagandists like Milton Freidman have succeeded in making even economists unlearn the truth they used to know.

Media ite has the post Bernie Sanders Has The Right Message—But The Wrong Strategy.

But the problem is who Sanders is allowing to piggyback off his powerful, consistent message. Schumer embodies everything that’s wrong, not only with the Democratic Party, but American politics in general. He’s a politician that, over the years, has invested more in his own personal perseverance [preservation] of power than in helping the average, working class person he’s entrusted in to represent.
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But if Sanders isn’t careful, he’ll repair a corporate-Democratic Party’s badly beaten vehicle for it just as the country predictably turns against President Trump, who by the looks of it, will be delivering one disastrous policy after another.

And without flinching, Schumer and the corporate establishment will open the car door, and toss him and the progressive movement he represents out into the muddy ditch—on their road back to power.

Senator Sanders, as obvious as it is not to drink and drive, it’s as politically obvious: don’t get in the car with Schumer and the oligarchs he represents. Or the ditch most Americans are already stuck in will only get muddier.

This is exactly why I did not attend the event in Boston. It seemed to be hosted by the Massachusetts congressional delegation personified by Elizabeth Warren. They are all on the team with Schumer and his ilk.