Monday, December 31, 2012

Currency Issuers and Users - Euro

Bishop John Shelby Spong is one of my favorite writers and progressive thinkers. Recently my friend Don called my attention to a recent weekly letter by the Bishop reporting on a trip to Europe with comments on its economy. Only recently would I have found the temerity to lecture the supreme lecturer. But, I did with the following comment on his website.


Your interesting essay might have shed a different light on austerity in Europe had you appreciated the difference between a currency issuer like the US, UK, Sweden, and Hungary and a currency user, as are the states in the European Monetary Union.

After President Nixon took us off the gold standard in 1971, all major countries have had fiat currencies with floating exchange rates. In the early 1990s a growing community of heterodox economists centered at the University of Missouri Kansas City have been studying how a fiat monetary system functions. This community foresaw the trouble in the EMU as it was being constructed in the mid 90s, it foresaw the current global recession, it explains why the S&P downgrade of US debt was a non-event, and why the Fed's quantitative easing has been ineffective. The insights of this community provide some perspective on your observations in Europe.

The UK has imposed austerity on itself consistent with the neoliberal dogma dominating current global economic practice. And, it is suffering the inevitable consequences as you observed. A currency issuer unlike a household, business, or US state government has the policy latitude to deficit spend until the unemployed productive resources are fully employed. It can do this counter-cyclicly to normal business cycles to maintain a healthy economy. The UK is unnecessarily causing human suffering throughout the land.
Euro is not a sovereign currency

Members of the EMU do not have this policy latitude. As users of their currency, they are under a de facto gold standard where the euro takes the place of gold. To obtain euros they must either borrow them or be net exporters in trade with other euro nations. The members of the EMU have given up their monetary but not their political sovereignty. So, unlike states in the US, there is no avenue for a central government to share the prosperity of the whole for the common good.

Germany has reigned as the dominant mercantilist exporting to the other EMU nations, thereby enriching itself at the expense of the others. Now Germany is reluctant to take its boot off their necks and is imposing, along with the IMF, draconian austerity with the inescapable results - high unemployment especially among the youth, severe human hardship, falling GDP, and increasing deficits. The political unity once expected from the monetary alliance has not yet developed and might be threatened by increasing civil unrest.

The antidote to the depression is expansion of the monetary base to employ the unemployed. The European Central Bank, which issues the euro, could issue euros (the equivalent to mining gold) to relieve the crisis, if its charter permitted it. Such action would tend to be inflationary in regions of nearly full employment. Germany, having suffered the Weimar hyperinflation, will have nothing to do with the slightest hint of inflation.

So far, the ECB has kept the lid on debt defaults by purchasing member state bonds to keep interest rates from exploding disastrously as only a central bank can do. However, its charter and Angela Merkel are making sure that it can’t do more. The EMU states may muddle through after a long time, if civil unrest does not intervene Arab-spring style or worse.

You rightly observe that there is little difference in the plight of EMU states between those with conservative or liberal governments. Neither has much policy discretion, and like here in the US, the difference between conservative and liberal economics is the intensity of their devotion to austerian dogma. They are both basically and unfortunately neoliberal.

As one who has put religious myths in proper perspective, you might enjoy ongoing efforts to do the same with economic myths that are causing worldwide suffering and forestalling progressive objectives.


Representative Pearce is Confused

This post was printed as a letter-to-the-editor in the Albuquerque Journal North twice. First on Wednesday, Dec 26 with the title Pearce Wrong on "Printing Money" and again on Sunday, Dec 30 with the title Rep Pearce Gets Money Lesson. Either the Journal staff really liked it or, more likely, they were just confused. Thanks to the Journal for the exposure!


On the Journal's Nation page for December 22, Michael Coleman quotes Representative Pearce as saying "...we're just printing money because we can't even borrow it. Somebody needs to say this is ludicrous."

Representative Pearce's statement is shockingly ludicrous. Presumably, Pearce is referring to the Federal Reserve Bank buying US Treasury and mortgage backed securities. He and others, who refer to this action as printing money, apparently forget that the securities were purchased previously by drawing down bank reserves on the part of banks or their clients. When the Fed purchases these same securities, bank reserves are restored as the Fed takes possession of the securities. It is merely an asset swap. The net effect of the swap is that interest is paid to the Treasury instead of to the former holders of the securities in the private sector.

The second part of the quote, that we "print" this money "because we can't even borrow it" is equally ludicrous. Where does Pearce get the idea that we can't borrow money - that is, sell treasuries to the non-government sector? Even at historically low interest rates, Treasury securities are being purchased at every Treasury auction. In fact, such auctions never fail. In purchasing Treasury securities banks are just trading reserves, which earn little interest, for securities that earn more interest. It is just another asset swap.

Pearce's ludicrous statement implies that he thinks buying securities with "printed" money is equivalent to selling securities. Of course, the two operations are the opposite.  The first increases bank reserves; the other decreases reserves.

Representative Pearce's confusion is representative of the confusion of the nation's leaders. It leads to self contradictions and poor solutions to our economic problems.

Tuesday, December 18, 2012

Connecting Modern Economics with Progressive Politics

Connecting Modern Economics with Progressive Politics

As Los Alamos scientists and engineers working on nuclear weapons, our sole interest was accurately defining the problems and researching, developing, and implementing workable solutions.  Our jobs involved objective assessment of situations, separating the wheat from the chaff, and bringing people together with the right skills to fix problems.   Politics never entered the problem solving processes.

In retirement, several longtime Los Alamos colleagues and friends concerned over the political “wars” in Washington preventing us from addressing Climate Change began discussing how we might contribute to a solution to get our country moving in a positive direction.  We believed we had the right credentials and technical knowledge to address the issue and wanted to find some way to influence our elected officials.  Needless to say, we have not been successful!

Along this path, Dan started digging into economics to see if there was an economic component to the climate change issue that could make the argument for addressing carbon emissions more compelling to our Congressional decision makers.  In the process he found that economic issues were the most important consideration in almost every issue our country faces. 

Dan discovered a group of academics advocating an approach to Macroeconomics called Modern Money Theory (MMT) that is more an explanation of the way a sovereign’s fiat currency works , if unencumbered by needless restrictive legislation, than it is a theory.   

Needless imposed legislative constraints, like the “debt ceiling“ and the obsessive fear over an expanding “national debt,” are causing law makers to make unnecessary and destructive budget cuts that are killing jobs, hurting our economy, and preventing our government from investing in almost every phase of our national public service needs, including now urgent climate change issues.

Unfortunately, both Republicans and Democrats have fallen into the trap of believing economic myths driving our governments decision making in the wrong direction: “our federal government’s finances are no different than a household’s finances, it is going broke, it needs to increase tax revenue or borrow money from China to support our national debt, and it must make major cuts to our safety net programs to survive. “  

All of those often repeated statements are wrong, yet they are so firmly entrenched in our current culture that peoples’ eyes glaze over when they hear anything that conflicts with these myths.

Most people do not understand macroeconomics on any level, but conservatives purposely trumpet these myths to achieve their ideological small government, privatization agenda.  Claiming our government is running out of money is literally the only way to get citizen voters to accept cuts to our social safety net programs as necessary to prevent our country from going bankrupt.

Our challenge is to find better ways to communicate to all citizens, public policy makers, and advocates of progressive policies the message of how money and our banking system really work and the key role the federal government plays in sustaining full employment for all those wanting work.
Arguments for saving Social Security, Medicare, and Medicaid from destruction and making the necessary investments to improve our “public common good” would be enormously strengthened by an understanding and integration of MMT principles into our discussion of all the critical issues of our time.

My hope is that others will join us in this quest!