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America's Main Street economy versus Wall Street
You might have noticed that Wall Street no longer is a thermometer for measuring Main Street’s economic health. While the stock markets have recovered from their 60% collapse caused by the 2007 Great Recession and are now at an all-time high, the health of the Main Street economy as measured by the quantity and quality of jobs is not doing so well.
Jobs being created tend to be lower paying with fewer
benefits than the jobs that were lost as fallout from the Great Recession and
the recent government budget cuts. Most concerning
of all is the fact that the income and wealth gap between the richest and the
working American continues to increase even as the stock markets continue their
advance to higher highs.
Politicians, analysts, and media pundits provide all kinds
of rationale for these discrepancies between Wall Street and Main Street and
the failure of the job market to improve.
Almost all are wrong.
A new branch of economics called Modern Money Theory (MMT) perfectly
explains these discrepancies. It emerged
during the early 1990s and foretold the euro zone crisis and the recent 2007 Great
Recession. And, it explains why the
Fed’s Quantitative Easing (QE) program has been insignificant in stimulating
the economy. QE did have an effect of
stimulating the stock market’s recovery while continuing to accelerate the
income and wealth gap.
MMT is actually not a theory and it has no political
ideological basis. It is an objective
study of modern (fiat) money and the way a sovereign country with its own fiat
currency works. It has nothing to do
with big government versus small government, and it has everything to do with
our government functioning effectively as our forefathers intended, using the
constitutionally mandated financial tools at their disposal.
Warren Mosler, a former hedge fund manager who made his
billions from these insights, challenged the economics profession that the U.S.
would be far more prosperous if we stopped basing our fiscal and monetary
policies on theories designed for a country whose currency was still tied to
the gold standard.
Today, tens of thousands of professionals in academia,
finance, business, and government also champion Mosler’s insights that (1) our
fears about the national debt and deficit are the result of a failure to understand
how modern money works and (2) that lack of understanding is holding back
progress on all economic fronts in America.
And recently, the mainstream media has begun to take notice
of MMT and is beginning to print articles about the economy discussed in a MMT
framework.
While the actual details of how the United States
government’s financial management system works are complex, MMT describes the
government’s basic financial management framework in a way that is simple and
straight forward that most of us can understand.
- The U.S. government’s finances are nothing at all “like a family sitting around the kitchen table working its budget” as has been metaphorically described by countless politicians.
- The U.S. dollar is not tied to a commodity. It is only a medium of exchange backed by the strength and power of the United States economy.
- The U.S. government’s financial management system consists of two components, fiscal (spending and taxing) and monetary (monetary operations and interest rates control).
- Effective financial management requires that both the fiscal and monetary parts of the government work together in sync.
Congress is solely responsible for the fiscal part. It literally puts U.S. dollars into the main
street economy by its spending and taxing directives and policy decisions. To be effective, Congress must put the
dollars where they are needed and in the amounts needed, coupled with effective
tax policies, to reach its economic and societal objectives.
The Federal Reserve Banking system (the Fed) is responsible
for the monetary part. As the central
bank of the U.S. government, it manages the federal government’s financial
balance sheet. The U.S. Treasury and all
states and commercial banks, both foreign and domestic, that want to do
business with the U.S. government must have an account at the Federal Reserve
Bank.
The Fed is the most misunderstood part of the U.S.
government’s financial management system, and its power is greatly
exaggerated. It is only the U.S.
Congress that has the power to create jobs and stimulate growth in the main
street economy.
The Fed does have the authority to change the supply of
reserves in the commercial banking system by exchanging reserves with
Treasuries on its central bank financial balance sheet as it is currently doing
with its QE program. This action by the
Fed does have great influence on the stock markets by changing the supply of
reserves in the banking system (the financial industry). But, increases in bank reserves do not make
it into the general economy until or unless banks give loans to credit worthy
customers in the private sector of the economy.
Therefore, the Fed’s QE action
artificially inflates Wall Street while doing nothing to grow the main street
economy that we all depend upon.
Real job creation and main street economic growth comes only
from U.S. government deficit spending at times when the private sector is not
producing enough jobs to generate disposable income in family budgets.
Just as the Fed is the “lender of last resort” for
commercial banks if they need reserves to balance their capital accounts, the
U.S. Congress must be the “job creator of last resort” for our economy. For the United States to regain its status as
the most prosperous and socially mobile country in the world, Congress must
create a modern work program similar to FDR’s New Deal Programs of the 1930s.
