Sunday, November 10, 2019

The Wonderful Wizard of Money - By Steve Brown - MMT A rebuttal to modern monetary theory

“The few who understand the system, will either be so interested in its profits, or so dependent upon its favours, that there will be no opposition from that class; while, on the other hand, the great body of the people, mentally incapable of comprehending the tremendous advantages, will bear its burden without complaint, and perhaps without suspecting that the system itself is inimical to their interests.”
The above quote is sometimes attributed to Senator John Sherman (author of the rarely-enforced Sherman Antitrust Act of 1890) in a letter supposedly sent by him to New York bankers Ikleheimer, Morton, and Vandergould, June 25, 1863. Sherman’s letter was in regard to the National Banks Act of 1863, but it’s more likely that the above quote is a made-up one, from ‘London Punch’. However, even if meant in jest, the author was certainly aware of the quote’s accuracy.
In 1890, Sherman – or London Punch – could not foresee the US financial collapse of the United States by 2009.  And by 2010 (with the 2011 debt crisis looming) the populace clamored for monetary answers and relief from the US financial crash that put many millions out of their homes, and many more homeless out on the streets.
With the US financial collapse, a new monetary system discourse entered the public consciousness. Monetary Realist politicians like Ron and Rand Paul gained in popularity with the public, while the late monetary historian Andrew Gause and market commentators like Mike Maloney, Peter Schiff, and Jim Rickard all popularly advocated monetary realism, and reform as well.  Although Monetary Realism gained traction, it was nowhere to be found in college freshman Economics 101 and much less in the major media.
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Running counter to Warren Mosler’s entrenched call for a “trillion dollar” US coin, for example, Monetary Realism has never been espoused at America’s wealthiest colleges and universities. Mainstream economists not only reject Monetary Realism, they do their best to trash it. So, by 2011, how could academia and Elites counter this new and growing threat to Keynesian dogma? Enter Modern Monetary Theory, MMT, the crowning achievement of Keynesian Neoliberal economic theory.
Let’s first consider the history of the US financial collapse since 2008-2009, just ten years ago. While ten years may seem long, in terms of monetary history ten years is but the blink of an eye. And during this ten-year period, the Federal Reserve and US Treasury engaged in open market operations (POMO quantitative easing), Twist, dealer bank repurchase agreements, and outright theft by TARP 1 & 2 to stabilize the system. Socializing loss while privatizing profit.
The ‘resources’ that the Money Trust employed in 2008-2009 included that of US taxpayers, which has kept the US bank solvency illusion alive ever since. In fact, with its monetary sleight of hand since 2009, the Fed has so impressed those who are “so interested in its profits, or so dependent upon its favours” that they’ve even come up with their own “new” monetary theory that for sure rocks the neighborhood, from New York’s Trump Tower to the upper 60’s.
MMT theorists, usually academics operating on behalf of major colleges and universities, tend to look at the US monetary system as a discrete entity, and in isolation. MMT academics believe that the status of the US dollar (USD) as global reserve currency is forever established, and that the USD will never be challenged or marginalized in currency markets. Another MMT rule is the hyper-Keynesian view that gold is a useless relic which should populate landfills and not Central Banks; that gold plays no part in world trade, and that gold is not used as collateral for sovereigns or by Central banks. MMT theorists assert that the gold Carry Trade only serves as a commodity trade because gold is not a monetary metal. To the MMT extremist, gold is far less useful than milk, cheese, or toothpaste: gold is not a monetary metal.
The next MMT postulate is their noble assertion that MMT is only about reducing unemployment. We can argue the hedge fund manager’s position, that the far less than 1% prefer to see their inflationary dollars blown up on a battlefield in Syria or Afghanistan (to benefit Lockheed Martin and General Dynamics of course) or that the Money Trust types prefer to see their inflationary dollars blown up in a fine art auction, or cached in physical gold. But for academic Elites and the political class to have their inflationary dollars blown up by the poor and by the unemployed? That certainly would never do.
Alas, separate papers could be written to refute all the foregoing MMT grounds, but let’s prima facie take MMT and its ivory tower academia postulates as given, and give a pass on all above.
Modern Monetary Theory (MMT)
Using the Steve Forbes (1) flavor of MMT as a baseline:
1.   The federal government can print its own money.
It can and should… but doesn’t. The above modern money point as it stands is not only false, but a bald-faced lie. Now, assuming at least one cash note exists in your wallet, take it out and have a look at the heading on its face, at the top – what is written there? ‘Federal Reserve Note’ – not ‘United States Note’. While that distinction may seem fine, it is exceedingly important and at the heart of all academic MMT duplicity. Indeed, the US Treasury out-sourced paper money-printing to the Federal Reserve by 1914, and the Federal Reserve has maintained its paper money-printing monopoly and private 10% skim on all related public debt, ever since.
But MMT adherents argue that the Fed is a branch of the Federal government, that the Chairman and its Board are federal employees, and that the Federal Reserve only acts on behalf of the US Treasury. But when top echelon Treasury and private Federal Reserve bankers inter-pollinate, the point is debatable. Regardless of that, all Federal Reserve banks are privately-owned corporations, and they cream off 10% of US public debt for their own private profit. (2) If any Economics professor at Stony Brook or anywhere else instructs you otherwise, it’s time to have their vetting very closely examined.
2.   The Federal Government (US Treasury) pays back its debt by issuing more debt.
That’s true, however MMT theory departs from Monetary Realism when MMT’s Keynesians insist that the US Treasury can infinitely create new debt to pay off the old debt, where infinity is a very big number. Even so, MMT theory fails there too. That’s because the US “debt ceiling” limits the amount of new debt that the Treasury may issue, and the US debt ceiling has not been abolished… yet.
Monetary Realists say that the debt ceiling is necessary to impose fiscal and monetary restraint, while MMT theory says that the ceiling is pointless and is now a ‘useless relic’ just like gold. Granted, a ceiling is not a ceiling when it is not a ceiling… and is a political football instead. To that extent, MMT has won the day since the debt ceiling was just suspended for two years, until July of 2021. That’s probably the first step to suspending the debt ceiling altogether (3) and one key to understanding MMT. Because that’s the MMT argument: that the currency has zero interest and by extension zero intrinsic value, other than the trust placed in it by the public.
MMT: So what if the private Federal Reserve banks and Fed Primary Dealer Banks cream off the public’s gravy for their own fine art, ever more? It’s a small price to pay so that 2/3rd of the US populace may receive a government check, right?  So Lockheed Martin can have its wars while share buybacks keep Wall Street bloated, and ‘economists’ and hedge fund wealth managers can command seven figure salaries…? A small price to pay? No, this author submits that MMT is meant to prolong the unsustainable and accelerated shift in wealth from bottom to top, despite MMT’s avowed benevolence toward the unemployed.
3.   The federal government can’t be forced into bankruptcy.
So? So what. Agreed, there is no circumstance where the federal government will declare itself insolvent. That’s because the US government can always demand Federal Reserve notes via infinite government-issued debt to cover the government’s liabilities. No argument there. In a pinch, the Treasury may even issue its own United States Notes (subject for another time) extinguish the Fed’s debt, and perhaps even leverage the Fed Board of Governors fine art collection. But what the MMT author really writes is that the hijinks at the US Treasury will cover for the hijinks at the Federal Reserve, and vice versa. And for ten years that Fed sleight-of-hand has held true, so no argument there either.
Even so, Federal Reserve banks are privately owned corporations in possession of risky assets as well as good ones. Recently the Federal Reserve attempted to make a real profit (not its usual fake profit built on cascading Treasury-issued debt and REPO’s managed by the Fed) by selling some of its better assets, purchased after the US financial collapse of 2008-2009; it was the current attempt by the Fed to balance their grossly out-of-balance books. It didn’t work.
Thus, the Fed was forced to end tightening and revert to accommodation (lowering federal fund rates) to an arguable extent where real US fund rates – taking inflation into account – are now negative. The point is that the Federal Reserve must retain real interest rates (taking cpi inflation into account) near zero, or negative, to avoid disaster in perpetuity – just as MMT folks constantly argue.
True too, if a Federal Reserve Bank did collapse under the weight of its bad assets, the bank would be bailed out, and the loss swept under the carpet by the Fed’s own unique accounting rules, while MMT maintains that state of affairs must continue forever. Well, the Fed chicanery has continued for ten years now, but this author’s argument is that ten years is not forever, and that the US cannot maintain itself as global financial hegemon forever as MMT states.
4.   We can afford any social program we want… or can we?
MMT enthusiast Harvey writes, “I don’t know a single, solitary MMT scholar who has ever argued this.” Perhaps not, but plenty of politicians advocate for modern money theory and do argue for infinite government spending. Those MMT advocates are as disparate as Elizabeth Warren (Medicare for all) and Trump with his aggressive arms race spending. Well, we can possibly give Trump a pass, since endless spending on new nukes and hypersonic weaponry perhaps does not qualify as being a ‘social program’!
And note how Harvey stresses resources. Since when have real resources mattered to modern monetary theory when ‘resources’ can be made up by more corporate conglomeration and financialization? Or at the far end, by simply leaning on the US taxpayer? Oh, except for hyper-wealthy taxpayers, of course. But what if a Fed bank were to implode?  Where would Harvey’s ‘resources’ come from then, to fix that? Don’t worry, we already know – the resources are you and me — just as in the US financial collapse of 2008. Dodd-Frank even tells us so.
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Modern Money Theory Summarized
To paraphrase and embellish Assistant Professor of Economics at Florida Atlantic University, William Luther, MMT may be (somewhat!) summarized thus:
1.   If the economy is underproducing, the government can improve matters by spending.
2.   A sovereign government is a unique entity unlike any other and can always issue money to cover its debt, it can never run out of money, not even Zimbabwe. (added Zimbabwe – ed.)
3.   Government spending gets idle resources into production, so creating money to stimulate that production will not generate undesirable inflation.
4.   Given all of the above the US government should run ever larger deficits.
5.   Zero or negative interest rates can be maintained in perpetuity without damage to the currency, or induced inflation. (added point 5 – ed)
6.   You can’t make this stuff up. (added point 6 too! – ed)
Does the above have a familiar ring? However, MMT is far more than souped-up Keynesian dogma. MMT includes elements of the Free Silver Movement which was a truly noble movement eventually checkmated by government funding for war. MMT also includes outright theft (grifters) and even a noble element or two harking back to the long lost Independent Treasury. So never mind the seven figure academics who sanctimoniously argue the economic sanctity of their MMT points in arcane and obfuscated language, this system intends to keep you fat and happy so long as the grifters are in charge… and no one can yet say how long that will be.
  • In this case, John T Harvey, professor of economics at Texas Christian University
  • The word ‘profit’ is something of a misnomer, since the profit related to Fed skimming off the top does not really count as profit, it’s more like grifters.
Interestingly, the macro
Steve Brown is the author of "Iraq: the Road to War" (Sourcewatch) editor of "Bush Administration War Crimes in Iraq" (Sourcewatch) "Trump's Limited Hangout" and "Federal Reserve: Out-sourcing the Monetary System to the Money Trust Oligarchs Since 1913"; Steve is an antiwar activist, a published scholar on the US monetary system, and has appeared as guest contributor to The Duran, Fort Russ News, Herland Report, The Ron Paul Institute, and Strategika51.

Copyright © 2019 Steve Brown