Wouldn’t you know, the worst possible thing to do to the economy is exactly what the idiots are planning to do
At various points in my shadowy, reclusive existence, I have studied economics, worked at the International Monetary Fund, and done mysterious things in the financial industry. I mention all this not to lay claim to being an economist, which I certainly am not, but merely to note that I have spent a fair amount of time in my life thinking and talking about economic theory.
And one thing I have learned is that most people simply do not understand fiat currency. They really, really don’t understand how our monetary system works, how our economy works, or how it all hangs together.
To be fair, many economists don’t seem to really understand it either. Or rather, they act like they don’t understand it. There isn’t an economist alive today who doesn’t know that we’re on a fiat currency, that we don’t need to dig metal out of a hole in the ground or mine it out of a mountain, that modern money is an imaginary unit of value, and that the U.S. government is sovereign in its own currency. They know all this. Yet they act as if we’re still on the frigging gold standard.
The economy is heading into a depression? Tax revenues are down? Oh noes! We must cut Social Security! We must cut spending! We must tighten our belts!
Oh, horseshit. It doesn’t work like that.
Consider taxation, for example. People talk about what their taxes are “paying” for, and whether or not the government has enough tax revenue to “pay” for various and sundry things. We all talk that way, just like we talk about the sun coming up tomorrow. But it’s not true. The sun doesn’t “come up,” and taxes don’t pay for anything. Money is a creation of the government. It’s an agreed-upon fictional unit of value. In a nation with sovereign currency, like the United States, the government can create as much of the stuff as it wants. We’re not dealing with finite gold reserves; the government doesn’t need to collect gold from the citizens in order to send the gold somewhere else. There is no gold. (Also, there is no spoon.)
If that’s the case, you might ask, then why do we have to pay taxes at all? And in fact economists were asking that question in the first half of the 20th century, as the world started sliding away from the gold standard and towards the realm of pure fiat currency. What is the role of taxation in a fiat currency? they wondered. What does it do? In a world where there is no spoon gold, what’s the point?
There are a few answers to that, and a few theories. The chartalist view is that in a sovereign currency, taxation is what gives value to money. The government prints dollars, but why should we use them? Because the government makes us use them, to pay taxes. Dollars are the only thing the government will accept. And the government’s ability to compel tax payments in its own currency is, at bottom, what gives that currency value.
Another purpose of taxation is to peg the rate of government spending to some real thing in the world: namely, the productive capacity of the economy. Back in the days of gold bullion, there was a clear physical connection between government spending, on the one hand, and a real pile of shiny metal on the other. Now that money is entirely a fictitious construct created by the government, what is it based on? What should it be based on? How much of the stuff should the government issue? What is the appropriate amount of money to have floating around to keep this imaginary exchange system going?
Everybody understands that the government mustn’t just print money at will: that would lead to massive devaluation of the currency, the imaginary system would collapse, and Keanu Reeves and Carrie-Anne Moss would fall to the bottom of the elevator shaft. So it needs to be tied to something. But what?
Milton Friedman had that whole automatic k-percent thing, but he was obsessed with keeping the government as powerless as possible, so his options were kind of limited. Also, his theoretical treatment of inflation basically amounted to the argument that modern fiat currency would, strangely enough, behave exactly like 18th-century Spanish doubloons. So, no help from Uncle Miltie.
Many theorists (post-Keynesians, chartalists/Modern Monetary Theorists) would say that the index for money creation/government spending needs to be something like the employment level. Unemployment indicates unused capacity in the economy, which means that the government can and should be spending to create wealth and inject stimulus. That makes sense to me, though the details are arguable.
The budgetary role of taxation in this scheme is to provide an index of the economy’s productive capacity, a guideline for how much money the government should be creating/spending. But notice: it’s a guideline. It’s just a proxy for the real thing — economic capacity — and there’s no reason to treat it like a real physical constraint. It should certainly never be treated as a real constraint when doing so means impoverishing the citizenry — which is what the deficit hawks want to do when they propose cutting Social Security in order to balance the imaginary budget that the government created to spend imaginary money created by the government and provided by imaginary taxes paid in imaginary money that the government created, ahem — and thus contracting the economy even further and diminishing wealth and, hello, future tax revenues.
Why is this so hard to understand? Maybe because it’s so new. The U.S. went off the gold standard less than 40 years ago. The generation of economists that should have been exploring the theoretical ramifications of modern fiat currency were instead in thrall to Ayn Rand novels and antiquated visions of private capital and money supply. It’s as if Darwin (read: Keynes) was followed by a bizarre interregnum when the creationists resumed control of everything and rewrote all the textbooks to say that evolution was wrong! wrong! wrong! and God really did create the world and us and all the animals, just like we used to think, and the sun really does come up and the earth is the center of the universe and fiat currency behaves exactly like currency based on a big pile of gold we dug out of the ground, because to imagine otherwise is too goddamn scary.
Okay, I’m ranting now. Shorter Violet: there is no spoon.
56 Responses to “Wouldn’t you know, the worst possible thing to do to the economy is exactly what the idiots are planning to do”
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alwaysfiredup says:
I don’t know when or where you studied economics, but Yale was telling me something very different 10 years ago. Money has value because people believe it has value. Those bills are just paper, and those coins just zinc, except that I believe the paper and zinc will be traded for something I value as much. Yes, the US could print as much of the paper money as it wants, but we live in a world of flexible international exchange rates. The moment people (particularly China) don’t believe the US can repay debts to other countries is the moment US currency loses value. Money that is valued less buys less, and suddenly we all have to pay more for the imports we buy (which, in this country, is most consumer goods). So, yes, we do have to pay some attention to not living too much in excess of our means, or the world will cease buying the money we print/treasury notes we auction.
June 28th, 2010 at 12:57 pm EST -
Violet Socks says:
I don’t know when or where you studied economics, but Yale was telling me something very different 10 years ago. Money has value because people believe it has value. Those bills are just paper, and those coins just zinc, except that I believe the paper and zinc will be traded for something I value as much.
Yes, that’s what fiat currency is. How is that “very different” from what I said?
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alwaysfiredup says:
And I didn’t mean that in a snooty Ivy-League way; I don’t necessarily believe that everything I was taught is true, I believe there are other perspectives, and I have noticed that the basics of economics education change more rapidly than some of the other disciplines. Keynes –> Friedman –> Neo-Keynes, etc.
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Violet Socks says:
The moment people (particularly China) don’t believe the US can repay debts to other countries is the moment US currency loses value.
You understand, of course, that our debts are in our own currency, which we control?
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alwaysfiredup says:
Yes, our debts are in our currency. If China buys US T notes, China buys them because it believes that is the currency most likely to keep value. (Let’s leave their fiscal manipulations out for now.) If we print a bunch of money, the excess money on the international exchange will lead to a devaluation of our currency. China doesn’t like that, so they stop buying our t notes. Then the interest rate on bonds has to increase to allow the auction to clear, so we owe more money than before. Maybe the auction won’t clear at all (like some in 2008-09). Meanwhile our exchange rate is plummeting and all imported goods are skyrocketing in cost (including oil). This is not the way to get out of an economic hole.
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alwaysfiredup says:
By “fiat currency” I believe you mean that money has value because government assigns it value. I am arguing that money has value because every day plebs like us believe that it has value. I think these are very different concepts.
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Violet Socks says:
By “fiat currency” I believe you mean that money has value because government assigns it value. I am arguing that money has value because every day plebs like us believe that it has value. I think these are very different concepts.
No. It is the same thing, viewed from different perspectives. The money we use is money because we say it is. The government says it and we believe it. We all believe it, and that keeps us from falling down the elevator shaft.
But money theorists naturally don’t leave it at that; they need to sort out exactly what the money is doing, what it’s based on, what it’s connected to, how it’s created and how much of it should be created.
If we print a bunch of money, the excess money on the international exchange will lead to a devaluation of our currency. China doesn’t like that, so they stop buying our t notes. Then the interest rate on bonds has to increase to allow the auction to clear, so we owe more money than before. Maybe the auction won’t clear at all (like some in 2008-09). Meanwhile our exchange rate is plummeting and all imported goods are skyrocketing in cost (including oil). This is not the way to get out of an economic hole.
Fortunately, Milton Friedman is dead, and we can stop pretending that monetary policy is the only way to influence the economy. We can also stop pretending that he got anything at all right about how stuff works in the real world.
The government doesn’t have to print money to create it; it can also create money by spending it. Which is precisely what needs to be happening now. The government needs to be spending/creating money by creating jobs, shoring up our infrastructure, and re-building our productive capacity.
Right now the U.S. dollar is the world’s gold. We are fortunate in that. We are sovereign in our currency and in our debt. But the only way to maintain the strength of our position is to maintain the strength of our real economy. Our real economy is jobs, plant, products, capital, trade — real stuff. Money is just a measuring stick and a lubricant.
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Suburban Guerrilla » Blog Archive » It’s Not That They Don’t Know says:
[...] It’s that they just don’t care. [...]
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warren mosler says:
I quick read of my ’7 deadly innocent frauds’ should clear it all up, thanks!
http://www.moslereconomics.com/?p=8662/
Warren Mosler
http://www.moslerforsenate.comAfter reading this page I’m sure you will approve of my economic agenda!
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Swannie says:
An economist’s guess is liable to be as good as anybody else’s.
Will Rogers -
alwaysfiredup says:
“The government doesn’t have to print money to create it; it can also create money by spending it. Which is precisely what needs to be happening now. The government needs to be spending/creating money by creating jobs, shoring up our infrastructure, and re-building our productive capacity.”
I have to reject this hypothesis. Government cannot create money by spending it. If you mean Romer’s theory of multipliers, I reject that too. We are fully capable of wasting public money or indirectly funneling it to a politician’s warchest (same thing, really). Not every dollar the government spends is likely to lead to a multiplier effect, which is amply demonstrated by the failure of the stimulus to create the predicted jobs. Government is simply not capable of spending money efficiently in a short period of time. Wasted money means the multiplier effect isn’t as strong as Romer predicted and very likely results in a real-world multiplier of <1.
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Violet Socks says:
Government cannot create money by spending it. If you mean Romer’s theory of multipliers, I reject that too.
No. I mean government creates money by spending it. The spending of money by the government is the creation of money.
See, you don’t understand fiat currency. You really don’t.
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Violet Socks says:
Also, the stimulus was much too small.
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alwaysfiredup says:
I will concede that small deficits aren’t that big of a deal, and occasional large deficits aren’t either, as long as they don’t impair global confidence in repaying the debt. What matters is the relative size of public debt to GDP. When you get to 100%, it’s a mental tipping point among other nations and their citizens. We’re not that far; Wiki says 86.1% as of the end of 2009 (fwiw). No one wants to end up like Greece, so maybe we could rein it in a little.
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alwaysfiredup says:
I understand fiat currency just fine. I just don’t agree with you. :)
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Violet Socks says:
No one wants to end up like Greece, so maybe we could rein it in a little.
Greece is not sovereign in its currency and debt.
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sandra s. says:
I honestly know next to nothing about economics, so maybe someone could enlighten me as to what global confidence in a nation’s capacity for debt repayment has to do with anything?
Seriously, what does it MEAN for a nation to have a debt? Who do they owe it TO? On what BASIS?
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Violet Socks says:
For the United States, our debt is in the form of our own Treasury notes, which are simply promissory notes to pay (with interest) at some point in the future, when the note matures. In other words, our debt consists of a solemn promise to enter the digital numbers in your digital bank account when the T-bill you hold comes due. That’s it.
For nations not sovereign in their currency or debt — meaning they have borrowed money in a currency they don’t control, and must pay back the loan in a currency they don’t control — it’s altogether another thing.
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Violet Socks says:
Oh, but to answer your question about confidence: for the United States, confidence in our ability to pay those T-bills in the future (or, more accurately, confidence that U.S. currency will still be useful then) is based on confidence in our economy. Well, it’s partly based on the fact that the U.S. dollar is the only game in town, effectively, which is why I said the US dollar is the world’s gold nowadays.
But the only way to remain the world’s gold, and the only way people will continue to have robust confidence in our currency is if we have a strong economy and infrastructure.
The Friedman acolytes are utterly blind to this reality; they keep reciting their formulas and imagining that the correct quantities and ratios are the crucial thing. Bullshit. They would destroy the fucking economy — the real economy — and create a nation of paupers in order to pursue their quest for what they believe are the “correct” ratios.
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Scott Fullwiler says:
Well said, Violet. You DO most definitely understand fiat currency.
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Huan says:
our money has value not because the government spend it, not so much because we plebs believe it. the dollar has value because foreigners believe it has value. the more we entwine our economy globally, the more true this become, and given our continue trade deficit, this is currently the trend.
whether logical or not, and for whatever reason the impression is predicated on, when the chinese (our largest debt owner) no longer believe it, the dollar value will decline.
btw, did the chinese recently loosen the yuan value a bit by letting it fluctuate against the US Dollar? interesting isn’t it.
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dandelion says:
Bill Mitchell has probably the best blog going on Modern Monetary Theory and each day he posts something that makes clear how much hysteria is involved in this deficit terrorism. The US is sovereign in its own currency. The govt. cannot ever run out of money: it can create money at will by, as Violet says, spending it, by crediting accounts at the Fed Reserve with dollars. We don’t need to fear the bond markets or the Chinese because we don’t need the bond markets or the Chinese to buy our debt. And, as Violet points out, our debt is payable in our own currency.
The value of our dollar is not simply something conjured by belief, though. The value of the US dollar is backed by the total assets of the US as a whole — everything in the country, everything. It’s not just make believe. The value of all our land, all our infrastructure, all our factories, all our intellectual capital, all our housing, every single bit of it goes into the value of the dollar. Spending to improve all that can ONLY strengthen the value of the dollar.
Deficit terrorits are terrified of inflation. Today,as Krugman points out, the yield on 10 year bonds has dropped to just over 3% — so where is this inflation everyone’s afraid of?
The fact is that in a deflating environment, we need inflation as a counterforce.
This really isn’t rocket science; and it’s just not true that the powers that be don’t get it: even Bernanke admitted that the US cannot run out of money, it’s simply impossible.
But austerity is a political win and a nice way to asset-strip the middle class. In a deflating environment, as more and more of us are forced to offload assets to meet daily expenses, we’re creating a nice buyer’s market for the elite.
This isn’t going to end well for most of us. But for a thin sliver of the population, it’s going to be a bonanza.
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dandelion says:
p.s. Bill Mitchell’s blog address is http://www.billyblog.com
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Adrienne in CA says:
I remember intuiting a rudimentary version of today’s topic in a college Econ class ~1985. I said something like, “you mean these things are true because we’ve agreed that they’re true, right?” The instructor gave me a weird look and made some remark that didn’t really answer my question. I decided then that Economics was like Advertising, but with numbers.
So, what should we say to the Ron Paul types, who absolutely agree we’re on a fiat currency, and want abolish the Fed and go back to gold?
Seems like creating an economic system that discourages the growing gap between rich and poor would be good. I’m wondering if using unemployment as a trigger for increased government spending could create an unintentional incentive to increase population.
What do you think of somehow pegging national wealth to finite resources, so that conserving resources preserves wealth?
Sorry if my questions are naive. I do find the topic intriguing. Are there Econ books for “dummies” you can recommend?
*****A
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dandelion says:
Adrienne: the Ron Paul types aren’t making economic arguments per se, they’re making moral arguments based on a kind of primitive revulsion at the idea that fiat currency creates money from “nothing.” The argument against the gold standard lies in history: there’s a reason countries went off the gold standard in the first place. Those who did so in the wake of the Great Depression came out of the depression fastest. Those countries today who have their currency pegged to a hard value they can’t control, like Ireland and Greece, are in real trouble. Greece in fact is the biggest argument AGAINST a hard-pegged currency: if the Greeks could pay off their debts in drachmas they’d be in much better shape.
After WWI, the Brits went off the gold standard so they could pay their war debts with inflated currency. Then they went back on to the gold standard and damn near destroyed the working class in England, who had seen their savings first destroyed via rapid inflation and then their assets and wages collapse in value due to deflation (which is what reverting to a hard currency involves.)
The question to ask any Ron Paul-type: name one successful economy that has gone back onto a gold standard and seen its people thrive. There isn’t one, anywhere. The Chinese have a pegged currency, but you can’t exactly say their people are thriving, and I doubt the Ron Paul types really want a Chinese-style state-capitalist economy.
But actually the Ron Paul types don’t want the people to thrive. Along with their moral revulsion against the idea of creating money from “nothing” comes a strong strangely Puritan streak that wants people to suffer, that believes that suffering will be good for the soul of the American people (most esp. for the soul of the American people who don’t know “their place.” You don’t have to scratch too far to find that streak.
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Violet Socks says:
dandelion, that link you gave goes to a parked domain. (Though if you’re interested in tickets to either Billy Idol or Billy Joel, you’re in luck.)
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dandelion says:
Violet — aargh! Sorry about that. Bill Mitchell’s blog is called billyblog and the web address is bilbo.economicoutlook.net/blog/
I hope that works.
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Petro says:
Thank you for this post! I’ve only recently grasped what you have correctly explained here. I was going to post a link to the very on-topic “7 Deadly Innocent Frauds,” but I see that Mosler has stopped by already… (#9) :)
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Toonces says:
Extremely interesting, Dr. Socks. Thank you. I hope you’ll do some more posts on this topic.
Also, dandelion, thank you for you commenting.
The value of the US dollar is backed by the total assets of the US as a whole — everything in the country, everything. It’s not just make believe. The value of all our land, all our infrastructure, all our factories, all our intellectual capital, all our housing, every single bit of it goes into the value of the dollar. Spending to improve all that can ONLY strengthen the value of the dollar.
This is said so perfectly. I may have read similar arguments but I feel like I’ve never heard this idea before (because I can’t speak Economese). It sounds somewhat like the difference between letting a home you own go to complete dogshit, or making sure it’s in good shape to retain or increase the value.
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julia says:
I’m very inspired by the resistance in Toronto and Greece. People are saying no, and risking everyhting. This country is ours. We can shut down the economy to remind Washington of that. We are out of practice but it is not human nature to lay down and die!
Please stop listening to NPR, which makes people an ally of the corporations/government, and clear your mind with independent media.
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Topper Harley says:
which is what the deficit hawks want to do when they propose cutting Social Security in order to balance the imaginary budget that the government created
As an aside, if you were to means test Social Security or work towards pegging retirement age to life expectancy, that would be classed as a “cut”, but with very few exceptions would I see that as “impoverishing the citizenry”. Unfortunately, the latter doesn’t really help with the current demographic bulge, and the former is too politically difficult.
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sandra s. says:
Topper,
Would you really recommend pegging retirement age to life expectancy? What do you know about the aging populace? Sure our life expectancy is increasing, but that doesn’t mean we’re just having a really LONG middle-age period. More people than ever before are experiencing age related dementias, and they’re living with them for longer than ever before, in part because we’re living longer (it certainly has nothing to do with our interventions for dementias, since they are in most cases totally useless).
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Briar says:
True, Sandra S. We may be living longer, but our later years are likely to be disease-ridden and demented. Retirement at 60 at least leaves some years of our healthy lives for ourselves. Morover, not all classes have the same life expectancy. The poorer you are, the shorter you live. And manual labourers cannot go on working as long as desk workers (or the gilded few who run hedge funds etc and can retire at 30 if they like). They simply wear out sooner. Delaying retirement may suit the gilded few and the fortunate minority who love their work, can do it indefinitely and can find work even when they stop being young and attractive, but that isn’t most of us.
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simplywondered says:
oh honestly, vi; i can solve this one for you.
if cutting benefits, raising the retirement age and generally eating the old and sick WASN’T the best way to restore national prosperity do you really think the new uk administration would have done it??? do you think they are stupid? i mean they went to eton and oxford. and mr cameron says at the recent g8 meeting of very clever people indeed all the other very clever people agreed that he was indeed very clever for having done it. i know it’s true; he said so. and godbama agrees.
so there you have it. you can stop fretting yourself with all that difficult thinking. it’s sorted. and once again it’s the clever men who sorted it (and that nice lady from germany with the clever husband).
must dash; off to a pauper barbecue – it’s all the rage, you know.
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votermom says:
Tyranny requires widespread poverty. A large middle-class gets all uppity and wanting rights and stuff. Just see how we got saddled with the Magna Carta.
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Violet Socks says:
This really isn’t rocket science; and it’s just not true that the powers that be don’t get it: even Bernanke admitted that the US cannot run out of money, it’s simply impossible.
I think there’s a continuum of dastardliness and ignorance at work. Kind of like the Village Voice’s evil/stupid meter. Pure dastardliness at one end — people who know full well what they’re doing and why it’s evil but they’re doing it anyway to line their own pockets. Pure ignorance at the other end — people who believe what they’ve been told by the dastardly types, and genuinely think the U.S. government is just like a household that must tighten its belt and not borrow money and all that nonsense.
Most people fall somewhere in between those two extremes. That includes the true believers, who find themselves powerfully persuaded by an economic theoretical framework that just happens (no coincidence!) to suit their own feelings about government and also just happens (no coincidence!) to result in a comfortable and lucrative state of affairs for themselves.
If I had time I would make a graph and we could figure out who goes where.
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cwaltz says:
I believe the part that makes it difficult to understand is that what you are saying is the opposite of how the average citizen deals with money. Most people derive a wage with an assigned value. An assigned value gets taken out for taxes(so they don’t see taxes as imaginary at all). An assigned value is left to pay for goods and services. We balance our budgets and our numbers are required to add up. If they don’t our access to goods and services, as well as in some cases, our livelihoods become jeopardized.
People see us as analgous to Greece because as individuals we are like Greece, we, unlike our government, don’t have the ability to mint money or endlessly run a deficit budget.
I do agree with you though. Austerity is a HUGE mistake. Government spending is a surer thing when it comes to stimulating the economy when demand is down. I’m not sure how cutting taxes stimulates anything when there is only a small demand for goods and services from the 80% on the bottom The extra $25 in everyone’s wallet that came from a Social Security holiday sure didn’t seem to help. It absolutely baffles the mind how Congress could think cutting off the lifeline to almost 2 million is going to help the economy. While I would like the government to rein in spending someday,I’d prefer they start with the bloated war machine, that’s primary function appears to be sticking its nose into every other country’s business.
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Three Wickets says:
North Korea is an example of a country with a pure fiat currency…virtually no trade or currency exchange with the outside world. It prints its own money, there is no private sector, the government rations and controls prices to avoid inflation or deflation.
Venezuela also has its own currency, and though it does trade with other nations with its ample natural resources, Hugo has been printing money vigorously and today they have the highest inflation rate in the world. That inflation hurts consumers and discourages investments in the economy from the inside and outside. It will lead to capital flight, price controls and eventually rationing of resources and services.
China is a form of state capitalism where the central bank and the government pretty much sets industrial policy. They have a seemingly endless supply of cheap labor, and combined with a currency which is shamefully undervalued, they have become the world’s factory and leading exporter. Their foreign currency reserves have become massive as a result, and they can basically act as the world’s lender of last resort, which gives them much power.
Our government does not really set industrial policy, and technically does not control the Fed our central bank. But we do still effectively print money, from the Fed’s lending facilities and also from the Treasury’s deficit spending. The Fed has the greater power, and its role is to manage money supply and money leverage to provide a predominantly free market profit incentivized environment for productivity and growth while avoiding inflation and deflation. Along with the Treasury, the Fed’s job is also to ensure full employment and maximum capacity utilization in the economy, but again neither the Fed nor the government sets long term economic strategies to accomplish that. It largely leaves it to the markets. Whether such a private sector skewed economy (75% in our case) is the ideal system is the ongoing debate.
But until we decide to stop trading with other nations, our deficit, national debt, and how much money we print directly and indirectly impacts on the value of our currency…value which translates into our national savings and assets, economic investments, our ability to provide public services, consumer purchasing power, the development of new industries and jobs. That doesn’t mean the government shouldn’t take on another trillion in debt for another large stimulus plan. That’s a near term policy decision that imo we should pursue aggressively. We may be treading closer to a deflationary spiral than inflation, as Krugman likes to point out. But there is a trade off, there is always a tradeoff. Some of it has to do with wealth distribution, some of it with our ability to get back to true economic recovery and growth while paying for the necessary public services of current and future generations.
The dollar has value because it is associated with output…output associated with investment, development, production, internal and external trade, and the public services that make all that possible. The dollar does not have value simply because it is printed.
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Adrienne in CA says:
The only way the U.S. is like Greece is that we both got suckered by Goldman Sachs. Of course “our” side can’t make that argument, since (1) every third position in the administration is ex-Goldman Sachs and (2) we wouldn’t want to interrupt campaign cash flow.
*****A
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Gregory Dursteler says:
Treating a fiat currency like a physical currency isn’t an accident or a failure of economics, its common sense. Economists understand fiat currencies just fine.
Imagine we took your idea to the extreme. Rather than pay any income taxes, all government spending was supported by the printing of money unsupported by the issuance of debt. Recognize this is different than deficit spending. Deficit spending involves borrowing bills from someone else, the net number of dollar bills doesn’t actually go up.
The result would be every year there would be another 20% or so more dollar bills being spent. All this extra currency floating around chasing the same number of goods and services would result in prices increasing by 20% or so every year.
That’s called inflation. Living in an extremely inflationary country sucks, mucho mucho mucho. It’s devastating.
Imagine if every week the grocery store prices were appreciably higher? If when you took out a loan you had to pay 35%, and credit cards were 80% interest? Imagine if your salary varied every month based on government outlays?
Moreover, the transition itself would be violent. How would you feel about dollar denominated bonds losing 90% of their value in an evening when the world figured out the US would be devaluing their currency so dramatically.
The reason the government collects taxes is because it needs them to have more stuff, to hire more people, to do more things. When I give up money, I give up my chance at having more goods and services. It has nothing to do with instilling confidence in the currency or any other such nonsense. The government REALLY does need your dollar bills, because if a government just prints little pieces of paper out all the time, then that is all a dollar bill would become. The value of the dollar is that is a limited resource, it fulfills the role that gold did with more flexibility because when you really are suffering from deflation, you can actually print money. (China for example prints money all day and night to keep their currency from appreciating too much)
“The economy is heading into a depression? Tax revenues are down? Oh noes! We must cut Social Security! We must cut spending! We must tighten our belts!”
It is true however, conservative panic about deficits are illformed. Borrowing huge amounts of money in a recession to prevent deflation, boost employment, and spur production is perfectly appropriate, as long as it is coupled with boot strapping during the good times.
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Briar says:
Over here, “middle class” is still more a term of abuse. The middle class are the Hyacinth Buckets, aspirationally greedy, deferential to the upper class, contemptuous of the working class. As such they are courted by the ruling class, since they are collaborators par excellence, readily trusted to suck up to the bosses while keeping the poor under. And while the middle class will be hit by the coming austerity over here, more than the ruling class (who will actually gain), it is still the working class who will be hit by far the worse, by a factor of something like seven. To sample the craziness: at a time when one and a half million people will lose their jobs, the government will deprive millions of citizens of their benefits and demand they find work in a contracting job market. This does not add up, but nobody seems ready to say it is therefore a catastrophically stupid policy.
One thing to be sure of though is that the middle class will certainly not say anything. They will not revolt, nor will they aid revolt. They will suppress it, in the hope of earning favour and out of the fear of joining the impoverished at the bottom of the pile. In the UK, the neoliberal rhetoric which removed the working class from the picture and made everyone supposedly middle class never took hold as firmly as it did in the US. We know our place.
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Violet Socks says:
The dollar does not have value simply because it is printed.
Of course not. Does anyone think that?
People seem to think my brief reference to the chartalist view of taxation was intended as a full exposition of why and how fiat currency has value. Of course not. The value of currency is a complex structure of factors, including quantity, confidence, debt ratios, foreign exchange, productive capacity and health of the nation with the issuing currency, etc., etc. But the topic was taxation. Why taxes? The chartalist view is that the government’s ability to compel tax payments in its currency is what, at bottom, compels citizens to use that currency. As opposed to, say, buttons. It’s the underpinning of sovereign control. It also serves to reclaim what the government has created, so that taxation and spending are two sides of the goverment control of supply.
But please note that this comment is not intended as an exhaustive discourse on chartalism, taxation, monetary policy, or the nature of fiat currency. Jesus.
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Violet Socks says:
Comment #40 is funny.
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Gramoflanz says:
What I find amusing is that the hallowed, Randian “gold standard” is a fiat as well, on the order of cowrie shells or of tulips. Anything can have a fiat, monetized value.
Randal Keynes just published Darwin, His Daughter and Human Evolution: the Darwin and Keynes families are quite intermarried, which lends another note of amusement.
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angus says:
China is starting on a period of wage growth which is good news for all Chinese workers, but will drive up the price of everything we buy from China. A price push is about to occur on our consumer societies, sort of like when OPEC put up the price of oil in the 1970s. If we have an over supply of money when this happens next year we will have stagflation. Stagflation is worse than deflation, so stimulus is problematic too.
How about instead of panicking into cuts or borrowing – we don’t do anyhting? Perhaps this is just a normal, run of the mill bubble bust recession like we have had before and will have again. We could try having the government do what it was doing yesterday today and even tomorrow too.
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Violet Socks says:
A price push is about to occur on our consumer societies, sort of like when OPEC put up the price of oil in the 1970s. If we have an over supply of money when this happens next year we will have stagflation.
All the more reason for an aggressive fiscal expansion. Stagflation = high unemployment and high inflation. If we suffer a supply shock soon when we have high unemployment, then I suppose stagflation is possible. So we need to deal with unemployment.
As I said in comment #7 above, Uncle Miltie is dead, monetarism is discredited, and we can stop pretending that open market operations are the be-all and end-all of our options.
We need an aggressive job creation program, with investment in the green technologies and infrastructure that our nation desperately needs anyway.
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a little night musing says:
I think we should go on the golem standard.
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iiii says:
I just want the WPA back.
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gxm17 says:
What a fascinating post and excellent comments! I’ve never had much interest in money and economic theory, but this was all quite illuminating. Thank you, all.
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angus says:
We need an aggressive job creation program, with investment in the green technologies and infrastructure that our nation desperately needs anyway.
Yes, but I don’t think that is stimulus as it is practiced.
What you call stimulus is a high cost program that creates a large number of jobs doing productive work. Something like what FDR did with the new deal jobs program. It would indeed be a very good idea.
There is another more modern criteria for a “stimulus” package. The last years “stimulus” managed to blow through a $trillion or so without actually creating jobs. They paid money for bad debt, they propped up failling car companies, they sent emergency funds to states who needed to pay off other debt and through it all unemployment rose. Modern stimulus seems to be fiscal expansion for the sake of fiscal expansion in the belief (so far unrealized) that job creation will follow.
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Violet Socks says:
Modern stimulus seems to be fiscal expansion for the sake of fiscal expansion in the belief (so far unrealized) that job creation will follow.
The simplest way to create jobs is to create jobs. Not send money to some failing company and cross your fingers and hope they’ll decide to lay on a bunch of new employees.
What is going on now is the result of three decades of political propaganda about the evils of government and the glories of the free market. There is enormous political resistance to doing anything direct, like the New Deal; no, everything must come from the private sector. The private sector is depressed and debt-ridden? We’ll just send them some more money and surely they’ll start creating jobs soon.
It’s fucking insane.
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sandra s. says:
I wish I could think of something better to say about Violet’s comment # 51, but I can’t. RIGHT ON!
BTW, anyone with a brain in their head knew this stimulus wasn’t going to work because it wasn’t being targeted at working class and middle class job creation. I… nope, nothing to add. Violet said it all and way more.
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Tabby Lavalamp says:
I’m not American nor an economist, but wouldn’t getting out of both wars be a big step in fighting the deficit (being Canadian, I’d hoping our government keeps its word and gets out of Afghanistan next year).
Conservatives are usually wrong, but they’re very good at being wrong and have controlled all conversation regarding taxes. If I remember correctly, the Bush regime was the first to ever cut taxes while going to war and that was what first drove the massive deficits in the first place following the few years of balance following Reagan’s massive deficits. -
Summer beach reading: The Seven Deadly Innocent Frauds of Economic Policy | Reclusive Leftist says:
[...] other day I dashed off a blog rant on economics. Lambert (of Corrente fame) alerted the media, and soon Warren Mosler himself showed up in the [...]
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propertius says:
I think comparing Obama to Hoover is terribly unfair – to Hoover. Hoover may not have understood much about economics, but he really was a pretty smart guy. He literally saved millions of Europeans from starvation during and after WW I. However misguided his policies were during the Depression, I don’t think anyone can honestly state that he didn’t mean well.
What has Obama done in his life? How many people has he rescued from famine? Do you really think he isn’t overtly hostile the welfare of the hoi polloi?
Personally, I think Obama is a lot closer to this guy:
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sister of ye says:
they propped up failling car companies
Yep, because saving one of the last bastion of decent-paying, union jobs for the working class is exactly like saving the bonuses of 6-figure financial leaches. The Obama administration had a very hands-on posture for GM and Chrysler, dictating union give-backs and even demanding that the GM president resign. Quite unlike the no-strings prop-up of the financial sector.
(Not that Rick Wagoner will be eating in soup kitchens, but the financial sector’s fuck-ups were uninterrupted in their predation.)
I read on another liberal blog the assertion that lower-paid waitresses must resent factory workers getting good wages. Well, the waitress who is a good friend of mine thinks it’s great. Blue- and white-collar workers having secure jobs with good wages means her restaurant has customers and she has a job. And unlike the elite, those people tend to tip well.
