Stocks and Precious Metals Charts - Chug-a-Lug - Hi-de-ho, Wall Street Does a Double Back Flip

Uncle Jay and his Monetary Moonshine

"The Federal Reserve, as one writer put it after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

William McChesney Martin, Speech to Investment Bankers Association of New York, October 1955


"We're not even thinking about thinking about the consequences of our actions."

Jerome Powell, Chairman, Federal Reserve


"Jukebox and sawdust floor
Sumpin' like I ain't never seen
And I'm just going on fifteen
But with the help of my finaglin' uncle I get snuck in
For my first taste of sin
I said "Lemme have a big old sip"
Brrrrr-bbbb, done a double back flip

Chug-a-lug, chug-a-lug
Make you want to holler hi-de-ho
Burns your tummy, don'tcha know
Chug-a-lug, chug-a-lug."

Roger Miller, Chug-a-lug

The spokesmodels were gushing with excitement as the SP500 snugged its beer goggles and managed to reach its pre-crash high.

The NDX is already in some alternate universe.

Thanks for the hot money for the recovery, Uncle Jay.

Great success.

Gold and silver responded to the call, as the Dollar continued to slide lower.

The commentary about the precious metals on financial TV is so shallow and badly informed that I think the metals may have quite a bit further to go.

The time to sell will be when even the most purblind Wall Street lounge lizards 'get it.'

Stock market will have its August stock option expiration on Friday.

Chug-a-lug, chug-a-lug.

Have a pleasant evening.

Stocks and Precious Metals Charts - Slip Sliding Away Into MMT - Non-Farm Payrolls on Friday

"We are warned against sharing in her sins and in her punishment;—against being found, when the end comes, mere children of this world and of its great cities; with tastes, opinions, habits, such as are found in its cities; with a heart dependent on human society, and a reason moulded by it;—against finding ourselves at the last day, before our Judge, with all the low feelings, principles, and aims which the world encourages; with our thoughts wandering, wandering after vanities; with thoughts which rise no higher than the consideration of our own comforts, or our gains; an admiration of the splendour and the fashions of the world, an affectation of refinement, an habitual self-esteem, and an utter ignorance of the number and the heinousness of the sins which lie against us."

John Henry Newman, The City of Antichrist


"It would be no sin if statesmen learned enough of history to realize that no system which implies control of society by privilege seekers has ever ended in any other way than collapse."

William Dodd, US Ambassador to Germany, 1933


"I was in Moscow doing business when the rouble was dying after the collapse of the Soviet Empire [and with the collapse of that political force, the failure of the state dictated exchange rates for their currency].  It made a lasting impression."

Jesse 2010

A value-dictated, purely fiat, currency exists through force and fraud. As the fraud grows thin and obvious, the greater and more pervasive the force must become. If imports are needed, wars of aggression will follow to extend and maintain the 'sphere of influence', a euphemism for control. When force finally falters, the currency collapses. A value-dictated, purely fiat currency is not an innovation— it is among the oldest forms of tyranny.

MMT is the Scientology of economics.

Stocks failed in their rally attempt.  Tomorrow is another day.

Gold and silver managed to find their footing.  They'll need to hang in there.

Non-Farm Payrolls on Friday.

Have a pleasant evening.

The US Dollar Since the November 2016 Presidential Election - Butter It With Growth and Take It Out In Trade

"Obviously a weaker dollar is good for us as it relates to trade and opportunities. The currency’s short term value is not a concern of ours at all Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,"

Steve Mnuchin, US Treasury Secretary


"Trade wars are fought every single day," he said. "So a trade war has been in place for quite a little while, the difference is the U.S. troops are now coming to the rampart."

Wilbur Ross, US Commerce Secretary


"With the global punditry assembled in Davos this week, the topic of the dollar seems to have bubbled to the surface again. Down more that 10% from the December 2016 peak, the greenback has started to sag at just the time when Treasury deficits are climbing and the Fed is paring back its purchases of US government debt and agency mortgage bonds."

Chris Whalen, Dollars, Deficits, and Duh in Davos

Short term at least, the Trump Administration is pursuing a weaker dollar policy.  This despite President Trump's very incongruous assertion late today from Davos that 'he supports a strong dollar'  and that Secretary Mnuchin's comments were taken out of context.   As if.

A weaker dollar stimulates exports, and acts like a general tariff on imports.   This is less of an issue for the US now that it has become 'oil independent.'  There are other key imports but oil has been the heavy hitter.

The financial sector may not be so welcoming of this, as the weaker dollar makes it a bit more difficult to peddle their dodgy financial instruments to non-US clients.

Still, in the bigger of things, the dollar weakness is rather mild.  I show a longer term DX chart in the second graph.

The weaker currency strategy is certainly good for those who hold gold and silver priced in US Dollars.

One of the more interesting economic phenomena to watch will be the manner in which the US Treasury and the Fed manage the huge US debt, having doubled to over twenty trillion US Dollars, with interest rates beginning to creep up back to more 'normal' levels.

And the recent tax cuts for the wealthiest and corporations will continued to fuel that deficit.

The hope is that a growing economy will help to offset will negate the problem.

This is a key facet of 'supply side' economics.

As Tony Sanders puts it at Confounded Interest, "The hope is the the economy will grow faster than it has since The Great Recession."

But at the end he does add that 'too much sugar is bad for you.'

Another party, which seeks to resurrect the printing money solution, albeit with a new brand and gnostic marketing campaign, is of the opinion that the US can resolve the issue by decoupling the currency from the US debt markets.

If too much sugar is bad for you, is replacing it with crystal meth going to be better long term solution? Not unless everyone around the world becomes your enabler, then caretaker, and finally caregiver.

As US Treasury Secretary John Connally put it at the G-10 meeting in late 1971, "It is our dollar, but it's your problem."

All in all, if I daresay, not such a bad time to own independently valued assets, like gold and silver.

Power: The Essence of Corrupt Banking and Politics Is to Grow and Control the Debt

"Events have satisfied my mind, and I think the minds of the American people, that the mischiefs and dangers which flow from a national [central] bank far over-balance all its advantages. The bold effort the present bank has made to control the Government, the distresses it has wantonly produced, the violence of which it has been the occasion in one of our cities famed for its observance of law and order, are but premonitions of the fate which awaits the American people should they be deluded into a perpetuation of this institution or the establishment of another like it."

Andrew Jackson, Sixth Annual Message, December 1, 1834


"Another cause of today’s instability is that we now have a society in America, Europe and much of the world which is totally dominated by the two elements of sovereignty that are not included in the state structure: control of credit and banking, and the corporation.

These are free of political controls and social responsibility and have largely monopolized power in Western Civilization and in American society. They are ruthlessly going forward to eliminate land, labor, entrepreneurial-managerial skills, and everything else the economists once told us were the chief elements of production.

The only element of production they are concerned with is the one they can control: capital."

Professor Carroll Quigley, Oscar Iden Lecture Series 3, 1976

Money is power.  And those who control the money, if they have the will for it, can use it as a means to incredible power, to create debt, and to control it, thereby controlling the debtors, both as individuals, as communities, as regions, and whole nations.

This is the story of global trade deals, the Dollar, and the foul marriage between politics, money, and central banking.   The more discretion and secrecy that is granted to those who create money and debt, the more vulnerable is the freedom of the people.

This is the story of Cyprus, of Greece, and of the Ukraine.

And there will be more.

This will to power is as old as Babylon, and as evil as hell.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations.

Each central bank, in the hands of men like Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Bank, Charles Rist of the Bank of France, and Hjalmar Schacht of the Reichsbank, sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

Professor Carroll Quigley, Tragedy and Hope, 1966


"He promises you illumination, he offers you knowledge, science, philosophy, enlargement of mind. He scoffs at times gone by; he scoffs at every institution which reveres them.

He prompts you what to say, and then listens to you, and praises you, and encourages you. He bids you mount aloft. He shows you how to become as gods.

Then he laughs and jokes with you, and gets intimate with you; he takes your hand, and gets his fingers between yours, and grasps them, and then you are his."

John Henry Newman

Deflation, Hyperinflation, Stagflation, and Where We Are Going

 

This is a repost of a column from four years ago almost to the day.

This is where I make the case most explicitly for the stagflation forecast I made in 2005.

Although I add one parenthetical note and some underlining for emphasis, otherwise I did not have to change a word.  I could have rewritten a few things a little more smoothly but at this point why bother.

I believe that things are playing out pretty much as I had thought with a few notable exceptions on the particulars.    The 'top down' approach to monetary stimulus favored by the Fed and their Banks and their politicians is fostering more inequality and slack aggregate demand while inflating select asset prices, a type of stagflation.  The 'inflation' component of that has not yet set in yet generally, but is certainly visible to anyone who uses incidental things like healthcare, higher education, and food. 

I think that the same dynamic is playing out in Europe and the UK.

It will end involuntarily in a social dislocation, or by a voluntary reform.  Since the oligarchs have apparently not yet been satisfied in their acquisition and looting, they believe that they can keep pushing the envelope for now.

One new area of thought for me now is how China and Russia and a few of their friends will attempt to implement a new regional currency and a global reserve currency with some inclusion or reference to gold, and perhaps silver.  That they are leaning into this area is to be found in their own words and actions.  

What I am struggling with is how they might do this without exposing themselves to currency manipulation and rigging, which is probably a lot easier to accept as a given now than it was in 2011, although it was certainly occurring before all these market rigging scandals broke.   I don't think a market was left untouched.

I suspect it will center around the terms for the exchange and the valuation or peg.  A misstep will open them to the predations of the global hedge funds and the Banks, and the status quo centered on the Dollar. 

One of the more interesting facets of this will be how this new monetary group deals with the bucket shops on the Hudson, that great price setting mechanism without a firm tie to reality.  I believe that recent developments are suggesting that they will make those markets as they are less relevant to the real world, which is precisely both their strength and their weakness. 

Their strength is that they may set price without the necessary reference to real world market supply and demand for surprisingly protracted periods of time.  And this is also their weakness, because with the right push in the right direction it will not take much to displace them since they do not have their feet firmly planted on anything substantial. 

The trick to be to throw them over without undue collateral damage to the real economy, a task that is not without some significant efforts.  If only the Banks would show the same forethought and courtesy when triggering their own financial crises.

16 April 2011

A Review on Where We Stand with Regard to Deflation, Hyperinflation and Stagflation

Well, the good news for everyone is that nothing seems inevitable here, that there is almost always a choice, but it is often wrapped up in a nice looking rationale, with all the compulsion of a necessity, for the good of the people.  Us versus them in a battle for survival and all that. 

And clever leaders on the extremes provide the 'them' to be dehumanized and objectified.  The leftist wishes to murder the bankers, and the fascist the lower classes and outsiders.  The extremes of both end up making life miserable for almost everybody except for a privileged few.

And so I reiterate that in a purely fiat currency, the money supply is indeed fiat, by command.

People like to make arguments about this or that, about how so and so has proved that the Fed does not or cannot do this or that, that banks really create money only by borrowing, that borrowing must precede this or that.

It's mostly based on a fundamental misunderstanding of what money is all about, with a laser beam focus on hair-splitting technical definitions and loquacious arguments more confusing than illuminating, lost in details.  In a simple word, rubbish.

Absent some external standard or compulsion, the only limiting factor on the creation of a fiat currency is the value at exchange of the issuers bonds and notes, and currency which is nothing more than a note of zero duration without coupon.

If I had control of the Fed, unless someone stopped me, I could deliver to you hyperinflation or deflation without all that much difficulty from a technical standpoint. The policy reaction of those who might be in a position to fire or lynch me is another matter.  The Fed not only has the power to influence money creation in the private banking system.  It has the ability to expand its balance sheet and take on existing debt of almost any type at will and at any price it chooses.

But that is the case as long as the Fed has at least one willing partner in the primary dealers, and the Treasury is in agreement. And even that requirement for a primary dealer is not all that much of an issue given the amounts of existing sovereign and private debts of which the Fed might avail itself for the forseeable future.

So at the end of the day, a thinking deflationist is almost reduced to the argument that 'the authorities will not allow it' or 'will choose deflation rather than inflation'  And this is technically correct. However, let us consider my earlier statement about those who might fire or lynch one for making a highly unpopular choice.

It is economic suicide for a net debtor to willingly engage in deflation when they have other options at their disposal, and especially when those decisions involve people outside the system.

That is not to say that the deciders could not opt for economic suicide, but the people designated to suffer and die for that choice and cause might not take kindly to it. Deflation favors the creditors significantly, and those creditors tend to be a minority of domestic elites and foreign entities.   Both the extremes, hyperinflation and deflation, are choices best implemented in autocratic governments.

There are those who observe that Franklin Roosevelt 'saved capitalism' by his actions in the 1930's and I believe they are correct. If one considers the various other outcomes in large developed nations to the Great Depression, whether it be Italy, Germany, Russia, or Spain, the US came out of it fairly intact politically. People conveniently overlook the undercurrent of insurrection and violence that was festering amongst the suffering multitudes, and the growth of domestic fascist and communist organizations.  There were several plots to overthrow the elected government by military means, although the history books tend to overlook them.

So it is really about making the best choice amongst bad choices. This is why governments choose to devalue their currency, either with quantitative easing, or explicitly against some external standard as the US did in 1933. Because when the debt is unpayable, it must be liquidated, and the pain will be distributed in a way that best preserves the status quo.

Hyperinflation and a protracted deflation are both very destructive choices. So therefore no rational government will choose either option.

They *could* have those choices imposed upon them, either by military force, political force, or by economic force. Economic force is almost always the cause of hyperinflation.

So you can see why a 'managed inflation' is the most likely outcome at least in the US. The mechanism has been in place and performing this function for the last 100 years.

The problem or twist this time around comes when the monetary stimulus does not increase jobs and the median wages, because of some inherent and unreformed tendency in the economy to focus money creation and its benefits to a narrow portion of the populace. The result of this is stagflation which although not indefinitely sustainable can be maintained for decades. 

Most third world republics are like this.  A vibrant and resilient middle class is sine qua non for a successful democratic republic, and this has strong implications for the median wage.  The benefits and the risks of growth and productivity must be spread widely amongst the participants.  Oligarchies tend to spread only the risks, keeping most of the benefits to themselves.

This is essentially the reasoning that occurred to me when I looked at the US economy and monetary system in the year 2000.

The one point I remain a little unclear on is how 'hard' the law is regarding the direct monetization of debt issued by the Treasury. I am not an attorney, but I am informed by those familiary with federal statutes that this is a gray area in the existing law but currently prohibited.  But it is easily overcome as I said with the inclusion of one or two amiable primary dealers who will allow the debt issued by Treasury to 'pass through' their hands in the market, on its way to the Fed at a subsidized rate.  For this reason, and for purposes of policy matters, and occasional economic warfare, countries may tolerate TBTF financial institutions with whom they have 'an understanding.' 

I have also come to the conclusion that no one knows the future with any certainty, so we must rely probability and risk management to guide our actions.

So really absent new data the argument is pointless, a matter of uninformed opinions. The dollar will continue to depreciate, (but the DX Index will be highly misleading - Jesse) and gold and silver and harder currencies appreciate (Well that one has gone sideways for now in this metals bear market - Jesse), until the fundamental situation changes and the US economic system is reformed.

I think there are other probable outcomes that involve world government and a currency war, and this also is playing out pretty much as I expected.  Fiat currency can take on the characteristics of a Ponzi scheme, whose survival is only possible by continuing growth until all resistance is overcome.

This is the conclusion I came to in 2000. I admit I was surprised by the Fed's willingness to create a massive housing bubble, and the willingness of the US government to whore out the middle class in their deals with mercantilist nations; their hypocrisy knows no bounds.

So that is the basis of much of my thinking and I wanted to take a moment to share it with you in a compact, highly condensed format.

I remain a little unsettled on the issue of hyperinflation, because there is the possibility that a large bloc of countries could join together to repudiate the dollar. Since so much dollar debt is held in these foreign hands, that is the kind of exogenous force that could trigger a bout of what might be termed hyperinflation. I don't see the dollar going to zero in this, but rather the dollar having a couple of zeros knocked off it, with a new dollar being issued. I have read John Williams case for hyperinflation several times now, and see nothing more compelling in it.

Indeed I think the reissue of the dollar with a few zeros gone is inevitable. It is the timing of that event that is problematic. It could be one year, or it could be fifty years. There is a big difference there for your investment strategy.

“One day you will go the ATM and the dollars will be Blue---not Green ---and you will get a few less than you expected.”

And yes, the government could just get medieval on your asses, and seize all the gold and silver, force you to take the value of the dollar at whatever they say it should be.  (As the MMT crowd has suggested - Jesse)   They could also seize all the farm land, all the means of production, and tell certain groups of people to get on freight trains for resettlement in Nevada. I think we can stipulate that governments can do this, and the people can accept it to varying degrees. If you wish to make this the dominant assumption in your planning then by all means.

For those who simply say "I disagree" or "Go read so and so he has proved this or that" I say that people believe lots of things, and can find data selectively to support almost any outcome they prefer,  But the market is the arbiter here, and the verdict so far is beyond all question. The Fed is doing exactly what they said they would do, so there should be no surprises. And they have more in their bag of tricks.

If there is new data I would certainly adjust my thinking but absent that I now consider this settled to my satisfaction, and wish to turn instead to more thinking on what changes need to occur to prevent the system breaking down, and restoring it to some semblance of reasonable functionality.

Economists-Say-Dumb-Things Chronicles: 'Debt Is Money We Owe To Ourselves'

Like so many sloppy discussions of economics to make an important policy point, but badly, this one diverges from common shared reality fairly quickly. 

Let me strike the key hypothesis in this, that prompts a leap of faith, over a cliff and into the abyss of fantasy.

"Debt is money we owe to ourselves."

Something on which Mr. Krugman can agree with Dick Cheney who said, 'Reagan proved that deficits don't matter.'   How is that for a twist?  

From an accounting standpoint and within the realm of theoretical identities this is true. Each debt is someone else's asset.

The key of course is how we define 'ourselves.'  

If 'we' are the entire planet, equally and without distinction of interests and property, then perhaps one might say, ok, although it loses all meaning and significance.   I would not mind pooling my household books with one of the Banking billionaires and to be able to step up to the Fed's free cash window anytime to do my business, with the assurance that I have a government guarantee underpinning my ledger, but alas.

And this is a problem because the paramount issue we are facing today is the historically extreme concentration of capital assets in a relatively few hands, and the burden of unpayable debts being imposed upon a large segment of the people by a system that has been hijacked by the moneyed interests.

If you take this pithless observation by Mr. Krugman down one level of detail in the States for example, one finds that the debt is an asset on the books of a increasingly small number of wealthy people, with much of it controlled for them by a handful of Banks.

This system is not sustainable, and I see no sign that it will even cohere, without substantial reform.

I wonder if the average American who is losing their car and house, and who is being hounded by debt collectors for whom those debts seems to matter a great deal, can use that argument with the Banks.

Putting aside private debts, let's just stay in the realm of sovereign debt, where the economic imagination can more easily take its flights of fancy.

Debt is just money we owe to ourselves is similar to the flat pronouncement that a sovereign that issues its own currency can never default. Money is just an accounting entry so why the fuss?  And from this comes a Pandora's Box of muddy thinking, a selective myopia towards history,  and Trillion Dollar Platinum coins. 

I wonder if Greece can use this argument, that debt is just money that we owe to 'ourselves,' when they meet with the Germans this week. 

But no, the US is different.  Every other country may fail, and many have including that insubstantial nation of Russia not all that long ago,  but not us. We are young and immortal.  Our benchmark for virtue is power, and we are virtuous enough to be able to say that when things are not working out as we planned, we are able to decree that 'money is whatever we say it is,' and God help anyone who does not agree.

And so we might presume that the mighty US is going to be able to make that case about debt forever to its creditors who are outside the direct thought control of its monetary system, a short list of which is contained below.

It is funny how the moneyed interests and their courtiers are always saying, 'debt doesn't matter,' especially when they want us to assume their gambling debts which they incurred by frauds using our own money.   Until, that is, they decide to call in the loans and the debts, and impose their will upon the people with foreclosures, garnishment, austerity, and debtors' prisons.

I agree wholeheartedly that the rhetoric around the discussion of spending priorities gets silly and overheated and quite frankly disgusting.  That has more to do with a society in the grip of a greedy few, corrupt public servants, sophistical theoreticians, and boisterous minions than it does with the need to expand our economic theories into existential irrelevance.  Madness is certainly attractive perhaps in a land going mad, but it is unlikely to be productive.

Arguments like those from the MMT crowd, both right and left, and economists like Paul do us no favors in concocting some fantastical solution to what is primarily a problem of governance, justice, transparency, and power gone horrible wrong.

The 'debt' and the 'budget' are not an economics argument but a policy argument.  What is important to us?  What do we continue to hold as these truths?   And how do we resolve those disagreements?  Avoiding that policy and priority discussion enables those who are caught in the credibility trap to continue to beg the question entirely, and the real task at hand, which is reform. 

We cannot discuss reform until we expose the corruption.  And therein lies the problem, because quite a few powerful hands have been dipping into the largesse, and quite a few courtiers have a vested interest in continuing to propagate the lies and myths of a failing system.

I am not a 'hard money' guy.  I am certainly not in favor of a domestic gold standard as a remedy for our current set of problems. 

 

What I am saying, and I think it has been consistently so, is that the system that we have now is so fundamentally broken that no matter what incidental things that we do, no matter how much stimulus is provided under whatever rationales, that all good will be turned to ill, the gap of inequality will keep widening, and that the situation will continue to worsen, lurching from crisis to crisis.

 

Is this not what we have seen since all the programs were put in place since the crisis of 2008?  That the rich are getting richer, because all we have really done is prop up an unjust, broken, and unworkable system.  And I think that this is the point that is being made by Greece in Europe today.

You cannot keep a game running when the insiders that control it are making up the rules as they go along, hiding their assets, dictating the judges' decisions,  dipping into the other players money at will, and generally cheating and doing whatever they wish when they wish, because they can.

The system is too flawed to be sustainable, and must change in order to cohere.

NY Times

Debt Is Money We Owe To Ourselves

By Paul Krugman

February 6, 2015

Antonio Fatas, commenting on recent work on deleveraging or the lack thereof, emphasizes one of my favorite points: no, debt does not mean that we’re stealing from future generations. Globally, and for the most part even within countries, a rise in debt isn’t an indication that we’re living beyond our means, because as Fatas puts it, one person’s debt is another person’s asset; or as I equivalently put it, debt is money we owe to ourselves — an obviously true statement that, I have discovered, has the power to induce blinding rage in many people...

More than that, as Fatas points out, rising debt could be a good sign. Think of my little two-classes model of debt, where some people are less patient than others — perhaps (to step outside the model a bit) because they have better investment opportunities. Moving from a very limited financial system that doesn’t allow much debt to a somewhat more open-minded system should, in that case, be good for growth and welfare...

And the problems with public debt are also mainly about possible instability rather than “borrowing from our children”. The rhetoric of fiscal debates has been, for the most part, nonsense.

Read the entire piece here.

A Further Response on the Weakness in Modern Monetary Theory and Modern Economics

“A concept is a brick. It can be used to build a courthouse of reason. Or it can be thrown through the window.”

Gilles Deleuze

A reader 'Joyce' sent an email to me today, and rather than just provide a complete answer to her I thought I would take the opportunity to expand on this to further explain what I said about Modern Monetary Theory yesterday.  

 

There were more responses from those from the fiscally conservative economic right, who support MMT as a rationale for eliminating the income tax.   The progressive voices speaking out for MMT as a cure for austerity ought to think long and hard about this. 

 

They would propose using MMT printing rather than progressive direct taxation.  This is a more regressive taxation of currency depreciation, or monetary inflation, that would adversely impact those without resort to holding inflation senstive assets as a store of wealth.   I might write something more about this later, 

 

Joyce's observations are in italics, with my reactions to them just below.

"I am just learning about MMT myself but I see that you are conflating the value of the currency with the use of the currency (no matter what its valuation is). MMT just describes the way money works in a sovereign country with its own currency. MMT makes no claims for the goodness of the politicians that are elected to the government that spends money into the economy."

The method of how a currency is created and used is intimately involved with its valuation.  As a medium of exchange and a store of value, the method in which money is created, distributed, and valued impacts every transaction that occurs within an economy, and in trans-economic (international if you will) commerce.

To say that assuming that printing money at will by the government without limit can have no effect on value flies in the face of historical experience.   MMT seems to be based on this assumption and a few others that do not hold up well to practical examination.

"The government has to spend money into the economy in order for the public and private sectors to "save" or use that money. The people accept the currency that is spent into the economy because they use it to pay their debts, such as income tax, to

government. I suppose the valuation can change but it remains true that the sovereign government can afford to pay for anything that it needs or wants to as long as it is in their own currency and is available."

The government manages the currency.  It provides it to the economy under certain sets of economic rules.  'Government spending' is one of them.   There are others.  These are not particularly germane to my major objection to MMT, but they do serve to divert the discussion from it so I will let that go for now.

But it is not true that 'the sovereign can afford to pay for anything that it needs or wants as long as it is in their own currency and is available.'   There must be an agreement on value for an exchange to occur between entities.  This is easier to see if you assume that one of the parties is another sovereign government.

What troubles me about some of the unspoken assumptions in MMT is that individuals within an economy are not 'sovereign' or free actors.   What comes out in discussions with MMT believers is that government rules by force, that individuals are compelled to accept the currency, presumably at some valuation well above worthlessness. 

This is why I say that there is nothing particularly 'modern' about Modern Monetary Theory.  It is the same old canard where the state sets the values, and dictates them to the people by force, whether it be official exchange rates, currency controls, or other draconian measure THAT  hold whether the governing authority is abusive or not.  If politicians were angels, it would not be such a worry that their power is largely unchecked by market forces in the MMT theory.

"Basically, the market is the people purchasing commodities or commercial dealings of companies and individuals; therefore, the market is the people."

The market is not only the people, but the set of rules under which they act.  The notion that there are no rules, spoken or unspoken, is romantic nonsense.   A 'society' is a group of people with a common set of rules and conventions.  The default condition of a failed society is that 'might makes right.'

MMT is a theory and can only be dangerous if it creates a dangerous environment. How can a theory create a dangerous environment? It is a belief system. MMT tries to describe how money works not how bad politicians and appointees use it for their own purposes."

If only this were true, if only these things were immutably decided for us.  Well they are, but that is another theory.   Theories and assumptions about values are the key to civilization if you think about it more deeply.  And they have a tendency to create a dangerous environment where there are not checks and balances on power because, quite frankly, people are not angels.

"There are, of course, limits on the use of money which rest on whether or not the resources are available and on whether or not there are arbitrary limitations such as the periodic caps placed on the deficit by politicians."

This I think is an oblique reason why some very smart people might find MMT to be attractive.  We are in a very contentious period of political history.  The current financial and political system is acting unevenly, unjustly if you will, and seeks to impose austerity on the unfortunate while subsidizing the wealthy and powerful with tax breaks and bailouts.

Well intentioned people see MMT as a wonderful methods of avoiding this conflict by asserting that money can flow without practical limit or consequence.   It reminds me of the common talk about the 'Trillion Dollar Platinum Coin' that was proposed by some Very Serious People as a response to the budget and debt ceiling impasse.

Like so many attractive expediencies, it had some very serious unintended consequences attached.  It would have signaled to the other sovereigns of the world, rightly or wrongly, that the US was willing to create money without regard to value in order to solve its own political difficulties.  It would have sent a chill through our trading partners (and creditors whom MMT desire to reduce to helpless subservience like our own citizens apparently) about the reliability of the full faith and confidence which is the basis of a modern fiat currency.  

It is a dangerous game, because once one loses that confidence, it can lead to collateral damage rather quickly, and provide a difficult situation that inflicts much damage and pain on many.

"MMT is not about justice and fairness. As far as I know, MMT does not have an 'efficient market hypothesis.'"

 All rules, particularly financial rules, are about justice and fairness.  Justice and fairness are not abstractions that sit on a shelf to be pulled out now and then.  Justice and fairness are a priori values encapsulated in the laws of the land,  and reasonably well stated in the Declaration of Independence and the Constitution.    Men and women have given their lives for justice and fairness, which are inherent qualities of liberty. 

We allow our choices to be limited by being members of a society.  But in return we demand certain services and considerations for it. 

A system that has not regard to justice and fairness is a tyranny, or quickly becomes one.

Now, I want to put a different meaning on what you said, that I think strikes a little closer to what you intended to say. 

I think you mean to say that MMT merely describes what is, some natural occurrence, like physics or any other pure science.   And this is one of the great fallacies that some promote about economics in general, that it is a pure science merely describing natural phenomena like the movement of the tides or the planets.

Economics is a social science.  It is all about interpreting realities and especially theoretical realities or systems through a prism of assumptions and values.   It is unavoidable for any macroeconomic system NOT to embody certain assumptions and values, whether they are spoken or just assumed.

And the whole point of my example about 'efficient market hypothesis' was that it 'worked' if one assumed certain qualities about people acting in groups that are not only incorrect, but radically so in the case of a persistent minority of the sociopathically inclined.

MMT does not have its own efficient market hypothesis.  It is like the efficient market hypothesis in that it assumes an otherworldly goodness in politicians and government bureaucrats in using the assumed to be unlimited power to create and spend money only wisely and for the greater good.  Try that idea out on any historian or political scientist and see how far it gets you.

And as a side note, politicians refused to regulate the shadow banking system that includes trillions of dollars of debt by banks and near banks, debts which can never be paid back should we have another recession.

I surmise that some of that QE money from the Fed was used by companies to create more wealth for themselves and I'm sure that some of it ended up in the shadow banking system where trillions of dollars of derivatives still thrive.  

This is precisely my point   The political class has been corrupted by Big Money.  I write about this all the time.   The bailouts were a clear abuse of power, especially in their collateral damage to innocents.

I do not think that MMT is a solution to  the problem of 'debts that can never be paid back should we have another recession.'   But I do think that this is the motivation for some who know deep down that MMT is founded on rubbish, but is the lesser of two evils in finding a way out of a bad situation.

My God, with our political class as corrupt as it is, would one wish to give them the power to create and spend money at will, under the assumption that they can never do it too much?

I will not muddy the waters here by getting into other solutions, but to willingly accept a belief system not founded in practical reality as a mean of escaping a dilemma does not encourage the rational person who has not given themselves over to the belief as a means of economic salvation.  

Reform is the most viable solution longer term.  We did it before and we must do it again.  Reform is a continual struggle against the worst tendencies of people.  

As Lord Acton said, "The danger is not that a particular class is unfit to govern.  Every class is unfit to govern. The law of liberty tends to abolish the reign of race over race, of faith over faith, of class over class."

In other words, no one is above the law, and their power is to be constrained by the restraints of the liberty of others, and therefore required to act justly and openly, under a system of checks and balances on their power.

One of the recurring myths throughout history is that a group of 'better men' are naturally equipped to rule.   There is much in modern economics that assumes that very dangerous idea, of superior people of natural rationality and virtue being naturally able to rule wisely and benignly without corruption.  And they may do so with secrecy, and independent of checks and balances, the better to serve the dispensation of their gnostic knowledge that is conflated by other mere mortals who simply cannot understand it.

And this is one of the major drawbacks with the methods of the central banks and the in particular Federal Reserve today.  Economics is no science, but a branch social science that at best casts some light on public policy, but with absolutely no claim to pure scientific objectivity or the ability to dictate outcomes independent of choices based on higher values.

History is the story of the never ending struggle between tyranny and liberty, the individual and the state, right and might, anarchy and society, with most of the action occurring in the vast area between.  

 

No system can guarantee freedom of the individual, or the rule of law over lawlessness.  But some may provide the means and the methods of giving individual rights a more even footing with organized power, and organized society with the means to hold individual power in restraint.

I have come to believe that the most critical step for our sustainable recovery is not more laws, the gold standard, a new system of currency like modern monetary theory, or one political party or another.

The key to our return to a sound economy is to be found in meaningful reform. And so far we have merely struck uselessly at a few largely symbolic branches, and failed to address the problem with a serious commitment to our values. The heart of the problem is the power of the financial sector over the greater part of society, through the corrupting power of Big Money over the political process.

 

 

The Great Fallacy at the Heart of Modern Monetary Theory

As with all theories that miss the mark, Modern Monetary Theory presents some insights into the matter of course, but seems to hinge on one or two key assumptions that are more matters of assertion than historical or even practical experience. It is founded not so much an economic theory, but on a belief without a firm foundation.

This paragraph taken from Yves Smith's recent article about MMT

"The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency because it is the ISSUER of the currency, not simply the USER (as a household or private business is).

This issuing capacity means that the government does not face the same kinds of constraints as a private sector user of money, which in turn exposes the fallacy of the household analogy, so beloved in popular economics discourse."

The finances of a sovereign are most assuredly NOT like those of a household. And those of a Bank are not like a household either.

In several ways they can be the inverse of a household in their motivations. For example, when household spending is slack because of an economic shock, the government may wish to engage in more spending to counteract this.  Some think it is the role of government to keep the economy out of what is called a liquidity trap or as I understand it a feedback loop of cutbacks that greatly exacerbate the problem of slack demand.

This is one of the points of having a government, that is, to do things that the individual cannot do well alone, no matter how powerful they may think that they are, and to protect the rights of the many from those who are more powerful, both foreign and domestic.

But here is the matter of disputation, emphasis in caps theirs, in italics mine. "The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency because it is the ISSUER of the currency, not simply the USER."

Do you see what is missing here, and more importantly, what is implied?

What is missing is the acknowledgement that the users of a currency, call them 'the market,' can and will and have quite often throughout history questioned the valuation of a currency, and often to the point of practical worthlessness, if certain actions are taken by the sovereign in creating their currency.

 

This speaks to a principle that I spelled out some time ago, that the practical limit on a sovereign government in printing money is the willingness of the market to accept it at a certain value. And this applies to any sovereign, more readily perhaps if they are smaller and weaker, but always given time nonetheless.

If Russia, for example, were to merely start printing more rubles and set a target valuation for them, they could enforce this internally. And in fact, many sovereigns have done so throughout history. I remember visiting Moscow shortly after the fall of the Soviet Union, and marveling at the disconnect between the official stated valuations and the actions of the ordinary people in seeking alternatives like the US Dollar, gold, diamonds, and even Western style toilet paper, a more useful sort of paper than the ruble.

Technically Russia could not become insolvent in rubles, because they could always print more of them to pay all their debts, make purchases, and salary payments. The great caveat in this is that Russia had to maintain a measure of control and enforcement to make that principle 'stick.'

And this is what probably makes MMT inadvertently statist, and dangerous. That is because this belief only works within a domain in which the state exercises complete control over valuation.

In the case of the US dollar as a global reserve currency, if this theory is applied, and one of my great fears is that it will be, then there is an inherent need for the Dollar Cartel to continuing expanding their span of control over all of the producing and purchasing world, in order to enforce this belief.

I am sorry to have to disagree with people whom I like and enjoy reading, but as you can see I think there is an important point of disagreement here. And given the number of sovereigns who have defaulted, causing significant pain in their people and in the lives of others, it is not a trivial thing.

I suppose that there are many other things in MMT that are correct, as it seems to be quite the usual thing in many ways, but there is an important exception in the assertion that the state has no limit to its power to set value, because that is exactly what is implied in the canard that a sovereign cannot default in its own currency. Technically it cannot because it can always print more than enough pay off debts and make more purchases. But it can create money in such a way as to break the confidence of the market, and call its valuation into question. And this is a de facto default.

What happens when the people refuse to accept it at their stated value?  What happens to people who do not agree that the State can do no wrong?  Because if the State can never be at fault in creating and spending money, that makes it a problem and a source of great mischief.

 

In the historical examples the government always resorts to force of some sort in varying degrees, and official exchange rates, and other actions not only on their own people but on their neighboring sovereigns who refuse to submit to the valuation of a currency by official diktat.

It is a dangerous statement that might be remedied by an acknowledgement that there are practical limitations on the power of the State in creating money, and that it is related to the willing acceptance and confidence of the people in its fairness and justice, and especially people who are not part of that same economic sphere of influence.   And if the adherents of a belief cannot agree with this, then it calls into question all the other aspects of a belief that is based on such an absurdity a priori principle. 

 

So it was with the 'efficient market hypothesis,' which believed that people acting in a group are naturally good and rational, and therefore needed little or no regulation.  It was widely accepted in economic circles, and those who did not accept it were dismissed as unsophisticated.  And it did not matter that this assumption was shown to be blatantly incorrect to anyone who is familiar with the reality of the marketplace, or has ever driven on a modern high speed motorway.

People on the whole are not naturally rational, good, and self-regulating to a degree sufficient to permit with the dispensation of the rule of law.  If only this were true!  And a persistent minority among them are so much not inclined to the good as to be sociopaths and inclined to be criminals.

And unfortunately politicians who act for the State are not angelically good and beneficent either. But this is what is implied in creating a system that allows for their acquiring and exercising almost unlimited power that is beyond question, in money or in anything else, but in particular something as important as the general means of exchange and valuation.

How To Waste £375 Billion - Positive Money - Apologia

I have been looking into and communicating with some of those involved with PositiveMoney.org of late.

The Princes of the Yen documentary that was featured here the other day was produced by some fellows that are also involved with this movement, although that Positive Money message did not permeate the documentary. There was no clear solution promoted, and most of the documentary was devoted to exposing how Central Banks shape policies and real world economies, not only in Japan but around the world through the IMF.

The Positive Money movement is based in the UK. Their idea is to change the manner in which money is created, taking it out of the hands of the private banking system and putting it back into the hands of the government, to be brief.

Their proposals are a bit lean in some aspects. They posit a transparent authority to determine the creation of money. But in the light of the abuses of the BOJ in the Princes of the Yen piece, it is obvious that such an enormous power must be safeguarded by something a little more stringent than 'transparency.'  But it is a step in the right direction.

And it is not lost on me that this movement sounds so similar to the Modern Monetary Theory group in the US. Both would like to remove the money power from the central banks and their affiliates and return it to the government/people.

But it is often lost on the MMT crowd that this is within the essence of Jacksonian Democracy, which is also adamantly opposed giving the sovereign power to create money to a cadre of 'independent' bankers.

Why then cannot these groups find common ground and unite in their efforts?

I think it comes down to power and ideology. 

 

Much of the nonsensical we are reading these days about gold from economists is because they are arguing from a pre-established premise.  That premise about the characteristics of gold refuses to allow their mind to go where reason might lead them.  And so in their gyrations to avoid an external standard, to not potentially limit their power and discretion while maintaining some sort of ongoing discourse, they appear almost comical.  It is the credibility trap.  And they are like Lewis Carroll's Humpty Dumpty, wishing only for the power to form reality to their liking.

 

`The question is,' said Alice, `whether you can make words mean so many different things.'

`The question is,' said Humpty Dumpty, `to be master -- that's all.'"

Lewis Carroll, Through the Looking Glass

 In the States, the MMT crowd go several steps further, and even add on the tenet to their doxology that the State can never print too much money, since their obligations are denominated in their own currency. This is of course at odds with most of recorded history, so it is no wonder that some might blanch at it as a tenet of a new economic faith.

And alas, everything in the States these days comes down to power politics and cliquish tribalism it seems. You must support MY proposals, or you are not one of us. And you must not speak ill of anything we propose, or we will label, and then exclude you. This is politics, not as usual, but as life imitates high school.

I was informed by a visitor that a 'liberal site' that heavily promotes MMT had quietly removed its references to my own café, and refused to link to pieces here that support their very same causes, because as it is well known I have some serious objections to sovereign money, American style. And I attempt to articulate those objections as best that I can, and on occasion with some pointedness when they are overreached and dismissed.

I mean no particular criticism to anyone by this. As a progressive I am anathema to many of the hard money people with whom I also have a common cause, because they often tend to be austerity driven, Austrian conservatives. 

And so there are similar de facto boycotts ongoing based on strictly unrelated matters.  I cannot get a link out of a major hard money organization because of it, for example.  Even though they can use all the friends and intellectual support that they can get.

I will not even get into the guff that one might take for standing up for any of their faith based beliefs and witnessing in their actions, even if it is done in what one might hope is a civil and accepting manner.

It is not easy to be a centrist, following your conscience and reason as it leads you, even with all due caution and self-examination, these days.  But that is what we must do, if we are to be true to ourselves.

And I confess to being no milquetoast, seeking to please all and thereby stand for nothing.  I know I have a fire in my heart at times when seeing injustice and suffering inflicted up on the innocent and the unsuspecting.  And I hope to never lose that to the apathy of well-worn care or cynicism.

One person I wish to acknowledge right here is Ted Butler.  I have strongly objected some of the things he has said, on rare occasions, but done so with as best an approach as one can strive for with regard to an acquaintance who in general is of a similar frame of mind.  

 

And I let him know about it, so it is not given to him in some distorted manner by a third party being mischievous.   To his credit he accepts this as constructive criticism and we talk about it, and sometimes agree to disagree.  Ted and I still talk and are friends, and he shares his information with me freely, and we engage in no infighting or polemics.  And we both draw comfort from our fellowship.  At least I do.

I have some similar arrangements with people of note who would probably not wish to be named here publicly.  But it is one of the many consolations I have received from this café, and I am grateful for it.

Too often these days, when people take positions, all thinking stops, and it starts coming down to a struggle with tricks and rhetoric for raw power.  And this is a sickness brought about by our culture of winning.

There should be no doubt that I think our current financial processes are misbegotten and riddled with fraud, and that this trickle down approach to stimulus is little more than corporatized and organized theft of public money by powerfully connected insiders. 

And the Fed has proven clearly that it is not capable of fulfilling its obligations as monetary authority and regulator under its current arrangements. It lacks objectivity and transparency. It has been captured by the Banks, and in looking at its structure, it would be foolish to think that over time there would be any other outcome.  For all its window dressing, the Fed is a creature of the Banks.

 

So I wanted to let you know where my thoughts might be going, less you think I have lost my mind.   Or my position, as it means the ground on which I am currently standing, while on a longer journey.   

There is only one real position that I hope to never lose, because at the end of the day, it is the only one that really matters beyond the comedy of our world as it is.   It is that affirmation with which I cup my hands together, and hold whatever it is that is me, the soul of me.  Enough of it slips over and away with the jostling of life as it is.  But if I ever open my hands wide for the sake of political expediency or gain, I may be lost.

 

Is this a kind of pride, of egoism?  Perhaps it may seem to be. Perhaps this is why God allows the storms to beat on us, and knock us down so often, as we struggle against the servitude of the dark powers in high places of this world.  And this may be why He allows for desolation to creep into the hearts of His own, and test them, and modify them.   So that we may realize that we are never standing alone, as gods on our own power, but in fear and trembling, proceeding slowly against the tides and the darkness, always seeking the light.

 

"To be dispassionate and cautious, to be fair in discussion, to give to each phenomenon which nature successively presents its due weight, candidly to admit those which militate against our own theory, to be willing to be ignorant for a time, to submit to difficulties, and patiently and meekly proceed, waiting for farther light, is a temper (whether difficult or not at this day)... in which we can hope to become interpreters of nature, and it is the very temper which Christianity sets forth as the perfection of our moral character."

J. H. Newman