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.

 

 

Entertaining Angels: Dorothy Day

"The greatest challenge of the day is: how to bring about a revolution of the heart, a revolution which has to start with each one of us?"

Dorothy Day


"Be not forgetful to show kindness to strangers: for thereby some have entertained angels unawares."

Heb. 13:2

Gold Daily and Silver Weekly Charts - NFP Next Week - Cloudy With a Change of Pace

Gold and silver took a sharp jump higher about 10 AM, when the economic news came in weekly, and stocks sold off. 

I am not too sure how much importance to give to the markets today, since it seemed that the algos were in charge, with some of the junior staff to tend to their needs.

Next week will see the December Non-Farm Payrolls Report.

 

There was intraday commentary on Modern Monetary Theory here.

The US is lost in a daydream about exceptional economic growth, so there might be some cloudiness with a chance of shenanigans in reaction to the headline jobs number, etc. next week.

 

If we say it is, and say it loudly and often enough, it must be so.  And if you do not agree, well then, you must obviously be afflicted, deficient, or disloyal.

 

I do not see a recovery behind the numbers yet, just the appearance of one manufactured out of generally abused accounting principles. It may be one of the few things that are seeing a boom in manufacturing: bad numbers and bad paper.  Ah, the wonders of financialisation.

 

Despite the soaring stock market and general American triumphalism, the year seemed somehow grim.  Not bad, but like walking on a treadmill, getting nowhere in particular.  Nothing was really accomplished except for more of the same.  And we increasingly reserve the right to do as we wish, and accuse just about anybody of anything that strikes our fancy without a resort to evidence, and with the right to pre-emptively punish them for it.  At least Rome had bread and circuses.  The Pax Americana offers drones and sanctions.

My outlook for 2015 is for increasing surrealism, as the dream fades, but the dreamers double down on their delusions. 

If this is the case, 2016 could be rather frisky, with a high probability of cognitive dissonance, and selective outbreaks of popular uprisings and demonstrations, with correspondingly heavy handed official tantrums.

 

The Ohio State - Alabama match up in the Sugar Bowl yesterday was diverting.  Go Buckeyes.

Have a pleasant weekend.

 

 

 

 

 

 

SP 500 and NDX Futures Daily Charts - Softserve Markets, With Sprinkles

I think most of the adults had the day off today, making it a four day weekend for the senior traders and all but the most hard core of punters, whose life seems empty when the market are not open.

Stocks opened like gangbusters, reflecting the jump in the overnight futures, but fell rather sharply at 10 AM when the news came out that the ISM index missed its target badly.

Does the ISM include monopoly priced healthcare spending?

At any rate the algos that read the news reacted sharply, and the market sold off. It managed to end the day almost unchanged, and then the futures sold off a bit again after the close.

Next week the adults will be back.

Have a pleasant weekend.

 

 

 

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.

Gold Daily and Silver Weekly Charts - And the First Runner Up Is....

"...the burning roof and tower, and Agamemnon, dead."

There is certainly no doubt that 2014 was 'the Year of the Dollar,' as King Buck staged a rally, based on a comparison to some historically important currencies as embodied in the DX index.

I have shown this is the latest update of the US Dollar Very Long Term Chart here.

In fact, the greenback has hit levels not seen since the last financial crisis.  You know, the one in 2008 that everyone has already forgotten, and which seems just as likely to reoccur as if we had done little or nothing about what had caused it in the first place. 

 

I was amused to see a chart posted over at Zerohedge that shows that the next best performing currency in the world after the dollar was gold of all things.   That chart is shown below.  This presumes that one would count gold as a proper 'currency.' 

 

I would say not quite, since technically no sovereign will admit to it at this point.  There is a patina of official sanction about a proper money.  The central banks all hold it, and some are buying it quite vigorously especially since 2006.  So it does have the character of a natural currency and enduring store of value, despite the blatherings and propaganda campaigns of its official detractors. 

Perhaps propaganda is too strong a word for our polite society, all whitewash on the outside, with the bones of the brutally savaged carefully hidden within..  'Manufacturing consent' and 'molding perceptions' is what we call the persuasion campaigns in our genteel era.  Propaganda is an ugly word, so let's put some icing on it and call it something else.

In addition to being a 'store of value' a currency must be a 'money' and for now at least it is the ultimate foreign currency, being exchangeable around the world, but no where treated as a routine means of purchasing items directly with some sort of official nod to its role as a form of money.

 

That may change in the years ahead.  I don't wish for it too eagerly, because I would like to see gold run a bit in value, mostly making up for lost time as it were, before nations get involved and start trying to fix its prices officially.  For now they are doing it unofficially, or at least some of them are doing so, and they are probably doing a bad job of it, in the longer term scheme of things.

They'll never learn. Never.  It is in their very nature not to learn.  They are not learning people.  They are headstrong power people, always wanting to run the show according to their own fancies, and therefore consistently reaching for some combination of force and fraud to impose their wills and their ideas.  Because they know better.  They are the epitome of progress, thoroughly modern and the recipients of special knowledge that sets them above and beyond all others.

 



"Queens have died, young and fair.  Dust hath closed Helen's eye..."

 

But as we know, it's all rubbish.  They speak well, and learn to impress, but they don't know anything new.  They mostly practice the same old tricks with different names and fancier titles.  An object lesson will therefore most likely be required, to be administered by the back of the invisible hand when their schemes go off in a bad way, as they seem to do about every five or six years now.

 

Thank you for your patronage at Le Café for another year.  I am pleased to note that there have been 34,915,180 customers served since opening at this location in February, 2007.  

 

This is not bad for what is most like just a small village café, off the main roads and patronized largely by locals, travelers and the disposed.  The goal is to provide a warm and familiar refuge for those who have become weary of the often tasteless fare produced and served in volumes at the larger commercial establishments of the day.

 

And there is often entertainment, and pleasant diversions from the day!  lol

 

If you have obtained any benefits from this establishment during this year past, as always, please pay it forward.  There is a decided lack of love in the world, and unrewarded kindness often works wonders for both the recipient and the one who gives, not for advantage, but out of a recognition of our own obligations, and at its best, love.

 

Have a very Happy New Year.

 

 

 

 

SP 500 and NDX Futures Daily Charts - Not with a Bang, But a Whimper

Having served its purpose, the paint was peeling off the tape with some vigor today.

Mr. Market shed some of its recent water weight, from the watering of its stocks indices, for the purposes of improving the bonuses of the financial class for the end of the year.

The first week of January may have an upward bias, depending on what happens. We may see some follow through selling on Friday, but the markets will be abnormally quiet most likely.

It is the whole of January that may likely set the tone for the new year, and not the first week. So we should watch this next month rather closely, so see what the themes might be, and how speculators, I would not dignify what they do by calling them investors, take the economic news as 'good' or 'bad' for certain classes of financial instruments.

Have a Happy New Year.