1038 Ellen Brown: China & Japan show how to pay for it - with MMT

Ellen Brown: China & Japan show how to pay for it - with MMT

Newsletter published on July 12, 2019

(1) MMT and the Budget Deficit
(2) Ellen Brown: China & Japan show how to pay for it - with MMT
(3) China Invents a Different Way to Run an Economy
(4) The Problem With "Modern Monetary Theory" Is That It's True
(5) How Bankers Became the Top Exploiters of the Economy, by Michael Hudson
(6) Deficit Owls: MMT Explained
(7) Examples of Financial Transactions - approved by Geoffrey Gardiner

(1) MMT and the Budget Deficit
by Peter Myers, July 12, 2019

Michael Hudson, Geoffrey Gardiner, Stephen Zarlenga, L. Randell Wray,
Henry Liu and other dissident economists honed their debating skills for
many years in an internet forum called Gang8, hosted by Arno Mong Daastol.

Gardiner and others were conservatives favouring capitalist banking,
whereas Hudson, Zarlenga, Wray and Liu favoured socialist banking.

I was privileged to receive the emails, and on a few occasions to
participate.

It was a great education in economics and banking.

Wray and Hudson have gone on to champion Modern Monetary Theory (MMT),
as a way out of the Budget Deficit.

The Budget Deficit exists because the 1% (a.k.a. the Ruling Class) don't
pay tax. Corporations avoid tax by using Tax Havens and Transfer Pricing.

Governments, instead of taxing them, are forced to borrow from them.

Whenever a politician canvasses taxing them, they use the 'Mainstream
Media', which they also own, to scare the Middle Class into thinking
that THEY will be the target of the new tax laws. Thus that politician
fails to get into power.

The only time they have accepted high taxation is during WW1 and WW2,
where their own assets were on the line, and in the postwar period until
Margaret Thatcher and Ronald Reagan re-launched Capitalism.

MMT is based on the 'State Theory of Money', first published by Georg
Friedrich Knapp in 1905.

It says that governments don't need to borrow to fund their financial
needs. Instead, a state-owned national bank can create debt-free money
for government to spend; the same money is accepted by government for
payment of taxes.

Famous examples are (a) Lincoln's Greenbacks, used to fund the northern
side in the Civil War (b) Bradbury Pounds, used by Britain in WW1 (c)
The Commonwealth Bank of Australia (the publicly owned Reserve Bank)
funding the Trans-Australia Railway and the Australian National
(shipping) Line in the early twentieth century.

Opponents of the Green New Deal say, 'Where's the Money Coming from?"
And Ellen Brown rightly explains, "From our own Publicly-Owned banks,
which we will create as part of the process".

At the start of WW1, Britain's Globalised financial system was so
interconnected with Germany's  that Britain could not fund the war; it
was bankrupt. As a solution, Bradbury Pounds were issued by the British
Treasury, not by the Bank of England. This was debt-free money.

In the same way, the US Treasury, a publicly-owned body, could issue
Dollars, instead of the privately owned Fed. This would be debt-free
money. At present, the US Government pays interest on the money it spends.

Alternatively, the Fed could be nationalised and made a branch of the
Treasury.

We need MMT, because we can't maske the 1% pay tax.

(2) Ellen Brown: China & Japan show how to pay for it - with MMT

https://ellenbrown.com/2019/07/10/how-to-pay-for-it-all-an-option-the-candidates-missed/

How to Pay for It All: An Option the Candidates Missed

Posted on July 10, 2019 by Ellen Brown

The Democratic Party has clearly swung to the progressive left, with
candidates in the first round of presidential debates coming up with one
program after another to help the poor, the disadvantaged and the
struggling middle class. Proposals ranged from a Universal Basic Income
to Medicare for All to a Green New Deal to student debt forgiveness and
free college tuition. The problem, as Stuart Varney observed on FOX
Business, was that no one had a viable way to pay for it all without
raising taxes or taking from other programs, a hard sell to voters. If
robbing Peter to pay Paul is the only alternative, the proposals will go
the way of Trump’s trillion dollar infrastructure bill for lack of funding.

Fortunately there is another alternative, one that no one seems to be
talking about – at least no one on the presidential candidates’ stage.
In Japan, it is a hot topic; and in China, it is evidently taken for
granted: the government can generate the money it needs simply by
creating it on the books of its own banks. Leaders in China and Japan
recognize that stimulating the economy is not a zero-sum game in which
funds are just shuffled from one pot to another. To grow the economy and
increase GDP, demand (money) must go up along with supply. New money
needs to be added to the system; and that is what China and Japan have
been doing, very successfully.

Before the 2008-09 global banking crisis, China’s GDP increased by an
average of 10% per year for 30 years. The money supply increased right
along with it, created on the books of its state-owned banks. Japan
under Prime Minister Shinzo Abe has been following suit, with massive
economic stimulus funded by correspondingly massive purchases of the
government’s debt by its central bank, using money simply created with
computer keystrokes.

All of this has occurred without driving up prices, the dire result
predicted by US economists who subscribe to classical monetarist theory.
In the 20 years from 1998 to 2018, China’s M2 money supply grew from
just over 10 trillion yuan to 180 trillion yuan ($26T), an 18-fold
increase. Yet it closed 2018 with a consumer inflation rate that was
under 2%. Price stability has been maintained because China’s Gross
Domestic Product has grown at nearly the same fast clip, by a factor of
13 over 20 years.

In Japan, the massive stimulus programs called "Abenomics" have been
funded through its central bank. The Bank of Japan has now "monetized"
nearly 50% of the government’s debt, turning it into new money by
purchasing it with yen created on the bank’s books. If the US Fed did
that, it would own $11 trillion in US government bonds, four times what
it holds now. Yet Japan’s M2 money supply has not even doubled in 20
years, while the US money supply has grown by 300%; and Japan’s
inflation rate remains stubbornly below the BOJ’s 2% target. Abe’s
stimulus programs have not driven up prices. In fact deflation remains a
greater concern than inflation in Japan, despite unprecedented debt
monetization by its central bank.

China’s Economy: A Giant Ponzi Scheme or a New Economic Model?

Critics have long called China’s economy a Ponzi scheme, doomed to
collapse in the end; and for 40 years China has continued to prove the
critics wrong. According to a June 2019 report by the Congressional
Research Service:

Since opening up to foreign trade and investment and implementing
free-market reforms in 1979, China has been among the world’s
fastest-growing economies, with real annual gross domestic product (GDP)
growth averaging 9.5% through 2018, a pace described by the World Bank
as "the fastest sustained expansion by a major economy in history." Such
growth has enabled China, on average, to double its GDP every eight
years and helped raise an estimated 800 million people out of poverty.
China has become the world’s largest economy (on a purchasing power
parity basis), manufacturer, merchandise trader, and holder of foreign
exchange reserves.

This massive growth has been funded with credit created on the books of
China’s banks, most of which are state-owned. Even in the US, course,
most money today is created on the books of banks. That is what our
money supply is – bank credit. What is different about the Chinese model
is that the Chinese government can and does intervene to direct where
the credit goes. In a July 2018 article titled "China Invents a
Different Way to Run an Economy," Noah Smith suggests that China’s novel
approach to macroeconomic stabilization by regulating bank credit
represents a new economic model, one that may hold valuable lessons for
developed economies. He writes:

Many economists would see this approach as hopelessly ad hoc, haphazard,
and interventionist — not the kind of thing any developed country would
want to rely on. And yet, it seems to have carried China successfully
through several crises, while always averting the catastrophic financial
crash that outside observers have been warning about for years.

Abenomics, Helicopter Money and Modern Monetary Theory

Noah Smith has also written about Japan’s unique model. After Prime
Minister Abe crushed his opponents in October 2017, Smith wrote on
Bloomberg News, "Japan’s long-ruling Liberal Democratic Party has
figured out a novel and interesting way to stay in power—govern
pragmatically, focus on the economy and give people what they want." He
said everyone who wanted a job had one; small and midsize businesses
were doing well; and the BOJ’s unprecedented program of monetary easing
had provided easy credit for corporate restructuring without generating
inflation. Abe had also vowed to make both preschool and college free.

Like China’s economic model, Abenomics has been called a Ponzi scheme,
funded by central bank-created "free" money. But whatever it is called,
the strategy has been working for the economy. Even the once-dubious
International Monetary Fund has declared Abenomics a success.

The Bank of Japan’s massive bond-buying program has also been called
"helicopter money" — a policy in which the central bank directly
finances government spending by underwriting bonds – and it has been
compared to Modern Monetary Theory, which similarly posits that the
government can spend money into existence with central bank funding. As
Nathan Lewis wrote in Forbes in February 2019:

In practice, something like "MMT" has reached a new level of
sophistication these days, exemplified by Japan. . . . The Bank of Japan
now holds government bonds amounting to more than 100% of GDP. In other
words, the government has managed to finance itself "with the printing
press" to the amount of about 100% of GDP, with no inflationary
consequences. [Emphasis added.]

Japanese officials have resisted comparisons with both helicopter money
and MMT, arguing that Japanese law does not allow the government to sell
its bonds directly to the central bank. As in the US, the government’s
bonds must be sold on the open market, a limitation that also prevents
the US government from directly monetizing its debt. But as Bank of
Japan Deputy Governor Kikuo Iwata observed in a 2013 Reuters article,
where the bonds are sold does not matter. What is important is that the
central bank has agreed to buy them, and it is here that US banking law
diverges from the laws of both Japan and China.

Central Banking Asia-style

When the US Treasury sells bonds on the open market, it can only hope
the Fed will buy them. Any attempt by the president or the legislature
to influence Fed policy is considered a gross interference with the
sacrosanct independence of the central bank.

In theory, the central banks of China and Japan are also independent.
Both are members of the Bank for International Settlements, which
stresses the importance of maintaining the stability of the currency and
the independence of the central bank; and both countries revised their
banking laws in the 1990s to better reflect those policies. But their
banking laws still differ in significant ways from those of the US.

In Japan, the Bank of Japan is legally free to set interest rates, but
it must cooperate closely with the Ministry of Finance in setting
policy. Article 4 of the 1997 Bank of Japan Act says:

The Bank of Japan shall, taking into account the fact that currency and
monetary control is a component of overall economic policy, always
maintain close contact with the government and exchange views
sufficiently, so that its currency and monetary control and the basic
stance of the government’s economic policy shall be mutually compatible.

Unlike in the US, Prime Minister Abe can negotiate with the head of the
central bank to buy the government’s bonds, ensuring that the debt is in
fact turned into new money that will stimulate domestic economic growth;
and he is completely within his legal rights in doing it.

The leverage of China’s central government over its central bank is even
stronger than the Japanese prime minister’s. The 1995 Law of the
People’s Republic of China on the People’s Bank of China states:

The People’s Bank of China shall, under the leadership of the State
Council, formulate and implement monetary policies, guard against and
eliminate financial risks, and maintain financial stability.

The State Council has final decision-making power on such things as the
annual money supply, interest rates and exchange rates; and it has used
this power to stabilize the economy by directing and regulating the
issuance of bank credit, the new Chinese macroeconomic model that Noah
Smith says holds important lessons for us.

The successful six-year run of Abenomics, along with China’s decades of
unprecedented economic growth, have proven that governments can indeed
monetize their debts, expanding the money supply and stimulating the
economy, without driving up consumer prices. The monetarist theories of
US policymakers are obsolete and need to be discarded.

"Kyouryoku," the Japanese word for cooperation, is composed of
characters that mean "together strength" – "stronger by working
together." This is a recognized principle in Asian culture and it is an
approach we would do well to adopt. What US presidential candidates from
both parties should talk about is how to modify the law so that
Congress, the Administration and the central bank can work together in
setting monetary policy, following the approaches successfully modeled
in China and Japan.

(3) China Invents a Different Way to Run an Economy

https://www.bnnbloomberg.ca/china-invents-a-different-way-to-run-an-economy-1.1110889

Noah Smith, Bloomberg News

(Bloomberg Opinion) -- In the U.S. and other developed countries, there
are three basic philosophies of macroeconomic stabilization. Each of
them was present in some form during the Great Depression, and each
survives to this day.

The first is Keynesianism, which centers around fiscal stimulus, mainly
in the form of increased government spending. The second is monetarism,
which holds that getting economies out of recession is the job of the
central bank, which can lower interest rates, engage in quantitative
easing or ease monetary policy in other ways. The third school holds
that recessions are a healthy and normal phenomenon, and that
governments shouldn’t try to fight them. This last idea was promoted by
the liquidationists during the Great Depression, and enjoyed a
resurgence of interest in the 1980s, eventually even winning a Nobel for
one of its leading proponents. {Milton Friedman - Peter M.}

These three approaches have been around so long that it’s tempting to
conclude that there aren’t any others. But it’s possible that there’s
something else out there -- a good way to stabilize the economy other
than fiscal or monetary policy. And it’s possible China may have been
the one to hit upon this alternative.

For the last quarter-century, growth in China has been remarkably
stable. Though there have been ups and downs, the country has never
recorded a recession in that time. During that period, real gross
domestic product growth has never fallen lower than 6 percent:

Of course, those are official government numbers, and many people accuse
China of fudging its statistics. Provincial and local officials have
incentives to report overly rosy growth figures, and the central
government may smooth out the GDP numbers in order to avoid having
capital flee from the country. Even China’s premier, Li Keqiang, once
called the country’s economic statistics "man-made and therefore
unreliable." For this reason, a number of independent observers have
constructed their own measures of Chinese growth, relying on data like
electricity usage to supplement the official numbers. But almost all of
them conclude that China hasn’t seen growth fall below zero in recent
years, despite a mild slowdown in 2015.

This is remarkable. Most fast-developing countries stumble at some
point. During its economic rise in the 1800s, the U.S. suffered numerous
panics and depressions (as recessions were then known). Japan’s catch-up
growth during the postwar period was remarkably rapid and steady, but it
suffered two recessions in the 1960s and 1970s. China, in contrast, has
now weathered both the Great Recession and its own stock market bubble
and crash without its growth ever once sliding into reverse.

How did China accomplish this feat? Monetary policy was certainly used
as a stabilization tool, but its interest rate moves haven’t been
particularly dramatic:

China did make use of fiscal policy in the Great Recession, running a
deficit of about 7 percent of GDP in 2009:

But the stimulus was over quickly, as China ran a small surplus the next
year. Fiscal policy might have been effective, but it wasn’t the whole
story.

In addition to spending more, China also directed banks to lend lots
more money. The World Bank estimated that increased bank credit
represented 40 percent of China’s stimulus. Much of the lending was done
by China’s four large state-owned banks. The money went to
infrastructure, real estate and all kinds of corporate projects, many of
which were carried out by the country’s state-owned enterprises. That
lending was often wasteful and probably hurt productivity, but saving
the economy from going off a cliff could easily have been worth it,
especially since a deep recession might have threatened the country’s
political stability.

In the years since the crisis, China has again and again turned to
credit policy to stabilize its economy -- encouraging banks to lend more
when there’s a risk of recession, and clamping down on credit when real
estate bubbles threaten to spin out of control. In 2011 the government
tightened lending in order to limit a possible housing bubble, and again
in 2013, and yet again in 2017. In 2014 it eased bank lending to
stimulate the economy. In 2016 it cut banks’ reserve requirements to
stimulate credit expansion. And recently, facing the threat of a trade
war with the U.S., it reduced reserve requirements again, and encouraged
lending with various other policy tweaks.

Although it’s hard to get a clear picture of China’s overall credit
policy -- because there are so many policy levers, and because so much
is done behind closed doors -- it appears that the country is feeling
out a novel approach to macroeconomic stabilization. That program
focuses on asset prices, bank finance, real estate and administrative
control of banks.

Many economists would see this approach as hopelessly ad hoc, haphazard
and interventionist -- not the kind of thing any developed country would
want to rely on. And yet, it seems to have carried China successfully
through several crises, while always averting the catastrophic financial
crash that outside observers have been warning about for years.

Is there a lesson for developed economies here? Countries such as Japan
and the European Union member nations use a lot of bank finance. The
U.S. tends to use bond markets more, but banks -- especially big banks
-- are extremely important in the real estate sector, which is a very
important factor in the business cycle. Could developed countries create
more policy tools to push banks to increase lending in recessions and
cut back when bubbles threaten? Or is China sui generis -- a model that
can’t be copied? Is China’s repeated intervention in credit markets
building up inefficiencies that will eventually bring the system down?
There’s no way to know the answers to these questions yet. But
macroeconomists should think about credit policy as an important
supplement to the traditional fiscal and monetary tools of
recession-fighting.

To contact the author of this story: Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story: James Greiff at
jgreiff@bloomberg.net

Noah Smith is a Bloomberg Opinion columnist. He was an assistant
professor of finance at Stony Brook University, and he blogs at Noahpinion.

(4) The Problem With "Modern Monetary Theory" Is That It's True

https://www.forbes.com/sites/nathanlewis/2019/02/21/the-problem-with-modern-monetary-theory-is-that-its-true/

Feb 21, 2019, 04:51pm

Nathan Lewis

"Modern Monetary Theory" basically posits that a government can pay its
bills by printing money. What exactly is so "modern" about this I don't
know. In the third century, the Roman government started paying its
bills by making coins with higher and higher denominations. I don't
think they ever made a "trillion denarii coin" but the value of the
denarius eventually fell to less than a millionth of its original value.
It is a recipe for disaster; but, even so, every government does it
today, to some extent.

The irony of it is: that a government can, in part, pay its bills with
the printing press, but this works best when the government acts as if
it cannot; for once a government goes too far down this road, the
government soon finds that confidence in the currency or the
government's bonds has fallen so far that it can no longer use
printing-press finance without disastrous and immediate consequences. In
short: it is best if you act as if you can't, even when you can.

Historically, beginning with the Bank of England in 1694, central banks
were private, for-profit institutions. By the end of the nineteenth
century, this model had spread over much of the world. Printing money,
as you might imagine, turned out to be very profitable. But, in time
people complained about this arrangement. During the twentieth century,
central banks spread still further, but they officially took on a more
public aspect, in which the interest income on their holdings of
government bonds were remitted to governments. The Bank of England was
officially nationalized in 1946. The Federal Reserve remains a
privately-owned entity, but it officially remits its income to the
Treasury. I often wonder if this is really true. Since the Federal
Reserve doesn't seem to want to be audited, I guess we will just have to
take their word for it.

Recently, the Federal Reserve held U.S. Treasury securities amounting to
about $2.2 trillion. The interest income from this is remitted back to
the Treasury. (In 2017 it was $80 billion, more than any other private
company.) The Treasury pays the Fed, and the Fed gives the money back to
the Treasury. It is as if the Treasury paid nothing at all. In effect,
the interest rate on these bonds is zero. If you issue a bond, and never
pay either interest or principal (the bonds are typically rolled into
new bonds upon maturity), then it is as if you made them disappear. The
Treasury has, over the course of decades, managed to make $2.2 trillion
of bonds disappear. This is functionally similar to if the Treasury
simply ordered up $2.2 trillion in the form of $100 bills on forklift
pallets, and used them pay bills.

{but Ellen says that the Fed deducts 6% for its 'expenses'; 6% of what?
Without an audit, how much the Fed skims off is unclear}

So we see that "printing press finance" has been going on for a long
time, and at a relatively large scale. The reason that this works is
because the Treasury doesn't get to decide how many bonds the Federal
Reserve buys, or, in crude terms, how much "money is printed." Since the
answer might be "zero"--and in recent months it has actually been
negative: the Federal Reserve has been reducing its government bond
holdings, in effect "unprinting" the money--the Treasury has to act as
if it did not have this advantage. The Treasury never gets to say: "we
want to fund this program so print us some money," even though
effectively the money is often printed and the program funded.

The Federal Reserve decides. So, how does it decide? Mostly it is a big
muddle, but the basic principle is this: the Federal Reserve is tasked
to provide the money that the economy "needs" to function. Actually, it
is the money that economic participants "demand." That money in your
wallet has to come from somewhere. If "supply" matches "demand," then
the value of the currency will maintain stability. "Demand" tends to
grow with a growing economy, so "supply" will also grow alongside--in
other words, money is "printed," with the government the eventual
beneficiary. Other factors can affect demand: since 2008, banks have
apparently wished to hold much more of their assets in the form of "bank
reserves," which basically means a cash account at the Federal Reserve.
The crisis of 2008 has made them much more wary about keeping enough
cash on hand to make payments. This is actually a return to
old-fashioned banking principles, after a long time in the 1970-2008
period when banks attempted to maximize profitability by holding as
little idle cash as possible.

Because we trust the Federal Reserve not to make too many mistakes
(rightly or wrongly), we are thus willing to hold ("demand") a large
amount of dollars. Because we "demand" this, the Federal Reserve can
thus "supply" a large amount of dollars, and the dollar does not lose value.

But this trust can be quickly undermined if the authority over how much
money is "printed" ("supplied") transfers from the Federal Reserve to
the Treasury; and the rationale for how much money is "printed" is no
longer the maintenance of a stable currency, but the Treasury's
deficit-financing needs. The Treasury would, of course, claim that
"maintenance of a stable currency" is very worthwhile, and that it
intends to do exactly that, just as recent MMT fans say that
money-printing is ultimately constrained by "inflation." But what the
MMT fans are talking about is what the Federal Reserve is already doing
-- without MMT. The only reason for the Treasury (per MMT) to use the
printing press expressly for financing is because it needs to or wants
to; and because it needs to or wants to, it will ignore inflationary
concerns, even if it says that it will not, because that is the only
reason to embark on this change in the first place.

The funny thing is, if the Treasury did take over the money-printing
role expressly for financing purposes, the value of the dollar would
probably fall and "inflation" would erupt, even if the Treasury didn't
print any money at all! (In other words, supply was unchanged.) This is
because a currency that is now being managed on those principles is,
obviously, an unreliable currency; and because nobody wants to hold and
unreliable currency, demand for the currency would fall. This is
sometimes called a failure of "confidence" or "faith"; somewhat
confusing terms to describe a change in the rational expectations of
future behavior. If you have falling demand and unchanging supply, you
get a fall in market value, which produces "inflation."

For example: in 1933 president Franklin Roosevelt said that he would
devalue the dollar, possibly printing money to do so. What happened is
that the dollar fell in value, without any money actually being printed
(money supply was unchanged) because who would want to hold a currency
that was going to be devalued?

There have been several instances in which the Treasury really did take
over the money-printing role. Each time was inflationary -- the Civil
War, World War I and World War II. The Treasury put a little pressure on
the Federal Reserve in the late 1960s to help fund deficits by stepping
up its bond-buying; this helped contribute to the breakdown of the
Bretton Woods system in 1971 and the following decade of "stagflation."

In practice, something like "MMT" has reached a new level of
sophistication these days, exemplified by Japan. This really is modern;
but I haven't seen any "MMT" theorist who can explain it. The Bank of
Japan now holds government bonds amounting to more than 100% of GDP. In
other words, the government has managed to finance itself "with the
printing press" to the amount of about 100% of GDP, with no inflationary
consequences. This has been possible due to the very large size of
Japans' banks, and the ability of the regulators to "persuade" these
banks to hold a very large portion of their assets in the form of BOJ
deposits. This in turn has been accomplished by forcing government bond
yields to zero; a level at which a bank would rather hold BOJ deposits
than government bonds. Since the "opportunity cost" of cash is zero,
demand for cash can be very large. It wouldn't work in the U.S., at
least at the same scale, because banks are a much smaller portion of the
economy.

It is hard to imagine how this sort of thing can end well. But, it has
been going on for some time now -- long enough to tempt the MMT fans to
indulge in their money-for-nothing fantasies.

When a government keeps its affairs in order, and acts as if it does not
need to rely on money-printing to get by, it actually gets a small
advantage from the money-creation process. But when a government
declares, via various silly justifications, that it intends to use the
printing press to finance itself, it typically finds that it cannot
without a currency breakdown. Currency traders know that he who panics
first panics best; to even talk about this sort of thing is dangerous.

(5) How Bankers Became the Top Exploiters of the Economy, by Michael Hudson

https://www.counterpunch.org/2017/03/15/how-bankers-became-the-top-exploiters-of-the-economy/

MARCH 15, 2017

How Bankers Became the Top Exploiters of the Economy

by MICHAEL HUDSON

The Next System Project’s Adam Simpson sat down with renowned economist
and economic historian Michael Hudson to discuss economic deceptions old
and new in the interview below. Michael Hudson is Distinguished Research
Professor of Economics at the University of Missouri, Kansas City and a
prolific writer about the global economy and predatory financial
practices. Among his latest books are Killing the Host: How Financial
Parasites and Debt Bondage to Ensure the Global Economy and its
follow-up J is for Junk Economics.

The transcript below has been edited for clarity.

Adam Simpson: So, Michael, I’m really glad to talk to you today. First,
I want to get to know a bit more about you before we dive into your new
book. I’ve heard you referred to as a heterodox economist. What does
that mean? How did you become heterodox?

Michael Hudson: "Heterodox" is a recent term coined mainly by the
University of Missouri at Kansas City where I’m a professor along with
Randall Wray and Stephanie Kelton and other members of the Modern
Monetary Theory (MMT) school of thought. The term simply means not
mainstream. We’re basically classical economists. We do what classical
economics used to do, which is to distinguish between earned and
unearned income. and between productive versus unproductive labor. And
we see that banks create credit – which governments could create just as
easily, along more socially and economically productive lines. We see
budget deficits as providing the economy with money to fuel growth.
That’s why Stephanie calls us "Deficit Owls" instead of the Republican
and Clintonite Deficit Hawks who prefer commercial banks to provide the
credit that the economy needs.

We look at how the economy, goods and services and labor, exists within
the context of wealth and assets and debt. And this is how people looked
at the economy before there was anti-classical reaction in the 1890’s.
We look at how land ownership, banks and credit shape the framework
within which the economy operates – at interest.

So we’re classical economists. Hyman Minsky was the main modern monetary
theorist. Heterodox meant that he got his ideas largely from Marx. You
can say classical political economy reached its logical conclusion with
Marx. Capital was the last great work of classical economics, and showed
where its logic was leading. Marx showed that capitalism itself was
revolutionary. Capitalism was a continually self-transforming system.
And so we’re looking at how the economy changes, not how it might settle
at equilibrium without political change. It evolves, in what Marx called
the laws of motion. So we’re putting the political back into what used
to be political economy – before the "political" was stripped out a
century ago and it moved toward today’s more tunnel-visioned
"economics." [...]

(6) Deficit Owls: MMT Explained

https://www.washingtonpost.com/blogs/wonkblog/post/you-know-the-deficit-hawks-now-meet-the-deficit-owls/2011/08/25/gIQAHsoONR_blog.html

You know the deficit hawks. Now meet the deficit owls.

By Dylan Matthews

February 19, 2012

About 11 years ago, James K. "Jamie" Galbraith recalls, hundreds of his
fellow economists laughed at him. To his face. In the White House.

What’s more, his father, John Kenneth Galbraith, was the most famous
economist of his generation: a Harvard professor, best-selling author
and confidante of the Kennedy family. Jamie has embraced a role as
protector and promoter of the elder’s legacy.

But if Galbraith stood out on the panel, it was because of his offbeat
message. Most viewed the budget surplus as opportune: a chance to pay
down the national debt, cut taxes, shore up entitlements or pursue new
spending programs.

He viewed it as a danger: If the government is running a surplus, money
is accruing in government coffers rather than in the hands of ordinary
people and companies, where it might be spent and help the economy.

"I said economists used to understand that the running of a surplus was
fiscal (economic) drag," he said, "and with 250 economists, they giggled."

Galbraith says the 2001 recession — which followed a few years of
surpluses — proves he was right.

A decade later, as the soaring federal budget deficit has sharpened
political and economic differences in Washington, Galbraith is mostly
concerned about the dangers of keeping it too small. He’s a key figure
in a core debate among economists about whether deficits are important
and in what way. The issue has divided the nation’s best-known
economists and inspired pockets of passion in academic circles. Any
embrace by policymakers of one view or the other could affect everything
from employment to the price of goods to the tax code.

In contrast to "deficit hawks" who want spending cuts and revenue
increases now in order to temper the deficit, and "deficit doves" who
want to hold off on austerity measures until the economy has recovered,
Galbraith is a deficit owl. Owls certainly don’t think we need to
balance the budget soon. Indeed, they don’t concede we need to balance
it at all. Owls see government spending that leads to deficits as
integral to economic growth, even in good times.

The term isn’t Galbraith’s. It was coined by Stephanie Kelton, a
professor at the University of Missouri at Kansas City, who with
Galbraith is part of a small group of economists who have concluded that
everyone — members of Congress, think tank denizens, the entire
mainstream of the economics profession — has misunderstood how the
government interacts with the economy. If their theory — dubbed "Modern
Monetary Theory" or MMT — is right, then everything we thought we knew
about the budget, taxes and the Federal Reserve is wrong.

Keynesian roots

"Modern Monetary Theory" was coined by Bill Mitchell, an Australian
economist and prominent proponent, but its roots are much older. The
term is a reference to John Maynard Keynes, the founder of modern
macroeconomics. In "A Treatise on Money," Keynes asserted that "all
modern States" have had the ability to decide what is money and what is
not for at least 4,000 years.

This claim, that money is a "creature of the state," is central to the
theory. In a "fiat money" system like the one in place in the United
States, all money is ultimately created by the government, which prints
it and puts it into circulation. Consequently, the thinking goes, the
government can never run out of money. It can always make more.

This doesn’t mean that taxes are unnecessary. Taxes, in fact, are key to
making the whole system work. The need to pay taxes compels people to
use the currency printed by the government. Taxes are also sometimes
necessary to prevent the economy from overheating. If consumer demand
outpaces the supply of available goods, prices will jump, resulting in
inflation (where prices rise even as buying power falls). In this case,
taxes can tamp down spending and keep prices low.

But if the theory is correct, there is no reason the amount of money the
government takes in needs to match up with the amount it spends. Indeed,
its followers call for massive tax cuts and deficit spending during
recessions.

Warren Mosler, a hedge fund manager who lives in Saint Croix in the U.S.
Virgin Islands — in part because of the tax benefits — is one proponent.
He’s perhaps better know for his sports car company and his frequent
gadfly political campaigns (he earned a little less than one percent of
the vote as an independent in Connecticut’s 2010 Senate race). He
supports suspending the payroll tax that finances the Social Security
trust fund and providing an $8 an hour government job to anyone who
wants one to combat the current downturn.

The theory’s followers come mainly from a couple of institutions: the
University of Missouri-Kansas City’s economics department and the Levy
Economics Institute of Bard College, both of which have received money
from Mosler. But the movement is gaining followers quickly, largely
through an explosion of economics blogs. Naked Capitalism, an irreverent
and passionately written blog on finance and economics with nearly a
million monthly readers, features proponents such as Kelton, fellow
Missouri professor L. Randall Wray and Wartberg College professor Scott
Fullwiler. So does New Deal 2.0, a wonky economics blog based at the
liberal Roosevelt Institute think tank.

Their followers have taken to the theory with great enthusiasm and pile
into the comment sections of mainstream economics bloggers when they
take on the theory. Wray’s work has been picked up by Firedoglake, a
major liberal blog, and the New York Times op-ed page. "The crisis
helped, but the thing that did it was the blogosphere," Wray says.
"Because, for one thing, we could get it published. It’s very hard to
publish anything that sounds outside the mainstream in the journals."

Most notably, Galbraith has spread the message everywhere from the Daily
Beast to Congress. He advised lawmakers including then-House Speaker
Nancy Pelosi (D-Calif.) when the financial crisis hit in 2008. Last
summer he consulted with a group of House members on the debt ceiling
negotiations. He was one of the handful of economists consulted by the
Obama administration as it was designing the stimulus package. "I think
Jamie has the most to lose by taking this position," Kelton says. "It
was, I think, a really brave thing to do, because he has such a big
name, and he’s so well-respected."

Wray and others say they, too, have consulted with policymakers, and
there is a definite sense among the group that the theory’s time is now.
"Our Web presence, every few months or so it goes up another notch,"
Fullwiler says.

A divisive theory

The idea that deficit spending can help to bring an economy out of
recession is an old one. It was a key point in Keynes’s "The General
Theory of Employment, Interest and Money." It was the chief rationale
for the 2009 stimulus package, and many self-identified Keynesians, such
as former White House adviser Christina Romer and economist Paul
Krugman, have argued that more is in order. There are, of course,
detractors.

A key split among Keynesians dates to the 1930s. One set of economists,
including the Nobel laureates John Hicks and Paul Samuelson, sought to
incorporate Keynes’s insights into classical economics. Hicks built a
mathematical model summarizing Keynes’s theory, and Samuelson sought to
wed Keynesian macroeconomics (which studies the behavior of the economy
as a whole) to conventional microeconomics (which looks at how people
and businesses allocate resources). This set the stage for most
macroeconomic theory since. Even today, "New Keynesians," such as Greg
Mankiw, a Harvard economist who served as chief economic adviser to
George W. Bush, and Romer’s husband, David, are seeking ways to ground
Keynesian macroeconomic theory in the micro-level behavior of businesses
and consumers.

Modern Monetary theorists hold fast to the tradition established by
"post-Keynesians" such as Joan Robinson, Nicholas Kaldor and Hyman
Minsky, who insisted Samuelson’s theory failed because its models acted
as if, in Galbraith’s words, "the banking sector doesn’t exist."

The connections are personal as well. Wray’s doctoral dissertation was
advised by Minsky, and Galbraith studied with Robinson and Kaldor at the
University of Cambridge. He argues that the theory is part of an
"alternative tradition, which runs through Keynes and my father and Minsky."

And while Modern Monetary Theory’s proponents take Keynes as their
starting point and advocate aggressive deficit spending during
recessions, they’re not that type of Keynesians. Even mainstream
economists who argue for more deficit spending are reluctant to accept
the central tenets of Modern Monetary Theory. Take Krugman, who
regularly engages economists across the spectrum in spirited debate. He
has argued that pursuing large budget deficits during boom times can
lead to hyperinflation. Mankiw concedes the theory’s point that the
government can never run out of money but doesn’t think this means what
its proponents think it does.

Technically it’s true, he says, that the government could print streams
of money and never default. The risk is that it could trigger a very
high rate of inflation. This would "bankrupt much of the banking
system," he says. "Default, painful as it would be, might be a better
option."

Mankiw’s critique goes to the heart of the debate about Modern Monetary
Theory — and about how, when and even whether to eliminate our current
deficits.

When the government deficit spends, it issues bonds to be bought on the
open market. If its debt load grows too large, mainstream economists
say, bond purchasers will demand higher interest rates, and the
government will have to pay more in interest payments, which in turn
adds to the debt load.

To get out of this cycle, the Fed — which manages the nation’s money
supply and credit and sits at the center of its financial system — could
buy the bonds at lower rates, bypassing the private market. The Fed is
prohibited from buying bonds directly from the Treasury — a legal rather
than economic constraint. But the Fed would buy the bonds with money it
prints, which means the money supply would increase. With it, inflation
would rise, and so would the prospects of hyperinflation.

"You can’t just fund any level of government that you want from spending
money, because you’ll get runaway inflation and eventually the rate of
inflation will increase faster than the rate that you’re extracting
resources from the economy," says Karl Smith, an economist at the
University of North Carolina. "This is the classic hyperinflation
problem that happened in Zimbabwe and the Weimar Republic."

The risk of inflation keeps most mainstream economists and policymakers
on the same page about deficits: In the medium term — all else being
equal — it’s critical to keep them small.

Economists in the Modern Monetary camp concede that deficits can
sometimes lead to inflation. But they argue that this can only happen
when the economy is at full employment — when all who are able and
willing to work are employed and no resources (labor, capital, etc.) are
idle. No modern example of this problem comes to mind, Galbraith says.

"The last time we had what could be plausibly called a demand-driven,
serious inflation problem was probably World War I," Galbraith says.
"It’s been a long time since this hypothetical possibility has actually
been observed, and it was observed only under conditions that will never
be repeated."

Critics’ rebuttals

According to Galbraith and the others, monetary policy as currently
conducted by the Fed does not work. The Fed generally uses one of two
levers to increase growth and employment. It can lower short-term
interest rates by buying up short-term government bonds on the open
market. If short-term rates are near-zero, as they are now, the Fed can
try "quantitative easing," or large-scale purchases of assets (such as
bonds) from the private sector including longer-term Treasuries using
money the Fed creates. This is what the Fed did in 2008 and 2010, in an
emergency effort to boost the economy.

According to Modern Monetary Theory, the Fed buying up Treasuries is
just, in Galbraith’s words, a "bookkeeping operation" that does not add
income to American households and thus cannot be inflationary.

"It seemed clear to me that . . . flooding the economy with money by
buying up government bonds . . . is not going to change anybody’s
behavior," Galbraith says. "They would just end up with cash reserves
which would sit idle in the banking system, and that is exactly what in
fact happened."

The theorists just "have no idea how quantitative easing works," says
Joe Gagnon, an economist at the Peterson Institute who managed the Fed’s
first round of quantitative easing in 2008. Even if the money the Fed
uses to buy bonds stays in bank reserves — or money that’s held in
reserve — increasing those reserves should still lead to increased
borrowing and ripple throughout the system.

Mainstreamers are equally baffled by another claim of the theory: that
budget surpluses in and of themselves are bad for the economy. According
to Modern Monetary Theory, when the government runs a surplus, it is a
net saver, which means that the private sector is a net debtor. The
government is, in effect, "taking money from private pockets and forcing
them to make that up by going deeper into debt," Galbraith says,
reiterating his White House comments.

The mainstream crowd finds this argument as funny now as they did when
Galbraith presented it to Clinton. "I have two words to answer that:
Australia and Canada," Gagnon says. "If Jamie Galbraith would look them
up, he would see immediate proof he’s wrong. Australia has had a
long-running budget surplus now, they actually have no national debt
whatsoever, they’re the fastest-growing, healthiest economy in the
world." Canada, similarly, has run consistent surpluses while achieving
high growth.

To even care about such questions, Galbraith says, marked him as "a
considerable eccentric" when he arrived from Cambridge to get a PhD at
Yale, which had a more conventionally Keynesian economics department.
Galbraith credits Samuelson and his allies’ success to a "mass-marketing
of economic doctrine, of which Samuelson was the great master . . .
which is something the Cambridge school could never have done."

The mainstream economists are loath to give up any ground, even in cases
such as the so-called "Cambridge capital controversy" of the 1960s.
Samuelson debated post-Keynesians and, by his own admission, lost. Such
matters have been, in Galbraith’s words, "airbrushed, like Trotsky" from
the history of economics.

But MMT’s own relationship to real-world cases can be a little
hit-or-miss. Mosler, the hedge fund manager, credits his role in the
movement to an epiphany in the early 1990s, when markets grew concerned
that Italy was about to default. Mosler figured that Italy, which at
that time still issued its own currency, the lira, could not default as
long as it had the ability to print more liras. He bet accordingly, and
when Italy did not default, he made a tidy sum. "There was an enormous
amount of money to be made if you could bring yourself around to the
idea that they couldn’t default," he says.

Later that decade, he learned there was also a lot of money to be lost.
When similar fears surfaced about Russia, he again bet against default.
Despite having its own currency, Russia defaulted, forcing Mosler to
liquidate one of his funds and wiping out much of his $850 million in
investments in the country. Mosler credits this to Russia’s fixed
exchange rate policy of the time and insists that if it had only acted
like a country with its own currency, default could have been avoided.

But the case could also prove what critics insist: Default, while
technically always avoidable, is sometimes the best available option.

(7) Examples of Financial Transactions - approved by Geoffrey Gardiner

I received tuition from Geoffrey Gardiner, formerly head of overseas
accounts at Barclays Bank in the City of London. Here is a discussion
between us, from 2010. I have not heard from Geoffrey for many years; he
was already old then. I'm sure he won't mind me forwarding this email
discussion to you.

examples of financial transactions

    Peter Myers <petermyersaus@gmail.com> 11 March 2010 14:00
To: G W Gardiner <geoffrey.gardiner@btinternet.com>

Geoffrey,

I have drawn up a list of examples of financial transactions (below).

Can you verify that I have it right?

I'm asking you to correct my homework.

I'm sure you'll agree that my knowledge is increasing.

Peter

Mr P writes a check (cheque) for $Q on bank A to pay Mrs L who deposits
it into bank B:
Mr P.'s balance at bank A falls by $Q.
Mrs L's balance at bank B rises by $Q.
Bank A's balance at the Central Bank falls by $Q.
Bank B's balance at the Central Bank increases by $Q. This process is
called "clearing a check".

A company pays Tax to the Federal Government:
The company has an account at Bank C. It writes a cheque (check) on Bank
C for $T, payable to the Federal Government.
The company's balance at Bank C is reduced by $T.
Bank C's balance at the Central Bank is reduced by $T.
The Federal Government's balance at the Central Bank is increased by $T.

The Federal Government makes a payment of $R to Mr K, who deposits it
into Bank P:
Mr K's balance at Bank P increases by $R.
Bank P's balance at the Central Bank increases by $R.
The Federal Government's balance at the Central Bank falls by $R.

The Federal Government covers its Budget Deficit by issuing Treasury
Bonds for $G; they are bought by bank P, which wants to lower its
balance at the Central Bank (it earns interest on bonds, but not on
its balance at the Central Bank):
Bank P's balance at the Central Bank falls by $G.
The Federal Government's balance at the Central Bank increases by $G.

The Federal Government runs a Surplus of $D (taxes exceed expenditure),
and redeems Government Bonds owned by Bank P for $D:
Bank P's balance at the Central Bank increases by $D.
The Federal Government's balance at the Central Bank falls by $G.

Peter

examples of financial transactions

G W Gardiner <geoffrey.gardiner@btinternet.com> 12 March 2010 20:33
To: Peter Myers <petermyersaus@gmail.com>

Peter,

Top marks. I wish academic economists grasped the accounting as well as
you have.

Geoff