Michael Hudson: MMT for the Real economy, not the Finance Sector. Ellen
Brown calls for Universal Basic Income
Newsletter published on April 21, 2020
(1) Michael Hudson: MMT for the Real economy, not the Finance Sector
(2) Pope Francis calls for "universal basic wage"
(3) Ellen Brown calls for a Central Bank-financed Universal Basic Income
(4) $800 billion in lost revenue
(1) Michael Hudson: MMT for the Real economy, not the Finance Sector
The Use and Abuse of MMT
April 10, 2020
By Michael Hudson, with Dirk Bezemer, Steve Keen and T.Sabri Öncü
Michael Hudson is a research professor of Economics at University of
Missouri, Kansas City, and a research associate at the Levy Economics
Institute of Bard College. His latest book is "and forgive them their
debts": Lending, Foreclosure and Redemption from Bronze Age Finance to
the Jubilee Year
Dirk Bezemer is a Professor of Economics at the University of Groningen
in The Netherlands..
Steve Keen is a Professor and Distinguished Research Fellow at the
Institute for Strategy, Resilience and Security of University College
London (www.isrs.org.uk). He blogs at www.patreon.com/profstevekeen
Sabri Öncü (sabri.oncu@gmail.com) is an economist based in I?stanbul, Turkey
Summary
After being attacked by monetarists and others for many decades, MMT and
the idea that running government budget deficit is stabilizing instead
of destabilizing are suddenly gaining applause from the parts of the
political spectrum that long opposed MMT: the banking and financial
sector, especially the Republicans. But what is applauded is in many
ways something quite different than the leading MMT advocates have long
supported.
Modern Monetary Theory (MMT) was developed to explain the logic of
running government budget deficits to increase demand in the economy's
consumption and capital investment sectors so as to maintain full
employment. But the enormous U.S. federal budget deficits from the Obama
bank bailout after the 2008 crash through the Trump tax cuts and
Coronavirus financial bailout have not pumped money into the economy to
finance new direct investment, employment, rising wages and living
standards. Instead, government money creation and Quantitative Easing
have been directed to the finance, insurance and real estate (FIRE)
sectors. The result is a travesty of MMT, not its original aim.
By subsidizing the financial sector and its debt overhead, this policy
is deflationary instead of supporting the "real" economy. The effect has
been to empower the banking sector, whose product is credit and debt
creation that has taken an unproductive and indeed extractive form.
This can clearly be seen by dividing the private sector into two parts:
The "real" economy of production and consumption is wrapped in a
financial web of debt and rent extraction – real estate rent, monopoly
rent and financial debt creation. Recognizing this breakdown is
essential to distinguish between positive government deficit spending
that helps maintain employment and rising living standards, as compared
to "captured" government spending to subsidize the FIRE sector's
extraction and debt deflation leading to chronic austerity.
Origins and Policy Aims of MMT
MMT was developed to explain the monetary logic in running budget
deficits to support aggregate demand. This logic was popularized in the
1930s by Keynes, base on his idea of a circular flow between employers
and wage-earners. Deficit spending was seen as providing public
employment and hence consumer spending to absorb enough production to
enable the economy to keep producing at a profit. The policy goal was to
maintain (or recover) reasonably full employment.
But production and consumption are not the entire economy. Modern
Monetary Theory (MMT) was formally developed in the 1990s, with roots
that can be traced by Abba Lerner's theory of functional finance, and by
Hyman Minsky and others seeking to integrate the financial sector into
the overall economic system in a more realistic and functional way than
the Chicago School's monetarist approach on the right wing of the
political spectrum. A key point in its revival was Warren Mosler's
insight that a currency-issuing country does not "tax to spend", but
instead must spend before its citizens can pay tax in that currency.
MMT was also Post-Keynesian in the sense of advocating government budget
deficits as a means of pumping purchasing power into the economy to
achieve full-employment. Elaboration of this approach showed how such
deficits created stability instead of the instability that results from
private-sector debt dynamics. At an extreme, this approach held that
recessions could be cured simply by deficit spending. Yet despite the
enormous deficit spending by the U.S. and Eurozone in the wake of the
2008 crash, the overall economy continued to stagnate; only the
financial and real estate markets boomed.
At issue was the role of government in the economy. The major opponents
of public enterprise and infrastructure, of budget deficits and market
regulation, was the financial sector. "Austrian" and Chicago-style
monetary theorists strongly opposed MMT, asserting that government
budget deficits would be inflationary, citing Germany's Weimar inflation
of the 1920s, and Zimbabwe, and portraying government deficits (and
indeed, active government programs and regulation) as "interference"
with "free markets."
MMTers pointed out that running a budget surplus, or even a balanced
budget, absorbed income from the economy, thereby shrinking demand for
goods and services and leading to unemployment. Without government
deficits, the economy would be obliged to rely on private-sector banks
for the credit needed to grow.
That occurred in the United States in the final years of the Clinton
administration when it actually ran a budget surplus. But with a public
sector surplus, there had to be a corresponding and indeed identical
private sector deficit. So the effect of that policy was to leave either
private debt financing or a trade surplus as the only ways in which
economic growth could obtain the monetary support that was needed. This
built in structural claims for interest and amortization that were
deflationary, ultimately leading to the political imposition of debt
deflation and economic austerity after the 2008 debt crisis.
Republican and Financial Sector Opposition to Budget Deficits and MMT
If governments do not provide enough purchasing power by running budget
deficits to enable the economy to grow, the role of providing money and
credit will have to be relinquished to banks – at interest, and for
purposes that the banks decide on (mainly, loans to buy real estate,
stocks and bonds). In this respect banks are competitors with government
over who will provide the economy's money and credit – and for what
purposes.
Banks want the government out of the way – not only regarding money
creation, but also for financial and price policies, tax policy and laws
governing corporate behavior. Finance wants to appropriate public
monopolies, by taking payment in natural resources or basic public
infrastructure when governments are, by policy rather than necessity,
short of their own money, or of foreign exchange. (In times past, this
required warfare; today foreign debt is the main lever.)
To get into this position, banks need to block governments from creating
their own money. The result is a conflict between private bank credit
and pubic money creation. Public money is created for social purposes,
primarily to maintain production and consumption growth. But bank credit
nowadays is created largely to finance the transfer of property and
financial assets – real estate, stocks and bonds.
Opposing the Logic for running Budget Deficits
The Reagan-Bush administration (1981-82) ran budget deficits not to pay
for social spending, but as a result of tax cuts, above all for real
estate.[1] The resulting budget deficit led to proposed "cures" in the
form of fiscal cutbacks in social spending, starting with Social
Security, Medicare and education. This aim became explicit by the
Clinton Administration (1993-2000), and President Obama convened the
Simpson-Bowles "National Commission on Budget Responsibility and Reform"
in 2010. Its name reflects its recommendation that "responsibility"
meant a balanced budget, which in turn required that social spending
programs be rolled back.
Opponents of public spending programs saw the rise in government debt
resulting from budget deficits as providing a political leverage to
enact fiscal cutbacks in spending. Many Republicans and "centrist"
Democrats had long sought a reason to scale back Social Security.
Austrian and Chicago-School monetarists urged that government shrink its
activity, privatizing as many of its functions as possible to let "the
market" allocate resources – a largely debt-financed market whose
resource and monetary allocation would shift away from governments to
financial centers – from Washington to Wall Street, and in other
countries to the City of London, the Paris Bourse and Frankfurt.
However, no such critique was levied against military spending, and the
government responded to the 2000 dot.com and 2008 junk-mortgage
financial crises by enormous monetary subsidy and bailouts of the
economy's credit and asset sector.
The Obama and Trump Financial Bailouts as a Travesty of MMT
To advocates of MMT, and indeed to most post-Keynesian economists, the
positive function of budget deficits is to spend money and therefore
income into the economy. And by "the economy" is meant the
production-and-consumption sector, not the financial and property
markets. That "real" economy could have been saved in a number of ways.
One way would have been to scale back mortgage debts (and debt service)
to realistic market prices and rent rates. Another would have been
simply to create monetary grants and subsidies to enable debtors to
remain in their homes. That would have kept the financial system solvent
as well as employment and existing home ownership rates.
But Obama double-crossed his voters by not rolling out bad mortgage
debts and other obligations to realistic market prices, and instead
bailing out the banks for credit creation in the form of bad loans
("liars' loans" to NINJA borrowers, and bad financial bets on
derivatives by brokerage firms that were designated as "banks" in order
to receive Federal Reserve credit and bailouts. With bank balance sheets
impairing their ability to create new credit, the government stepped in
by creating its own credit. This gave the banks, shadow banks and other
non-bank financial institutions a bonanza of credit – replete with the
opportunity to buy up foreclosed homes and create rental properties This
policy was organized by Blackstone, and turned the crisis into an
opportunity to make enormous rates of return for its participants. The
effect was to intensify the economy's polarization, as investors
typically needed a minimum $5 million tranche to join.
The Federal Reserve's $4.6 trillion in Quantitative Easing did not show
up as money creation, because it was technically a swap of assets – like
Aladdin's "new lamps for old, in this case "good credit for junk." The
effect of this swap was much like a deposit inflow. It enabled banks to
ride out the downturn while making a killing in the stock and bond
markets, and to lend for takeover loans and related financial speculation.
Wall Street's Financial Capture of MMT To Inflate Asset Prices, Not
Revive the Economy
At issue is how to measure "the economy." For the wealthy One Percent,
and even the Ten Percent, "the economy" is "the market," specifically
the market value of the assets that they own: their real estate, stocks
and bonds. This property and financial wrapping for the "real"
production-and-consumption economy has steadily risen in proportion to
wages and industrial profits. It has risen largely by government money
and credit creation (and tax breaks for property and finance), along
with its economic rent, interest and financial charges and service fees,
which are counted as part of Gross Domestic Product [GDP], as if they
were actual contributions to the "real" economy.
So we are dealing with two economic spheres: the means of production,
tangible capital and labor on the one hand (what is supposed to be
measured by GDP), and the market for financial and property assets,
along with their rentier charges that are taken from the income earned
by this labor and real capital.
Financial engineering replaces industrial engineering – along with
political engineering by lobbyists seeking tax breaks, rent-extraction
privileges, and government subsidy. To increase property and financial
asset prices and corporate behavior, companies are drawing on credit and
government subsidy not to increase their production and employment, but
to bid up their stock prices by share buyback programs and high dividend
payouts. Buybacks are called "repaying capital," so literally this
policy is one of disinvestment, not investment. It is favored by tax
laws (taxing "capital" gains at a lower rate or not at all, as compared
to taxes on dividends).
The Blind Spot of Vulgarized MMT: The FIRE Sector vs. the "Real" Economy
Much superficial confusion between the FIRE sector and the
production-and-consumption economy comes from repeating the
over-simplification of classical monetary formula MV=PT, namely,
dividing the economy into private and government sectors. Setting aside
the balance of payments (the international sector), it follows that
government spending will pump money into the domestic economy, and that
conversely, budget surpluses will suck money out.
The problem is that this analysis, used by many MMTers, for instance,
the Levy Institute's typical chart, does not distinguish between
government spending into the FIRE sector and asset markets as compared
to spending into the "real" economy on employment and production
(including the building of public infrastructure, for instance). Without
this distinction it is not possible to see whether deficit spending is
productive by aiming at supporting employment and output, or merely aims
at supporting asset prices and making sure that creditors do not lose
the value of their financial claims on debtors – claims that have become
unpayable and thus are a bottomless pit of government deficit spending
in the end.
Trying to keep the financial sector and its debt overhead afloat implies
imposing austerity on the rest of the economy, IMF-style. So "MMT for
Wall Street" is an oxymoron, and is the opposite of MMT for a full
employment economy.
MMT, Public and Private Debt
Money is debt. Government money creation for public purposes – to pay
for employment and output – spurs prosperity. But in its present form,
private-sector debt creation has become largely extractive, and thus
leads to the opposite effect: debt deflation.
Governments can pay public debt without defaulting, as long as this debt
is denominated in their own domestic currency, because the governments
can always print the money to pay. To the extent that public debt
results from spending that supports output, employment and growth, this
process is not inflationary. The government gives value to money by
accepting it in payment of taxes. So the monetary system is inherently
bound up with fiscal policy. The classical premise of such policy has
been to minimize the economy's cost structure by taxing mainly unearned
income (economic rents), not wages and profits in the
production-and-consumption sector.
The problem nowadays is private debt. Most such debt is created by
banks. This bank credit – debts owed by bank customers – tends to
increase faster than the ability of debtors to earn enough income to pay
it. The reason is that most of private debt is not used for productive,
income-generating purposes, but to finance the transfer property
ownership (affecting asset prices in proportion to the rate of credit
growth for such purposes). That use of credit – not associated with the
production-and-consumption economy – leads to debt deflation. Instead of
providing the economy with purchasing power (as in running government
budget deficits), private debt works over time to extract interest and
amortization from the economy, along with servicing fees.
The typical mortgage, including its interest charges ends up exceeding
the value that the property seller received. As a result of compound
interest, the mortgage debt is repaid several times to the bank. The
effect is to make banks the main recipient of rental income (as mortgage
debt service) and ultimately the main beneficiaries of "capital" gains
(that is, asset-price gains).
What gives bank credit its monetary characteristics – and enables debt
to be monetized as a means of payment – is the government's willingness
to treat banks as a public utility and guarantee bank deposits (up to a
specified limit) and ultimately to guarantee bank solvency.
A budget deficit resulting from a financial bailout reflects the
inability of the economy to carry its exponentially growing debt
overhead. Because this overhead increases as a result of the mathematics
of compound interest, the size of bailouts must increase – and with it,
the budget deficit (plus swap agreements) to subsidize this debt
overgrowth as an alternative to imposing losses by banks and financial
investors.
That is what we have seen since the financial crisis of 2008, both in
Europe and the United States. Led by the financial sector, much of the
economic mainstream finally has come to embrace the idea of budget
deficits – now that these deficits are benefiting primarily the
financial and other parts of the FIRE sector, not the population at
large, that is, not the "real" economy that was the focus of Keynesian
economics and MMT.
This kind of endorsement for government money creation thus should not
be considered an application of MMT, because its policy goal is almost
diametrically opposite. Much as the Reagan-era budget deficits were used
as the first part of a one-two punch to roll back social spending
(Social Security, Medicare, education, etc.), so today's Obama-Trump
deficits are being used to warn that the economy must preserve fiscal
"stability" by rolling back social programs in order to bail out the
financial economy. Wall Street magically has become transmogrified into
"the economy." Labor and industry are viewed simply as deadweight
expenditures on the financial sector and its attempted symbiosis with
the central bank and Treasury.
The Financial Sector, Private Capital and Austerity and Central Planning
If Wall Street is bailed out once again at the expense of the "real"
economy of production and consumption, America will have turned
decisively away from democracy into a financial oligarchy. Ironically,
the initial logic is the claim that an active state is inherently less
efficient than the private sector, and thus should be shrunk (in the
words of lobbyist Grover Norquist, "to a size so small that it can be
drowned in a bathtub"). But relinquishing resource allocation to the
financial sector leads to its product – that is, debt – creating a
crisis that requires unprecedented government intervention to "restore
order," defined as saving banks and financial investors from loss. This
can only be achieved by shifting the loss onto the economy at large.
Today, the financial sector – banks and financial investors – play the
role that the landlord did in the 19th century. Its land rents made
Britain and continental Europe high-cost economies, as prices exceeded
cost-value. That is what classical economics was all about – to bring
market prices in lines with actual, socially and economically necessary
costs of production. Economic rent was defined as unnecessary costs,
which were merely payments for privilege: hereditary landownership, and
monopolies that creditors had carved out of the public domain or won as
legal compensation for financing public war debts.
The rentier class not only was the major income recipient of the
economic surplus, it controlled government, via the upper house – the
House of Lords in Britain, and similar houses across continental Europe.
Today, the Donor Class controls electoral politics in the United States,
via the Citizens United ruling. Political office has become privatized,
and sold to the highest bidders. And these are from the financial sector
– from Wall Street and financialized corporations.
The post-2008 stock market and bond-market boom raised the DJIA from
8500 to 30,000. This gain was engineered by central bank support far in
excess of what a "free market" would have priced stock at. Before QE,
U.S. shares had fallen only slightly below the market average for the
previous century. QE drove it to its highest level outside the 1929 and
2000 bubbles. Even after the Coronacrash, shares are still overpriced
compared to pre-"Greenspan Put" prices.
The result is best thought of as a blister, not a bubble. Its only hope
of surviving without bursting is for the government to continue to
support it in the face of a drastically shrinking post-coronavirus economy.
So the question is what will be saved: The economy's means of
livelihood, or an oligarchy of predators living in luxury off this
shrinking livelihood?
All this was explained by classical economists in their labor theory of
value, which was designed to isolate economic rent and other
non-production overhead charges (perceived to be mainly services in the
18thand 19thcentury, especially by the wealthy classes).
The Hudson Paradox: Money, Prices and the Rentier Economy
Without distinguishing between the FIRE sector and the "real" economy
there is no way to explain the effects of government budget deficits on
asset-price inflation and commodity-price inflation
Here is a seeming paradox. Bank credit is created mainly against
collateral being bought on credit – primarily real estate, stocks and
bonds. The effect of increasing loans against these assets is to raise
their prices – mainly for housing, and secondarily for financial
securities. Higher housing costs require new home buyers to take on more
and more debt in order to buy a home. Their higher debt service leaves
less disposable income to spend on goods and services.[2]
The asset-price inflation effect of money creation by banks is thus to
exert a downward impact on commodity prices, to the extent that the
carrying cost on bank credit reduces the net purchasing power of debtors
to buy goods and services. This deflationary effect of bank money ends
in a bad-debt crash, to which the government responds by bailing out the
financial sector with a combination of money creation and central bank
swaps (which do not appear as money creation). This is just the reverse
of the MV = PT tautology, which only measures the volume of new money
(M) without considering its use– what it is spent on. By failing to
distinguish the use of bank credit to buy assets (hence, adding to
asset-price inflation) as compared to government deficit spending, both
the old monetary formulae and the frequent MMT contrast between public
and private sectors neglect the need to distinguish the FIRE sector's
"wealth and debt" transactions from how wages and profits are spent in
the production-and-consumption economy.
The commercial banking system's "endogenous" money creation takes the
form of credit at interest. The volume of this interest-bearing debt
grows exponentially, absorbing and extracting more and more income from
industry and labor. The effect on the overall economy is debt deflation.
It may be epitomized as
Give a man a fish, and you feed him for a day;
Teach him how to fish, and you lose a customer.
But give him a loan to buy a boat and net to fish, and he will end up
paying you all the fishes he catches. You have a debt servant.
__________
[1] Real estate was given a fictitiously short accelerated depreciation
allowance – as if a building lost its entire value in just 71?2 years,
providing all rental income to be charged as an expense and even to
generate a fictitious tax-accounting tax loss. This catalyzed the great
conversion of rental properties to co-ops. Landlords (called
"developers") took out a mortgage equal to the entire market price of
the building, and then sold apartments at a price not only greater than
zero, but typically equal to the entire mortgage. It was one of the
great "wealth creation" ploys in modern history. And it was left out of
the National Income and Product Accounts (NIPA), which used "realistic"
depreciation – which still pretended that buildings were losing value,
despite the maintenance and repair expenditures to prevent such loss.
[2] Higher stock and bond prices lower the yield of dividend income.
(Most such income is spent on new financial assets, not goods and
services, so the effect of lower yields probably is minimal, and may be
offset by a "wealth effect" of higher asset prices and net worth.)
(2) Pope Francis calls for "universal basic wage"
The Daily Wire
APRIL 13TH, 2020
Pope Francis Suggests ‘Universal Basic Wage’ In Letter: ‘So Human And So
Christian … No Worker Without Rights’
By Frank CampDailyWire.com
In an Easter letter to "brothers and sisters of popular movements and
organizations," Pope Francis wrote about the struggles of the poor and
"marginalized," and offered prayer and blessings to them.
The letter also appeared to cast a negative light on the world as it
currently operates.
For example, Francis wondered in writing about the possibility of a
"universal basic wage," specifically because those who work "on your own
or in the grassroots economy" are "hit … twice as hard" by economic
hardship (emphasis added):
I know that you have been excluded from the benefits of globalization.
You do not enjoy the superficial pleasures that anesthetize so many
consciences, yet you always suffer from the harm they produce. The ills
that afflict everyone hit you twice as hard. Many of you live from day
to day, without any type of legal guarantee to protect you. Street
vendors, recyclers, carnies, small farmers, construction workers,
dressmakers, the different kinds of caregivers: you who are informal,
working on your own or in the grassroots economy, you have no steady
income to get you through this hard time … and the lockdowns are
becoming unbearable.
This may be the time to consider a universal basic wage which would
acknowledge and dignify the noble, essential tasks you carry out. It
would ensure and concretely achieve the ideal, at once so human and so
Christian, of no worker without rights.
Francis referred to the "brothers and sisters" as "social poets," as
they "create admirable solutions for the most pressing problems
afflicting the marginalized."
The Pope also appeared to criticize free market "solutions," as well as
state safety nets:
I know that you nearly never receive the recognition that you deserve,
because you are truly invisible to the system. Market solutions do not
reach the peripheries, and State protection is hardly visible there. Nor
do you have the resources to substitute for its functioning. You are
looked upon with suspicion when through community organization you try
to move beyond philanthropy or when, instead of resigning and hoping to
catch some crumbs that fall from the table of economic power, you claim
your rights.
"You often feel rage and powerlessness at the sight of persistent
inequalities, and when any excuse at all is sufficient for maintaining
those privileges," Francis wrote, adding that the individuals to whom he
directed his letter don’t simply give up and complain, but get to work
with "resilience."
Francis wrote kindly about women in soup kitchens, small farmers who
aren’t "exploiting … needs," as well as the sick and elderly, who he
said aren’t seen "in the news."
The Pope offered encouragement to the members, telling them that after
the COVID-19 "storm" has passed, they have the wisdom needed to feel the
suffering of others.
Finally, Francis noted that he hopes this crisis will shake up the world:
I hope that this time of danger will free us from operating on automatic
pilot, shake our sleepy consciences and allow a humanist and ecological
conversion that puts an end to the idolatry of money and places human
life and dignity at the centre. Our civilization — so competitive, so
individualistic, with its frenetic rhythms of production and
consumption, its extravagant luxuries, its disproportionate profits for
just a few — needs to downshift, take stock, and renew itself.
You can read the full letter from Pope Francis here.
The COVID-19 pandemic also hung over the Pope’s Easter Sunday message in
which he talked about the elderly and sick "who are alone," and families
who didn’t get to say goodbye to their loved ones.
"For many, this is an Easter of solitude lived amid the sorrow and
hardship that the pandemic is causing, from physical suffering to
economic difficulties," Francis said.
To doctors, nurses, and other essential workers, Francis gave thanks.
"…grant strength and hope to doctors and nurses, who everywhere offer a
witness of care and love for our neighbors, to the point of exhaustion
and not infrequently at the expense of their own health," Francis said.
"Our gratitude and affection go to them, to all who work diligently to
guarantee the essential services necessary for civil society, and to the
law enforcement and military personnel who in many countries have helped
ease people’s difficulties and sufferings."
Francis also offered reassurance, quoting Jesus: "I have risen and I am
with you still!"
(3) Ellen Brown calls for a Central Bank-financed Universal Basic Income
A Universal Basic Income Is Essential and Will Work Posted on April 19,
2020
by Ellen Brown
A central bank-financed UBI can fill the debt gap, providing a vital
safety net while preventing cyclical recessions.
According to an April 6 article on CNBC.com, Spain is slated to become
the first country in Europe to introduce a universal basic income (UBI)
on a long-term basis. Spain’s Minister for Economic Affairs has
announced plans to roll out a UBI "as soon as possible," with the goal
of providing a nationwide basic wage that supports citizens "forever."
Guy Standing, a research professor at the University of London, told
CNBC that there was no prospect of a global economic revival without a
universal basic income. "It’s almost a no-brainer," he said. "We are
going to have some sort of basic income system sooner or later …."
"Where will the government find the money?" is no longer a valid
objection to providing an economic safety net for the people. The
government can find the money in the same place it just found more than
$5 trillion for Wall Street and Corporate America: the central bank can
print it. In an April 9 post commenting on the $1.77 trillion handed to
Wall Street under the CARES Act, Wolf Richter observed, "If the Fed had
sent that $1.77 Trillion to the 130 million households in the US, each
household would have received $13,600. But no, this was helicopter money
exclusively for Wall Street and for asset holders."
"Helicopter money" – money simply issued by the central bank and
injected into the economy – could be used in many ways, including
building infrastructure, capitalizing a national infrastructure and
development bank, providing free state university tuition, or funding
Medicare, social security, or a universal basic income. In the current
crisis, in which a government-mandated shutdown has left households more
vulnerable than at any time since the Great Depression, a UBI seems the
most direct and efficient way to get money to everyone who needs it. But
critics argue that it will just trigger inflation and collapse the
dollar. As gold proponent Mike Maloney complained on an April 16 podcast:
Typing extra digits into computers does not make us wealthy. If this
insane theory of printing money for almost everyone on a permanent basis
takes hold, the value of the dollars in your purse or pocketbook will …
just continue to erode …. I just want someone to explain to me how this
is going to work.
Having done quite a bit of study on that, I thought I would take on the
challenge. Here is how and why a central bank-financed UBI can work
without eroding the dollar.
In a Debt-Based System, the Consumer Economy Is Chronically Short of Money
First, some basics of modern money. We do not have a fixed and stable
money system. We have a credit system, in which money is created and
destroyed by banks every day. Money is created as a deposit when the
bank makes a loan and is extinguished when the loan is repaid, as
explained in detail by the Bank of England here. When fewer loans are
being created than are being repaid, the money supply shrinks, a
phenomenon called "debt deflation." Deflation then triggers recession
and depression. The term "helicopter money" was coined to describe the
cure for that much-feared syndrome. Economist Milton Friedman said it
was easy to cure a deflation: just print money and rain it down from
helicopters on the people.
Our money supply is in a chronic state of deflation, due to the way
money comes into existence. Banks create the principal but not the
interest needed to repay their loans, so more money is always owed back
than was created in the original loans. Thus debt always grows faster
than the money supply, as can be seen in this chart from
WorkableEconomics.com:
When the debt burden grow so large that borrowers cannot take on more,
they pay down old loans without taking out new ones and the money supply
shrinks or deflates.
Critics of this "debt virus" theory say the gap between debt and the
money available to repay can be filled through the "velocity of money."
Debts are repaid over time, and if the payments received collectively by
the lenders are spent back into the economy, they are collectively
available to the debtors to pay their next monthly balances. (See a
fuller explanation here.) The flaw in this argument is that money
created as a loan is extinguished on repayment and is not available to
be spent back into the economy. Repayment zeros out the debit by which
it was created, and the money just disappears.
Another problem with the "velocity of money" argument is that lenders
don’t typically spend their profits back into the consumer economy. In
fact, we have two economies – the consumer/producer economy where goods
and services are produced and traded, and the financialized economy
where money chases "yields" without producing new goods and services.
The financialized economy is essentially a parasite on the real economy,
and it now contains most of the money in the system. In an unwritten
policy called the "Fed put", the central bank routinely manipulates the
money supply to prop up financial markets. That means corporate owners
and investors can make more and faster money in the financialized
economy than by investing in workers and equipment. Bankers, investors
and other "savers" put their money in stocks and bonds, hide it in
offshore tax havens, send it abroad, or just keep it in cash. At the end
of 2018, US corporations were sitting on $1.7 trillion in cash, and 70%
of $100 bills were held overseas.
Meanwhile the producer/consumer economy is left with insufficient
investment and insufficient demand. According to a July 2017 paper from
the Roosevelt Institute called "What Recovery? The Case for Continued
Expansionary Policy at the Fed":
GDP remains well below both the long-run trend and the level predicted
by forecasters a decade ago. In 2016, real per capita GDP was 10% below
the Congressional Budget Office’s (CBO) 2006 forecast, and shows no
signs of returning to the predicted level.
The report showed that the most likely explanation for this lackluster
growth was inadequate demand. Wages were stagnant; and before producers
would produce, they needed customers knocking on their doors.
In ancient Mesopotamia, the gap between debt and the money available to
repay it was corrected with periodic debt "jubilees" – forgiveness of
loans that wiped the slate clean. But today the lenders are not kings
and temples. They are private bankers who don’t engage in debt
forgiveness because their mandate is to maximize shareholder profits,
and because by doing so they would risk insolvency themselves. But there
is another way to avoid the debt gap, and that is by filling it with
regular injections of new debt-free money.
How Much Money Needs to Be Injected to Stabilize the Money Supply?
The mandated shutdown from the coronavirus has exacerbated the debt
crisis, but the economy was suffering from an unprecedented buildup of
debt well before that. A UBI would address the gap between consumer debt
and the money available to repay it; but there are equivalent gaps for
business debt, federal debt, and state and municipal debt, leaving room
for quite a bit of helicopter money before debt deflation would turn
into inflation.
Looking just at the consumer debt gap, in 2019 80% of US households had
to borrow to meet expenses. See this chart provided by Lance Roberts in
an April 2019 article on Seeking Alpha:
After the 2008 financial crisis, income and debt combined were not
sufficient to fill the gap. By April 2019, about one-third of student
loans and car loans were defaulting or had already defaulted. The
predictable result was a growing wave of personal bankruptcies, bank
bankruptcies, and debt deflation.
Roberts showed in a second chart that by 2019, the gap between annual
real disposable income and the cost of living was over $15,000 per
person, and the annual deficit that could not be filled even by
borrowing was over $3,200:
Assume, then, a national dividend dropped directly into people’s bank
accounts of $1,200 per month or $14,200 per year. This would come close
to the average $15,000 needed to fill the gap between real disposable
income and the cost of living. If the 80% of recipients needing to
borrow to meet expenses used the money to repay their consumer debts
(credit cards, student debt, medical bills, etc.), that money would void
out debt and disappear. These loan repayments (or some of them) could be
made mandatory and automatic. The other 20% of recipients, who don’t
need to borrow to meet expenses, would not need their national dividends
for that purpose either. Most would save it or invest it in non-consumer
markets. And the money that was actually spent on consumer goods and
services would help fill the 10% gap between real and potential GDP,
allowing supply to rise with demand, keeping prices stable. The end
result would be no net increase in the consumer price index.
The current economic shutdown will necessarily result in shortages, and
the prices of those commodities can be expected to inflate; but it won’t
be the result of "demand/pull" inflation triggered by helicopter money.
It will be "cost/push" inflation from factory closures, supply
disruptions, and increased business costs.
International Precedents
Critics of central bank money injections point to the notorious
hyperinflations of history – in Weimar Germany, Zimbabwe, Venezuela,
etc. These disasters, however, were not caused by government
money-printing to stimulate the economy. According to Prof. Michael
Hudson, who has studied the question extensively, "Every hyperinflation
in history has been caused by foreign debt service collapsing the
exchange rate. The problem almost always has resulted from wartime
foreign currency strains, not domestic spending."
For contemporary examples of governments injecting new money to fund
domestic growth, we can look to China and Japan. In the last two
decades, China’s M2 money supply grew from 11 trillion yuan to 194
trillion yuan, a nearly 1,800% increase. Yet the average inflation rate
of its Consumer Price Index hovered between 2% and 3% during that
period. The flood of money injected into the economy did not trigger an
inflationary crisis because China’s GDP grew at the same fast clip,
allowing supply and demand to rise together. Another factor was the
Chinese propensity to save. As incomes went up, the percent of income
spent on goods and services went down.
In Japan, the massive stimulus programs called "Abenomics" have been
funded through bond purchases by the Japanese central bank. The Bank of
Japan has now "monetized" nearly half the government’s debt, injecting
new money into the economy by purchasing government bonds with yen
created on the bank’s books. If the US Fed did that, it would own $12
trillion in US government bonds, over three times the $3.6 trillion in
Treasury debt it holds now. Yet Japan’s inflation rate remains
stubbornly below the BOJ’s 2% target. Deflation continues to be a
greater concern in Japan than inflation, despite unprecedented debt
monetization by its central bank.
UBI and Fears of the "Nanny State"
Wary critics warn that a UBI is the road to totalitarianism, the
"cashless society," dependence on the "nanny state," and mandatory
digital IDs. But none of those outcomes need accompany a UBI. It does
not make people dependent on the government, so long as they can work.
It is just supplementary income, similar to the dividends investors get
from their stocks. A UBI does not make people lazy, as numerous studies
have shown. To the contrary, they become more productive than without
it. And a UBI does not mean cash would be eliminated. Over 90% of the
money supply is already digital. UBI payments can be distributed
digitally without changing the system we have.
A UBI can serve the goals both of fiscal policy, providing a vital
safety net for citizens in desperate times, and of monetary policy, by
stabilizing the money supply. The consumer/producer economy actually
needs regular injections of helicopter money to remain sustainable,
stimulate economic productivity, and avoid deflationary recessions.
(4) $800 billion in lost revenue
Press freedom amid a pandemic.
Imagine if, right now – as the coronavirus pandemic sweeps across the
world – governments had access to the $800 billion in lost tax revenue
that's currently sitting in offshore tax havens?
Our healthcare systems could be stronger. Our protective gear stockpiles
could be bigger, and our emergency funds could be much larger – if only
everyone had paid their fair share.
It gets to the heart of what we do at ICIJ: we investigate global
inequities – and expose those who take advantage of them. It takes a lot
of time, and human resources, because these are complex stories that
cross borders.
Our award-winning Panama Papers investigation was first published four
years ago this week. To mark the anniversary, we’ve taken a deep dive
into tax havens and offshore finance – in an effort to keep talking
about the systemic inequality they perpetuate.
As a nonprofit newsroom, we had also planned to fundraise around the
anniversary – asking readers like you to help us keep shining a light on
these global inequities. This time last year, we raised nearly $19,000
(thank you!). Our investigations, like Panama Papers, Luanda leaks,
Implant Files and more cannot happen without this support.
We have a few (30!) of our 2019 Panama Papers ‘I pay my taxes’ tote bags
left. While we’re not going to be in your inbox every week reminding
you, we are offering you the opportunity to keep supporting our
investigations.
If you have the capacity, please donate $60 or more using this link, or
reply to this email and we’ll send you a tote bag (once things are back
to normal).
In return, we promise to keep shining a light on those taking advantage
of loopholes and crises like these. Now here are our latest stories!
Four years after we published the Panama Papers, we remain committed to
reporting on offshore finance and those who exploit it. Tax havens, and
industry professionals, make it possible for the wealthy and
well-connected to avoid paying trillions of dollars in taxes. We hope
this Q&A explains how offshore finance works, and why it matters.
"Tax havens are at the heart of the financial and budgetary crisis,"
economist Gabriel Zucman told us. He and other tax experts say now is
the time for a more forceful tax response to the coronavirus – as
governments stretch their resources to meet demand. "Now is the time to
push hard for tax justice," Tax Justice Network’s Nicholas Shaxson said.
The economists we spoke to have a few suggestions for regulators, as
they face the pandemic.
Isabel dos Santos says the seizure of her $442m stake in a Portuguese
telecommunications company is "excessive" and "clearly abusive."
Portugal’s latest move comes as Angola seeks to recoup more than $1
billion worth of assets that they claim she, her husband and associates
siphoned from the nation.
Some tactics being implemented by governments to address the coronavirus
are turning into tools to repress basic human rights. Reporters are
being affected in a number of ways around the world. For example, police
stormed the house of a reporter in Peru, a journalist was arrested in
Serbia, and reporters were attacked in Uganda. Other governments have
cut off access to information, passed new repressive laws and asked
reporters to cover "positive" stories.
The alleged contract killing of investigative reporter Jan Kuiack and
his fiancee Martina Kus?nírová triggered mass protests, a political
crisis and brought down Slovakia’s government. Yesterday, a former
soldier, who pleaded guilty to the murders, was sentenced to 23 years in
prison. Three other people, including property developer Marián Koc?ner
- who Kuiack had reported on, are standing trial on charges of paying
for the murder.
Until next week!
Amy Wilson-Chapman ICIJ’s community engagement editor
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