I'd be remiss if I didn't highlight this story from The Onion which I mentioned in yesterday's comment thread.
"U.S. Economy Grinds to a Halt as Nation Realizes Money Just a Symbolic, Mutually Shared Illusion"
"The U.S. economy ceased to function this week after unexpected existential remarks by Federal Reserve chairman Ben Bernanke shocked Americans into realizing that money is, in fact, just a meaningless and intangible social construct.
What began as a routine report before the Senate Finance Committee Tuesday ended with Bernanke passionately disavowing the entire concept of currency, and negating in an instant the very foundation of the world's largest economy.
"Though raising interest rates is unlikely at the moment, the Fed will of course act appropriately if we…if we…" said Bernanke, who then paused for a moment, looked down at his prepared statement, and shook his head in utter disbelief. "You know what? It doesn't matter. None of this—this so-called 'money'—really matters at all."
"It's just an illusion," a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him. "Just look at it: Meaningless pieces of paper with numbers printed on them. Worthless."
According to witnesses, Finance Committee members sat in thunderstruck silence for several moments until Sen. Orrin Hatch (R-UT) finally shouted out, "Oh my God, he's right. It's all a mirage. All of it—the money, our whole economy—it's all a lie!"
Screams then filled the Senate Chamber as lawmakers and members of the press ran for the exits, leaving in their wake aisles littered with the remains of torn currency.
As news of the nation's collectively held delusion spread, the economy ground to a halt, with dumbfounded citizens everywhere walking out on their jobs as they contemplated the little green drawings of buildings and dead white men they once used to measure their adequacy and importance as human beings."
As usual, it's scary when The Onion explains economic factoids better than the WSJ or NYT can. Everyday I write a blog post saying that I don't want to get into another comment thread debate about MMT, and everyday I do it anyway - but let me just say this: the more money we create, the more likely it is that this article from The Onion turns out to be reality.
-KD
35 comments:
the RTE blog at the wsj carried it:
http://blogs.wsj.com/economics/2010/02/17/the-onion-finds-bernanke-disavowing-the-entire-concept-of-currency/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+wsj%2Feconomics%2Ffeed+%28WSJ.com%3A+Real+Time+Economics+Blog%29
Kid D,
The Onion article is funny because it is already true. Money is a social construct. You don't get the joke. You're in good company though - the WSJ doesn't get it either.
jeff - i was wondering if someone was going to mention that. in my first writing of the blog post, i was going to clarify what i meant, but i decided to just leave it short and sweet.
you are absolutely correct: (fiat) money is already (and always has been and will be) TECHNICALLY worthless. The real problem comes when it becomes PRACTICALLY worthless - when everyone realizes this, as in The Onion article.
Kid D,
An autobiographical note - I started paying attention to politics and economics only about three years ago. You might be surprised to know that about two years ago I was in the hard money camp, but I kept reading.
I got the basics of Post-Keynesianism about 3 or 4 months ago from Warren Mosler: http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/
After first reading it I knew that the gist of it was absolutely correct. Something still bothered me about it though. I figured out what it is that troubled me while debating with you yesterday and that is: in order for it to work correctly we must have sane people in government acting in the best interests of their constituency. But it also occurred to me that this is true no matter how govt / economics is operated, regardless. That there is any kind of restraint imposed on politicians in the current operation of the money system is a total fantasy.
jeff - i think a problem is that even IF we had sane government officials each acting in the best interest of their constituencies - those interests collide. you get NIMBY syndrome (not in my backyard)... each constituency wants all the benefits and none of the costs.
in fact, that's actually a huge part of the problem - that our officials cater to their own constituents and not anyone else's.
but yes - i think the biggest problem of MMT is not the monetary theory - it's the practical theory. economic theories assume rational implementation. Greenspan made the same mistake, assuming that markets would be self correcting - he was wrong. In the same manner, MMT is incorrect (in my opinion) in assuming that whatever puppet master is pulling the strings can control the money flow such that the system simmers at just the right temperature.
Let's just hope the Chinese don't take this seriously, like they did with the Onion piece a few years ago about the Congress moving to Memphis because they couldn't get a new building in Washington DC.
But What do I Know: lets hope the chinese dont understand it; after all, they dont even hold those worthless dollars; they merely hold claim for future delivery of them...
[url]http://www.cbsnews.com/blogs/2010/02/17/politics/politicalhotsheet/entry6217403.shtml[/url]
South Carolina Rep. Mike Pitts has introduced legislation that would mandate that gold and silver coins replace federal currency as legal tender in his state.
As the Palmetto Scoop first reported, Pitts, a Republican, introduced legislation this month banning "the unconstitutional substitution of Federal Reserve Notes for silver and gold coin" in South Carolina.
In an interview, Pitts told Hotsheet that he believes that "if the federal government continues to spend money at the rate it's spending money, and if it continues to print money at the rate it's printing money, our economic system is going to collapse."
"The Germans felt their system wouldn't collapse, but it took a wheelbarrow of money to buy a loaf of bread in the 1930s," he said. "The Soviet Union didn't think their system would collapse, but it did. Ours is capable of collapsing also."
Reminds me of this:
http://www.youtube.com/watch?v=C6DGs3qjRwQ&feature=related
Kid D,
I am new to your blog, but have been a lurker for a bit.
Your post @ 3:13 re: MMT captures the entirety of my resistance to fiat. It''s all theory.
"In theory, theory and practice are the same. In practice, they are not."
I guess an any good engineer(or any parent, coach, trader, poker player, or anything) could tell you in the real world things don't go as planned.
Any system that lacks the ability to self correct is inherently unstable. In life things happen. Ask the LTCM guys, they had 60 PhD's checking their VAR risk numbers - they missed one apparently.
I think Economists would have better luck trying to even out the rhythms of the tides, than the cycles of capitalism.
That being said,I also feel that the current system, whatever you would call it, has failed. My mind is open.
PS fun watching you and Jeff65 spar. As an amateur boxer, good sparring partners are hard to find. Greetings to Jeff65 as well. I enjoy the blog, am referring friends, so keep up the good work.
Kid,
thanks for stopping by!
I agree that the Onion piece is both funny and sad. Lets hope it does not make the rounds large scale, would not want to scare anyone!
Kid D,
>MMT is incorrect (in my opinion) in assuming that whatever puppet master is pulling the strings can control the money flow such that the system simmers at just the right temperature.<
MMT describes how the current monetary system actually works. It can't really be "incorrect" because it is made up of accounting identities that must be true. It isn't a matter of opinion. You might disagree with MMT as a system, but it exactly describes the fiat system we have right now.
And the flaw you see in MMT is inherent in every economic system. As much as you might wish to believe it because of your mistrust of human nature, there is no economic system that runs itself without human choices. The "invisible hand" is still a human hand - it just isn't yours.
The only answer is to choose your human administrators very carefully. Indigenous cultures typically had very good safeguards against sociopaths taking the reigns. We've pretty much allowed a system to evolve that ensures all we get to choose from are sociopaths.
This is one of the problems with money as a store of value. It enables sociopathic behavior by eliminating some of the consequences. The sociopath can leave the community that he has exploited for another that doesn't know him and can rely on his savings rather than on building relationships.
The US economy ceased to function this week…”
@ http://ftalphaville.ft.com/blog/2010/02/18/152831/further-reading-460/
jeff, you wrote: "MMT describes how the current monetary system actually works. It can't really be "incorrect" because it is made up of accounting identities that must be true. It isn't a matter of opinion. You might disagree with MMT as a system, but it exactly describes the fiat system we have right now."
this is not true, no matter how many times you say it. really - it's not. MMT describes principals of how the system works - it certainly explains some misconceptions that people have with fiat systems - but is not a blueprint for our current system, NOR for fixing it. The concept that the government cannot run an extended surplus forever is true. sure. The concept that deficits put money into the private sectr is true - sure. The fact that a sovereign can print its own currency, and thus doesn't need to "fund" spending with debt or taxes is true - sure. That doesn't mean we have a fixed set of rules to run a system by in the real world.
and i understand that there is a human element in any system. that is important to realize - but it's important for MMT'ers to realize that their perfect pretty little model can blow up when you throw just a little bit of human element or emotion into it.
i'm a mathematician by nature. i would like it if we could make a model of how the world operates. but we CANNOT! you need to understand that!
Kid D,
You agree that the basic tenants of MMT are all true, but that it is still wrong? Strange.
I'd like you to point out where anyone said it provides a fixed set of rules. You are reading many things in to what people have written because MMT suggests that the govt should do things that you dislike: deficit spending, taxation. It doesn't say that you have to do these things. The stock flow model is correct. If it is wrong, then the principles of accounting are wrong.
The compelling thing about MMT is that it is predictive of past events. For example: every time the US govt has been in surplus in the 20th century, a major recession has followed - exactly as MMT predicts. Other evidence it is correct: Japan has done what you're most concerned about for two decades and they have yet to see inflation. More evidence: how did the huge deficits the US incurred fighting WWII get paid off? Where was the sustained surplus afterward that would be required to pay it? Look at the data - there wasn't one.
I like bread. I buy it. So did my Grandmother. She paid 8 cents. I like better bread. Mine costs around 8 bucks. Her baker apparently thought he could go out and readily buy 8 cents worth of things he wanted. My baker apparently thinks he can go out and buy 8 bucks worth of the things he wants.
Nothing has changed. Change the numbers to 8 cents and 45 bucks, and nothing changes. Unless the baker stops believing.
And that is highly unlikely.
jch - when you change the numbers to 8c and 45 bucks, things are absolutely changing. your currency is losing purchasing power. if you have no savings, you don't care.
i have savings. i care. i'm not the only one. like the article this post was about - fiat currency is worthless. the more money the government creates, the more likely it is that this worthlessness is realized in practice.
jeff - again, it brings us right back to THIS post... if the government prints so much money that people either, as JCH said, "stop believing" or they just wake up and realize that they can form their own system using sugar and flour as currency to trade for the baker's skills in making it into bread - THAT is where MMT fails. The Onion understands that.
just because the government removing money from the system via running surpluses has coincided with recessions on a HANDFUL of data points does not mean that MMT is the explanatory end all! What i meant when i said that MMT's theories are right is that they are simple math - when the government removes money from the system, it should slow down. it's not rocket science.
No, they're not. My purchasing power is little different than my Grandparents. They were upper middle class. I'm the same.
They had a house. I have a house. Theirs was very modern for the Great Depression. Mine is very modern for the Great Recession. They had a car and a pickup. I have a car and an SUV. Their kids went to college. I have one in college and one in med school. They had some nice antiques. I have some of theirs and some of my own.
She bought the bread she wanted. Her baker had confidence in the currency. I buy the bread I want. My baker has confidence in the currency.
Nothing has changed.
Well, my Grandparents would have been elated to find a penny lying on the ground; I walk by.
JCH; the penny your grandmother would pick up was copper, and the dime she used to pay for her bread was silver...
the problem is not so much an inflation where the price of a loaf of bread goes from 8c to $8 in two generations, the problem occurs when the price of a loaf a bread goes from $8 to $80 between the time you get your paycheck and the time you go shopping, such as has happened in argentina and zimbabwe...no one is saying that will happen here, but even a 20 percent inflation like we saw in the 70s can cause behavioral distortions; instead of saving money, people try to use it immediately to beat an impending price rise...as stored goods hold their value better tahn the money, people start hoarding...instead of one ladder to use, for instance, kid dynamite might buy another to hold as a hedge against a price increase, or possibly as a defacto "savings", to later use for barter...
yes RJS - exactly. i don't know why this is such a hard concept.
inflation punishes savers. it's the bane of existence for people like me with savings but no income.
also, back to Jeff's question - once you start to get a little inflation, economic models, MMT included, CANNOT predict how quickly things go haywire, like RJS said, as a result in behavior changes. it's like a binary jump - an event horizon - a paradigm shift. it's not a pretty linear graph.
Kid D,
Once again, MMT is not in any way wrong in the way it describes how a fiat money system works. This understanding prescribes certain policies that you disagree with, but that doesn't make it wrong.
If you get inflation from govt spending, direct taxation is a much more direct and effective tool to control the money supply than interest rate policy. If you're worried about MMT you should be more worried about what we have now because the Fed cannot control the money supply with the tools it uses. This is a proven fact.
I don't understand why people should have a right to live on savings without threat of inflation.
What you are having trouble letting go of is the fantasy that a self-regulating system exists. You might want to believe the current policy actions taken by govt are more self-regulating than MMT would be, but they are not and neither is there any other self-regulating system. What we have right now is that the elite class decides what we will spend money on and what we will go without. After unprecedented spending on endless wars and bailouts, but no spending for universal health care or bail outs for the average person, I don't see how anyone can now deny this is the absolute truth.
I'm going to quit here, but people should raise questions on Bill Mitchell's blog.
http://bilbo.economicoutlook.net/blog/
I've yet to see any question or problem raised by anyone that wasn't convincingly addressed. That doesn't mean the questioners always went away convinced, of course.
"I don't understand why people should have a right to live on savings without threat of inflation." what about retirees unable to work anymore...euthanasia?
I don't care of what it was/is made. Why would they waste perfectly good copper and silver on coins?
That was stupid of them. Both of those metals have much higher uses.
They should have used some sort of waste material.
"I don't understand why people should have a right to live on savings without threat of inflation."
that statement simply boggles my mind. i have no reply for it. it's like saying "i don't understand why people assume that their currency will have value in the future."
i guess we can agree to disagree jeff - philosophical differences. I am pretty sure that my readers agree that they expect their savings to be able to buy stuff in the future - and that's not cause we're a bunch of ignorant right wing rich people.
and again, it's VERY relevant to The Onion post!
jch - i agree that it doesn't matter what the coin is/was made of once you're in a fiat system.
RJS's second paragraph is still relevant though.
Unfortunately, I can remember the 1970s. One of the common things one heard was the following retirement plan:
"I'll save 100,000, retire early, and live on certificate of deposit interest for the rest of my days."
Then there were these farmers, many with 8th-grade educations, who were borrowing every dime they could scrounge with the explanation they were going to "pay it back with cheaper dollars."
They, by and large, went broke - unless Willie Nelson saved them.
The CD'ers, by and large, reentered the labor market.
I've turned over a new leaf. From now on I'm picking up pennies.
Kid D,
Since you singled out one sentence for criticism I thought I should elaborate.
I said: "I don't understand why people should have a right to live on savings without threat of inflation."
rjs said: "what about retirees unable to work anymore...euthanasia?"
Kid D said: "that statement simply boggles my mind."
Use your imagination people.
Here's what I didn't say: "I don't understand why people should have a right to protect themselves from inflation."
Maybe try holding some other asset besides money?! Money cannot be both a risk free asset and a medium of exchange that doesn't constrain trade at the same time.
A shortage of money should never restrain trade. Think about what that means.
jeff - honestly, you're in a downward spiral.
when you suggest "Maybe try holding some other asset besides money?!" you are PROVING the point of the skeptics - that your model results in money losing its value. when that happens, AGAIN, we're back to The Onion article.
do you expect the elderly to have the sophistication to hold some other asset besides money, or an income producing equivalent?
even with a modest inflation of 10%, one who retires at 65 will have the purchasing power of his or her income and savings cut in 1/4 by the time they reach 79...
Kid D, rjs,
It takes sophistication to buy a house? Or precious metals? Or TIPS? Of course there is risk associated with all of those but why should savers bear no risk?
And I have not conceded that the principles of MMT guarantee more inflation than we already have. I know all about inflation. I have a 93 year old grandfather who retired in 1978.
You seem to believe that MMT advocates switching on the printing presses full time, all the time. It just isn't true.
What I will concede is that we would have to hold govt accountable so that politicians don't just turn on the spigot for their mates, but we have to do that now because it is happening now.
jeff - i have no interest in continuing a debate with you regarding if it's reasonable to expect your currency to maintain its purchasing power. I think you are alone on the island here.
Kid D,
I may be on an island in my thinking, but I would like someone to convince me that money can be a store of value while never constraining trade at any time. It is an impossibility.
People are not remembering the 1970s very well. Retirees who had cash assets were lovin' it.
hey, i remember...at one point during the 70s inflation, 5 year CDs were paying 15.6%...meanwhile, i was paying 6.78% on my mortgage...
JCH - just to be clear, i'm not saying i have a right to earn 15% on my riskless cash assets. although I am saying that I have a right to expect a NON-NEGATIVE REAL interest rate. thus, if yields are zero, we must avoid inflation.
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