The Ponzi world is in full effect, with Europe's massive bailout program announced last night. Basically, in case you don't get this - the ECB (European Central Bank - Europe's version of our Federal Reserve) will buy the crappy assets no one else wants to buy. It's like TARP for Europe, only their problem is that the "toxic assets" are not complicated synthetic structured mortgage bonds - it's their own currency and the debt of their constituent countries!
Solving debt problems by printing more money... Again... As if that will solve the problem - which, remember, is INSOLVENCY... I guess we (the U.S.A.) can't complain, though - after all, we wrote the book on Ponzi bailouts. (related: see FNM's earnings from last night). The Fed and Helicopter Ben originally created this plan and implemented right here on our home soil, buying mortgage backed securities and treasury bonds, and then, when they finally called it quits on that program, simply using Fannie and Freddie to overpay for mortgage loans in a relentless attempt to prop up the housing market.
I know I'm not the only one who remembers the classic public service announcements from the 80's, where the father finds drugs in his son's room and confronts him:
Of course, Europe learned the Ponzi bailout model by watching us... For a change, I'm not the only one using the term "Ponzi" this morning - check out TPC and Jesse.
Also, my friend Ted wanted me to link to this SnL segment where there's a good bit on Greece at the end (3 minutes in): "Really? With Seth & Amy"
"Really Greece - you're in crippling debt and you don't want to make spending cuts? Really? Where do you think your money is going to come from? Royalties for inventing civilization? Really? Your only exports are olive oil, takeout coffee cups, and Zach Galifinakis.
And so the Ponzi Scheme goes on, Yet people will still be surprised the next time the market crashes.
-KD
26 comments:
awesome! I never really got that commercial. Why does the dad have a problem if he's lighting up too?
I know this is somewhat unrelated to this post, but the "printing money" made me think of this - I remember reading through some of your chartalism / mmt articles and I could never decide if I understood or not / If you bought it.
I understand "it's a fact" and I like their more thorough explanation of the monetary system, but something still never sat right with me about printing money / defecit spending in order to support the economy - what were your thoughts on this / are you a complete buyer of their theories / prescriptions for action?
Thanks.
adam - i don't really want to get into that again, but i'll say this: it's a fact that the US gov't does not need to levy taxes or sell debt in order to spend money (they can just create money). The problem for Greece is that it's NOT true for them - they don't have their own currency and printing press, which is precisely their problem.
the real question is what the effects of all the "printing" are, and at what point you end up with inflation and devaluation of your currency. again - let's not turn this thread back into that debate.
I understood the facts part - just wasn't sure on the second part (the actual effects).
I can understand not wanting to go into it again though. Thanks.
adam - i don't know what the effects are - that's the problem - and i claim that the MMT guys don't know what the effects are, even though they think they've modeled it via equation, econ lab, or whatever...
I'm sick of all this "Ponzi Scheme" talk.
As a good, honest con-man, Ponzi had to work hard to recruit his victims.
The Fed, Treasury and ECB is just frog marching us in to these bail-outs.
good point anon - i didn't realize I was insulting Charles Ponzi...
The current dynamic strikes me as counter-intuitive. Europe creates half a trillion out of thin air, but it strengthens their currency. I can think only of two possible explanations for this: 1) Folks now have renewed belief that the Euro will survive, and therefore it's safe to assume it is a stronger currency or 2) the bailout signals a return to the risk trade (which also currently connotes a weaker dollar and a stronger Euro), because central banks (particularly the fed) are determined to fight deflation by any means necessary.
The latter strikes me as more likely. But I think it will ultimately fail, because the countries most in need of help, the PIIGS, need a weaker currency to resolve their imbalances. A strong Euro means rampant unemployment and political upheaval in countries that can little afford it. The dynamics that led us here are totally unresolved, only reignited in a slightly more unstable configuration.
kieran - i had the same initial reaction: how are they defending the Euro by printing a trillion of them?
but it's not hard: extend and pretend.. they defend and strengthen the euro NOW - today... don't think about the consequences later! in my opinion, it's stronger NOW at the expense of weaker LATER.
I'm not an MMTer but I've thought about the effects of money printing a lot. Most people talk about printing enough money to pay off massive debt levels, when in actuality all that is needed is a fraction of the total debt (the amount coming due that can't be paid from tax receipts). The level of annual inflation engendered by such an amount probably isn't that high. Most people forget too that inflation itself mostly affects wealth distribution, it does not mean EVERYONE is now poorer.
Buffet said something in Omaha last week that was very insightful (and I will paraphrase): Those who are educated and hard working will still command their share of resources. I believe it's 100% true...if you provide a service or goods that people continue to demand, your compensation will adjust to reflect a particular market price level. The issue with high inflation is those that are retired (they get poorer), though again that wealth is merely redistributed (purchasing power transfer) to those with more debt/less savings, etc
Also, the ECB is saying that their bond purchases will be fully sterilized...thus no money printing. The mechanics of this are a bit complicated but essentially I take it to mean that they will be buying debt from the private sector and funding it with their own borrowings, which would arbitrage sovereign interest rates. It doesn't change the total stock of member country debt outstanding, but lowers their rates. This will help them on the margin but the PIGS still have to cut their deficits or nothing will get solved. The ECB may yet have to print money, but we aren't there yet.
The failure mode for Moslerism or "MMT" (what a pretentious name!) is monetary competition.
Moslerism works in a sense, because fiat currency is national equity. Just as a corporation can dilute its equity, so a country can dilute its currency.
Problem is, if a corporation dilutes its equity to fund ongoing deficits, it's in a textbook death spiral. Is the same thing the case at the sovereign level? History certainly suggests so, although a sovereign can get away with a lot.
But fiat currency is a little special, because it experiences anomalous monetary demand - it is held in order to save, ie, transfer purchasing power from now to then.
Here is where "MMT" falls down. Mosler assumes that savers are forced to keep using his evaporating pesos. If they are - congratulations, you've just reinvented one of the most successful institutions of the 20th century: the Soviet Union.
And if not, you see capital flight to gold. Gold bitchez, etc.
Basically, currency dilution is a capital levy. Writers on political economy, for the last 2 millennia, have warned against taxing capital. Capital taxes cause capital flight. Game over.
Moreover, we see the consequences everywhere in the 20th century of this kind of banana-republic economics. There is no experiment in paper money which has not, in the last two centuries, been tried in South America alone. Mosler should call his inflationist hopium "Third World Monetary Theory." Alas, it's where we're headed!
When I run the world I'm going to expropriate every last ounce of gold on earth, put all of it on a fleet of barges, sail them out into the far Pacific and sink it all in the Marianas trench. Those goldbugs who haven't died from the initial shock will then spend the rest of their miserable little lives far from civilization, plotting and scheming to raise their "real money" Titanic.
This will be my service to humanity.
You're very welcome - in advance.
Mencius: MMT (or CHartalism -- whatever you wants to calls it) has many problems, but I assure you "currency competition" is not one of them.
Currency is not "equity" -- you clearly do not understand balance sheet entry or you are making up terms (which will not advance conversations).
fiat currency is simply extension of sovereign power. And even in weak countries with currency competition, life goes on. Mixed currency regime can be, in practice, very stable.
Currency dilution is not capital levy, price inflation is levy (and dilution need not lead to price inflation). Indeed -- even some austrians were able to figure that out!
It is the error of most austrians, all monetarists, and most keynesians who believe that monetary base has any connection with monetary supply and in reality there is no connection. Only one of these fanatics could see situation where "printing monies" both has no impact on prices AND increases real goods and services available and starts whining about crying like little girl about "levies" and the "dilution".
For the goldbugs, reality never gets a bat it sesms
Sensei: You do great public service. I tip my hats.
zanon,
There is nothing even slightly magical about sovereignty - save for the fact that sovereigns have always surrounded themselves with magical hoodoo. "MMT" is more of the same.
From an accounting perspective, however, there is no categorical distinction at all between a sovereign firm and a non-sovereign firm.
If the British East India Company issues securities, those securities are either equity or debt. If they promise a fixed payment in an exogenous currency, they are debt. Otherwise, they are equity. The Company can increase the market price of its securities by a number of means, including dividends, buybacks, discharge of hut-tax obligations, etc, etc.
The Company's market capitalization, however, is always the net price of its securities outstanding. In any currency. The Company may not want its market cap or stock price to be calculated in gold - it can be calculated nonetheless. Nor does any of this change if the Company renames itself "The Republic of India."
Serious problems arise in the use of Company shares for money if the price of each share, in any other currency, is descending. Since the Company is issuing new shares, but the business as a whole - valued in gold - is not becoming more valuable, we can expect the price of its individual instruments to decrease.
In our case, USG paper is being printed like water, and the gold price of each share has been dropping steadily by about 15% a year for the last decade. Thus a dollar investor fleeing to gold enjoys a 15% annual return, and a gold investor fleeing to dollars enjoys a 15% annual loss - mitigated, of course, by whatever return he can earn in the healthy, liquid and stable dollar financial markets!
The end result of this is either (a) a successful transition to a gold financial system, (b) a system of private gold hoarding and soft-money state capitalism, or (c) a system of no private gold hoarding and soft-money state capitalism.
It is certainly possible to live a relatively normal life under very unusual and unpleasant monetary, economic and even political conditions. I'd rather not have to do it, though.
Mencius, gold can be "printed" by way of mining the hell out of the earth. The supply can be diluted and thus I have a hard time understanding how it would be a better system
do we really need to do this all over again?
you guys are focusing in economic theories - but it's not about models - it's about social theories.
The United States was founded and excelled based on Capitalism. printing money, regardless of the effects, to bail out the failures, goes against all capitalistic traits that we are used to. it punishes prudence and rewards failure. it transfers wealth from savers to spenders.
now, is it better that people don't starve in the streets? of course it is - but you NEED failure (and i'm mostly talking about DEFAULTS, here, although not sovereign defaults from countries who control their own currencies) in capitalism, and more and more it seems we're trying to bail out failure by simply papering over it.
the thing that's not in any of the economic models is the moral hazard that results - you'll see it in the US with strategic defaults on mortgages, as people say "fuck it - i can afford to pay my mortgage, but i'm not going to."
Mencius: Problem is not that you do not undestand how system works -- lots in same boat including faculty of Harvard econ.
Problem is you are closed to seeing. Also like faculty of harvard econ -- at least they have a good reason (must keep selling textbooks!!) Maybe your reason is to shill your previous GLD.
I have no idea why you say I call sovereignity "magical". I do not believe it is any such things.
Your precious British Tea company would set up plantation, issue scrip, and tell people to work for scrip or else. Scrip could also be used in company store of course.
No sane shareholder in Tea Company would want to hold scrip Team company issued -- why would they? What they want is output of the Company -- real goods.
A Tea Company with brain would issue correct quantity of scrip to keep all workers employed and hard at work and happy (enough). A Tea Company run by MORON would not issue scrip because of scrip "dilution", sit there watching real output fall, and therefore outstanding scrip having less and less to buy (and therefore having less value in total) and declare success. He would also try to pay shareholders in scrip, and say not worry about failing plantation, quantity of scrip is not changing! It is so ridiculous I laughs!
If Tea Company issued correct quantity of scrip to keep people employ, then real output goes up, and scrip can buy more, therefore is more valuable not less. The demand of workers to save scrip varies, and scrip that is saved has no impact on the prices. "Dilution" is wrong because it assume connectio between base and supply and there is no such mechanism. And it is all downhill from there. Still, you give me delicious spectable of Goldbug and Monetarist on same side shouting drivel.
Smart investor who wants to transfer purchasing power does it old fashion way -- real assets (of which gold is not one).
KD: MMT suggestion of payroll tax holiday does not introduce moral hazard in my books, and it does recapitalize private sector through higher deficit (which means we do NOT need to prop up banks -- an act which reeks of the moral hazards to be sure!)
But I respect your decision as blog master and will drop thread unless you decide to re-open.
thanks zanon - i think it gets off topic very quickly. the topic is that Greece is insolvent, and that the EuroBailout doesn't change that fact.
as an aside, i don't think I have a problem with a tax holiday.
No sane shareholder in Tea Company would want to hold scrip Tea company issued -- why would they?
They wouldn't. However, Teh Company's scrip and shares are part of the same equity pool. They're no different from two classes of stock. So if you dilute the shareholders, you dilute the scripholders as well. And vice versa.
All securities issued by a sovereign, regardless of what they are called, are its equity. The liability side of a sovereign's balance sheet is the list of promises that sovereign has made. Scrip, as well as shares, represent such promises.
USG issues no shares, only scrip. There is no seniority structure within this scrip. There is a maturity structure - if a dollar bill is a share of scrip, a T-bill is a restricted share of scrip. But, because it is not a fixed commitment in an exogenous currency - eg, gold - Treasury securities cannot be described as genuine debt.
Don't worry - it's not just you who doesn't understand the sovereign balance sheet! It's the Harvard professors as well. I suspect the Harvard professors have had more sleep, however.
KD,
Put it this way: my personal guru is Carlyle, and your "social economics" is more or less exactly Carlyle's (as expressed in, say, Chartism).
Hard money leads to social good. Soft money leads to social evil. History tells us this clearly - we don't need to check it with logic! And it is the fundamental reason to support hard over soft money.
(The case for mercantilism is also much better than commonly supposed, and for similar reasons. If you disagree, check out the German Historical School - surprisingly coherent, eg, Friedrich List.)
The mechanism of the evil, however, remains interesting. At least to me. But this is your blog, so I'll try to honor the request!
menicus - it's just that we've been through all of this before on this blog - over a series of posts that lasted a week. so i don't want to do it again right now.
i'm sure we'll have ample opportunity in some future relevant post to have another MMT debate...
thedude,
Gold is extraordinarily expensive to mine and experiences serious diminishing returns. If it were not for these facts, you would be right and gold would not be appropriate as a monetary metal.
I believe mining costs today are well above $600/oz. Gold production has been more or less flat across 10 years of tripling gold price. Multiply the gold price by 50, and how much mining would there be? Probably not as much as you think. Gold mining is hard. And the existing stockpile is incredibly large, hence, hard to dilute.
That's not to say an electronic substitute, strictly limited, might not be superior. It might be. But it would have to outcompete gold. You'd need a lot of gold mining for that to happen!
Moldbug-
I'm not sure if all of those in the MMT school are fully dilutionist. Rather, they think that the government should dilute during a deflationary period ( a period of rising demand for money) and then contract during the boom. Large deficits/dilution will before too long result in rising tax revenue from capital gains and income taxes (income taxes are pretty leveraged). This rise in tax revenue eliminates the deficit and turns the budget (before interest payments, which shouldn't be counted) into surplus. This surplus is anti-dilutionary. The anti-dilution may trigger a collapse in over-extended credit and pop bubbles in real estate and stock. Thus the system self corrects.
The counter-cyclical nature of the deficit/surplus is the main thing keeping the economy going entirely off the rails. It's definitely a Rube Goldberg machine. But it may last a while longer yet.
I don't think the dollar has been a store of value for a long time. It holds value a little better than a peso, but that much better. Most people hold their long term portfolios largely in stocks. Essentially, corporate stocks have become a private currencies that hold value better than the dollar. Earnings per share has essentially become an arbitrary valuation metric for the private currency (equivalent to valuing a diamond based on color and cut).
Also, you somewhat overstate the level of dilution. The level of dilution is the percentage growth of government backed paper (t-bills, FDIC insured accounts, de facto insured money market funds, etc) minus the t-bill rate of interest. Interest rates on t-bill are more akin to a rolling stock-split than a dilution, since the dilution is in the exact amount that current holders possess.
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