Debt Archives

Is the new progressive IMF just an illusion?

“The Funeral of Austerity”– that’s how the FT referred to the IMF’s last round of annual meetings. In a radical departure from past approaches, the fund’s glossy publications encouraged countries to increase spending during the pandemic. Managing Director Kristalina Georgieva even talked about the need to ramp up public investment in service of greener and more inclusive economies. It was a big shift in rhetoric, and it earned the IMF stellar press coverage. But was it just rhetoric, or have things actually changed? To know whether austerity really died, we have to look at what the IMF said to its members states, not to the press.

To give credit where credit is due, the IMF did step up to offer emergency loans during the pandemic. Unlike usual IMF lending, they did not carry conditions; countries were not forced to adopt any particular economic policies to get access. By the end of 2020, over 70 countries had taken out such loans, and they provided a lifeline. As uncertainty around the pandemic triggered a massive capital outflow from the developing world, these loans helped alleviate some of the most immediate needs.

But although conditionality was absent, the emergency loans did come with advice. And despite the novel rhetoric at the IMF annual meetings, the advice was business as usual: regressive taxation, “structural reforms” (deregulation, liberalization, and privatizations), and fiscal consolidation. These are the same policies that the IMF has imposed for decades and that have had disastrous results for borrowing countries. Does the Fund really believe they can be relied upon to provide the inclusive and sustainable growth they’ve come to emphasize?

Answering this question required me to better understand the way the IMF justifies its recommendations. In a report for the ITUC, I was able to unpack just that.

This recent IMF research paper gives some clues by tracing the evolution of the Fund’s growth narratives over time. What becomes apparent is that IMF’s narratives have changed response to politics more so than in response to results. The paper asserts that industrialization, manufacturing, and innovation were considered as drivers of growth by the IMF, until the 1980s. The shift in narrative coincides with a push from the Reagan administration to adopt trickle-down economics and make neoliberal ideology go global.

It was then that the IMF’s narrative on what are the main drivers of growth morphed into the “Washington Consensus”, blaming poor economic performance on government intervention and encouraging states to get out of the way. From that premise, privatizing, deregulating, and liberalizing seem like the path to growth. And the now ubiquitous Dynamic Stochastic General Equilibrium (DSGE) models have helped the cause along. With market superiority built into the assumptions of the model, a lot of mathematics can “demonstrate” the justifiability of the policies proposed.

The Washington Consensus policies are what the IMF refers to as structural reforms. The 1980s marked the start of “Structural Adjustment Programs” that had disastrous consequences for the developing world, while the benefits never materialized. Over the last decades, none of the countries that followed the IMF’s advice were able to industrialize and move up the income ladder. The countries that did move up (such as the Asian Tigers) relied on industrial policy.

After a series of high profile failures and a loss of credibility, the IMF officially discontinued Structural Adjustment Programs. However, while additional language was added to its advice, terms such as inequality, inclusive growth, corruption, and human capital started to appear alongside elements of the Washington Consensus. The structural reforms at the core of those programs are still prevalent.

Those shaping IMF policy advice continue to tell a different story, one where structural reforms work, even if they are unpopular. Their work continues to find creative ways to group countries together to claim that its approach works and blame abysmal growth performance in some of their top “reformers” on their own failures.

For example, a 2019 publication that aimed to defend the benefits of such reforms scored countries based on their adoption of structural reforms. While the paper groups countries in a way that allows reporting better growth from more reforms, a look at the entire sample paints a different picture. The best per capita growth in the sample is from China, which is not a top reformer and certainly not a follower of IMF advice, while top scorers such as Ukraine, Russia, and Egypt have amongst the worse growth performances in the sample.

In general, it is well documented, including in the IMF’s own internal review of programs, that the IMF in its programs and projections continues to underestimate the negative impacts of austerity, while overestimating the growth grains from the reforms it pushes.

While those designing policy advice at the IMF might not be fully ready to admit their approach does not deliver on growth, the institution’s own research department published a series of papers on the negative social consequences of many of these policies. There is IMF research that links policies the IMF has imposed for decades to increasing inequality, and higher inequality to lower growth. Furthermore, Argentina and Greece are just two recent examples of huge spikes in poverty caused by the economic collapse that followed IMF-imposed policy approaches.

If the IMF truly means what it says about wanting to support a green and inclusive recovery, it needs to fully revamp its policy toolkit, and reassess all the advice it gives countries. Even if the IMF were to incorporate concerns about inequality and the environment in its current models, they would still be underpinned by the market fundamentalism baked into the DSGE models it uses. The limitations of adding variables to the same old paradigm are already showing when it comes to climate policies. The IMF is suggesting, all based on carbon pricing and the idea that nudging markets can solve the existential climate crisis in a timely manner, an overoptimistic assumption this time with devastating consequences for the entire planet.

As long as trickle-down, supply-side economics continues to shape the core of its advice, the new IMF will be just like the old IMF, now with more gentle rhetoric.

Lara Merling is a policy advisor at the International Trade Union Confederation, which represents over 200 million workers in 163 countries, and is a Senior Research Fellow at the Center for Economic and Policy Research in Washington DC. You can find her on Twitter @LaraMerling

Minsky is more than a moment

After the Great Financial Crisis, Minsky rose to fame. But few people grasp the breadth and depth of his work beyond the “Minsky Moment”. If that’s you, Daniel Neilson’s recent book is a worthy read. By Ayoze Alfageme.

A decade after the Great Financial Crisis, Minsky presents a meticulous reconstruction of Hyman Minsky‘s lifework that goes well beyond the mere explanation of financial bubble bursts. Indeed, Neilson devotes only a few pages to what Minsky is best known for—his Financial Instability Hypothesis. The reason is not for its lack of relevance within Minsky’s theory, but because the author places it as one piece of an overall financial theory of capitalism that he painstakingly elaborates in a mere 150 pages. Presenting Minsky’s ideas in a comprehensive and exhaustive way is not an easy task, given that he worked out his thinking by sketching his theory piecemeal in various places as he witnessed history pass by. Thus, the author elaborates three different threads through which he deconstructs Minsky’s work into elements to be then reconstructed and presented as a thorough vision of capitalism.

A financial theory of capitalism

The first thread comprises four out of eight chapters of the book and deals with Minsky’s financial theory. In modern societies, a matrix of balance sheets connects all agents via debt and credit commitments—assets and liabilities—that have arisen from past payment decisions. Minsky shows that payment structure, intrinsic to capitalist societies, is prone to recurrent crises due to the imperative requirement to repay debts. This requirement, or ‘survival constraint’ as Minsky termed it, forces everyone to generate greater monetary inflows than outflows. When debts come due, debtors search for a liquid position that allows them to redeem their debts using money or, as Minsky said, whatever the lender will accept to write off the debt. Position making is the action through which assets and/or liabilities are sold if a unit is illiquid and in need of cash. The famous hedge, speculative, and Ponzi positions are nothing more than a form of position making—a search for liquidity. A crisis might be triggered by the effect upon other units of a unit’s inability to pay i.e. to find liquidity. A widespread financial crisis unfolds when the market for position making for liquidity comes to a halt. At this point, the role of the central bank is to step in as a lender of last resort—the market maker of last resort—that can blow liquidity into the system as its only initiative.

The making of a maverick economist

The second thread, interwoven with the first, narrates Minsky’s path to becoming the economist he was. For example, we learn from Henry Simons, his professor in Chicago, how Minsky adopted a practical outlook view of Simon’s view on the requirement to pay debts and how he added the theoretical and institutional issues of liquidity to Schumpeter and Keynes’ monetary theory of production. In Neilson’s account, liquidity is at the core of Minsky’s financial theory. Minsky’s considerations about liquidity, uncertainty, and time, stand as the main divergences between his approach and that of the mainstream.

The third and final thread of the book deals with the position Minsky took towards the rest of the economist profession, disentangling the contradictions between the two. In need of a new language through which he could express the knowledge he wanted to convey, Minsky found himself at the margins of the profession and in conscious opposition to the mainstream. Interestingly, the book also reveals how even interpretations by those who, as post-Keynesians of different strands claiming to Minsky’s insights, sometimes fail to understand his core contributions.

Throughout the book, Neilson successfully presents Minsky’s theory and policy and the intellectual challenges he faced during his career as an economist. The book also encompasses his Ph.D. thesis, the writing of his two books—John Maynard Keynes and Stabilizing an Unstable Economy—his collaborations with the financial sector, his financial analyses for the public sector, as well as the economic and financial crises he witnessed and eagerly strove to analyze. Overall, the author conveys, with a dash of critical insights of his own, what he and his professor, Perry Mehrling, consider to be the most important thing we can learn from Minsky: his vision of how financial capitalism works

Buy the book: Minsky. By Daniel H. Neilson. Polity Press: Cambridge, 2019. 224 pages, £16.99.

About the Author: Ayoze is teaching assistant and PhD candidate at the University of Geneva. Twitter: @_Ayoze_

Want to review a book you read? YSI will reimburse you for the price of the book, and will consider your piece for publication on Economic Questions. Reach out to contact@economicquestions.org to get started.

This article was originally posted in Economic Issues, Vol. 25, Part 1, 2020.
Access here.

New Thinking in the News

How to respond to rising sovereign debt? What do food shortages look like now? How can we guard against data authoritarianism? This and more in this week’s collection of #NewThinkingintheNews

1 | Hunger amid plenty: how to reduce the impact of COVID-19 on the world’s most vulnerable people in Reuters, by Mari Pangestu

“It’s important to not only ensure people access basic food supplies, but also that they have money to purchase them. On average, food accounts for up to 60 percent of household expenditures in low income countries and 40 percent in emerging and development market economies. Economic recession and loss of livelihoods quickly erode the food security of millions of people – especially if food prices increase. The World Bank estimates that 40 to 60 million more people will be living in extreme poverty in coming months, depending on the scale of the economic shock.”

2 | New Laws for the Fissured Workplace in the American Prospect, by David Weil

“After this acute crisis passes, we must confront the reality that our existing workplace policies no longer account for the millions of workers with jobs (often multiple jobs) that do not fit the narrow definitions of employment embodied in federal and state laws. Today’s workforce—and those displaced from it—requires core protections linked to work, not just employment, in areas like assuring a safe and healthy workplace, receiving a minimum wage, and being protected against retaliation from exercising rights granted by our laws. This crisis also reveals the long-term need for wide access for all workers to safety-net protections like unemployment insurance and workers’ compensation as well as to comprehensive paid-leave policies that protect workers, their households, and the wider community.

3 | How to Develop a COVID-19 Vaccine for All in Project Syndicate by Mariana Mazzucato

“To succeed, the entire vaccine-innovation process, from R&D to access, must be governed by clear and transparent rules of engagement based on public-interest goals and metrics. That, in turn, will require a clear alignment between global and national public interests… But today’s proprietary science does not follow that model. Instead, it promotes secretive competition, prioritizes regulatory approval in wealthy countries over wide availability and global public-health impact, and erects barriers to technological diffusion. And, although voluntary IP pools like the one that Costa Rica has proposed to the World Health Organization can be helpful, they risk being ineffective as long as private, for-profit companies are allowed to retain control over critical technologies and data – even when these were generated with public investments.”

4 | Preventing Data Authoritarianism in Project Syndicate by Katharina Pistor

“While digital technologies once promised a new era of emancipatory politics and socio-economic inclusion, things have not turned out quite as planned. Governments and a few powerful tech firms, operating on the false pretense that data is a resource just like oil and gold, have instead built an unprecedented new regime of social control.”

5 | The Necessity of a Global Debt Standstill that Works in Project Syndicate, by Beatrice Weder di Mauro and Patrick Bolton

“Without private-sector participation, any official debt relief for middle-income countries may simply be used to service their private-sector debt. It would be pointless for the official sector to lighten poorer countries’ debt burdens if this results only in a transfer to commercial creditors… All private creditors need to participate on an equal basis in any standstill on debt service, both as a matter of fundamental fairness and to ensure adequate funding for emerging economies. And their participation cannot be purely voluntary. If it is, relief provided by participating private creditors will simply subsidize the non-participants.”

Every week, we share a few noteworthy articles that showcase the work of new economic thinkers around the world. Subscribe to receive these shortlists directly to your email inbox.

New Thinking in the News

Can countries safely print money to combat the crisis? What ethical principles can we rely on in this pandemic? What policy does Soros think the US should implement right away? How does an understanding of gender theory improve our approach to doing economics? This week’s recommended read tackle these themes, and more. Enjoy.

1 | Finding the ‘Common Good’ in a Pandemic in the New York Times, with Michael Sandel

“Think about the two emblematic slogans of the pandemic: “social distancing” and “we’re all in this together.” In ordinary times, these slogans point to competing for ethical principles — setting ourselves apart from one another, and pulling together. As a response to the pandemic, we need both. We need to separate ourselves physically from our friends and co-workers in order to protect everyone, to prevent the virus from spreading. But ethically, these slogans highlight two different approaches to the common good: going it alone, with each of us fending for ourselves, versus hanging together, seeking solidarity. In a highly individualistic society like ours, we don’t do solidarity very well, except in moments of crisis, such as wartime.”

2 | Can We Print Infinite Money to Pause the Economy During the Coronavirus Pandemic? in Vice, featuring David Weil

“What are the consequences of just giving everyone enough cash to survive the next few months? […] It’s complicated.”

3 | With working Americans’ survival at stake, the US is bailing out the richest, in the Guardian, by Morris Pearl and Bill Lazonick

“Amid a humanitarian crisis compounded by mass layoffs and collapsing economic activity, the last course our legislators should be following is the one they appear to be on right now: bailing out shareholders and executives who, while enriching themselves, spent the past decade pushing business corporations to the edge of insolvency.”

4 | George Soros: Guarantee paychecks for all workers displaced by coronavirus to save the economy in the LA Times by George Soros and Eric Beinhocker

“History has shown the strategy works. Thanks to Germany’s “Kurzarbeit” program, unemployment there actually fell from 7.9% to 7% during the Great Recession, while average unemployment in other major developed economies rose by 3%. As a result, the German economy recovered more quickly than those of many other countries.”

5 | The Human-Capital Costs of the Crisis, in Project Syndicate, by Barry Eichengreen

“Unemployment and hardship can also lead to demoralization, depression, and other psychological traumas, lowering affected individuals’ productivity and attractiveness to employers. We saw this in the 1930s, not just in declining rates of labor force participation but also in rising rates of suicide and falling rates of marriage. Here, too, one worries especially about the US, given its relatively limited safety net, its opioid crisis, and its “deaths of despair.”

6 | Ecological and Feminist Economics, an interview with Julie Nelson in Real World Economics Review

“…the mainstream discipline of economics relies on a deeply gendered belief about what makes for good science. Economists like to think of economic life as confined to the market, driven by self-interest and competition, rational and controllable, and intrinsically governed by mathematics and physics-like “laws” not because the economy is intrinsically that way but because these ways of seeing it are all associated with masculinity and toughness. What about production in the home? Care for others and the environment? Human emotions, in the face of a future that is fundamentally unknowable? Ways of understanding that require hands-on investigation and broader sorts of reasoning? Acknowledging these things is, by comparison, seen as womanly and weak. And so those parts of reality and those parts of good science – which I define as open-minded and systematic investigation – were banished.”

Every week, we share a few noteworthy articles that showcase the work of new economic thinkers around the world. Subscribe to receive these shortlists directly to your email inbox.

When it comes to sovereign debt, what is the real concern? Level or Liquidity?

“What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?”
Adam Smith

By Elham Saeidinezhad | The anxieties around the European debt crisis (often also referred to as eurozone crisis) seem to be a thing of the past. Eurozone sovereigns have secured record-high order books for their new government bond issues. However, emerging balance-sheet constraints have limited the primary dealers’ ability to stay in the market and might support the view that sovereign bond liquidity is diminishing. The standard models of sovereign default identify the origins of a sovereign debt crisis to be bad “fundamentals,” such as high debt levels and expectations. These models ignore the critical features of market structures, such as liquidity and primary dealers, that underlie these fundamentals. Primary dealers – the banks appointed by national debt agencies to help them borrow from investors- act as market makers in government bond auctions. These primary dealers provide market liquidity and set the price of government bonds. Most recently, however, primary dealers are leaving Europe’s bond markets due to increased pressure on their balance-sheets. These exits could decrease sovereign bonds’ liquidity and increase the cost of borrowing for the governments. It can sow the seeds of the next financial crisis in the process. Put it differently, primary dealers’ decision to exit from this market might be acting as a warning sign of a new crisis in the making.

Standard economic theories emphasize the role of bad fundamentals such as high debt levels in creating expectations of government default and reaching to a bad-equilibrium. The sentiment is that the sovereign debt crisis is a self-fulfilling catastrophe in nature that is caused by market expectations of default on sovereign debt. In other words, governments can be subjected to the same dynamics of fickle expectations that create run on the banks and destabilize banks. This is particularly true when a government borrows from the capital market over whom it has relatively little influence. Mathematically, this implies that high debt levels lead to “multiple equilibria” in which the debt level might not be sustainable. Therefore, there will not be a crisis as long as the economy reaches a good equilibrium where no default is expected, and the interest rate is the risk-free rate. The problem with these models is that they put so much weight on the role of expectations and fundamentals while entirely abstract from specific market characteristics and constituencies such as market liquidity and dealers.

Primary dealers use their balance-sheets to determine bond prices and the cost of borrowing for the governments. In doing so, they create market liquidity for the bonds. Primary dealers buy government bonds directly from a government’s debt management office and help governments raise money from investors by pricing and selling debt. They typically are also entrusted with maintaining secondary trading activity, which entails holding some of those bonds on their balance sheets for a period. In Europe, several billion euros of European government bonds are sold every week to primary dealers through auctions, which they then sell on. However, tighter regulations, such as MiFID II, since the financial crisis has made primary dealing less profitable because of the extra capital that banks now must hold against possible losses. Also, the European Central Bank’s €2.6tn quantitative easing program has meant national central banks absorbed large volumes of debt and lowered the supply of the bonds. These factors lead the number of primary dealers in 11 EU countries to be the lowest since Afme began collecting data in 2006.

This decision by the dealers to exit the market can increase the cost of borrowing for the governments and decrease sovereign bonds’ liquidity. As a result, regardless of the type of equilibrium the economy is at, and what the debt level is, the dealers’ decision to leave the market could reduce governments’ capacity to repay or refinance their debt without the support of third parties like the European Central Bank (ECB) or the International Monetary Fund (IMF). Economics models that study the sovereign debt crisis abstracts from the role of primary dealers in government bonds. Therefore, it should hardly be surprising to see that these models would not be able to warn us about a future crisis that is rooted in the diminished liquidity in the sovereign debt market.

Elham Saeidinezhad is lecturer in Economics at UCLA. Before joining the Economics Department at UCLA, she was a research economist in International Finance and Macroeconomics research group at Milken Institute, Santa Monica, where she investigated the post-crisis structural changes in the capital market as a result of macroprudential regulations. Before that, she was a postdoctoral fellow at INET, working closely with Prof. Perry Mehrling and studying his “Money View”. Elham obtained her Ph.D. from the University of Sheffield, UK, in empirical Macroeconomics in 2013. You may contact Elham via the Young Scholars Directory

How Progressives Can Win Big: Casting out the Spirit of Defeatism, One Keystroke at a Time

By Steve Grumbine.

Progressives Trigger warning: Compassion required. When is the last time you heard Greens, Berniecrats or Indie voters not acknowledge the distinct and pressing need for election reform, campaign finance reform, voting reform? More to the point, when haven’t they mentioned unleashing 3rd parties from the fringe of irrelevancy and up onto the debate stage?

That is mostly what is talked about, simply because it is low hanging fruit.

It has long been known that our electoral system and methods of voting are corrupt, untrustworthy, and easily manipulated by less than savvy politicians, state actors, and hackers alike. The answers to many of these issues is the same answer that we would need to push for any progressive reforms to take place in America: namely, we need enlightened, fiery, peaceful, and committed activists to propel a movement and ensure that the people rise, face their oppressors, and unify to demand that their needs be met.

What is not as well-known, however, is how a movement, the government, and taxes work together to bring about massive changes in programs, new spending, and the always scary “National Debt” (should be “National Assets”, but I will speak to that later). In fact, this subject is so poorly understood by many well-meaning people on all sides of the aisle that these issues are the most important we face as a nation. Until we understand them and have the confidence and precision necessary to destroy the myths and legends we have substituted in the absence of truth and knowledge, it must remain front and center to the movement.

Progressives, like most Americans, are almost religiously attached to the terms “the taxpayer dollar,” and the idea that their “hard earned tax dollars” are being misappropriated. Often, the most difficult pill for people to swallow is the concept that our Federal Government is self-funding and creates the very money it “spends”. It isn’t spending your tax dollars at all. To demonstrate this, consider this simplified flow chart:

These truths bring on even more hand wringing, because to the average voter they raise the issue of where taxes, tax revenue, government borrowing, and the misleading idea of the “National Debt” (which is nothing more than the sum of every single not yet taxed federal high-powered dollar in existence) fit into the federal spending picture. The answer is that they really don’t.

A terrible deception has been perpetrated on the American people. We have been led to believe that the US borrows its own currency from foreign nations, that the money gathered from borrowing and collected from taxing funds federal spending. We have also been led to believe that gold is somehow the only real currency, that somehow our nation is broke because we don’t own much gold compared to the money we create, and that we are on the precipice of some massive collapse, etc. because of that shortage of gold.

The American people have been taught single entry accounting instead of Generally Accepted Accounting Practices, or GAAP-approved double entry accounting, where every single asset has a corresponding liability; which means that every single dollar has a corresponding legal commitment. Every single dollar by accounting identity is nothing more than a tax credit waiting to be extinguished. Sadly, many only see the government, the actual dollar creator, as having debt; that it has liabilities, not that we the people have assets; assets that we need more and more of as time goes on, to achieve any semblance of personal freedom and relative security from harm.

In other words, at the Federal level it is neither your tax dollars nor the dollars collected from sales of Treasury debt instruments that are spent. Every single dollar the Federal Government spends is new money.

Every dollar is keystroked into existence. Every single one of them. Which brings up the next question: “Where do our hard-earned tax dollars and borrowed dollars go if, in fact, they do not pay for spending on roads, schools, bombs and propaganda?” We already know the answer. They are destroyed by the Federal Reserve when they mark down the Treasury’s accounts.

In Professor Stephanie Kelton’s article in the LA Times “Congress can give every American a pony (if it breeds enough ponies)” (which you can find here ) She states quite plainly:

“Whoa, cowboy! Are you telling me that the government can just make money appear out of nowhere, like magic? Absolutely. Congress has special powers: It’s the patent-holder on the U.S. dollar. No one else is legally allowed to create it. This means that Congress can always afford the pony because it can always create the money to pay for it.”

That alone should raise eyebrows and cause you to reconsider a great many things you may have once thought. It will possibly cause you to fall back to old, neoclassical text book understandings as well, which she deftly anticipates and answers with:

“Now, that doesn’t mean the government can buy absolutely anything it wants in absolutely any quantity at absolutely any speed. (Say, a pony for each of the 320 million men, women and children in the United States, by tomorrow.) That’s because our economy has internal limits. If the government tries to buy too much of something, it will drive up prices as the economy struggles to keep up with the demand. Inflation can spiral out of control. There are plenty of ways for the government to get a handle on inflation, though. For example, it can take money out of the economy through taxation.”

And there it is. The limitation everyone is wondering about. Where is the spending limit?

When we run out of real resources. Not pieces of paper or keystrokes. Real resources.

To compound your bewilderment, would it stretch your credulity too much to say that the birth of a dollar is congressional spending and the death of a dollar is when it is received as a tax payment, or in return for a Treasury debt instrument, and deleted? Would that make your head explode? Let the explosions begin, because that is exactly what happens.

Money is a temporary thing. Even in the old days we heard so many wax poetically about how they took wheelbarrows of government — and bank – printed IOUs to the burn pile, and set the dollar funeral pyre ablaze.

In the same LA Times piece, Professor Kelton goes on to say:

“Since none of us learned any differently, most of us accept the idea that taxes and borrowing precede spending – TABS. And because the government has to “find the money” before it can spend in this sequence, everyone wants to know who’s picking up the tab.

There’s just one catch. The big secret in Washington is that the federal government abandoned TABS back when it dropped the gold standard. Here’s how things really work:

Congress approves the spending and the money gets spent (S)
Government collects some of that money in the form of taxes (T)
If 1 > 2, Treasury allows the difference to be swapped for government bonds (B)

In other words, the government spends money and then collects some money back as people pay their taxes and buy bonds. Spending precedes taxing and borrowing – STAB. It takes votes and vocal interest groups, not tax revenue, to start the ball rolling.”

Let’s be clear, we are not talking about the Hobbit or Lord of the Rings. We are not talking about Gandalf the Grey or Bilbo Baggins. We are not referencing “my precious!”. It’s not gold, or some other commodity people like to hold, taste and smell. It is simply a tally. Yet somehow, we have convinced ourselves that there is a scarcity of dollars, when it is the resources that are scarce. We have created what Attorney Steven Larchuk calls a “Dollar Famine”.

To quote Warren Mosler in his must-read book “The 7 Deadly Innocent Frauds of Economic Policy” (you can download a free copy right here) he states:

“Next question: “So how does government spend when they never actually have anything to spend?”

Good question! Let’s now take a look at the process of how government spends.

Imagine you are expecting your $1,000 social security payment to hit your bank account which already has $500 in it, and you are watching your account on your computer screen. You are about to see how government spends without having anything to spend.

Presto! Suddenly your account statement that read $500 now reads $1,500. What did the government do to give you that money? It simply changed the number in your bank account from 500 to 1,500. It added a ‘1’ and a comma. That’s all.”

Keystrokes. Is it becoming clearer? Let’s go further for good measure. Mosler continues:

“It didn’t take a gold coin and hammer it into its computer. All it did was change a number in your bank account. It does this by making entries into its own spread sheet which is connected to the banking systems spreadsheets.

Government spending is all done by data entry on its own spread sheet we can call ‘The US dollar monetary system’.

There is no such thing as having to ‘get’ taxes or borrow to make a spreadsheet entry that we call ‘spending’. Computer data doesn’t come from anywhere. Everyone knows that!”

So why do we allow people to tell us otherwise? Maybe it is too abstract. And on cue, Mosler explains this phenomenon via a sports analogy for those who are not comfortable with the straight economic narrative:

“Where else do we see this happen? Your team kicks a field goal and on the scoreboard the score changes from, say, 7 point to 10 points. Does anyone wonder where the stadium got those three points? Of course not! Or you knock down 5 pins at the bowling alley and your score goes from 10 to 15. Do you worry about where the bowling alley got those points? Do you think all bowling alleys and football stadiums should have a ‘reserve of points’ in a ‘lock box’ to make sure you can get the points you have scored? Of course not! And if the bowling alley discovers you ‘foot faulted’ and takes your score back down by 5 points does the bowling alley now have more score to give out? Of course not!

We all know how ‘data entry’ works, but somehow this has gotten all turned around backwards by our politicians, media, and most all of the prominent mainstream economists.”

Ouch! Mosler pointed out the obvious, the propaganda machine has polluted our understanding. So how is this done in economic language? Let’s let Warren finish the thought:

“When the federal government spends the funds don’t ‘come from’ anywhere any more than the points ‘come from’ somewhere at the football stadium or the bowling alley.

Nor does collecting taxes (or borrowing) somehow increase the government’s ‘hoard of funds’ available for spending.

In fact, the people at the US Treasury who actually spend the money (by changing numbers on bank accounts up) don’t even have the phone numbers of the people at the IRS who collect taxes (they change the numbers on bank accounts down), or the other people at the US Treasury who do the ‘borrowing’ (issue the Treasury securities). If it mattered at all how much was taxed or borrowed to be able to spend, you’d think they’d at least know each other’s phone numbers! Clearly, it doesn’t matter for their purposes.”

So why do progressives allow the narrative that the nation has run out of points deter us from demanding we leverage our resources to gain points, to win the game of life, and have a robust New Deal: Green Energy, Infrastructure, free college, student debt eradication, healthcare as a right, a federal job guarantee for those who want work and expanded social security for those who do not want to or cannot work?

How has a movement so full of “revolutionaries” proved to be so “full of it” believing that we must take points away from the 99% to achieve that which the federal government creates readily, when people do something worth compensating? Why does the narrative that the nation is “broke” resonate with progressives? Why do they allow this narrative to sideline the entire movement?

I believe it is because progressives are beaten down. Many have forgotten what prosperity for all looks like or sounds like. Many are so financially broke and spiritually broken that the idea of hope seems like gas lighting. It feels like abuse. It crosses the realm of incredulity and forces people into that safe space of defeatism.

If they firmly reject hope, then they can at least predict failure, be correct and feel victorious in self-defeating apathy. If the system is rigged; if the politicians are all bought off; if the voting machines are hacked; if the deep state controls everything; then we think we are too weak to unite and stand up and demand economic justice, equality, a clean environment, a guaranteed job, healthcare and security and then we have a bad guy to blame.

Then we can sit at our computers, toss negative comments around social media, express our uninformed and uninspired defeatism about the system, and proclaim it is truth by ensuring it is a self-fulfilling prophecy about which we can be self-congratulatory in our 20/20 foresight as we perform the “progressive give-up strategy”. Or, if we want to achieve a Green New Deal, then in a radical departure from the norm we can own our power; we can embrace macroeconomic reality through the lens of a monetarily sovereign nation with a free floating, non-convertible fiat currency and truly achieve the progressive prosperity we all deserve.

The choice is ours. It is in our hands.

**For more of Steve’s work check out Real Progressives on Facebook or Twitter

PostCapitalism: A Guide to Our Future

By Hannah Temple.

It is difficult to get through a day without encountering the idea that we as a species and a planet are at some kind of a tipping point. Whether for environmental, economic or social factors (or a mix of them all) there is a growing collective of voices claiming that the fundamental ways in which we live our lives, often linked to the structures and incentives of capitalism, must change. And they must change both radically and soon if we are to protect the future of the human race. Paul Mason’s PostCapitalism: A Guide to Our Future adds another compelling voice to this increasingly hard-to-ignore din. However, what makes this book refreshingly different is the tangible picture it paints of our possible path to a “postcapitalist” world. Mason’s belief is that capitalism’s demise is in fact already happening, and it is happening in ways we both know and like.

The book starts by looking at Kondratieff waves– the idea developed by Nokolai Kondratieff in the 1920s that capitalist economies experience waves or cycles of prosperity and growth, followed by a downswing, characterised by regular recessions, and usually ending with a depression. This is then followed by another phase of growth, and so on and so on. Many people, especially those that benefit from the current economic model, argue that what we are experiencing currently is just another of these regular downswings and we all just have to hunker down and ride the wave until the going gets good again. Mason, however says that even a quick glance at whatever form of evidence takes your fancy (global GDP growth, interest rates, government debt to GDP, money in circulation, inequality, financialization, productivity), demonstrates that the 5th wave that we should currently be riding has stalled and is refusing to take off.

The shift from the end of one wave and the start of a new one is always associated with some form of societal adaptation. Usually this is through attacks on skills and wages, pressure on redistribution projects such as the welfare state, business models evolving to grab what profit there is. However, if this de-skilling and wage reduction is successfully resisted then capitalism is forced instead into more fundamental mutation- the development of more radically innovative technologies and business models that can restore dynamism based on higher wages rather than exploitation. The 1980s saw the first adaptation stage in the history of long waves where worker resistance collapsed. This allowed capitalism to find solutions through lower wages, lower-value models of production and increasing financialization and thus rebalance the entire global economy in favour of capital. “Instead of being forced to innovate their way out of the crisis using technology, the 1 per cent simply imposed penury and atomization on the working class.”

This failure to resist the will of capital and the subsequent emergence of an increasingly atomised, poor and vulnerable global population is part of Mason’s explanation for our stalled 5th wave. The other half of the explanation comes from the nature of our recent technological innovations. Mason contends that the technologies of our time are fundamentally different to those of previous eras in that they are based on information. This is significant in that information doesn’t work in the ways that printing presses or telephones or steam engines work. Information throws all the basic tenets of capitalism- supply and demand, ownership, prices, competition- on their heads. Information technology essentially works to produce things that are increasingly cheap or even free. Think of music- from £10 for a CD in 1997 to 95p for an iTunes track in 2007 to completely free via sharing sites like Spotify in 2017. Over time, Mason claims the market mechanism for setting prices for certain information-based goods will gradually drive them down and down until they reach essentially or even actually zero – eroding profits in the process.

Capitalism’s response to this shift has basically been to put up lots of walls and retreat to stagnant rentier activity rather than productivity or genuine innovation. Legal walls such as patents, tariffs and IP property rights are used to try to maintain monopoly status so that profits can continue to be earnt. Politics is following in the same path with some real walls as well as plenty of metaphorical ones in the form of disintegrating international agreements and partnerships, import tariffs, immigration caps and so on. “With info-capitalism a monopoly is not just some clever tactic to maximise profit, it is the only way an industry can run. Today the main contradiction in modern capitalism is between the possibility of free, abundant socially-produced goods and a system of monopolies, banks and governments struggling to maintain control over power and information”.

However, what seems to be part of the problem is, according to Mason, a critical part of the solution. These new sharing, or “information” technologies, have led to what Mason sees as an already emerging postcapitalist sector of the economy. Time banks, peer-to-peer lending, open-source sharing like Linux and Wikipedia and other technologies are not based on a profit-making motive and instead enable individuals to do and share things of value socially, outside of the price system. This peer-to-peer activity represents an indication of the potential of non-market economies and what our future might look like.

Mason argues that we have now reached a juncture at which there are so many internal and external threats facing our existing system- from climate change, migration, overpopulation, ageing population, government debts- that we are in a similar position to that faced by feudalism before it dissolved into capitalism. The only way forward entails a break with business as usual. Mason emphasises that it is important to remember that capitalism is not a “natural” state of being, nor has it gone on for such a long time. We live in a world in which its existence is seen to be unquestionable but we must take time to teach our brains how to imagine something new again. For Mason, in rather sci-fi fashion, this “something new” is called Project Zero.

Project Zero aims to harness to full capabilities of information technologies to:

– Develop a zero-carbon energy system
– Produce machines, services and products with zero marginal costs (profits)
– Reduce labour time as close as possible to zero

“We need to inject into the environment and social justice movements things that have for 25 years seemed the sole property of the right: willpower, confidence and design.”

Mason provides us with a comprehensive and exciting list of activities to be cracking on with to shape our new world. Some of his ideas are excitingly fresh and new such as the development of an open, accurate and comprehensive computer simulation of current economic reality using real time data to enable the planning of major changes. Others are more familiar such as the shifting of the role of the state to be more inventive and supportive of human wellbeing by coordinating infrastructure, reshaping markets to favour sustainable, collaborative and socially just outcomes and reducing global debts. He also supports the introduction of a universal basic income, the expansion of collaborative business models with clear social outcomes and the removal of market forces- particularly in the energy sector in order to act swiftly to counter climate change. He calls for the socialisation of the finance system. This would involve the nationalization of central banks, setting them explicit sustainability targets and an inflation target on the high side of the recent average to stimulate a “socially just form of financial repression”. It would also involve the restructuring of the banking system into a mixture of non-profit local and regional banks, credit unions and peer-to-peer lenders, a state-owned provider of financial services and utilities earning capped profits. Complex, financial activities should still be allowed but should be separate and well-regulated, rewarding innovation and punishing rent-seeking behaviour.

This push towards a system that rewards and encourages genuine innovation underlies most of Mason’s suggestions for our postcapitalist future. He contends that, if we continue down our current path, it will suffocate us and lead to a world of growing division, inequality and war. We already have systems for valuing things without prices. Working on optimising the technologies we have available to expand these systems, allowing us to live more sustainable, equal and happy lives, Mason argues, should be the key focus for us all.

This book review of Paul Mason’s PostCapitalism by Hannah Temple is originally posted at Rethinking Economics. 

Let’s face it: Monetary Policy is Failing

By Nikolaos Bourtzis.

Monetary policy has become the first line of defense against economic slowdowns — it’s especially taken the driver’s seat in combating the crisis that began in 2007. Headlines everywhere comment on central bank’s (CB) decision-making processes and reinforce the idea that central bankers are non-political economic experts that we can rely on during downturns. They rarely address, however, that central banks’ monetary policies have failed repeatedly and continue to operate on flawed logic. This piece reviews recent monetary policy efforts and explains why central bank operations deserve our skepticism–not our blind faith.

What central banks try to do

To set monetary policy central banks usually target the interbank rate, the interest rate at which commercial banks borrow (or lend) reserves from one another. They do this by managing the level of reserves in the banking system to keep the interbank rate close to the target. By targeting how cheaply banks can borrow reserves, the central bank tries to persuade lending institutions to follow and adjust their interest rates, too. In times of economic struggle, the central bank attempts to push rates down, such that lending (and investing) becomes cheaper to do.

This operation is based on the theory that lower interest rates discourage savings and promote investment, even during a downturn. That’s the old “loanable funds” story. According to the neoclassical economists in charge at most central banks, due to rigidities in the short run, interest rates sometimes fail to respond to exogenous shocks. For example, if the private sector suddenly decides to save more, interest rates might not fall in response. This produces mismatches between savings and investment; too much saving and too little investment. As a result, unemployment arises since aggregate demand is lower than aggregate supply. In the long run, though, these mismatches will disappear and the loanable funds market will clear at the “natural” interest rate which guarantees full employment and a stable price level. But to speed things up, the CB tries to bring the market rate of interest towards that “natural” rate through its interventions.

Recent Attempts in Monetary Policy

However, interest rate cuts miserably failed to kick-start the recovery during the Great Recession. That prompted the use of unconventional tools. First came Quantitative Easing (QE). Under this policy, central banks buy long-term government bonds and/or other financial instruments (such as corporate bonds) from banks, financial institutions, and investors, which floods banks with reserves to lend out and financial markets with cash. The cash is then expected to eventually filter down to the real economy. But this did not work either. The US (the first country to implement QE in response to the Crash) is experiencing its longest and weakest recovery in years. And Japan has been stagnating for almost two decades, even though it started QE in the early 2000s.

Second came “the ‘natural rate’ is in negative territory” argument; Larry Summers’ secular stagnation hypothesis. The logic is that if QE is unable to increase inflation enough, negative nominal rates have to be imposed so real rates can drop to negative territory. Since markets cannot do that on their own, central banks will have to do the job. First came Sweden and Denmark, then Switzerland and the Eurozone, and last but not least, Japan.

Not surprisingly, the policy had the opposite effect of what was intended. Savings rates went up, instead of down, and businesses did not start borrowing more; they actually hoarded more cash. Some savers are taking their money out of bank accounts to put them in safe deposits or under their mattresses! The graph below shows how savings rate went up in countries that implemented negative rates, with companies also following suit by holding more cash.

Central bankers seem to be doing the same thing over and over again, while expecting a different outcome. That’s the definition of insanity! Of course, they cannot admit they failed. That would most definitely bring chaos to financial markets, which are addicted to monetary easing. Almost every time central bankers providea weaker response than expected, the stock market falls.

There is too much private debt.

So how did we get here? To understand why monetary policy has failed to lift economies out of crises, we have to talk about private debt.

Private debt levels are sky high in almost every developed country. As more and more debt is piled up, it becomes more costly to service it. Interest payments start taking up more and more out of disposable income, hurting consumption. Moreover, you cannot convince consumers and businesses to borrow money if they are up to their eyeballs in debt, even if rates are essentially zero. What’s more, some banks are drowning in non-performing loans so why would they lend out more money, if there is no one creditworthy enough to borrow? Even if private debt levels were not sky high, firms only borrow if capacity needs to expand. During recessions, low consumer spending means low capacity utilization, so investing in more capacity does not make sense for firms.

How to move forward

So, now what? Should we abolish central banks? God no! Central banks do play an important role. They are needed as a lender of last resort for banks and the government. But they should not try to fight the business cycle. Tinkering with interest rates and buying up financial instruments encourages speculation and accumulation of debt, which further increases the likelihood of financial crises. The recent pick-up in economic activity is again driven by private debt and even the Bank of England is worried that this is unsustainable and might be the trigger of the next financial crisis.

The success of monetary policy depends on market mechanisms. Since this is an unreliable channel that promotes economic activity through excessive private debt growth, governments should be in charge of dealing with the business cycle. The government is the only institution that can pump money into the economy effectively to boost demand when it is needed. But due to the current misguided fears of large deficits, governments have not provided the necessary fiscal response. Investment requires as little uncertainty as possible to take place and only fiscal policy can reduce uncertainty. Admittedly in previous decades, monetary responses might have been responsible for restoring some business confidence as shown in the figure below.

This effect, though, cannot always be relied upon during severe slumps. And no doubt, more attention needs to be given to private debt, which has reached unprecedented levels.

Monetary policy has obviously failed to produce a robust recovery in most countries. It might have even contributed in bringing about the financial crisis of 2008. But central bankers refuse to learn their lesson and keep doing the same thing again and again. They don’t understand that their policies have failed to kick-start our economies because the private sector is drowning in debt. It’s time to put governments back in charge of economic stabilization and let them open their spending spigots. A large fiscal stimulus is needed if our economies are to recover. Even a Debt Jubilee should not be ruled out!

About the Author
Nikos Bourtzis is from Greece, and recently graduated with a Bachelor in Economics from Tilburg University in the Netherlands. He will be pursuing a Master in Economics and Economic analysis at Groningen University. Research interests are heterodox macroeconomics, anti-cyclical policies, income inequality, and financial instability.