Two links: A link post

One of my recent obsessions is monetary policy, prompted by the onset of the Great Recession (which threatens to destroy all our careers) and then the reading of Goodchild’s Theology of Money. My central question is precisely why all money must be created as debt rather than spent into circulation — why does the U.S. government, for instance, “borrow” something that the state itself has willed into existence (fiat currency)? (The best reason I can come up with is that interest rates, etc., give you access to market signals to tell you when monetary policy is becoming inflationary or deflationary, but that can’t be right given that the Federal Reserve is always actively manipulating rates.) Jared Woodard sends me an Interfluidity post suggesting that the most viable way forward for monetary policy after the failure of the Fordist and Great Moderation regimes is “helicopter money”:

Here’s my proposal. We should try to arrange things so that the marginal unit of CPI is purchased with “helicopter drop” money. That is, rather than trying to fine-tune wages, asset prices, or credit, central banks should be in the business of fine tuning a rate of transfers from the bank to the public. During depressions and disinflations, the Fed should be depositing funds directly in bank accounts at a fast clip. During booms, the rate of transfers should slow to a trickle. We could reach the “zero bound”, but a different zero bound than today’s zero interest rate bugaboo. At the point at which the Fed is making no transfers yet inflation still threatens, the central bank would have to coordinate with Congress to do “fiscal policy” in the form of negative transfers, a.k.a. taxes. However, this zero bound would be reached quite rarely if we allow transfers to displace credit expansion as the driver of money growth in the economy. In other words, at the same time as we expand the use of “helicopter money” in monetary policy, we should regulate and simplify banks, impose steep capital requirements, and relish complaints that this will “reduce credit availability”. The idea is to replace the macroeconomic role of bank credit with freshly issued cash.

On a lighter note, K-Punk perfectly captures my experience of the internet:

I know that I would be more productive (and less twitchily dissatisfied) if I could partially withdraw from cyberspace , where much of my activitity – or rather interpassivity – involves opening up multiple windows and pathetically cycling through twitter and email for updates, like a lab rat waiting for another hit. (The rat analogy is not idle: there’s an argument that rats become more quickly addicted when they are given stimuli randomly; email is similarly random, sometimes providing massive satisfaction, often thin pickings.)

This phenomenon is much bigger than our own personal productivity — it’s a huge pedagogical problem for those who have to educate the younger generation, and also, as K-Punk suggests, a political problem.

If you have interesting links to share, please do so in comments.

10 thoughts on “Two links: A link post

  1. Yes, this is the foundational paradox of monetary theory: we used to sell bonds when we had deficits because the currency was gold-backed, and we needed to have something “in the bank” for each buck in circulation. But since Nixon we have been off the gold standard, yet continue to sell a dollar of debt for every dollar of deficit. It’s crazy, for sure, but I think that there is a political reason for it: namely, people don’t understand that a government printing a sovereign currency does not have to balance a budget like a family does. This basic disconnect is exploited for political means by “deficit hawks,” and it sounds insane to say “deficits don’t matter, only the inflation rate matters.” Rhetoric about balancing the budget gets votes. Taking away the bond market would be a major point of political liability (and it would make bond traders and others who invest in bonds upset.) It’s an easy profit, and people hate to lose that.

    I don’t know if you have read Modern Monetary Theory folks like Bill Mitchell (blogs at or Marshall Auerbach (blogs at New Deal 2.0) but they are great at explaining this stuff. Mitchell’s blog has some great basic posts, and he’s fun to read. Here’s his basic introduction to MMT:
    Bill’s approach is, I think, the right one. Put this in simple terms, at hit at it relentlessly. People are starting to take note.

    It is truly sad that we are living in this terrible economy because of political, not truly economic, constraints. We should have spent like crazy a long time ago, and the low-and-falling inflation rate and the bond market are proving it.

  2. I think the more fundamental reason we aren’t taking advantage of the full power of fiat currency isn’t that the general population wouldn’t understand — they don’t understand a lot of things — but that the current setup is to the advantage of the capitalist class. I sincerely think that fiat currency could be the most powerful tool of socialism ever invented if it was unleashed.

  3. Yes, I think you are right – certain folks make out like bandits because of this arrangement, and others profit in political ways. That people don’t understand fiat currency makes this situation really hard to change.

    And just like you say, an actually sane monetary policy (that took into account floating currency) would certainly lead to full employment and a surging labor class. It would also lead to incredible infrastructure improvements and social programs, transportation, etc.

    This is why simple presentations of MMT are so crucial: they remove the ignorance that capitalists and politicians manipulate so easily. Marshal Auerbach has written some posts on “why the federal government’s budget is not like your budget,” Bill Mitchell has written a “business card economy” example. And some of these ideas are getting out there – Matt Yglesias and Ezra Klein are starting to ask questions about monetary policy, and Krugman has been giving more airtime for these views.

  4. Thanks for pointing out that article — I think it’s really important in combatting the standard response to this kind of thing, namely, “Wouldn’t that cause hyper-inflation?” As you pointed out to me recently, there seem to be two examples of hyper-inflation in history: Weimar Germany and contemporary Zimbabwe, both of which were in pretty uniquely bad situations. Maybe hyper-inflation isn’t really that easy to trigger, given the track record.

  5. It’s true, hyper-inflation only happens when certain conditions are met. The Confederacy had hyperinflation near the end of the Civil War, for example, because they were printing money while no one had food. We don’t have this problem at all: we have plenty of people looking for work, while idle construction equipment rots right next to crumbling infrastructure. If we just pay the people to fix the infrastructure, they will take their money and buy more crap that will put more people back to work. It is only when resources or labor start to get stretched thin that hyperinflation is a problem. We’ve got lots of both. The only thing keeping us down in political spinelessness. Bill Mitchell has a post called “Zimbabwe for hyperventilators” that may be of interest. He writes like a tool but he’s on point otherwise.

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