Friday, August 15, 2014

Would you believe me if the Treasury said it?

Source: Forbes book review Six Myths that Hold America Back
Listen, I get it. When one first hears this government money stuff all our objections drown out the words before we finish the first paragraph. It goes against everything we've heard and believed for a long time, right? 

I didn't believe it either. 
  • The government has to behave like everyone else! 
  • The debt is out of control! 
  • The US dollar is going to collapse with all this Fed money printing! 
  • It's just a matter of time until we have hyperinflation.
  • Interest rates are going to skyrocket when China stops buying our debt! 
  • Greece - we're next! 
  • Let's reign in the government pending and "get our house in order"...

Yep, it all sounds so rational and on the moral high ground. Except that it's all wrong. 

Fortunately for many of us, the explanations that were coming from all sources (media, mainstream economists, and even Austrians/gold folks) regarding how economies worked and what caused the Great Recession left too many unanswered questions. I was very fortunate to have someone I deeply respected tell me "Listen, this modern monetary theory stuff is right on track". So despite all my objections, I kept with it until I understood what they were saying. It wasn't long before the light bulbs went on and all the puzzle pieces finally fit together. 

The funny thing is once you see how it works, it is all so simple and obvious that you wonder how such a great deception could have overtaken western civilization.

I'm hoping some of you will get a similar push from this blog to dig deeper and get your own answers. And then pass it along to your friends. We are in great need of a shift in the political discourse regarding fiscal policy in order to have a path out of the mess we've created.

You might ask why a guy that's involved in renewable energy cares so much about something as boring as economics and monetary policy. Why isn't my blog about climate change, saving the planet or hugging trees? Well, the short answer is that until we get the money stuff figured out, we're not going to get very far on any of our other economic, social, and physical needs. I'm still shocked every day about just how pervasive are the myths that hold back our nation, and virtually every other nation. You should be shocked too. 

If we believe the lie that we can't afford anything we simply won't do anything. And that's both foolish and tragic. Great nations with rich resources, amazing people, and big dreams are sitting idle, unemployed, and frustrated -- all because we have bought the lie that money was our problem; our primary limiting factor.

The good news is that word is spreading and the myths are being exposed for the destructive nonsense that they are. Here's an example: 

A Treasury Secretary speaks up

Frank Newman is a former Deputy Secretary of the Treasury. He's been at the highest levels of the system and knows how it works inside-out. He managed Treasury's side of the interplay between the Fed and the Treasury and speaks authoritatively about the operations of modern monetary systems. He's also been at the top of some of the largest banks in the US and China. He knows how it works, and he's telling us we've got it all wrong!

Mr. Newman has written a couple of small books, explaining to Americans that they have been terribly misled, and appealing to us all to grasp our folly as it is holding our nation back from progress and prosperity.

I've included some excerpts below from his books Six Myths that Hold Back America and Freedom from National Debt. You'll recognize the same themes we've been covering on this blog. 
The expression "National Debt" is neither meaningful nor appropriate for the United States.
Misunderstanding of the modern nature of money and Treasuries needlessly confines our thinking about economic approaches to reducing unemployment and growing GDP. The reasons often alleged for fear of "national debt" are not valid for the U.S. and other nations with similar structures of financial systems.
Newman challenges many basic concepts of current economic thinking (you'll recognize some of these if you've been reading along), including:
  • Saving cannot generate productive business investment; it's the other way around: Investment generates economic Saving
  • Deficits do not reduce national Saving or Investment. 
  • Issuance of Treasury securities (deficit financing) cannot "use up" equivalent amounts of funds intended for private-sector use.
Many people who have been lectured a thousand times about the "evils" of "national debt" believe that the U.S. government will have to generate enough money revenue, through future taxes, to "pay off" all the Treasury securities that have been issued to finance deficits. But none of these beliefs are true.
Many Americans are under the misimpression that they are paying taxes, this year, that are being used to "pay off the national debt." In fact, the amount of our tax dollars used to "pay off national debt" this year is zero, last year was zero, and next year will be zero. And no tax dollars will be required of our children to "pay off national debt."
We have talked ourselves into sustaining an unfounded fear. The real damage to America relating to "national debt" is a result of America's fear of it: we have been too reluctant to take steps that would be good for the nation, as we have been held back by needless fear of increasing the "national debt." (emphasis added)

Don't be fooled

Consensus among all the political, religious, and scientific experts at one point was that the world was flat. It also wasn't all that long ago that the medical community unanimously condoned the practice of bleeding patients that were sick. Sometimes society as a whole just gets fooled and it takes a new generation to restore knowledge and common sense. We are in such a time.

The west is finally waking up to the incredible folly of economic thought that's dominated the narrative for the past 30+ years. This economic "mainstream" ideology never saw the Great Financial Crisis coming and still has no clue how to spot the next one. It doesn't understand the role of banks in creating money so it doesn't recognize the instability they cause when they do so irresponsibly. It perpetuates myths in economics textbooks that have not been updated since before the world left the gold standard - a completely different monetary system and fiscal paradigm. It provides no real solutions to unemployment, growth, economic stability, or income inequality. It provides no path forward for achieving financial prosperity while addressing environmental and social challenges. 

Modern monetary theory does. It is a framework for understanding how the modern systems of money really work. From that perspective, we can see clearly the obvious (and extremely positive!) path forward to using national currencies for the real needs and prosperity of the country and its citizens. That's why we have a national currency! 

If you're still wrestling but are ready to get your own objections answered, I would actually suggest you start reading Warren Mosler's books, The Seven Deadly Innocent Frauds of Economic Policy, and Soft Currency Economics. They are short and easy to read even for those without an economic background. Frank Newman's books are a good addition but are best read with a little background.