Modern Monetary Theory

[Elvis]

The end came in August 1971. As part of the larger package of policy changes announced during that month, the United States ceased to supply gold to other central banks in accordance with the arrangement just described. Not many noticed what would once have been an heroic act. That was at least partly because heroic language was avoided. Men did not speak of the final abandonment of the gold standard. Instead it was said that the gold window had been closed. No one could get much excited about the closing of a window. No one much noticed that the gentle Bretton Woods system had by now succumbed. It was not intended to cope, nor could it, with the larger, divergent movements in prices and in currencies that now were commonplace.

John Kenneth Galbraith, Money: Whence It Came, Where It Went, 1975 (p.296)

[JackRiddler]

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Following up on the historic notes about the gold standard, see in the middle panel of this tryptich how all these idiots climb on to gold, contrary to any logic, throughout the 1920s. Some even join after 1929, responding to the crash by attempting to restore "sound money." Then, suddenly, nations are defaulting, the bank runs are on, the Americans finally jump off (for ground level convertibility, anyway), and most of the rest give way...

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[Elvis]

Some even join after 1929, responding to the crash by attempting to restore "sound money."

Great graph thanks, going in my collection.

Galbraith goes over and over this, I looked for some pertinent quotes from my latest read, Money: Whence It Came and Where It Went (1975). Keep in mind, as I just heard Galbraith say in a 1980s interview, 'when you use irony, there will will always be someone who takes you seriously'; Galbraith also coined the term "conventional wisdom":

. . . Arrayed against the Keynesian ideas in a stout phalanx were all the practical men. When not able to grasp an idea, practical men take refuge in the innate superiority of common sense. Common sense is another term for what has always been believed.

What had always been believed, as against Keynes and the Keynesians, was an inordinately powerful thing. For two hundred years Americans of the truest blood had displayed a penchant for paper money. For seventy years they had agitated for silver. Monetary experiment in the United States was thus in an ancient and politically most acceptable tradition. It also retained a large political constituency. A congressman or senator, returning to Oklahoma or Iowa after urging an issue of greenbacks to enhance prices and advance social justice, could be a hero. No such tradition and no such constituency supported the idea of deficit financing, a deliberately, promiscuously unbalanced budget. A man returning to Iowa after advocating this in Washington might be thought dangerously insane.

Wise governments had always sought to balance their budgets. Failure to do so had always been proof of political inadequacy; things need not be any more complicated than that. Also politicians had always sought to excuse failure to make ends meet and sometimes had displayed no slight ingenuity in the effort. However ingenious the explanations, all were ultimately meretricious—a cover for spending too much, taxing too little, managing too badly. Keynesian rationalization of deficits and deficit financing was surely more of the same. Advising Roosevelt in February 1933, President Hoover had said it would "steady the country greatly" were it made clear ". . . that the budget will be unquestionably balanced, even if further taxation is necessary; that the Government credit will be maintained by refusal to exhaust it in the issue of securities." 22

Roosevelt did not disagree; in his first post-convention radio speech he said the country must "stop the deficits," adding that "Any Government, like any family, can for a year spend a little more than it earns. But you and I know that a continuation of that habit means the poorhouse." 23 The beliefs so affirmed by the two Presidents were still powerful five years later — still a formidable barrier against the ideas of a distant English don. There was also explicit in Roosevelt's position what has come to be called the fallacy of composition. This too was a staunch bar to the Keynesian ideas — and it remains influential to this day.

An engagingly plausible mode of thought, the fallacy of composition extends the economics of the family to that of the government. A family cannot indefinitely spend beyond its income. So neither can a government. A parent who borrows to liveleaves debts, not a competence, to those who come after. A government that borrows does the same. Both are morally deficient.

The comparison between family and state, on second thought, is implausible. That anything so massive, diverse, complex, incomprehensible as the United States government (or any national government) should be subject to the same rules and constraints as a wage-earner's household is a matter that, to say the least, requires proof. Nor is it proof, as often said, that it should be so. Additionally it should be observed that the wealth and solvency of a nation depend on what its national economy produces. If borrowing and spending enhance production, as the Keynesian ideas held, then such borrowing and spending enhance solvency. Only rarely do borrowing and spending enhance wealth for a family. It was an enduring complaint of Keynesians that their opposition did not understand what they were trying to do. It was equally the case that the Keynesians did not understand the depth of the tradition to which their opposition was subject or the power by which it was governed.

Well, I didn't find the single sentence I recall which succinctly sums it up, to the effect of:

'No sooner is a crisis is ended—invariably by government deficits—than the 'prudent' managers of the economy dust their hands and announce that "now we can return to the important work of balancing the budget."' And the same crises find their roots all over again.

Also interesting to note that FDR did not enter the presidency knowing exactly what he would do; only after experimentation and by steps did he come to the fiscal policy/New Deal solution.

[Elvis]

New interview with Warren Mosler!

On other sites hosting the video, I read a bunch of commenters blasting Mosler and MMT. They haven't absorbed MMT enough to escape their brainwashing. The Mises types are the worst, you can never get through to them; I just laugh when someone links a mises site. (I do have a friend who, after a lifetime of SDS socialism, went through a libertarian/"Rothbardian" phase; he's since realized his error, then awhile back I introduced him to MMT and he'll never be the same.

Anyway—here's the man who helped get the MMT ball rolling perhaps more than anyone, and not least by funding an entire research institute (with the millions he made using his MMT knowledge in the bond market):


Warren Mosler - Modern Monetary Theory (MMT) Interview - Real Vision - July 2019

https://www.youtube.com/watch?v=ymcKtdnR3fg


And here's Mosler on Bloomberg in May—listen to the various economists lambast MMT and then read the Galbraith passage I quoted in my previous post above. No other profession rewards failure so completely. (Can''t find an embeddable version.)

https://www.bloomberg.com/news/videos/2 ... SNJp9iO2Bw

[Elvis]

Teriffic little article—a talk given at the Philadelphia Fed, actually—about Ben Franklin and the Colonial currencies, with some fascinating details. Won't paste all, but worth the quick read; mentions the expiration-dated money that was tried in some places, plus cool photos of bills printed by Franklin et al. Also made explicit is the practice of some colonies making direct paper money mortgage loans to citizens. Remarkable!


https://www.philadelphiafed.org/-/media ... conomy.pdf

...Knowing how, when, and why paper money first became commonplace in America and the nature of the institutions issuing it can help us better comprehend paper money’s role in society. Benjamin Franklin dealt often with this topic, and his writings can teach us much about it.

There are two distinct epochs of paper money in America. The first began in 1690 and ended with the adoption of the U.S. Constitution in 1789. In this first epoch the legislatures of the various colonies (later states) directly issued their own paper money — called bills of credit — to pay for their own governments’ expenses and as mortgage loans to their citizens, who pledged their lands as collateral. This paper money became useful as a circulating medium of exchange* for facilitating private trade within the colony/state issuing it. By legal statute and precedent, people could always use their paper money to pay the taxes and mortgage payments owed to the government that had issued that specific paper money, which, in turn, gave that money a local “currency.” There could be as many different paper monies as there were separate colonies and states.

At the 1787 Constitutional Convention, the Founding Fathers took the power to directly issue paper money away from both state and national legislatures. This set the stage for the second epoch of paper money in America, namely, the ascendance of a government-chartered and -regulated, but privately run, bank-based system of issuing paper money, an epoch we are still in today.

Benjamin Franklin’s life spans most of the first epoch of paper money, and he is its most insightful analyst and ardent defender. He did not create the first paper money in America, nor was he yet born when it was first used. However, these early experiments with paper money, beginning in 1690 in New England and in the first two decades of the 18th century in the Carolinas, New York, and New Jersey, were limited emergency wartime exercises, temporary in design. Beginning in the 1720s colonial legislatures began to move toward issuing paper money with a view to making it a permanent fixture within their colonies. Pennsylvania was an important leader and the most successful colony in this movement. It is the birth of this permanent peacetime paper money supply that Franklin will affect.

No other American was involved over as long a period of time with so many different facets of colonial paper money as was Benjamin Franklin — certainly no other American with such a preeminent stature in science, statesmanship, and letters. Franklin arrived in Philadelphia the year paper money was first issued by Pennsylvania (1723), and he soon became a keen observer of and commentator on colonial money. He wrote pamphlets, treatises, and letters about paper money. He designed and printed paper money for various colonies. He entertained ideas about and proposed alternative monetary systems. As an assemblyman for the colony of Pennsylvania, he was involved in the debates during the 1740s and 1750s over the management of that colony ’s paper money. As a lobbyist for various colonies to the British court, he dealt with conflicts over colonial paper money that arose between Britain and her colonies in the 1760s and 1770s. Finally, at the end of his life as one of the preeminent Founding Fathers at the 1787 Constitutional Convention, he participated in con-stitutionally ending the first epoch and so helped usher in the second epoch of paper money in America. Franklin is arguably the preeminent authority on paper money in America in this period.

more: https://www.philadelphiafed.org/-/media ... conomy.pdf


And here is Franklin's pamphlet referenced in the talk:
A Modest Enquiry into the Nature and Necessity of Paper Currency
Benjamin Franklin | April 3, 1729

[Grizzly]

Also made explicit is the practice of some colonies making direct paper money mortgage loans to citizens. Remarkable!

Interesting for sure... Thx, E!

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Somebunall, may have seen this:

What the 1% Don't Want You to Know

Economist Paul Krugman explains how the United States is becoming an oligarchy - the very system our founders revolted against.

[Elvis]

Audio only (no transcript) but fascinating:

https://mronline.org/2019/02/15/myth-of ... ulie-mell/

Myth of the Medieval Jewish Moneylender with Julie Mell
Posted Feb 15, 2019 by Scott Ferguson, Maxximilian Seijo, and William Saas

In this episode, we talk to Julie Mell, an associate professor of history at North Carolina State University and author of the two volume book, The Myth of the Medieval Jewish Moneylender.

In The Myth of the Medieval Jewish Moneylender, Mell marshals previously untapped primary sources to upend the common historical narrative regarding the role of Jewish moneylenders in the development of the modern economy. On Mell’s reading, the prevailing understanding of the medieval Jewish moneylender–common to both antisemitic and philosemetic discourses in the 19th and 20th centuries– has no more basis in history than does the prevailing myth of barter.

At North Carolina State University, Mell teaches courses in medieval history, Jewish history, and economic thought; she also recently served as a fellow at the Center for the History of Political Economy and as a visiting scholar at the Centre for Hebrew and Judaic Studies at the University of Oxford.

[JackRiddler]

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I can't wait to listen to that one (myth of the medieval Jewish moneylender) and to catch up with all here. This is one of the best and turns out most educational (to me) threads I ever started here.

Reading another book about Franklin (Waldstreicher, Runaway America), I resolve not ever again to teach a US history course without including Franklin himself on paper money, and the paper money issuance schemes repeatedly instituted in the colonies. It's foundational to the U.S. (and to modern capitalist political economy generally) and an example of how present-day conventional wisdom about money turns the actual history literally on its head.

Randians (Paul and Ayn), if you want to play your Patriot Saw, you gotta figure out that Gold is un-American, Greenbacks are American. It's Opposite World.

My New Deal course was an obvious place to go deep into this -- law, macroeconomics, Keynesianism, Federal Reserve all central -- but also was incredibly full of stuff to cover (since it was a 2/3-grad course with heavy reading all around and went very deep into both World Wars). So the "What is Money" question remained tangential.

I am making up for this next year!

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[Elvis]

This is one of the best and turns out most educational (to me) threads I ever started here.

Yes.

MMT in the New York Times again, a fairly balanced Reuters piece; I'll let those who have been following along critique the "pro" and especially the "con" arguments for/against MMT as expressed here:

Archive link: http://archive.is/48Kcx

https://www.nytimes.com/reuters/2019/08 ... y-mmt.html

MMT May Be Democrats' Economic Cure, but Only Trump Got the Memo
By Reuters

Aug 7, 2019

SETAUKET, New York — From her home overlooking Setauket Harbor on Long Island's North Shore, a motorboat bobbing at the dock, Stephanie Kelton hopes to revolutionize how the U.S. government manages the economy.

It isn't always a pleasant task.

A key figure in the "Modern Monetary Theory" economic camp, her assertions that the federal government could spend freely for things like a jobs guarantee or Green New Deal without risking runaway inflation, a debt default or a clubbing by global creditors have been Twitter-bombed by mainstream economists as left-wing free lunchism.

Proponents of MMT have been called fanciful for the notion that the U.S. Congress, which typically struggles to pass an annual budget, could with smart budgeting and regulation take over the Federal Reserve's job of controlling inflation.

And even Kelton, an economics professor at Stony Brook University in New York and an adviser to Senator Bernie Sanders' presidential campaign, is a bit thrown by the fact that the person who appears closest to accepting her argument is President Donald Trump, whose Republican Party has traditionally touted an adherence to fiscal discipline.

Trump and Republicans in Congress, she said, "did not allow perceived budget constraints to stand in their way" of a $1.5 trillion tax cut package which was passed in late 2017 and pushed the federal debt beyond $22 trillion.

Democrats now seem ready to get in the game.

Lawmakers from both parties recently reached a federal spending deal that is expected to raise the federal deficit by $2 trillion over the next two years, and Democrats lining up to run against Trump in 2020 have largely avoided talk of fiscal restraint so far in the campaign.

Groups like the Center for Equitable Growth have begun developing ideas for new "automatic stabilizers" that would boost federal spending in a downturn without action by Congress, something Kelton argues could be achieved with a jobs guarantee to absorb those thrown out of work when the economy weakens.

'VOODOO ECONOMICS'

Some of Kelton's highest-profile critics, like former U.S. Treasury Secretary Lawrence Summers, agree the United States should worry less about debt, more about public investment, and accept that fiscal policy - deficit spending - needs a greater role in future U.S. economic policy.

They part ways, though, over the Kelton camp's contention that the risks of excessive government debt are far overstated by mainstream economists largely because the U.S. government borrows in its own currency, and any threat of excessive inflation can be countered by regulation or even tax hikes that would rein in spending.

While Summers, who had key roles in the Obama and Clinton administrations, has decried such assertions as "voodoo economics," other notable economic figures including Ray Dalio, the founder of hedge fund Bridgewater Associates, say policies like those Kelton embraces have become "inevitable" in the "new normal" economy.

With interest rates stuck at historically low levels and inflation weak, central bankers themselves wonder if they have the tools to weather the next downturn, and what can lift the economy if they don't.

To Kelton and other MMT adherents, that is emblematic of a system that needs changing in favor of one where Congress simply spends what is needed to ensure full employment and adequate demand, the Treasury writes the checks, and the Fed prints the money to cover them.

It isn't, she said, a recipe for "infinite" spending, as her critics suggest. Inflation is the constraint that would prevent it. But she argues that Congress, not the Fed, could manage the pace of price increases while still meeting the goal of full employment, and that the public could discipline elected officials at the ballot box if it was not done well.

Those are large leaps of faith. But Kelton, who helped develop MMT in the 1990s, argues they are warranted in an era when inflation is not a problem, unemployment remains high among some minority groups and in some regions, and a sort of war-like initiative is needed to direct the investment needed to combat climate change.

"Look at what the world looks like not just in the U.S., but much of Europe and Japan," she said. "We operate chronically with governments that don't run their budgets aggressively enough, and as a result you have unemployment and stagnation."

But even Democratic presidential candidates with ambitious spending plans, including Sanders, a democratic socialist, have not publicly endorsed MMT. The theory also is not headlined on campaign websites dense with spending plans.

Yet, it has worked its way into the national debate, partly out of an acknowledgement that monetary policy may not be able to ride to the rescue in another deep downturn.

Even officials at the U.S. central bank wonder if their existing framework is wobbly, and whether they need a better sense of how to define full employment in an economy with wide disparities among regions and demographic groups.

That only proves the current arrangement isn't working, Kelton said, in the United States or Europe. Japan is struggling as well, though notably there is now a constituency inside the Bank of Japan arguing for something like MMT - a major fiscal push to try to jolt the country away from its dangerously low levels of inflation.

MMT supporters may not be alone in seeing a greater fiscal role as necessary. They just don't see the need to wait for a crisis to make a move.

"People are thinking ahead. We are not going to be leaning on central banks exclusively ... That is encouraging," Kelton said. Congress "already has all the powers they need ... We cannot ask the power of the purse to make us all rich and wealthy and never have to work. But we can do better."

(Reporting by Howard Schneider; Editing by Paul Simao)

After almost two years of scrutinizing MMT, I can't find holes in its logic, and money history points us to the MMT fork in the road (and make it a left turn).

[Elvis]

I thought I had posted this article but apparently not. Ellen Brown is 'MMT-ish', e.g. quoting Warren Mosler (who btw has said that MMT just comes down to logic) and others, but she has her own set of ideas that may not always mesh with MMT. In any case, I've seen MMT economists cite this article she posted in 2014. It explains, contrary to the popular belief, why banks don't need retail deposits to make loans, but they do want deposits. Ends with an interesting note on the rather brilliant idea behind the Bank of North Dakota. Links at original:

https://ellenbrown.com/2014/10/26/why-d ... ake-loans/

Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans.
Posted on October 26, 2014 by Ellen Brown

Many authorities have said it: banks do not lend their deposits. They create the money they lend on their books.

Robert B. Anderson, Treasury Secretary under Eisenhower, said it in 1959:

When a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposits; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.

The Bank of England said it in the spring of 2014, writing in its quarterly bulletin:

The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

. . . Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

All of which leaves us to wonder: If banks do not lend their depositors’ money, why are they always scrambling to get it? Banks advertise to attract depositors, and they pay interest on the funds. What good are our deposits to the bank?

The answer is that while banks do not need the deposits to create loans, they do need to balance their books; and attracting customer deposits is usually the cheapest way to do it.


Reckoning with the Fed

Ever since the Federal Reserve Act was passed in 1913, banks have been required to clear their outgoing checks through the Fed or another clearinghouse. Banks keep reserves in reserve accounts at the Fed for this purpose, and they usually hold the minimum required reserve. When the loan of Bank A becomes a check that goes into Bank B, the Federal Reserve debits Bank A’s reserve account and credits Bank B’s. If Bank A’s account goes in the red at the end of the day, the Fed automatically treats this as an overdraft and lends the bank the money. Bank A then must clear the overdraft.

Attracting customer deposits, called “retail deposits,” is a cheap way to do it. But if the bank lacks retail deposits, it can borrow in the money markets, typically the Fed funds market where banks sell their “excess reserves” to other banks. These purchased deposits are called “wholesale deposits.”

Note that excess reserves will always be available somewhere, since the reserves that just left Bank A will have gone into some other bank. The exception is when customers withdraw cash, but that happens only rarely as compared to all the electronic money flying back and forth every day in the banking system.

Borrowing from the Fed funds market is pretty inexpensive – a mere 0.25% interest yearly for overnight loans. But it’s still more expensive than borrowing from the bank’s own depositors.


Squeezing Smaller Banks: Controversy Over Wholesale Deposits

That is one reason banks try to attract depositors, but there is another, more controversial reason. In response to the 2008 credit crisis, the Bank for International Settlements (Basel III), the Dodd-Frank Act, and the Federal Reserve have limited the amount of wholesale deposits banks can borrow.

The theory is that retail deposits are less likely to flee the bank, since they come from the bank’s own loyal customers. But as observed by Warren Mosler (founder of Modern Monetary Theory and the owner of a bank himself), the premise is not only unfounded but is quite harmful as applied to smaller community banks. A ten-year CD (certificate of deposit) bought through a broker (a wholesale deposit) is far more “stable” than money market deposits from local depositors that can leave the next day. The rule not only imposes unnecessary hardship on the smaller banks but has seriously limited their lending. And it is these banks that make most of the loans to small and medium-sized businesses, which create most of the nation’s new jobs. Mosler writes:

The current problem with small banks is that their cost of funds is too high. Currently the true marginal cost of funds for small banks is probably at least 2% over the fed funds rate that large ‘too big to fail’ banks are paying for their funding. This is keeping the minimum lending rates of small banks at least that much higher, which also works to exclude borrowers because of the cost.

The primary reason for the high cost of funds is the requirement for funding to be a percentage of the ‘retail deposits’. This causes all the banks to compete for these types of deposits. While, operationally, loans create deposits and there are always exactly enough deposits to fund all loans, there are some leakages. These leakages include cash in circulation, the fact that some banks, particularly large money center banks, have excess retail deposits, and a few other ‘operating factors.’ This causes small banks to bid up the price of retail deposits in the broker CD markets and raise the cost of funds for all of them, with any bank considered even remotely ‘weak’ paying even higher rates, even though its deposits are fully FDIC insured.

Additionally, small banks are driven to open expensive branches that can add over 1% to a bank’s true marginal cost of funds, to attempt to attract retail deposits. So by driving small banks to compete for a relatively difficult to access source of funding, the regulators have effectively raised their cost of funds.

Mosler’s solution is for the Fed to lend unsecured and in unlimited quantities to all member banks at its target interest rate, and for regulators to drop all requirements that a percentage of bank funding be retail deposits.


The Public Bank Solution

If the Fed won’t act, however, there is another possible solution – one that state and local governments can embark upon themselves. They can open their own publicly-owned banks, on the model of the Bank of North Dakota (BND). These banks would have no shortage of retail deposits, since they would be the depository for the local government’s own revenues. In North Dakota, all of the state’s revenues are deposited in the BND by law. The BND then partners with local community banks, sharing in loans, providing liquidity and capitalization, and buying down interest rates.

Largely as a result, North Dakota now has more banks per capita than any other state. According to a May 2011 report by the Institute for Local Self-Reliance:

Thanks in large part to BND, community banks are much more robust in North Dakota than in other states. . . . While locally owned small and mid-sized banks (under $10 billion in assets) account for only 30 percent of deposits nationally, in North Dakota they have 72 percent of the market. . . .

One of the chief ways BND strengthens these institutions is by participating in loans originated by local banks and credit unions. This expands the lending capacity of local banks. . . .

BND also provides a secondary market for loans originated by local banks. . . .

Although municipal and county governments can deposit their funds with BND, the bank encourages them to establish accounts with local community banks instead. BND facilitates this by providing local banks with letters of credit for public funds. In other states, banks must meet fairly onerous collateral requirements in order to accept public deposits, which can make taking public funds more costly than it’s worth. But in North Dakota, those collateral requirements are waived by a letter of credit from BND. . . .

Over the last ten years, the amount of lending per capita by small community banks (those under $1 billion in assets) in North Dakota has averaged about $12,000, compared to $9,000 in South Dakota and $3,000 nationally. The gap is even greater for small business lending. North Dakota community banks averaged 49 percent more lending for small businesses over the last decade than those in South Dakota and 434 percent more than the national average.

In other states, increased regulatory compliance costs are putting small banks out of business. The number of small banks in the US has shrunk by 9.5% just since the Dodd-Frank Act was passed in 2010, and their share of US banking assets has shrunk by 18.6%. But that is not the case in North Dakota, which has 35 percent more banks per capita than its nearest neighbor South Dakota, and four times as many as the national average. The resilience of North Dakota’s local banks is largely due to their amicable partnership with the innovative state-owned Bank of North Dakota.

____________

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.

The comments are mixed, worth reading maybe but overall less informed that than say, neweconomicperspectives and other MMT-oriented sites.

[Belligerent Savant]

.

So how does MMT correlate with/compliment -- or not -- the rise of crypto/digital currency, particularly the growing trend of using 'digital assets' as a hedge/future safe-haven from the apparent volatility of the dollar/FIAT currency (however sound such a trend may be)?

(Historically, gold/metals play a similar role; there are a number of articles pointing to China and Russia 'stockpiling' gold, such as the one below, for reasons that may be subjective depending on the author's perspective/opinion).


A layman's response would be ideal.


https://medium.com/@bunkerbob/china-and ... 05d52bd4be

China and Russia Stockpile Gold While Gold Prices Are Artificially Low

China is aggressively buying gold in an effort to build its reserves. While it has not been selling off its US dollar holdings, there’s evidence to suggest China wants gold to upend the US dollar as the global reserve currency of choice. The US dollar has long served as a safe haven asset. As the world’s number one superpower, the US’ currency is expected to maintain its value and stability. In fact, the US has been short selling gold in the paper markets to better ensure the US dollar maintains its supremacy as a reserve. This behavior has artificially suppressed the price of gold and has enabled China and Russia to buy gold cheaply. With gold prices still depressed, we may begin to see other countries’ central banks follow the lead of China and Russia.

China’s ongoing trade war with the US hasn’t benefited either country involved in the conflict so far. The tit-for-tat tariffs and political posturing are forcing China and the US to hunt for negotiating leverage. Negotiating Leverage, of course, is needed to end the trade war on somewhat favorable terms. Moreover, each country knows the world is watching the conflict. The US and China need to consider their future positioning on the world stage. If China can begin to wean the world off the US dollar, it will deal the US a crippling blow. China also has a willing partner in disrupting the US’ world standing: Russia.
Russia has been selling off the US treasuries that comprise its reserves. Some analysts speculate the reason for doing so was to hurt the US. A US creditor selling US debt could send the prices of treasuries higher, though Russia doesn’t own enough US debt to make much of an impact. Other analysts suggest Russia’s sale of US treasuries protects Russia from the imposition of US sanctions restricting its ability to trade US treasuries. Whatever the case may be, tensions with the US have pushed Russia to buy gold. It now has the fifth largest stockpile of gold in the world.

Hedging Against Recession

Speculation about a global recession has been circulating for quite some time now. We’ve reached a late economic cycle, as the bull market that had been charging forward for over a decade finally lost steam. One worrisome symptom of late cycle economies is slowing growth. Debt is predicated on growth, so as growth slows, halts, or contracts, debt can no longer be serviced. With this in mind, the US’ addiction to debt has become a self-inflicted wound that gives countries reason for pause. If the US struggles with its debt, the US dollar could decrease in value. Because the value of gold and the US dollar are inversely correlated, gold would be a better store of value in the event of a recession. The late economic cycle and indebted nature of the world’s premier superpower may give countries a reason to follow China and Russia in buying gold.

Related:

https://www.cnbc.com/2019/08/05/crypto- ... m-lee.html

Crypto rally sparked by investors seeking hedge against rising global risks, says bitcoin bull Tom Lee

Bitcoin bull Tom Lee told CNBC on Monday that cryptocurrency is a hedge against global risks, amid the U.S.-China trade conflict and currency war.

The founder and head of research at Fundstrat explained on "Fast Money" that "bitcoin has done something very interesting this year."

"Last couple of years, it's been really correlated to dollar." he said. "Weak dollar has been good for bitcoins. ... And it's been really correlated to risk markets. This year, it's steered away from the dollar because dollar's been strong, bitcoin's been up, which is a real breakage. It's gone negative on correlation to the equity markets."

Lee also added that crypto is now "positively correlated to gold" and it proved "itself this year to be a hedge against global risks."

Gold surged as much as 2% on Monday, reaching its highest level in more than six years as U.S.-China trade conflict worsened. Investors are seeking safer assets like gold, cryptocurrency and bonds as the equity market is growing more volatile. Bitcoin also jumped nearly 8% on Monday.

In response to bitcoin rallying, Lee contributed "crypto winter" being over as one of the reasons why the currency is now bullish.

"I think that makes [crypto] authentic institutional source of diversification. I think that's gonna help it propel to new highs."

Earlier Monday, China, which has historically controlled its currency, allowed the yuan to fall to its lowest level in more than a decade. The onshore yuan breached above 7 per U.S. dollar and traded at 7.04. The Chinese currency has not broke over the 7 level against the dollar since the global financial crisis in 2008.

The yuan's breakthrough came after President Donald Trump announced last week that the U.S. is putting 10% tariffs on another $300 billion worth of Chinese goods, effective September 1.

Following the move, U.S. stocks were trading sharply lower as the trade war between the U.S. and China intensified.

[Elvis]

So how does MMT correlate with/compliment -- or not -- the rise of crypto/digital currency, particularly the growing trend of using 'digital assets' as a hedge/future safe-haven from the apparent volatility of the dollar/FIAT currency (however sound such a trend may be)?

A layman's response would be ideal.

I'm a layman, so I'll give it a shot. I know that most if not all MMT economists poo-poo Bitcoin. In any event it's a completely different animal than the state money we use and that MMT describes. Biotcoins are digitally "mined," in emulation of gold, but gold-based money was exchangable for gold; there's no exchange value for bitcoin—electricity credits maybe?—except in dollars or other tradables that are available for sale in bitcoin.

I remember seeing these articles about MMT's views on Bitcoin on the New Economic Perspectives blog (a sort of online 'home of MMT'):

https://neweconomicperspectives.org/201 ... -zero.html
The Fair Price of a Bitcoin is Zero
Posted on December 2, 2013 by Devin Smith | 82 Comments
By Eric Tymoigne

It's long and gets technical but probably worth a skim (I haven't read it). Part 2 is short and sweet, I'll quote it here:

https://neweconomicperspectives.org/201 ... blems.html
Bitcoin System: Some Additional Problems
Posted on December 9, 2013 by Devin Smith | 20 Comments
By Eric Tymoigne

In my last post, I argued that the fair price of a bitcoin as a monetary instrument is zero BTC; a bitcoin contains no promise in terms of income, in terms of convertibility, in terms of maturity, or any other. As a commodity, I have no idea what its fair price is. BOA says it is $1300. I will let those who find utility in the bitcoin payment system and speculators decide how much they are willing to pay in USD for a number credited on their screen in BTC. All I can tell you is: “money does not grow on trees.” Money is not a natural occurrence, it is a man-made financial devise. It looks like the bitcoin creator’s views on money were shaped by the old and erroneous idea that “gold is money.” Gold was at best a collateral embedded in a monetary instrument (gold coin), the metal itself was never money. In today’s blog, I will focus on three other issues with the bitcoin system that prevent it to work well as a monetary system. While I explain what ought to happen to make the bitcoins work properly as a monetary instrument, I am not sure it can be done.

1 - The supply of bitcoins is inelastic

If a monetary instrument works properly, its supply changes with the quantity demanded. It goes up when there is more demand for it, and down when there is less demand for it. Think of bank accounts. When people need more funds for transactions they can apply for a bank advance. When people are bearish about the future, they can repay their bank advances and the outstanding amount bank accounts declines. The same is true for government currency via the automatic stabilizers of fiscal policy, the central bank clearing and settlement mechanisms, and the lender of last resort. When the economy is doing poorly, government spending rises automatically and tax revenues decline, and the central bank may help by providing reserves on demand to banks to maintain their liquidity. When the economy is doing well and people can rely on banks to sustain their financial needs, non-discretionary government spending declines, tax revenues rise (given tax rate, i.e. no increase in tax burden), and central-bank advances to banks are repaid.

The bitcoin supply is fixed in terms of flow (BTC 25 per 10 minutes now) and in terms of maximum outstanding amount (BTC 21 millions). It cannot be increased in function of the demand for bitcoins. In addition, it is not redeemable (either through conversion or by handing it back to the issuer), i.e. it cannot be decreased in function of the demand for bitcoins.

If it were possible to change the injection and destruction mechanisms to make the bitcoin supply perfectly elastic, they could easily be created and destroyed at will. Bitcoins can be created out of thin air. This is a great quality but as the saying goes “with great power comes great responsibility.” The fact that bitcoins can be created at will only means that there is no need to care about “running out of money;” this takes care of the financial side of economic problems in terms of availability of funds (a central point of MMT). However, easiness of creation does not mean one should not be careful with the way bitcoins are injected (that is another central point of MMT). Banks must perform underwriting (we saw what happens when they do not). Government have budgetary procedures. The supply of bitcoin is provided arbitrarily.

2 - The supply of bitcoin is arbitrary

The reward structure of miners is not based on the difficulty of solving the problem. Why are miners paid BTC 25 now? Why did they get a pay cut from BTC50 to BTC 25 and why will pay cuts continue? I have no idea. The consequence is that the maximum amount of bitcoin will be reached in in 2140. Why aiming for 2140? I have no idea. It does not make any economic sense.

In addition, the supply of bitcoin is based on a bonanza, think lottery winnings, rather than the needs of the payment system for more bitcoins. That does not promote a smoothly working of the payment system.

3 - There is no deposit insurance, no lender of last resort, and fraud does occur and it is difficult to offset its consequences.

The payment system is subject to frauds in terms of accounting frauds (here and here), in terms of ponzi schemes, and in terms of thefts (here). Recently the following occurred: “The largest Bitcoin payment processor in Europe, BIPS, said last month that it was hacked and that it lost about $1 million worth of Bitcoins, including coins that were in the personal online wallets of customers. The company, which is still in business, said this week that it would be “unable to reimburse Bitcoins lost unless the stolen coins are retrieved.” (here).

If one compares the traditional payment system with the bitcoin payment system on equal footings (i.e. no regulation), are frauds and thefts more prone in the traditional payment system? I.e. is the bitcoin payment system intrinsically safer? I cannot tell you. Accounting fraud seems pretty hard to do but is not impossible, others seem more feasible.

The main point here is that you are on your own when you enter this payment system. The price of bitcoins will drop dramatically in the future. Why and when this will happen is anybody’s guess and is irrelevant. All that is known is that the structure of the system is flawed and needs to change (you do not ask your mechanic when your brakes will fail if he tells you they need to be changed). For example, the value of bitcoins may drop dramatically in terms of USD as people figure out that their savings in BTC is not as safe as they thought, and as they try to leave the bitcoin system all at once. In that case, their savings valued in USD would decline dramatically.

At the moment I do not see the need for a deposit insurance and lender of last resort. Debt-deflations are not possible in the bitcoin system for now because there is no debt written in BTC. The risk of contagion is also small given the limited size of this payment system. There can be a deflation (“bubble popping”) but not a debt-deflation. This, of course, assumes that no BTC-debt exists. I do not know for sure. We have had the shadow banking system, now we have shadow payment systems (Bitcoin and others) that financial professionals seem to enjoy using (see comment in my previous post).

Looking around, I saw these reader comments on a Medium bloggy thing about the differences (the essay was terrible but a couple of the comments are good):

Bitcoin...is nineteenth century monetary wine in twenty-first century bottles. As anything other than a better way of moving fiat money across borders, it is utterly useless.

and this,

The value of bitcoin, which is obviously modeled on gold (a commodity which like any other can be used as a medium of exchange, store of value, etc. but is NOT money) is clearly dependent only on the existence of greater fools.

Bitcoin also seems to be serving as much more of a speculative investment rather than a currency to buy stuff with.

As a stable store of value? Fuggetaboutit.




In a quick search a pertinent page comes up on a Bitcoin advocacy site:

https://bitcoinexchangeguide.com/how-bi ... heory-mmt/

First they draw from an Economist article to give a surprisingly accurate—for the Economist—description of MTT's core tenets (probably drawn from their interview with Stephanie Kelton):

“A government that prints and borrows in its own currency cannot be forced to default since it can always create money to pay creditors. New money can also pay for government spending; tax revenues are unnecessary. Governments, furthermore, should use their budgets to manage demand and maintain full employment. The main constraint on government spending is not the mood of the bond market, but the availability of underused resources, like jobless workers. Raising spending when the economy is already at capacity can lead to rapid inflation. The purpose of taxes, then, is to keep inflation in check. Spending is the accelerator, taxation the brakes. Fiscal deficits are irrelevant as long as unemployment is low and prices are stable.”

The article is stubbornly skeptical of MMT, and this is all they say about any relation to Bitcoin:

there is no coherent explanation of integration of MMT and cryptocurrencies. What it does provide is a bridge between the right-leaning and left-leaning take on MMT. The left-leaning economist has always been wary of corporations controlling the money supply. Bitcoin certainly is an alternative to this.

A young man I know, who's working at the forefront of AI and other digital technologies, was just a year ago intensely curious about cryptocurrencies; he lost interest when he realized it's not terribly viable or reliable as money. I'll ask him about next time I see him (he just left town for grad school).


Digital currencies are something else, and I don't fully comprehend them as a separate notion from central bank money—except for something like Facebook's Libra, which sounds like a bad and probably dangerous idea.

A different idea is about using the central bank to issue digital currency; again, even though I've read this interview about it, the concepts haven't really gelled in my mind. But give this a try—the interviewee, Rohan Grey, an exponent of MMT, is at the leading edge of the digital currency thing:

[soundcloud]macro-musings/rohangrey[/soundcloud]
https://soundcloud.com/macro-musings/rohangrey

TRANSCRIPT is here: https://seekingalpha.com/article/424180 ... ary-theory


Hope that helps... I learned a few things...thanks!


P.S. -- how do I make the Soundcould player display?

[Belligerent Savant]

.

Thanks for taking the time to put this together, Elvis -- will dig into this when time allows.

One brief note, however: given the history/nature of Bitcoin [and related cryptocurrency], any opinion prior to the last, say, 12 months, will be of limited value given the price activities over the past ~2 yrs. It's a completely different 'universe' now compared to 2013, at least with respect to cryptocurrency. Adoption rates, both institutional and otherwise, are far higher.

The chart you included above provides a useful visual for the variance in price (especially when compared to 2013), though the currency is still in its pre-teen years, so volatility is expected. It may well stabilize over time, as it evolves into its post-adolescent, adult manifestation (or otherwise, it'll simply wink out -- though I don't think that'll happen. Genie can't be put back in the bottle).



There's also been substantial regulatory guidance and clarity provided by domestic and international govt institutions over the past 2 yrs, which in turn has increased institutional interest in cryptocurrency, or at least inspired a few of the bigger banks/hedge funds to begin creating investment vehicles for their clients [of course, that certainly isn't a 'stamp of approval' by any means; they'll sell whatever they think the plebes will buy. But it does demonstrate that adoption has increased over the past 2+ years in particular].

This piece raises some interesting points [the comments section is worth perusing as well]:

https://medium.com/@burningw0rds/modern ... 6e1e47f96c

Excerpt:

Instead of governments arbitrarily shocking or inflating the supply of money (by spending, capital control, or central banking), Bitcoin has completely rearchitected an alternative. Also known as a distributed ledger, or blockchain, Bitcoin is founded on ideals such as:

Predictable & programmatic money inflation schedule
Geographically unlimited & permissionless access to the network

Ballooning government debt is historically correlated with hyperinflation and ultimate social misery. Although steady/predictable government debt growth may allow midterm prosperity, there may be a swelling risk that the system crashes harder once a real shock occurs.

In cases of hyperinflation like Venezuela today and pre-Nazi Germany in the past, populations of innocent people become economic hostages during hyperinflation. Theoretically, Bitcoin could become a universal economic escape hatch- to allow individuals insurance against local economic meltdown. Anyone with internet access can potentially access this alternative store of value to guard their wealth.

However, Bitcoin is subject to extreme volatility and is still technologically limited. While holding promise as an alternative to a possibly corrupt legacy global economy, Bitcoin has political dysfunctions of its own that sensationalizes the public.

Similar to MMT, the myth of Bitcoin can easily get out of control, and there are competing camps within the Cryptocurrency sphere vying for control of the narrative. However, predictable and permissionless digitally native currency will likely prevail as Bitcoin’s narrative. Past the hacks, scams, bubbles or token hyperinflation, the other elements of cryptocurrency may emerge later after Bitcoin, to further expand the scope of this new financial alternative.

It can be logically assumed that all MMT scholars, of all camps, would regard BTC as a theoretical nemesis. As opposed to MMT, BTC takes a drastically different philosophical approach to government debt. Allowing individuals an escape hatch against endless government debt may actually disable the financial monopolies that support MMT’s current fiat system.

Other more logical proponents of MMT, like Bill Mitchell, may applaud Bitcoin as an independent free-market alternative actually affirming MMT as he says:

“All of the imbalances in the foreign exchange market are resolved by the price of the currency fluctuating. What that means is that domestic policy instruments — the central bank and fiscal policy — are free to target domestic policy goals knowing that the exchange rate will resolve the currency imbalances arising from trade deficits, trade surpluses, et cetera.”

The free-floating currency foreign exchange system of today provides an existential check and balance on MMT. Bitcoin presents another extended option. If global government debt and central banking easy money is truly a long-term threat, then the entire world economy is at incredible risk.

All of the world’s governments + central banks will be guilty in this regard. And if the world economy does face a reckoning, there will be no safe haven found amid fiat currency. So we will see what kind of refuge Bitcoin can provide in reality, if any…

[Elvis]

If global government debt and central banking easy money is truly a long-term threat, then the entire world economy is at incredible risk.

MMT says that government debt and central banking "easy money" are not the mortal dangers some try to make them out to be.

Bitcoin is the theoretical nemesis of MMT insofar as Bitcoin's limited quantity, like gold, makes it entirely unsuitable as a state unit of exchange.

The superior quality of a fiat currency is that you can match the quantity of money to the resources it can marshal.

And we've barely touched on the ridiculous amount of electricity it takes to generate Bitcoin. This alone should probably kill it.

[Belligerent Savant]

.

The last bit about bitcoin's power consumption can benefit from some context.

This person breaks it down well:

Excerpt

Depending on who you ask and what assumptions they make in their calculations, Bitcoin’s annual electricity consumption is somewhere between 15 and 65 terawatt hours (TWh) per year, as of May 2018.
That sounds like a really big number, but it’s hard to know how big it really is without further context.

Bitcoin VS Countries

You may have seen one of the countless news stories in the past year with headlines like “Bitcoin mining consumes more electricity a year than Ireland” (25 TWh).
That is technically true, but it’s a flawed “apples to oranges” comparison because Bitcoin is not a country, nor is it limited to a single country — it’s a new global financial system that can be used by anyone, anywhere in the world.
If we’re going to use the world’s countries as a point of comparison, we should start with the fact that the world’s total electricity consumption is about 22,000 TWh per year, with China (6,300 TWh) and the United States (3,900 TWh) together making up almost half of the world’s total.
That means that Bitcoin (15 to 65 TWh) currently makes up between 0.07% and 0.30% of the world’s annual electricity consumption.

Bitcoin VS Power Plants

The world’s largest power plants — the Three Gorges Dam in China and the Itaipu Dam in South America — each produce about 100 TWh per year, while the ten largest power plants in the United States generate between 19 and 33 TWh per year.
In other words, Bitcoin’s electricity consumption today (15 to 65 TWh) is comparable to the annual generation of a single large power plant.

Bitcoin VS Other Industries

Some people like to (favorably) compare Bitcoin’s energy consumption to that of industries like banking or gold, but I’m not a fan of that approach because the way Bitcoin uses energy is so fundamentally different.
For example, the global banking system consumes less electricity per transaction than Bitcoin, but it also employs millions of employees and maintains hundreds of thousands of bank branches and corporate offices that all require extra energy that is difficult to account for.
And gold is an even messier comparison. Despite its misleading name, Bitcoin “mining” is a purely digital activity, while gold mining is a physical activity that destroys landscapes and vital ecosystems, and releases toxic substances like cyanide and mercury into the environment.

Bitcoin VS Internet Data Centers

My favorite approach is comparing Bitcoin’s energy consumption to that of the world’s data centers, which are the backbone of the Internet and all the web-based services we use nowadays.

Bitcoin mining centers and internet data centers have a lot in common. They both require minimal human staff to operate, they both require a lot of electricity, and they even look similar — they’re both just endless racks of computer hardware.

Data centers in the US alone consume about 70 TWh, while data centers worldwide consumed 416.2 TWh of electricity in 2015. (Google consumed 5.7 TWh that same year.)

In other words, Bitcoin’s global electricity consumption (15 to 65 TWh) is still less than that of data centers in the US alone, and is between 4% and 16% of data centers worldwide.

https://medium.com/@petershin45/bitcoin ... f23a933f34

As with many things, time will resolve much of this. Will be interesting to revisit this topic in 5 yrs, at which point the landscape may be more clearly defined... or not.


In any event, back to MMT.