Do Economists Understand Money?

I'm no expert, but I can see when "experts" are 180 degrees from each other.

For example, in an interview with New York Times "Daily", an expert economist is asked where all these trillions of dollars of the bailout money are coming from. He seems to think that all Federal funds are either collected in taxes or "borrowed into existence". The implications are that it will take generations to "repay" all these massive loans.

This seems factually wrong in several respects if you know "Modern Monetary Theory (MMT)". MMT is not exactly a "theory" needing proof. It is simply a description of how things work in the accounts of a sovereign nature when it comes to its sovereign currency.

For one thing, all government funds spent are materialized "out of the blue". This applies to all spending all the time and not just in times of crisis. The exception which is not really an exception is government borrowing that covers the gaps between outright cash expenditure and money acquired by the sale of bonds, T-bills, and the like. This is not really an exception since these bonds are serviced and/or repaid out of funds that are "materialized". There is no limit to how much money the Federal Government can "print". Some of it appears in the current year. More is sprinkled into future years in debt "service" and repayment. All of it appears magically by Government fiat.

Taxes are not in any way "revenue" for the Federal Government. They cancel out a tax obligation, likewise created "out of the blue". The effect is to remove currency from circulation, preventing the world from filling up with money printed by the government. The difference between "spending" and "Income" (the deficit) is a made-up number that nobody cares about except when opposing social spending and ranting to the general public about impending doom. For the Federal government, there is no such thing as a "balanced" budget any more than there is a "purple" budget. Of course, the situation is different with the levels of government that are forbidden by law from printing money.

So, where do the trillions come from? They just roll off the press, or, more precisely, they are keyed into a computer at the Federal Reserve (or similar institution). Congress (or the PM) simply orders up a number and voila, it exists ("borrowed" from the future or printed).

Why would a government borrow money it can print? This is an (often ineffective) way to steer the interest rates in the general economy. Banks and the "shadow banking system" actually create far more money than the Government. "Control" of interest rates is hopefully influenced by the bond market. But the government certainly doesn't "need" the money raised by bond sales. On the other hand, this method of control builds up a fictitious number that grows to frightening proportions, called the "national debt". This is "money" that can either be serviced or paid off with printed money or simply ignored. The size of this number is meaningless. Yet we find "expert " opinions on things like the dangers of allowing debt GDP rise to some number pulled out of an economist's nether regions. "Servicing" this debt has the effect of putting vast sums of printed money into the hands of the investor class, but this is beyond the scope of this essay.

So what seems to be the sensible view of injecting trillions into the economy to keep the lights on?

For one thing, we can see the catastrophe that results from not doing this in the horror of the '30s in Canada. Among the many problems in the Canadian depression was the simple lack of cash and the universally accepted gospel of the "balanced budget". Yet, when Canada entered the war against Germany, all of a. sudden there was no problem paying thousands of previously out of work young men and transporting them overseas at considerable cost. Obviously, there was a problem with our assumptions.

On the other hand, we can see some famous examples of governments attempting to print their way out of disaster, resulting in hyperinflation.

Let me give you a metaphor infested personal view of this.

When the government gives you $1, it's an IOU. The government is saying, I owe you $1. But the Canadian Economy is what stands behind this idea. They are saying, this piece of paper can be exchanged for any goods or services created or acquired by the Canadian economy. You can redeem the IOU by spending the $1 on what Canada has for sale.

So the trick is to have enough of these $1 floating around that they more or less track the amount of goods and services available. A dramatic increase in these IOU's will, all things being equal, lead to an over-supply - too many dollars chasing a fixed amount of goods and services, resulting in inflation. This is the classic objection to "printing money" even though that's the only way a Federal Government spends money. Note that the "same problem arises if money is created by the banking system - credit and debt. This leads to the conventional way of attacking inflation by raising interest rates - sometimes to painful levels - and why the government keeps its toe in the sea of debt by issuing bonds when it could just as easily print money. The effectiveness of this policy is questionable, but that's a subject for another time.

But what happens when there is a big drop in the amount of goods and services available, such as when the economy is locked down for months? People following the situation mostly hear about people's dwindling buying power and, in Canada at least, massive direct injections of cash are made (for example) to prevent people from losing their homes. But a more subtle danger is the loss of productive capacity in the economy, leading to a drastic reduction in the amount of goods and services for sale. The latter problem is far more complex and difficult than the first. You can't just throw money at it. For example, many small businesses constantly skate on the edge of. bankruptcy. Moving at "government speed", there is no way to save these businesses from disappearing - possibly forever. Moreover, mass failures of these businesses has an implication for creditors, including Federally-supported banks. The Government will presumably save the banks but not the millions of businesses whose loads went bad.

Put these together ("supply-side" and "consumption") and you see a drastic contraction in the amount of money needed in the economy and a serious risk of runaway inflation. From a monetary point of view, the task would seem to be interventions that recognize both sides of the issue. "Fortunately", the current situation results in contraction of both supply and consumption so, in theory, we can visualize a "balanced' intervention. In the current situation, the added problem of keeping people alive makes it a problem from Hell. One obvious long-term problem (especially in the US) is that direct subsidization of wages is laughably inadequate. Even if a low-wage person manages to keep a roof over her head, she will emerge with staggering debt. Similar situations will emerge in most of the "supply-side", where businesses will survive only by accumulating debt. Since all money is an IOU to somebody, we see the emergence of an even larger creditor class whose size depends largely on who gets the trillions of dollars being printed to deal with the current problem. It is the creditor class (the rich) who are deciding all this.

Sorry if you were expecting solutions...