This article is excerpted from my new book Banking on the People: Democratizing Money in the Digital Age, available in paperback June 1.

The U.S. federal debt has more than doubled since the 2008 financial crisis, shooting up from $9.4 trillion in mid-2008 to over $22 trillion in April 2019. The debt is never paid off. The government just keeps paying the interest on it, and interest rates are rising.

In 2018, the Fed announced plans to raise rates by 2020 to “normal” levels — a fed funds target of 3.375 percent — and to sell about $1.5 trillion in federal securities at the rate of $50 billion monthly, further growing the mountain of federal debt on the market. When the Fed holds government securities, it returns the interest to the government after deducting its costs; but the private buyers of these securities will be pocketing the interest, adding to the taxpayers’ bill.

In fact it is the interest, not the debt itself, that is the problem with a burgeoning federal debt. The principal just gets rolled over from year to year. But the interest must be paid to private bondholders annually by the taxpayers and constitutes one of the biggest items in the federal budget. Currently the Fed’s plans for “quantitative tightening” are on hold; but assuming it follows through with them, projections are that by 2027 U.S. taxpayers will owe $1 trillion annually just in interest on the federal debt. That is enough to fund President Donald Trump’s trillion-dollar infrastructure plan every year, and it is a direct transfer of wealth from the middle class to the wealthy investors holding most of the bonds.

Where will this money come from? Crippling taxes, wholesale privatization of public assets, and elimination of social services will not be sufficient to cover the bill.

Bondholder Debt Is Unnecessary

The irony is that the United States does not need to carry a debt to bondholders at all. It has been financially sovereign ever since President Franklin D. Roosevelt took the dollar off the gold standard domestically in 1933. This was recognized by Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, in a 1945 presentation before the American Bar Association titled “Taxes for Revenue Are Obsolete.”

“The necessity for government to tax in order to maintain both its independence and its solvency is true for state and local governments,” he said, “but it is not true for a national government.” The government was now at liberty to spend as needed to meet its budget, drawing on credit issued by its own central bank. It could do this until price inflation indicated a weakened purchasing power of the currency.

Then, and only then, would the government need to levy taxes — not to fund the budget but to counteract inflation by contracting the money supply. The principal purpose of taxes, said Ruml, was “the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as ‘the avoidance of inflation.’”

The government could be funded without taxes by drawing on credit from its own central bank; and since there was no longer a need for gold to cover the loan, the central bank would not have to borrow. It could just create the money on its books. This insight is a basic tenet of Modern Monetary Theory: the government does not need to borrow or tax, at least until prices are driven up. It can just create the money it needs. The government could create money by issuing it directly; or by borrowing it directly from the central bank, which would create the money on its books; or by taking a perpetual overdraft on the Treasury’s account at the central bank, which would have the same effect.

The “Power Revolution” — Transferring the “Money Power” to the Banks

The Treasury could do that in theory, but some laws would need to be changed. Currently the federal government is not allowed to borrow directly from the Fed and is required to have the money in its account before spending it. After the dollar went off the gold standard in 1933, Congress could have had the Fed just print money and lend it to the government, cutting the banks out. But Wall Street lobbied for an amendment to the Federal Reserve Act, forbidding the Fed to buy bonds directly from the Treasury as it had done in the past.

The Treasury can borrow from itself by transferring money from “intragovernmental accounts” — Social Security and other trust funds that are under the auspices of the Treasury and have a surplus – but these funds do not include the Federal Reserve, which can lend to the government only by buying federal securities from bond dealers. The Fed is considered independent of the government. Its website states, “The Federal Reserve’s holdings of Treasury securities are categorized as ‘held by the public,’ because they are not in government accounts.”

According to Marriner Eccles, chairman of the Federal Reserve from 1934 to 1948, the prohibition against allowing the government to borrow directly from its own central bank was written into the Banking Act of 1935 at the behest of those bond dealers that have an exclusive right to purchase directly from the Fed. A historical review on the website of the New York Federal Reserve quotes Eccles as stating, “I think the real reasons for writing the prohibition into the [Banking Act] … can be traced to certain Government bond dealers who quite naturally had their eyes on business that might be lost to them if direct purchasing were permitted.”

The government was required to sell bonds through Wall Street middlemen, which the Fed could buy only through “open market operations” – purchases on the private bond market. Open market operations are conducted by the Federal Open Market Committee (FOMC), which meets behind closed doors and is dominated by private banker interests. The FOMC has no obligation to buy the government’s debt and generally does so only when it serves the purposes of the Fed and the banks.

Rep. Wright Patman, Chairman of the House Committee on Banking and Currency from 1963 to 1975, called the official sanctioning of the Federal Open Market Committee in the banking laws of 1933 and 1935 “the power revolution” — the transfer of the “money power” to the banks. Patman said, “The ‘open market’ is in reality a tightly closed market.” Only a selected few bond dealers were entitled to bid on the bonds the Treasury made available for auction each week. The practical effect, he said, was to take money from the taxpayer and give it to these dealers.

Feeding Off the Real Economy

That massive Wall Street subsidy was the subject of testimony by Eccles to the House Committee on Banking and Currency on March 3-5, 1947. Patman asked Eccles, “Now, since 1935, in order for the Federal Reserve banks to buy Government bonds, they had to go through a middleman, is that correct?” Eccles replied in the affirmative. Patman then launched into a prophetic warning, stating, “I am opposed to the United States Government, which possesses the sovereign and exclusive privilege of creating money, paying private bankers for the use of its own money. … I insist it is absolutely wrong for this committee to permit this condition to continue and saddle the taxpayers of this Nation with a burden of debt that they will not be able to liquidate in a hundred years or two hundred years.”

The truth of that statement is painfully evident today, when we have a $22 trillion debt that cannot possibly be repaid. The government just keeps rolling it over and paying the interest to banks and bondholders, feeding the “financialized” economy in which money makes money without producing new goods and services. The financialized economy has become a parasite feeding off the real economy, driving producers and workers further and further into debt.

In the 1960s, Patman attempted to have the Fed nationalized. The effort failed, but his committee did succeed in forcing the central bank to return its profits to the Treasury after deducting its costs. The prohibition against direct lending by the central bank to the government, however, remains in force. The money power is still with the FOMC and the banks.

A Model We Can No Longer Afford

Today, the debt-growth model has reached its limits, as even the Bank for International Settlements, the “central bankers’ bank” in Switzerland, acknowledges. In its June 2016 annual report, the BIS said that debt levels were too high, productivity growth was too low, and the room for policy maneuver was too narrow. “The global economy cannot afford to rely any longer on the debt-fueled growth model that has brought it to the current juncture,” the BIS warned.

But the solutions it proposed would continue the austerity policies long imposed on countries that cannot pay their debts. It prescribed “prudential, fiscal and, above all, structural policies” — “structural readjustment.” That means privatizing public assets, slashing services, and raising taxes, choking off the very productivity needed to pay the nations’ debts. That approach has repeatedly been tried and has failed, as witnessed for example in the devastated economy of Greece.

Meanwhile, according to Minneapolis Fed president Neel Kashkari, financial regulation since 2008 has reduced the chances of another government bailout only modestly, from 84 percent to 67 percent. That means there is still a 67 percent chance of another major systemwide crisis, and this one could be worse than the last. The biggest banks are bigger, local banks are fewer, and global debt levels are higher. The economy has farther to fall. The regulators’ models are obsolete, aimed at a form of “old-fashioned banking” that has long since been abandoned.

We need a new model, one designed to serve the needs of the public and the economy rather than to maximize shareholder profits at public expense.

_____________________

An earlier version of this article was published in Truthout.org. Ellen Brown is an attorney, founder of the Public Banking Institute, and author of thirteen books including Web of Debt and The Public Bank Solution. Her latest book is Banking on the People: Democratizing Money in the Digital Age, published by the Democracy Collaborative. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

The post The Bankers’ “Power Revolution”: How the Government Got Shackled by Debt appeared first on P2P Foundation.

Republished text from The Money Question

Modern Monetary Theory

Introduction

In the space of little more than a decade, Modern Monetary Theory has spread from a relatively small group of academics to become a mass movement for economic change.

In general terms, MMT is a macroeconomic paradigm based on an understanding of monetary and fiscal dynamics that stands in stark contrast to neoclassical, neo-Keynesian, and other mainstream approaches. It is most well known for the claim that since monetarily sovereign governments issue their own currency and determine the unit of account, there are no purely financial constraints on public spending. However, at its core is the recognition that money is a creature of public law and state authority, not private exchange, and thus monetary systems can and should be designed in ways that best further public purpose.

Most modern economies use a ‘fiat’ currency, which gains acceptance because it can be used to meet legal obligations imposed by the state, and needn’t be convertible to a physical commodity (such as gold). Such countries face no technical limit to the amount of money that can be created. Therefore, there are no monetary constraints on a nation’s prosperity – there are only the physical limits of the economy’s productive capacity, and administrative, social, or political constraints on utilising that capacity.

While MMT has roots in historical and theoretical discussions over the nature of money, and its contemporary scholarship features relatively technical analysis of the monetary operations of governments and central banks, it has also acquired a broad appeal among progressive campaigners. No one group claims sole ownership over the theory, but prominent groups include the Modern Money Network and Sunrise Movement in the United States, Red MMT in Spain, Rete MMT in Italy, and the Gower Institute for Modern Money Studies (GIMMS) in Britain.

In the United States in particular, politicians and campaigners have drawn on MMT principles to promote dramatically increased public spending on social and environmental priorities, such as a ‘Green New Deal’. Their arguments have begun to affect the national conversation over economic policy.

MMT in 10

L. Randall Wray, an early member of the group of academics who refined and popularised MMT, explains the paradigm in 10 points, intended to capture the logic of the MMT position in a comprehensive way. The details of some of these points are unpacked further down this page. Paraphrased, they include:

1. Money is an IOU, because the issuer promises to accept it back in payment of debts they are owed. That IOU is denominated in a ‘socially sanctioned money of account’, usually established by a centralised authority: the state.
2. Taxes (or other obligations) drive the currency. Sovereign states can impose obligations that give the currency value, since it can be used as payment.
3. Anyone can issue money; the problem is to get it accepted. People who try to issue an IOU in the unit of account without support from the sovereign will struggle to make their promise credible.
4. ‘Redemption’ of money refers either to accepting it as payment of taxes, or converting to gold, foreign currency, etc. on request. However, the latter is no longer promised by the central bank in countries with non-convertible, floating exchange rate currency regimes.
5. There is no chance of an involuntary default on sovereign debt, ‘so long as the state only promises to accept its currency in payment’ – in other words, so long as the debt is denominated in a floating, non-convertible currency issued by the sovereign itself.
6. Functional Finance: the public finances should be managed in a ‘functional’ manner, i.e. with an eye to the actual effects of decisions in particular contexts, in order to achieve full employment with price stability. This doctrine stands in contrast to ‘sound finance’, which evaluates budget decisions against predetermined beliefs about the desirability of deficits and/or surpluses.
7. The Job Guarantee, a policy whereby the public sector will employ anyone willing and able to work at a fixed wage, is a critical component of MMT as a macroeconomic framework. It is thought to anchor the currency and provide greater price and financial stability than the alternative (i.e., than maintaining a pool of reserve (unemployed) labour).
8. Hyman Minsky’s lessons on financial instability: that periods of stability and growth see continual changes and increased risk-taking in financial markets, which lead to a build-up of instability such that ‘a slight reversal of prosperity can trigger a crisis.’
9. The government’s debt is a non-government asset, following from a view of sectoral balances across the macroeconomy. The non-government sector (including households, firms, and the rest of the world) must, as a simple fact of accounting, hold assets that correspond to the liabilities of the government sector.
10. The central bank is neither independent nor potent – conventional monetary policy, which operates primarily by manipulating the overnight interest rate on lending between banks, is weak and its impact is at best uncertain. In addition, monetary policy implementation always and everywhere requires the coordination and support of the treasury. This final point often leads to a preference for managing macroeconomic conditions through coordination between fiscal and monetary authorities, typically in the form of ‘permanent zero interest rate policy (ZIRP).

Wray’s 10 points reveal that MMT, like other schools of economics, is a theoretical paradigm where certain dynamics in the economy follow logically from fundamental premises, and from which policy insights can easily be drawn.

Thought Genesis and History

Chartalism

MMT was initially known in academic literature as ‘Neo-Chartalism’. Chartalism is a theory that stresses the importance of social context for the existence of money. It is typically contrasted with the ‘orthodox’ (‘M-form’, ‘Metalist’, or ‘commodity money’) view, which holds that money was invented to facilitate exchange, and that its value was initially determined by the value of a physical commodity (e.g. gold or silver) from which it was made. By contrast, Chartalism holds that ‘the value of money is based on the power of the issuing authority, and not by any embodied or backing precious metal’ (Wray, 2000).

Several important intellectual precursors to MMT held this view. George Knapp argued in 1924 that ‘the attempt to deduce [money] without the idea of a State [is] absurd’. This was an explicit contradiction of commodity money – Knapp claimed that ‘the soul of the currency is not in the material of the pieces, but in the legal ordinances that regulate their use.’ Several years later, Abba Lerner also contributed to this standpoint with an article entitled ‘Money as a Creature of the State’.

Neo-chartalism reorients the emphasis of monetary theory on the currency systems prevalent in the world today, which, almost without exception, are fiat currencies issued by sovereign governments. The phrase ‘taxes drive money’ captures this recognition that the state creates the value for a common currency by leveraging its centralised authority. It does so by imposing non-reciprocal obligations (e.g. taxes and fines) that can only be paid by tendering the currency.

Functional Finance

Building on the lessons of neo-chartalism, MMT next draws important conclusions about the nature of public finance and government spending.

MMT scholarship has since applied the chartalist understanding of money and taxation through analysis of the economy’s sectoral balances, an approach pioneered by Wynne Godley. As Stephanie Kelton argues, ‘proceeds form taxation and bond sales are not even capable of financing government spending since their collection implies their destruction.’ When the fiscal authority (Treasury) receives tax payments, the banking system loses the same quantity of money in reserves. Similarly, the purpose of bond sales is argued to be the same: draining reserves, and thereby relieving pressure on the policy interest rate, due to the incentives faced by banks holding excess reserves. The central bank provides the reserves necessary to ensure bond sales clear.

This accounting logic gives a concrete, practical face to the occasionally abstract theory of money that MMT is ultimately based on. It also has radical consequences for how to understand the options for fiscal policy faced by a monetarily sovereign government.

In 1943, Lerner wrote another article, ‘Functional Finance and the Federal Debt’. There, he staked out the position that:

‘government fiscal policy, its spending and taxing, its borrowing and payment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound.’

Put differently, this means that there should be no concern over the size of the government deficit on the grounds of ‘debt sustainability’ (or other axioms about the desirability of running a budget in balance or in surplus). Insolvency of a monetarily sovereign government is impossible.

Nevertheless, government spending adds to a real economy where productive resources are used and prices are set; public spending must take these ‘productivity enhancing’ factors into account. This is the ‘functional’ in Functional Finance – fiscal policy should be operated with a view only to the function it serves in achieving real economic effects. MMT scholar Bill Mitchell expresses the principle as:

‘the desirable deficit outcome at any point in time to be a function of the state of non-government spending and the utilisation of the productive capacity of the economy.’

Financial Instability

Alongside Knapp and Lerner, MMT is indebted to Minsky, who proposed that ‘money manager capitalism’ – the form of economic order that became ascendant in the post-war world – is inherently unstable.

In short, the implication of Minsky’s view was that a period of stable and growing prosperity leads caution among private firms to lapse. Firms, households and banks undertake ‘innovations’, engage in speculative activity, and start to take on more risk, increasing fragility in the economy. As the cycle continues, short-term debt is increasingly used to cover interest charges on earlier investment. This behaviour makes a crisis almost inevitable over a long enough stretch of time (Minsky, 1982).

The privileged position Minsky occupies in the lineage of MMT has affected contemporary thinkers. Many hold that the public financial architecture must recognize that there there are multiple sources of new purchasing power and investment beyond government spending. The resultant purchasing power has consequences for economic activity, the distribution of wealth and income, and financial stability, and so must be addressed by any comprehensive paradigm. Public authorities must be on guard against the effects of private money markets, even while the government operates Functional Finance (for an example, see Warren Mosler’s ‘Proposals for the Treasury, the Federal Reserve, the FDIC, and the Banking System’).

Policy recommendations

It is important to recall that MMT is not prescriptive of specific spending priorities. It simply undermines any objection to increased public spending that is based on an idea of monetary scarcity, or that the nation ‘can’t afford it’. Instead, as according to Functional Finance, spending proposals should be assessed on the basis of their effects on society and the economy.

Nevertheless, the intellectual framework for understanding the modern economy that MMT provides offers several priorities and directions for building government institutions. Éric Tymoigne and L. Randall Wray have written that:

‘Financial stability, price stability and full employment… are important goals that have to be met independently from one another by putting in place structural policies that work independently of the current political climate, and that manage as directly as possible the goal that needs to be achieved.

MMT rejects the traditional trade-off between inflation and unemployment, and does not rely on economic growth and fine-tuning to reach full employment.’

An important plank in the MMT framework that helps to achieve these goals is the Job Guarantee. The JG is a ‘buffer-stock’ scheme for the job market where the state functions as ‘employer of last resort’. Anybody who wants a job on the public scheme can have one at a fixed wage; the scheme, therefore, absorbs workers displaced from private sector employment. Mitchell (2000) claims that the JG wage ‘prevents serious deflation from occurring and defines the private sector wage structure’ (in the sense of providing a viable outside option for those on low wages).

MMT reverses the typical role played by a nation’s economic institutions, in that typical MMT policy platforms see fiscal policy, and not the manipulation of interest rates by the central banks, as the proper tool for controlling inflation. For MMT advocates, this is a simple consequence of the fact that taxes destroy money, and also follows from Wray’s 10th point: that a policy interest rate is a weak tool for manipulating spending in the real economy.

For the part of the JG, Mitchell proposes a ‘Buffer Employment Ratio’ or incomes policy to keep the lid on inflation resulting from the increased government spending such a scheme would require. (Importantly, MMT advocates acknowledge that there are other sources of inflation beyond excessive demand, and other tools that can address inflation in general, ranging from better financial regulation (Minsky) to reducing accounting control fraud (Bill Black) to improving market governance and competition law (Fred Lee)).

Critiques & Responses

Despite its growing popularity, MMT has not enjoyed an easy reception from the mainstream of economic thought and commentary. Eric Témoigne and Wray classify critiques of the paradigm into five categories: ‘views about origins of money and the role of taxes in the acceptance of government currency, views about fiscal policy, views about monetary policy, the relevance of MMT conclusions for developing economies, and the validity of the policy recommendations of MMT’ (2013).

Some have questioned whether MMT really offers any novel lessons for macroeconomic policy that aren’t already implicit as components of a more conventional view, mainstream view. For instance, Simon Wren-Lewis has argued that:

1. ‘MMT seems obsessed with the accounting detail of government transactions;
2. This seemed to lead to ideas that I thought were standard bits of macroeconomics.’

Similarly, an article published in mid-2018 at the Institute for New Economic Thinking (INET) by Arjun Jayadev and J. W. Mason claimed that ‘the analysis underlying [MMT’s policy proposals] is entirely orthodox.’ They elaborate:

‘The difference between MMT and orthodox policy can be thought of as a different assignment of the two instruments of fiscal position and interest rate to the two targets of price stability and debt stability. As such, the debate between them hinges not on any fundamental difference of analysis, but rather on different practical judgements—in particular what kinds of errors are most likely from policymakers.’

Jayadev and Mason accordingly target the switch in policy emphasis from interest rate-fixing at the central bank to fiscal policy as the main tool of macroeconomic stabilisation, a point that Wren-Lewis also sees as the main divide between MMT and more ‘mainstream’ economic thinking.

However, the INET authors’ argument addresses ‘the logic of the functional finance position rather than MMT as a body of thought’, and they admit to ‘make only limited references to MMT literature’.

This has led MMT scholars to respond that the economic paradigm they have developed goes far beyond the implication of functional finance, and rests on fundamentally different premises about the economy from mainstream views (such as Kelton’s argument about the impossibility of bond finance or taxation to fund government spending). The INET critique also gives no room to the ideas on investment and financial dynamics adopted from Minsky, which lead to differences between MMT and the mainstream in terms of understanding the business cycle.

Finally, MMT advocates take issue with the assumptions about human behaviour and macroeconomic dynamics used to structure the very formal model used by Jayadev and Mason in their analysis (see Mitchell for more detail). For example, MMT denies that there is a ‘natural’ rate of interest at which the economy will reach full employment, if only it is set by the central bank (which can be prevented by the zero lower-bound). In that sense, MMT advocates do not see their theory as a ‘preference’ for fiscal policy over monetary policy as a tool of macroeconomic stabilisation. Instead, from an MMT perspective one of those tools (monetary policy) can never achieve what it claims it can achieve, whereas the other can.

Economic theory as a ‘lens’

One category of objections to the MMT narrative concerns how it relates to the institutions and practices established to manage government spending and monetary policy in reality. Some critics have claimed that MMT has few lessons for modern economies. They argue that legal structures – such as central bank independence and laws prohibiting monetary financing of deficit spending – mean that MMT is only true in a stylised world, and therefore lacks relevance to the real one.

This as Bill Mitchell writes,

‘MMT identifies two levels of reality. The first level defines the intrinsic characteristics of the the monopoly fiat currency issuer which clearly lead us to understand that such a government can never run out of the currency it issues and has to first spend that currency into existence before it can ever raise taxes or sell bonds to the users of the currency – the non-government sector…

The second level of reality [is] the voluntary institutional framework that governments have put in place to regulate their own behaviour. These accounting frameworks and fiscal rules are designed to give the (false) impression that the government is financially constrained like a household – that is, in context, has to either raise taxes to spend or issue debt to spend more than it raises in taxes.’

Elsewhere, he describes MMT as a lens ‘which allows us to see the true (intrinsic) workings of the fiat monetary system.’

The power of MMT, then, lies in its ability to reveal the gap between what is necessarily true about monetary systems, and other, contingent facts that are only true under present circumstances. It shows that gap for what it is: a political construct that persists only because our society so chooses. Structures like central bank independence must be argued for on their merits, and cannot be referred to as ‘how the world really works’. Ultimately, MMT has become a much broader project than a single economic theory, and is consistent with insights from historical, anthropological, legal, and sociological approaches to understanding money, the economy, and society. Increasingly, the future of MMT is interdisciplinary.

References

Bell, S. (1998). Can Taxes and Bonds Finance Government Spending?. Levy Economics Institute of Bard College, Working Paper No. 244, July

Bell, S. (2001). The role of the state and the hierarchy of money. Cambridge Journal of Economics, 25, 149-163

Knapp, G.F. (1973). The State Theory of Money. Clifton, Augustus M. Kelley [1924].

Lerner, A.P. (1947). Money as a Creature of the State. American Economic Review, vol. 37, no. 2, May, pp. 312-317.

Lerner, Abba P. (1943). Functional Finance and the Federal Debt. Social Research, vol. 10, 1943, pp. 38-51

Jayadev, A., and Mason, J.W. (2018). Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them? Institute for New Economic Thinking, September. Available at: https://www.ineteconomics.org/perspectives/blog/mainstream-macroeconomics-and-modern-monetary-theory-what-really-divides-them

Minsky, H. (1982). Can “It” Happen Again? A Reprise. Hyman P. Minsky Archive. Paper 155. Available at: https://digitalcommons.bard.edu/hm_archive/155/

Mitchell, W. (2016). Modern Monetary Theory – What is New About It? Available at: http://bilbo.economicoutlook.net/blog/?p=34200

Mitchell, W. (2000). The Job Guarantee and Inflation Control. Centre of Full Employment and Equity, Working Paper No. 00/01, January

Mosler, W. (2009). Proposals for the Treasury, the Federal Reserve, the FDIC, and the Banking System. Draft, September. Available at: http://moslereconomics.com/2009/09/16/proposals-for-the-banking-system-treasury-fed-and-fdic-draft/

Tymoigne, Éric and Wray, L.R. (2013). Modern Money Theory 101: A Reply to Critics. Levy Economics Institute of Bard College, Working Paper No. 778, November

Wray, L.R. (2000).‘The Neo-Chartalist Approach to Money’. July. Available at SSRN: https://ssrn.com/abstract=1010334

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To understand them and what they’re fighting for, it’s important to understand the system they’re challenging.

Our money system is underpinned by national central banks and treasuries that issue foundational “base” money. This includes the physical cash in our wallets and also reserves, the special forms of digital money that commercial banks hold in their central bank accounts, which are inaccessible to us.

These commercial banks then boost the money supply by issuing a second layer of money on top of the central bank money layer, through a process called credit creation of money (sometimes called “fractional reserve banking”) to create commercial bank money, which we see as bank deposits in our bank accounts.

The details are subtle and complex ― especially at the international level ― but the interaction of these players issuing money and taking it out of circulation makes the money supply expand and contract as if it were breathing. Monetary reform groups target different elements of this. Here are five of them.

1. Government Money Warriors

Stephanie Kelton, professor of public policy and economics at Stony Brook University, is one of the leading lights of modern monetary theory.

We say that the sun rises, but in reality the sun stays fixed and the illusion of sunrise is created by the Earth turning. Modern monetary theory argues that a similar delusion occurs in our thinking about government money ― we often claim that a federal government “raises money” through taxation and then spends it, but actually it is government institutions that originally issue money by spending it into existence and then withdrawing it from circulation by demanding it back in taxation. If the government issues money, then why would it have to raise money by asking for it back?

The idea that a federal government can run out of money like an ordinary household or business is an illusion, argue advocates of modern monetary theory. A government can only run out of money if it either does not issue its own sovereign currency (like the European nations, which have opted for the euro) or if an artificial political limit has been placed on how much money it can issue. In the latter situation, governments must first recall money via tax (and other means) before reissuing it elsewhere.

This is why modern monetary theory advocates are incredulous about conservatives who want to block spending on education and health care by saying we don’t have the money to pay for it. “Governments with monopoly control over their currency can always pay for their policy priorities,” says Pavlina Tcherneva, an economics professor at the Levy Economics Institute at New York’s Bard College.

Under modern monetary theory, if there are unemployed people who want to work and material resources for them to work with, a federal government can issue new money without causing inflation because the increase in money supply will be met with an increase in production. “The goal is to use the public purse to serve the broad public interest without accelerating inflation,” said Stephanie Kelton, professor of public policy and economics at Stony Brook University and former senior adviser to Sen. Bernie Sanders (I-Vt.).

2. Bank Money Reformers

Bank money reformers want to target the powers of commercial banks to create money.

Other reformers target the commercial bank money system. They argue it creates economic instability, over-indebtedness and concentration of power in the hands of banks ― the very banks that led us into the 2008 financial crisis.

Bank money reform groups include the American Monetary Institute, Positive Money, and the International Movement for Monetary Reform.

Commercial banks create new money when they issue loans. The moderate wing of the bank reform movement argues that, because the government grants them this privilege, banks should be subject to greater democratic scrutiny over their lending. The hard-line wing believes bank creation of money should be banned altogether.

The movement to curtail bank money is politically more diverse than modern monetary theory; it’s been supported by certain libertarians, including the late economist Murray Rothbard, neoclassical economists such as Irving Fisher, as well as left-wing proponents, such as the U.K.’s Green Party, which believes bank money-creation leads to environmental crises and corporate domination.

Their prescriptions are not uniform: Positive Money, a research and campaigning organization in Britain, calls for the power to create money to be granted exclusively to a democratic, accountable and transparent public body, creating a “sovereign money” system in which we might all have our own accounts at the central bank. This is distinguished from full-reserve banking, which would require your bank to have the reserves to fully back your account.

3. Cryptocurrency Crusaders

The Bitcoin logo on display at the Consensus 2018 blockchain technology conference in New York City on May 16.

Cryptocurrency crusaders not only reject both national and bank money systems, but also reject the entire concept of credit money (money that is “created from nothing” through law or social agreement), calling for it to be replaced with “commodity money” (money that is “created from something” through production). They have inherited the baton from “goldbugs,” who called for gold to be money.

The movement, which began with Bitcoin, argues that the best money system is one that’s outside of human politics. This comes from a philosophical tradition that says systems should be governed by the boundaries of God, physics or math, rather than laws set by politicians. With gold, for example, these natural boundaries would be geology: how much gold can be found and extracted. In Bitcoin’s case, the boundary comes from the fact that the digital system sets a hard limit on how much digital money can be issued and then forces participants to “mine” it as if it were a commodity.

Because Bitcoin hard-liners believe true money is a limited-supply good that must be extracted through production, they claim that fiat money ― created by banks or countries ― is artificial or deceitful money under the control of corrupt powers. There’s a puritanical edge to these cryptocurrency crusaders, who mistrust human institutions and trust in an abstract ‘godlike’ order of mathematics and markets.

While theories like MMT hinge on collective human political institutions, crypto crusaders see politics as foolish. This distrustful attitude shows: The movement sometimes seems as much at war with itself as with the fiat money system, with bitter in-fights between supporters of different crypto-tokens.

They are, however, the richest of all monetary reformers, with many crypto users having ironically become millionaires in the fiat currency they claim to dislike so much.

4. The Localists

A note worth 10 Brixton pounds, an alternative currency in London, is illustrated with an image of David Bowie.

There’s a whole history of alternative non-government money prior to cryptocurrency. These original alternative currency variants include mutual credit systems, timebanks (where time is used to measure how many credits you earn), local community currencies, such as the U.K.-based Brixton pound, and systems like the Swiss Wir, a currency used between businesses.

The tradition is also skeptical of large-scale government-bank money systems, but rather than calling for them to be replaced by a robotic algorithm, they believe small-scale communities should take control to issue money locally.

Unlike cryptocurrency advocates, they have no problem with money being “created out of nothing.” Rather they have a problem with who gets to do that and at what scale. They believe large-scale systems alienate people and dissolve close-knit communities.

A mutual credit system like Sardex in Sardinia, for example, does not reject the idea of money expanding and contracting, but it brings together an island community to decide on what terms that occurs.

While the other movements are outspoken, local complementary currency enthusiasts are often humble and below-the-radar, working for low pay to build resilient community structures.

“Local currencies change how money is issued,” says Duncan McCann of the New Economics Foundation, “how it circulates and what it can be spent on in order to re-localize economies, encourage environmental behaviour, and promote small businesses.”

The crypto-credit alliance looks to merge older, alternative currency systems with blockchain technology.

5. The Crypto-Credit Alliance: Mutual credit meets blockchain technology

This is the least-known or developed of the movements, but is perhaps the most exciting. Nascent initiatives, such as Trustlines, Holochain, Sikoba, Waba and Defterhane, seek to hybridize older alternative currency systems like mutual credit with the blockchain architectures that underpin cryptocurrencies. They share common ground with both modern monetary theorists, who also see commodity money as regressive, and cryptocurrency advocates, who wish to bypass the government.

Cryptocurrency unleashed a lot of creativity, but much has been wasted on toxic speculation. On the other hand, localist mutual credit movements have powerful ideas but often struggle to get heard or to spread. Crypto-credit innovators are exploring the creative possibilities of merging these two to solve flaws in both.

Originally published in the Huffington Post

The post These 5 Rebel Movements Want To Change How Money Works appeared first on P2P Foundation.

As our demands grow bolder—true full employment, the rebuilding of the social safety net starting with Medicare for All, an overdue green and just transition—so will the naysayers’ inevitable refrain: “How will you pay for it?” This Left Forum panel on June 5, 2018 moderated by Gar Alperovitz brought together the speakers listed above. They show a way out of the austerity trap and reveal that the obstacles to bold action at a national scale on jobs, healthcare, and climate are political, not economic. This is a partial, edited transcript.

Gar Alperovitz: One of the things that’s happening around the country, as you probably know, is  there’s an upsurge of interest in the idea that the banks ought to be under public control. There are public banking initiatives in something like 30 or 40 cities and a couple of states around the country. There was a forum on this  only six years ago promoting the idea. We’re seeing all over the country a very, very fast pick-up on this, including in Los Angeles, Washington D.C. and several other cities. State legislation pending in Michigan and Washington state.

The subject we’re going after today is probably the other piece of the puzzle, monetary policy and money, because there’s a revolution going on in that area as well. It’s not simply the establishment of public banks, but actually getting down to how money works, a subject that has been obfuscated for many, many decades.

We’re going to go into how the revolution is emerging very, very fast on the ground as well as in theory.

Our first speaker, Stephanie Kelton, is currently a professor of public policy and economics at Stony Brook University. She was also chief economist on the minority staff of the Senate Budget Committee. More important, she was the key economist behind Bernie Sanders’ presidential campaign, so we’re delighted to have her. She is also one of the leading experts in this field and getting a lot of attention, deservedly so, for not only for opening a way to rethink monetary theory or monetary practice, but for explaining it to the public in serious terms.

The ‘pay-for-it’ trap

Stephanie Kelton: I’m going to try to focus my remarks on three broad topics. I’m aiming at a progressive audience obviously, but honestly I give a version of this exact same talk most of the time to conservative audiences. The response that I get in those audiences, it would surprise you probably, is extremely positive.

What is it about what I’m going to say that can resonate both with audiences like this and with a very fiscally conservative audience? Let me jump in and we’ll see where this takes us.

This is just to tell you the kinds of things progressives are up against when they propose a big, ambitious agenda.

Bernie Sanders runs for president on the most ambitious agenda I have seen in my lifetime. Hillary Clinton publishes in her book a bit of an exchange she had with someone who said, “Man, it’s awful. Every time we propose something, he goes bigger. We say we want debt-free college. We want to help make college more affordable. He says, ‘Let’s make it free.’ If we say we want to make health care more affordable and increase access, he says, ‘Let’s just make it free.’ Every time we propose something, he goes bigger.” In this exchange that is included in her book somebody said, “This is like Bernie saying, ‘I think America should get a pony.’” Hillary, the fiscally responsible voice in the room says, “How will you pay for the pony?”

It’s the idea that all of this stuff is so grandiose that it’s beyond reality. This is what we’re up against as progressives, putting forward a bold agenda.

This again is Hillary Clinton, from years before the 2016 campaign, when she’s a senator. She’s talking about the reality of being in Washington D.C.She says, “The reality is you cannot cut taxes or increase spending unless you can pay for it.”

What she’s saying is, and I worked on the budget committee, if you propose to do something, you’ve got to show people how you’re going to pay for it. If you want to cut taxes or you want to put more money in education or infrastructure or defense or anything else, you’ve got to show where the money is going to come from. A congressional budget office has to take a look at it. Things are supposed to be done in a deficit-neutral way so that you’re not adding to future deficits so that you’re not increasing the size of the national debt.

Okay, so Senator Sanders gets accused of putting forward a big proposal and not paying for any of it, right? Everybody “knows” that. That was the accusation, but that wasn’t the reality. He actually attempted to play by Washington rules, which are you’ve got to pay for the stuff you want to do. If you go down his agenda, every item on the agenda, you could really draw a line from what it was he was proposing to the source of revenue that was supposed to pay for it all, whether it was Medicare, infrastructure, making public colleges and universities tuition-free. If you actually looked at what he proposed, it was paid for in the conventional sense of the word.

Now, obviously if you have to find the money, as Hillary Clinton says, then where do you look when you need money? Who’s going to pay for stuff? Who’s got the money? Obviously the rich people have the money. It’s a natural place to look when you’re trying to find the money to pay for a big ambitious agenda. You go for the billionaire class or you go for Wall Street, and you say Wall Street will pay.

If it’s making public colleges and universities tuition-free, which was one of the things he proposed, the pay-for on the other side of that was a tax on Wall Street speculation. You’ve all heard this probably 100 times.

How do you pay for a progressive agenda if these are the constraints because this is the current narrative? This means that you have to fight two battles. You have to fight for the agenda that you’re fighting for, and you have to sell policies on their own merits, and you simultaneously have to wage war on another front, which is you have to fight to raise the revenue. You have to get people to vote for the tax increase, for the closing of the loopholes of whatever it is that’s giving you the additional revenue. You’re waging two battles when you do this. My spending proposal is this, and here’s where I propose we get the money. This one can’t happen unless and until this one happens and you have success on the revenue front.  It actually means that you are in a very real sense dependent upon the rich because you can’t feed a hungry kid, you can’t fix crumbling infrastructure, you can’t provide health care for all, unless and until you can claw some cash away from the people who have it. You need their money. It makes you dependent upon the wealthy.

I think progressives should ask themselves, “What is the purpose of tax?” If your instinct, if your impulse is to say to pay for the stuff we want, my suggestion is you’re doing it wrong.

Rethinking taxes

In the 1940s, the New York Federal Reserve Bank was headed by a guy named Beardsley Ruml. He wrote this really important piece in 1946 called “Taxes for Revenue are Obsolete’” What’s he saying? I don’t know that I need to read the whole thing, but he says basically the need for the government to raise taxes in order to remain solvent and run its affairs is completely yesterday. We don’t do that anymore. Why? Because we have a central bank and because we went off the gold standard. The fact that we changed the monetary system in this fundamental way opens up space for us to do stuff we couldn’t do before when we had to find the money.

You’re trapped in a gold standard framework when you’re operating in this frame of mind that money is this finite thing that exists somewhere, it’s physical and you’ve got to find it, and you’ve got to go get it in order to spend it. Ruml says, no, no, no, that’s not how it works in the modern era – by the way, modern in the 1940s, and we still haven’t caught up with this reality.

Ruml goes on to say the purpose of the tax is not to fund the federal government. The purpose of the tax is multifold. One important thing it does is it allows the government to remove some money from the economy so that you don’t overheat the economy through government spending. In other words, taxes help you keep a lid on inflation. If you just spent money into the economy but you didn’t tax anything back, you’d run the risk of overheating the economy, causing an inflation problem.

Another thing taxes do is affect the distribution of income. You lower taxes on some folks, they end up with more take-home pay. You raise taxes on others, it takes the money away. You impact the distribution of income. You use taxes to incentivize or disincentivize behavior. A carbon tax is a good example. You don’t want as much pollution. You don’t want certain activities taking place, put a tax on it. You want to encourage certain other things like people driving electric cars, give a tax incentive or some form of a subsidy to encourage that.

The last one is he says you might want for some reason or another to have a line item where you can keep track of a certain program, like for example Social Security or the Highway Trust Fund or something like that. Taxes do a lot of stuff that’s important. What they don’t do is provide the government with revenue that it needs in order to operate.

Go back to this picture. You don’t tax the rich because you need their money in order to feed a hungry kid or fix a crumbling bridge. You tax the rich because they are too damn rich and extreme concentrations of wealth especially, but also income, are bad for the functioning of the economy, are bad for democracy. That’s the rationale for taxing the rich. Not because we can’t do other things unless we get money from them to pay for it.

You tax Wall Street speculation because you want to discourage certain behaviors, not because you need their money that you raise from a financial transaction task in order to pay for free college. Think it through. Suppose you said, “We’re going to make public colleges and universities tuition-free in the US. It’s going to cost about $70 billion a year to do that.” Now, to pay for it, we’re going to put a tax on Wall Street. Every time somebody buys stocks or engages in derivatives trading or bond trading, they’re going to pay a small transactions tax. That’s our tax.

Now, you simultaneously have said you want to break up the banks, you want to make banking boring, you want to shrink the size of the financial sector, and you have made yourself completely dependent upon what in order to fund your education proposal? Wall Street speculation. Not only do you need Wall Street to continue to speculate, but you’re going to need them to do more of it over time and grow because of the amount of money need to pay for college and university. You don’t want to hitch your wagon to the very thing that you loathe and are trying to shrink as part of your overall economy. There is a rationale for doing it, right? That would be to discourage certain behaviors, not to fund programs.

The household fallacy

My argument is that when we think about the government’s financial operations we tend to do so with reference to our own. We think of the government as a household. I say, “Well, I can’t go on spending more than I take in year after year and borrowing. I’d go broke.” This is a huge mistake, and if progressives do it, they need to stop it right now. The federal government is nothing like the household. The federal government plays by a completely different set of rules compared to all the rest of us.

If we want to go out and buy a car tomorrow, we have to have the money in the bank or be able to prearrange the financing. The dealership is not going to let us drive off the lot with a car until we have security financing to pay for the car, right? What we think is that the government prearranges its financing – the T.A.B. or “taxes and borrowing”; it collects taxes from the rest of us, it engages in borrowing when it sells bonds. It arranges the financing. It raises the revenue. It has money and now it goes out and spends. The spending comes last.

That’s completely backwards. What happens in reality is the federal government – the House and Senate – get a budget together. If the budget passes, there’s an appropriations process. It is through the appropriations processes that the budget authorization for government spending is triggered. That’s how the government pays for everything. We spend first, and the taxes and borrowing are secondary. The rest of us can’t do this. Money matters.

The fact that the federal government has control of the U.S. dollar, creates it, issues it, and is its sole source, means it can never run out of money.. You can try to create it, but you’d get arrested for counterfeit. You can’t do it. You can’t create high-powered money. The government’s money is special.

How should progressives answer the question, “How will you pay for it?” It’s a trap. Don’t fall into this. What they’re really asking is not how will you pay for it but who will pay for it. The question is designed to name the enemy. Who’s going to be footing the bill? In other words, who’s paying the T.A.B.? Don’t answer that question.

The bottom line is all this pay-for stuff is built around the idea that deficits are bad. They aren’t. Dr. Evil told us a long time ago that deficits don’t matter. Well, it turns out they do, but not the way we usually think about it. Deficits matter, but not because they add to the national debt, burden future generations and all that kind of stuff, create instability in the economy. Deficits matter because the government’s deficits become surpluses somewhere else in the economy. Guess what? Dick Cheney knows it and the Republicans know it. How do I know that? Because they just passed tax cuts that will add $1.5 trillion to deficits over the next 10 years. Why did they do that? Because they know that when a government is increasing its deficit somebody else’s surplus is going up, and they know exactly whose surplus it is. They’re using the budget deficit to channel financial resources to the people they are trying to help. Democrats or Greens or whoever could be using budget deficits to channel financial resources, infrastructure, real things, to the people they’re trying to help.

How should progressives talk about money, debt and taxes? Don’t repeat this stuff about taxes paying for federal government programs. It’s not taxpayer money. This is the wrong frame. Don’t talk about the debt as if it’s something that we owe. It’s something that some of us own. You may have treasuries. Mostly they are concentrated in the hands of wealthier individuals. Don’t talk about government money as if it’s something that the government needs to get from us. They’re the source of the money. We get it from them. They don’t need it from us.

An economy on FIRE

Gar: The next person is going to give us the next step. Michael Hudson is the distinguished professor of economics at University of Missouri, Kansas City. He’s also a research fellow of the Democracy Collaborative. Michael has been in this for a long time. Michael, take it away.

Michael Hudson: My first discussion of modern monetary theory really was in Canada 40 years ago. I was the financial advisor to the Canadian government. At that time the big problem from Canada was how provinces would get enough money to build infrastructure. I’m going to talk a little bit about that because it’s the same problem that the United States is facing today. You can understand it, I think, more clearly in the international sense.

There are two ways of financing infrastructure. One would be if the government, the Bank of Canada, which was more than any other bank able to create its own money, spent the money into the real economy for infrastructure. The banking lobbyists – I won’t call them conservatives; they were radical reactionaries and lobbyists for the banks – said, “Look, if the government creates the money, you’ll have to borrow it, and you’ll have to pay 5 percent, 6 percent, but you can save half a percentage point by borrowing German marks or Swiss francs.”

This was Trudeau’s liberal government, and you can’t get more right-wing than the liberals in Canada. What they did was they borrowed billions for Deutsche marks and Swiss francs that were turned over to the government central bank. What did the government do? All this domestic spending in the real economy was in Canadian dollars to hire Canadian labor, to buy Canadian goods and services, to build the infrastructure.

My point was, why do you need Swiss francs and German marks if you’re going to create dollars? The Swiss francs and German marks ended up in Canada’s central bank as its foreign exchange reserves. What did it need these reserves for? If the government is going to create the money as a result of this borrowing abroad, why have the foreigners?

Well, the answer from the banks was you need the foreign banks as an honest broker because they’re responsible. In literature, you think of bankers as being responsible, but they’re really not responsible. What happened after 1979 was that the Canadian dollar went down from about $1.06 into the $0.80s. The Swiss franc went way up. The German mark went way up. The result was that Canada had to pay a 50 percent premium on the capital as a result of having the banks work as the honest broker for them.

None of this was necessary. The government could spend it into the real economy. The problem is the private sector is not just the real economy. The private sector also is the FIRE – finance, insurance and real estate – sector. You can see today the ability of the government to spend money into the economy through the Federal Reserve’s quantitative easing, technically bailout money to subsidize the finance, insurance and real estate sector. This is considered to be noninflationary.

Who gets to create money

You have to ask, what kind of inflation are people talking about? When they talk about government spending into the real economy and running deficits, they say there will be price inflation. What they really mean is wage inflation. What they want to do is keep wages down. When they talk about inflation of prices, they really mean living standards going up. We don’t want that, do we, because we call that consumer price inflation. We don’t call that rising living standards. The fact is, there’s a disconnect. There’s no reason why consumer prices should rise when wages go up. There’s a disconnect with the largest increase in prices that we have today, whether it’s housing prices and rents, as you have in New York, or medical care.

The government is able to create money now for the financial sector, but there is this patter about why you can’t run a deficit for the domestic economy. Now, what is true for Canada is exactly what Stephanie has explained for the United States. Banks can create money simply on their computers. If the rich people lend this money to be spent, how is the price effect any different from the government simply creating the money? The effect is exactly the same. That’s what they don’t get. You don’t need to borrow to spend into the economy at all. It’s a science fiction story, a parallel universe, as if the governments are somehow dependent on the banks.

All this developed about 100 years ago when the Federal Reserve was created in 1913 and ‘14. Before that, there was a crisis in the United States in 1907. Congress had maybe 18 volumes of national monetary commission reports. One of the volumes explained everything that the Federal Reserve had done, creating money, moving it around 12 districts, pumping it into the economy for the autumnal drain when you have to move the crops. All of this was done by the treasury. The difference is that the treasury was controlled in Washington. I have on my website from an Indian journey all of the documents of how the Federal Reserve was created, essentially to take control of the money supply out of Washington and distribute it to the banks in the various Federal Reserve districts.

You have a whole political fight between the FIRE sector and the government sector. You can only understand this fight by looking at the politics of it.

Unforeseen financialization

The fact is that Karl Marx was much too optimistic about the financial system. His volume three of “Capital” was all about how finance tended to grow and extract more and more from the economy. The FIRE sector today essentially funds real estate. It extracts rents. It raises prices. It backs great monopolies. Banks don’t create money into the real economy basically. They create money to buy companies, divide real estate already in existence. They transfer wealth, but they don’t really produce.

I’m working with Gar’s group to re-describe how the gross domestic product accounts. We actually treat the FIRE sector, finance, as a subtraction from gross domestic product, not an addition to.

Getting back to Marx, Marx expected in the late 19th century that the historical destiny of capitalists, he wrote, was to take banking and money creation out of the feudal stage, out of the medieval European stage and industrialize it and essentially move towards public banking. The whole 19th century was doing this. There are three volumes of the national monetary commissionary report on the right spot for the large German banks and how German banks were working hand in hand with government to finance industry. The Bank of Canada was formed during this time.

Things had not worked out that way. World War I changed everything, and now you have instead of industrializing finance, you’ve had a financialization of industry. What you’re having instead of the government spending into the real economy, it’s starving the real economy.

What happens when a government doesn’t pump money into the economy? That means there are only two sources. One source is international. You borrow the money abroad in a foreign currency that you’ll have to repay at a currency risk. The other source is domestic; you borrow from the banks or you let the banks pump the money into the economy. The problem is the banks don’t pump the money into the economy. The banks only lend essentially for the real estate, corporate raids, corporate loans. They even make loans to corporations to pay dividends. The beneficiaries are the 1 percent or the 5 percent.

The real question of the budget deficits or modern monetary theory is who’s to get the benefit of the money? Will it be the 1 percent or will it be the 99 percent? The answer can be increasing the flow of funds, and the flow of funds, who gets what will make it very clear. Who gets the result of the government spending in forms that do not take the form of a deficit or if it runs the deficit, is it into the real economy or the FIRE sector? You need to divide the private sector into FIRE and into the industrial, agricultural and infrastructure.

Gar: Let me say, I suspect there are people out there, because I’ve done this myself several times, who hear the words ‘the banks will create the money’, and that doesn’t ring straight for most people, that money is actually created. Those questions, I’m sure, are going to hang in the air into which modern monetary theory has the answers. I want you to understand that.

Another way to think about it, although we can easily get into a trap about taxes here: When the government wants to run a war, money does not seem to be a problem. It creates money when it wants to, and it taxes back some of it if it likes to. By way of comment, having talked to a number of folks, the word ‘create’ kind of gets in the way sometimes if you’re not economists.

Fear of a job guarantee

Our next speaker is Pavlina Tcherneva, an associate professor and chair of the department of economics at Bard College and a research associate at the Levy Economics Institute. She’s led the way in showing very, very practical applications of the theory.

Pavlina Tcherneva: Thank you. You are all, I’m sure, familiar with the seven deadly sins. Today I would like to address the seven deadly fears of economic policy. Mostly I’d like to address and face those fears and how to defend a progressive agenda, whatever that may be.

The policy proposal that I’ve been working on for 20-odd years is an employment program that has become known as the job guarantee program that has recently entered the mainstream conversation. A number of senators and representatives have endorsed the program. There are lots of versions of the program out there, but it is a recognition that the government has a responsibility to do something about the persistent problem of unemployment.

What I’d like to do today is basically address some of those seven deadly fears. As the program has discussed, there’s a lot of response, both on the right and on the left, and a lot of it is quite alarmist, frankly. I’d like to ease our fears by addressing each one of them.

First, what is the job guarantee? Essentially, it’s a public option for jobs that offers decent work at decent pay. The public sector acts as an employer of last resort, if you will, when people seek work and they’re unable to find good work at decent pay.

It is a permanent program. The unemployment problem is an ongoing problem, and thus, this program is a standby option for jobs. It’s federally funded but locally administered. It’s voluntary. Nobody is asked to work for their benefits. It’s open-ended. You can go to the unemployment office, and you seek work. There will be a list of options for you. The way we propose it is that those list of options will largely focus on public service and the neglected areas of public sector work. It’s open to all people irrespective of their labor market status, race, sex, color or creed.

The way I think of this program is that it’s an employment safety net, the way we have safety nets for various other problems. If the problem is that you don’t have retirement insurance, we guarantee it; we have Social Security. If the problem is access to food, we guarantee that there will be access to food.

It’s also a transitional program where people essentially get their starter jobs if they need to. They get their stepping stone. They enter into this program and then transition out of it if they so desire.

Overcoming the spending myth

Let’s discuss the fears. The first one that we normally have to address is the fear of spending. It’s based on a deep misunderstanding of what money is and what it does. Again, Stephanie explained how normally there are images that are conjured in our mind that, “Gee, my hard-earned money. I’ve been saving it, and now the government wants to tax it away from me so that it can pay for these policies. Who knows if they’re going to be good or bad?”

We just need to give up this myth of the taxpayer money because this is not how actually the public sector spends. I want to add one other purpose of taxes to the list that Stephanie provided: taxes create demand for money; for the dollar, in a sense. Just think of it this way: If the government tomorrow decided to tax you in Canadian dollars and April 15 you have to deliver Canadian dollars or euros, what will you ask your employer to pay you? Will you ask them for dollars or will you ask them for euros? The tax in this coercive way, if you will, creates demand for the very thing that the government issues: the dollar. The reason is the government needs to be able to spend something that we value to be able to fulfill its various public service objectives.

Here’s one way of thinking about it. The government is the monopoly issuer of the dollar. It is the ultimate source of dollars. Unemployment in a way is people seeking dollars but not able to find them. Whatever the other arguments for addressing the problem of unemployment, and we can discuss that, there is one key aspect to this problem. It is that there is only one sector that can actually choke up the demand for dollars. There’s only one sector that can actually provide it to those who need it, and that is the public sector.

Another piece to the story is that the unemployed are already in the public sector. The government is already responsible for the unemployed. We do the right thing. We provide unemployment insurance, as inadequate as it might be. We provide various other income supports, even though those programs are also underfunded. We have this understanding that we have to provide for people who don’t have access to decent employment or decent incomes.

We provide a slew of programs, but we don’t provide the one that many people need, and that is employment. We are not only responsible for the unemployed, but we also bear the costs of underemployment poverty. If you think of virtually all social, economic and political problems, in one way or another they are connected to communities that have lost their economic life, people who have lost economic opportunities. The distress that families feel not being able to provide for themselves. These are large invisible but very real costs that we already bear.

The fear of spending is the first fear that we need to debunk. This is a bit of an esoteric point, but I want to put it out there. If the government sector is the monopoly issuer of the currency, and it provides the currency in exchange for employment in the public sector, public sector work, then there is an exchange. We establish some sort of baseline value for that currency. We anchor the value of the currency and labor power. We know exactly what it is worth. It is worth $10 or $15 for one hour of publicly useful labor. In a sense, it’s our gold standard. It uses not gold, but it uses labor to anchor the value of the currency.

Big numbers and big government

The next fear is the fear of inflation. I think that that is really the fear of big numbers when we estimate what a job guarantee would cost. We have a proposal that you can find at the Levy Institute website that estimates a job guarantee would cost between $300 billion to $500 billion a year to employ 50 million people. A lot of people have said, “Oh gee, this is an enormous program. It’s going to be very inflationary.” Is $300 billion really inflationary? The Department of Defense, including the war budget, is about $900 billion. Social Security is upwards of $1 trillion. Medicare is $700 billion. Medicaid is $600 billion.

Somehow $300 billion is supposed to generate this massive inflation that will erode the value of the currency. This is not really the problem. A lot of people are actually worried that this actually might push up wages, that it might actually provide wages at a decent living level. We understand that the job guarantee will be the effective minimum wage for the economy, so why would you work for $7 an hour if there’s a public option of $15? The private employer has to match this. We have modeled this, and we find negligible impact of this very bold program on inflation.

The other thing that virtually everybody misses in this discussion is that a one-time adjustment in prices and wages across the economy, across the board, is not inflationary. Inflation is when prices keep going up. If the wage goes up from $15 to $16 to $20 to $25 to $30, then the private sector will have to match it. Yes, that will be inflationary, but no, we are anchoring the floor. We are raising the floor, and we are anchoring it at $15.

The second piece that everybody misses is that the job guarantee actually shrinks when the economy is growing. When the economy is growing, when private employment is growing, when there are ”inflationary pressures” in the economy, the program shrinks. Actually, it’s a dampening effect on inflation, not a fueling effect to inflation.

There’s a fear of big government, of course, but most people ignore the fact that we already have big government. What I already pointed out is that government has devoted enormous amounts of financial and real resources to deal with the fallout from unemployment, underemployment and poverty.

In this sense, the way to think about this is that the job guarantee actually reduces the costs of unemployment.

Whatever you discuss, whatever your policy priority is, always separate the financial cost from the real cost.

When you defend Social Security, don’t fall into the trap of this discussion of how will we pay for it. The question is what would we do with a whole bunch of people who are retiring who don’t have the goods and services that they might require to live a decent life. It is not a matter of financially providing for them but providing for them in real resources.

It’s the same thing with unemployment. It’s not the problem of paying for unemployment, but the problem is, do we really want to maintain this paradigm of neglect, of abandoning our public spaces, of abandoning our public purpose, of allowing people to suffer all the consequences that come with unemployment.

Double standards

There’s also fear of the administrative burden. This is a unique double standard that the job guarantee faces. We never hear that we can’t go to war, we can’t engage in nation-building because it’s going to be an administrative nightmare. The job guarantee uses the existing institutional infrastructure to simply expand the number of jobs out there.

Is it really so difficult to employ 50 million people? Is this really the biggest problem that the government is facing? Well, public education serves 50 million students. Nobody is saying we have to take it away because it’s an administrative nightmare. Social Security, 50, 60 million people. Medicare 44 million. Medicaid 70 million. Yeah, it’s easy to sign a check, but all of this involves a fair amount of administration, and we don’t discuss these.

Fear of boondoggles. This was the fear during the New Deal that somehow the government is going to create bad jobs. Well, just go to the Living New Deal map, and you will find what we did and the legacy that we left. Don’t fall into the trap of productivity. What’s the productivity of these jobs? It’s a natural impulse to say, “But what will people really do?” I can give you a very long list of what they can do. Good useful jobs. The way to answer this question is what is the productivity of the unemployed today? It’s negative productivity. You have malnourished children that go to school because their parents don’t have income to provide for them. That is the productivity you need to be focusing on.

Finally, there’s the fear of political revolution. This was raised by Robert Samuelson in The Washington Post. He says, “Imagine people who work in the private sector who suddenly realize the public option provides Medicare and child care, and they don’t have it. This is going to be enormously disruptive to the business as usual model.”

Look, in information technology, disruptions are considered great, right, progressive. In public policy, disruptions are awful, terrible. This is a defense of the status quo. It is the defense of a model where firms are only profitable when they pay poverty wages. We don’t want to defend this model. We want to disrupt it.

Finally, I think all of this amounts to pure change, but Americans are really not so afraid of it; a recent survey showed that the job guarantee had overwhelming support, and even in deep red states upwards of 70 percent of respondents supported it.

Those of us that have been working on this project are very encouraged, excited that it is in the mainstream, but my cautionary note is that we put way too much on the shoulders of the job guarantee. We have had decades of neglect of the public sector. We have enormous environmental challenges. We are suddenly putting all of these problems on the shoulders of the job guarantee and saying, “Hey, look, see, this is the program that will solve these problems.” It will not.

This program provides jobs for all. This program is a very crucial piece of the progressive agenda, but we need so much more than that.

Rethinking the monetary system

Gar: I want to introduce Raúl Carrillo, who’s the staff attorney at the New Economy Project and a member of the board of directors at the Modern Money Network, and he’s going to talk about actual on-the-ground projects that he’s working on and how they relate to this theory.

Raúl Carrillo: What I’m going to try to do, depending on your opinion, is synthesize or bastardize some of the ideas that were just presented by three of my heroes here and articulate those in a language that is useful, I think, to organizers, activists, people who are in this economy trying to heal the wounds, trying to take care of other people, trying to actually introduce some of these intellectual paradigms to work on the ground.

I’m particularly going to focus on two movements that I’m a part of. The first is the Modern Money movement. I’m affiliated with a number of modern money organizations, but principally Modern Money Network, which a few of us started several years ago when we were law students at Columbia and activists. We started thinking how does this kernel of what we consider to be factually correct analysis of the economy connect to law, organizing, technology, all these other things? How can we build bridges? How can we create packages that are useful for activists and organizers to use?

Over the last five years or so we’ve held about 70 symposia in the United States, United Kingdom, Germany, Australia, Brazil and a few other places, trying to connect MMT (Modern Monetary Theory) to other things.

The other one is that I work for the New Economy Project, which is a 20-year-old nonprofit here in New York City, and we do two things. One is we fight corporate power. I personally operate a financial justice hotline where folks can call when they have problems with banks, debt collectors, landlords, etc. They come to the office. We try and help them out on a very individual level. We also bring some impact litigation.

The second thing that we do is community economic development. We try to build community land trusts, financial cooperatives. We work with co-ops, all the good stuff that I know a lot of people in the audience are involved in already.

What is “the New Economy movement”? The essential idea is we’re trying to move out capitalism, but we have a very, very strong focus on environmental sustainability. The production system with FIRE (finance, insurance and real estate) on top of it, as Michael mentioned, is tricking us, so how do we get out of here?

The New Economy Project has a particular focus on something called the “just transition,” which arose in the 1980s and 1990s. The idea here is that we don’t just want to go to an economy that’s more sustainable. Along the way we want to heal some of the wounds that have been caused. We want to help people who face the biggest threats from ecological disaster. That means a particular focus on racial justice, gender justice, all the various forms of social justice that need to come along with a push to an environmentally sustainable world.

How does Modern Monetary Theory help? I’m actually going to borrow a quote from one of the organizers of this panel: ‘What MMT and PK theory does is it concentrates our minds on the real limits, on the real things we need to make more sustainable.” That means we’re focusing on the real: What’s happening to people, what’s happening to communities, what’s happening to the planet.

The dig-burn-dump economy

If we’re talking about an economy with limits, money is not necessarily the enemy. In fact, a lot of MMTers agree. A dear friend, Fidel, often says our economy runs on waste now. One of the fears, fear of waste for the job guarantee, fear of financial waste, fear of fiscal waste. That’s nothing. We make that stuff. It’s a legal construct. It’s a social construct. Really, the problem is when money is used to burn up a planet.

This is how an environmental justice group in Oakland called the Movement Generation Justice and Ecology Project describes the process that the industrial production system applies to our planet and thus to us: We dig up resources, we burn them, then we dump the waste, we churn it up.

Not only does the industrial production system do this to nature, but the financial system does this to people. FIRE burns people. It’s right there in the name.

What does the FIRE system do? It converts a participant in the economy, you or I whether in our capacity as a worker, a tenant, a borrower, a debtor of some sort, and it turns us into nonrenewable participants. It treats us like it can draw money out of us and then discard us, whether that’s in a place of employment, whether that’s in the credit system. It treats us like we’re disposable. We are waste.

How did we get here? Again, lots of different leftist stories on how this is done, but I think that MMT adds a particular element to this. We all know the story of enclosure, property rights, etc. People become dispossessed. They become part of a labor force that is roving. We don’t have property. We can’t work just for biophysical resources. We can’t just find some land and grow some food, even if we wanted to. We have to pay taxes. By taxes, what we really mean is any kind of fines, fees, obligation with the state. That means the fees you get for walking while black in Ferguson. That means student loan interest. That means a wide variety of things.

The point is the system is set up so we have to get money, and people take advantage of that. Now capitalists are not only trying to control the means of production. They’re trying to control the means of the means of production, the FIRE system, as well as the industrial production system.

How does this system keep going? It acts like the money comes from the users, from the resources that are being used rather than by the system itself. We talked about the taxpayer money frame, how that’s particularly harmful. When we think that the money to keep a machine running has to be extracted from people, we get some really terrible political dynamics.

The other lie is that banks are just either making money wildly or they’re using our deposits and turning back around and the banks rely on us. I would say that the banks are rogue public utilities. They have been chartered by the government, licensed by the government, regulated by the government, and they’re out here not doing their job. When we talk about pushing them to do particular things, we have to recognize that it’s even worse than we thought. They’re powerful. They have the money power. They can create and generate credit at the point of lending. They can do a wide variety of other things that are very, very terrible.

Austerity makes room for financial extraction. If the government is not putting money into the economy, the banks are controlling the borrowing process, and we’re all going to die if we don’t stop it.

Money doesn’t grow on rich people, not on wealthy taxpayers, not on banks. What we want to do is get the money power away from the banks, away from rich people by making claims on the state. You’ve got that giant piggy bank, call it what you will, money can come out of the state. Monetary sovereignty means that you can spend on people, on planet, on communities.

The way that we stake our claim and make the state do that is we establish rights to the things that we want. Then the dynamics for fiscal spending become repooled. We pull money out of state coffers, depending on how much we need based on each eligible individual instead of waiting for whoever in Congress, rich folks, to write that check and change the dynamics.

Basically what we’re talking about here is that MMT allows activists and people to, once they establish rights, pull money out of the system rather than wait for them to push.

What does that mean for activists, for organizers, for leftists? We’re establishing rights. We’re marching for jobs. We’re marching for various other freedoms. We want the entitlements. Fiscal austerity is the enemy even though we might want to be austere towards nature and other sorts of respects.

The plant-nurture-thrive alternative

Now I’m going to go out on a real, I think, new limb here. I’m going to suggest that MMT combined with a new-economy focus on environmental sustainability can take us away from the dig-burn-dump model and into a plant-nurture-thrive model.

Plant. We establish rights with this right to housing, with its right to jobs. We free up space to grow, to pool funding and to have a space outside of the profit motive, even outside of the revenue motive. We can start to do new things within that space. We fertilize the space with more of that sweet, sweet money from the public government. We can start to heal wounds, start to do things more equitably. People from bad sectors will leave to new jobs and a job guarantee. People from bad buildings will leave to new houses and new forms of shelter with the home sprawl movement that’s going on.

I’m just going to do a little bit of implementation here and talk about how MMT can potentially change things. I think that public money for public purpose is awesome, and that’s going to give us a platform to do new things. Eventually, it can be public money for public power. We can do even more. The way that dynamic works is by reversing essentially the dig-burn-dump cycle that we have going on here.

We can eventually move on to even stronger things like unions, to collective bargaining. People leave spaces that are extractive. No one wants to be a part-time prison guard anymore. No one wants to work in fast fashion. No one wants to work in fast food. Not necessarily everybody is going to leave, but it provides people with the opportunity to do so, so we can move again towards a regenerative economy, towards people leaving extractive industries.

Eventually, you can layer on democratic processes into the job guarantee, into the new space that’s been created. Participatory budgeting and worker co-ops can fold into the job guarantee.

Just two more examples of implementation. Extractive finance in housing is dispossessing people, either through the initial capture of land or gentrification. The landlord is in charge. The landlord kicks you out. The landlord doesn’t like you. The landlord segregates people. You get redlined. You get gentrified. You get surveilled by all these crazy consumer reporting systems. Then the threat of homelessness keeps you in line. This is true even for the middle class who’s enthralled to the banks, if not to landlords.

With MMT, what does it look like? You establish a right to housing. MMTers don’t necessarily believe in that, but I do. The point is that you can establish a right. You create a space. Once it’s guaranteed that everyone gets this thing, now you have room to maneuver. The rights pull the money down to tenants. You can have things like social housing projects. Then you can start doing things that are more democratic over time. Community land trusts, mutual housing associations. These things can all be contemplated once we have the funding and public capital. Again, that sweet, sweet fertilizer.

In East Harlem, the New Economy Project is helping to build a community land trust where you take land off the market, the residents own it. These things can be helped by MMT.

Finally, everybody is familiar with the access to credit scenario. I think that in and of itself is a problem that we think that people don’t have enough loans. Really what we want is for people to get more money, for people to get money from the state and from benefits. More people will get higher wages whether that’s through a job guarantee program or something else.

In the instance that people need credit, right now they’d be set with a bunch of predators, whether that’s payday lenders, whether that’s banks acting terribly, whether it’s this new fintech stuff from online, which actually turns out to be just as predatory as the analog version. What you can do with an MMT framework is again, establish public infrastructure. Establish rights. You can do some forms of postal banking. You can do public banking. From then on out the threat of you having to go to a payday lender is gone, so you have room to maneuver. Again, political room and fiscal room. You can start doing things like complementary currencies. You can start doing things like public banking. You can start doing all these more democratic things once the public sector is putting pressure on the private sector and giving civil society room to grow.

As you see here, there is a regenerative model for all of these things. You just need the public money. My friends in Reston, England have a complementary currency program. They generate money, or you could say their own forms of IOUs, which they use in the local community so that people only do business with local business. They’re keeping what they call “clone town London” out of there. These are acceptable in receipt of taxes, which is very interesting.

Finally, Gar mentioned the public banking movement. The New Economy Project and a coalition of other grassroots groups are launching an effort to create one here in New York. The idea there is that the public bank will generate credit to lend to democratic enterprises, ideally we would want federal money, but this is something that is powerful that municipalities can do, and in the process we can highlight a lot of what money really is. It’s a public feature that should be used for the public good, and we can do a lot of political education with this as well as whatever material healing help to organizations throughout New York City. Public money for public power.

Gar: Let me just say one thing. I’m from Racine, Wisconsin. I had an aunt who ran a little tiny Jewish bakery. She used to say, “You know, during the Depression there wasn’t any money around. Then they decided to run a war, and there was all kinds of money around. Why can’t we do that when we want to do that?” That is probably the point.

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The post Money Matters! Why Monetary Theory and Policy Is a Critical Terrain For the Left appeared first on P2P Foundation.

Writing at New Economic Perspectives, Eric Tymoigne, a research associate at the Levy Economics Institute, argues that the fair price of Bitcoin is zero.

Tymoigne’s reasoning is based on the the fact that money is a financial instrument. The value of a financial instrument can come from being redeemable to its issuer, from providing an income stream or from having a collateralized value. For example US Dollars are redeemable against taxes. Bonds bear interest and stocks pay dividends. Gold coins contain gold, which can be sold as a commodity.

Since Bitcoin is not redeemable, provides no income and has no collateralized value, it is worthless as a financial instrument. Thus, its “fair price” is zero. Eric concludes that “Bitcoins are purely speculative assets.”

From the point of view of modern finance, Bitcoin is not money at all.

The inventor of Bitcoin, Satoshi Nakamoto, did set out to create a new kind of money. The very first words of the Bitcoin whitepaper state that a “purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

Bitcoin is intended to be money. A different kind of money. A form of money that is not a financial instrument issued by a bank or government, as Tymoigne understands it, but a form of money that is independent of financial institutions, governments and all other intermediaries.

Bitcoin is intended to be a kind of money that can be used to make payments across the internet in a way that makes government unnecessary and doesn’t reveal real names or physical locations. As such, it does not have properties that would tie it to an issuer who could redeem it, or provide a money income, or be collateralized with a physical commodity. Decentralized money can not have the properties on which Eric Tymoigne bases fair price.

The economic school most associated with the Bitcoin community is the Austrian school, especially its libertarian capitalist adherents. This school views money as being firmly rooted in what Tymoigne refers to as its collateralized value, i.e. the gold content in a gold coin, what Austrian-influenced economists call “sound money.”

While the modern finance view holds that even with gold coins, “the gold content of the coin is not a monetary instrument, and it is not what makes the coin a monetary instrument” as Tymoigne puts it, on the hand the Austrian view is that it is specifically the gold content of a gold coin that makes it money.

Frank Shostak, associated scholar of the Mises Institute, claims “An object cannot be used as money unless it already possesses an objective exchange value based on some other use.” Murray Rothbard, one of the key theorists of libertarian capitalism, states that money cannot originate “by everyone suddenly deciding to create money out of useless material, nor by government calling bits of paper ‘money.'”

Rothbard further explains that the only way money can come to exist is “by beginning with a useful commodity under barter, and then adding demand for a medium for exchange to the previous demand for direct use.”

Though inconvenient to Bitcoin proponents, it’s clear that Austrian theory would not consider Bitcoin money, since it’s a “useless material,” which never had any “value based on some other use” prior to being money. Despite this, Bitcoin’s design has been influenced by a faulty application of the Austrian theory of sound money, especially the “gold standard.”

The logic of the gold standard is that the supply of sound money, a useful commodity such as gold, determines the value of paper money issued by governments. Paper money is not a useful commodity and therefore has no intrinsic value. The government should be limited in the amount of paper money they create to the amount of gold they have. The gold standard is a proposal to have a fixed ratio between sound money, e.g. gold, and paper money.

It is not the amount that is fixed, but the ratio. Neither the amount of gold, nor the amount of paper money is fixed in the gold standard, the ratio between them is. If the government gets more gold, it should also create more paper money according to the theory, to keep the exchange value of money stable.

The Bitcoin software is programmed so that a fixed total supply will be eventually be mined, 21 million Bitcoin, and the rate at which Bitcoin is mined is also fixed. Starting at 50 BTC every 10 mins, the rate is reduced by half every four years. As of 2016 the rate of Bitcoin creation is 12.5 Bitcoins every 10 minutes, and will become 6.25 in 2020.

Bitcoin’s creators attempted to follow the reasoning of the gold standard by fixing the number of Bitcoins, understanding it to be like paper money, but as Bitcoin does not have a source of sound money to fix the supply of Bitcoin to, they just made up a wacky formula out of thin air. Essentially attempting to fix the money supply by decree, and encode that decree into Bitcoin’s software. In the Austrian view, this results in a broken digital currency that lacks a ratio to sound money.

Bitcoin can not be rational. Its face value can not be expressed as a consistent ratio with a supply of useful commodities. It is irrational by design, just like Bitcoin would have zero value from the point of view of modern finance, it would also have zero value from the point of view of Austrian theory. Both views consider the entire exchange rate of Bitcoin to be a speculative bubble, but neither can elaborate on how this bubble came to exist.

The Austrian schools of thought subscribes to the “subjective theory of value” developed by economists such as William Stanley Jevons, Léon Walras, and Carl Menger in the late 19th century.

Without an objective measure of value, money has to be itself a thing that can be used. For value to be subjective, money has to be an object, the utility of which measures the price of all of the things priced in it. For this reason, the Austrian school can not see the forest for the trees when it comes to Bitcoin, because it can not see the obvious source of value as being the computational power used to mine Bitcoin, as Bitcoin is not directly backed or collateralized by the mining rigs and the power they consume.

The subjective theory of value was developed in opposition to the labour theory of value, especially in opposition to socialist views and the ideas of Karl Marx. However Marx’s theory of money is not rooted in redeemability, nor collateralization, nor income, nor usefulness, but rather in labour.

Ironically, while libertarian capitalist theories of money can not account for Bitcoin, Marxist theories of money can. The face value of Bitcoin represents a certain worth in terms of the labour time embedded in the computation power used to mine it. The Marxist theory of money is a Proof of Work theory.

For Marx, the value of all commodities is not subjective, but objective; all commodities have a value that is created by the labour required to produce them. The reason that money can be used as a way to express the price of other commodities is because it represents a certain amount of labour, which is also what the worth of the other commodities is based on. As Marx states in Grundrisse “1/x ounce of gold is in fact nothing more than 1/x hours of labour time materialized, objectified.”

Marx illustrates that the face value of money is a rational number. It always represents a specific ratio. In the case of gold, Marx employs the ratio between the amount of gold and the amount of labour, the work:gold ratio. The value of the total volume of gold is derived from the amount of work required to produce it.

For something to be money, it needs to have a rational value, and it is that value in which the prices of all other commodities are expressed. Money, as such, has no price, and can not.

Take for example an economy that produces apples, oranges and coconuts, you could have a table of prices that lists apples and oranges in terms of coconuts, oranges and coconuts in terms of apples, and apples and coconuts in terms of oranges. You could not have a price of apples in terms of apples, nor oranges in terms of oranges, nor coconuts in terms of coconuts, or rather that price would always be 1.

If we chose to use coconuts as money, presumably because we’re coocoo for them, how many apples are worth a coconut? How many oranges are worth a coconut? The value of the coconut is its socially necessary labour time. Say that is 10 hours. Therefor a coconut is “worth” 10 hours. Say an orange is worth 2 hours and apple is worth 5 hours, the price of the orange is 0.20 coconuts (20 cococents), and the apple is 1/2 a coconut.

As coconuts are money, more are produced than are used, since once you use it to make a chutney, you can’t spend it as money, and you can’t save it. So its original use value as food is replaced by its new use value as money.

Yet, the value of a coconut is still rooted in socially necessary labour time, like the commodities that are priced in it, this is why it can be used to compare all the other commodities, because its value is rooted in the same thing: labour.

If there are not enough coconuts for the savings needs of the economy, demand for coconuts will go up. The exchange value of coconuts will temporarily rise, but will fall back to its value as more labour is drawn into coconut production, and away from the production of the other commodities. The market regulates the value of coconuts.

Money can express the value of commodities, because both money and the commodities priced in it can be reduced to a ratio of work to supply.

While the libertarian capitalist theory is not useful in determining the value of Bitcoin, Marxist theory is. Bitcoin does not need to be backed or collateralized in any reserve of useful commodities, but instead in the labour time required to produce it. Proof of work.

The Bitcoin software employs an algorithm that increases the difficulty of the work needed as more mining capacity is added to the pool to keep the rate at the current limit that is configured in the software. This means that while the face value of Bitcoin represents a certain worth in terms of labour, this worth is not consistent. There is no fixed ratio between work and coin. More work creates more value, but instead of creating more coins with the same value each, it creates the same number of coins. Each coin has more value.

As more computational power, representing ever greater amounts of labour, is employed in Bitcoin mining, the number of Bitcoins produced does not go up, instead, the value of each Bitcoin goes up, creating a positive feedback loop. The more Bitcoin goes up, the more people are attracted to mining it, the more it goes further up.

The Bitcoin creators model Bitcoin as a kind of paper money with an arbitrarily fixed supply and therefore an irrational value, attempting to follow Austrian theory, rather than model it as a money commodity according to Marxist theory, which is regulated by the market.

While at first Bitcoin’s exchange rate was only of interest to the economy of enthusiasts who are attracted to its intrinsic decentralized features, eventually investors and speculators took notice, and Bitcoin become the purely speculative asset Tymoigne accuses it of being. The positive feedback loop quickly became a short circuit, and kick-started an asset bubble.

As the bubble grows, the capital gains from Bitcoin become larger, and exceed returns from other forms of investment. Investment portfolios will over time start to carry a larger portion of Bitcoin, squeezing out other investment options.

During a bubble, It becomes perfectly rational for investors to pay a foolish price for an asset if they are certain that it can be sold for a higher price to a greater fool. The exchange rate of Bitcoin become detached from the labour time embedded in the computational capacity of the mining pool and become underwritten instead by the supply of the greater fool.

This turns the bubble investor into a judge in a kind of a beauty contest described by Keynes as not being one where we choose the prettiest option, but where “we devote our intelligence to anticipating what average opinion expects the average opinion to be.”

Like a game of betting on the answers of the contestants on Family Feud, so long as the investors believe that the average opinion expects the average opinion to be that Bitcoin will go up, Bitcoin will win the Keynesian Beauty Contest and the bubble will continue to inflate. However, the greater fool regularly has a crisis of confidence, which causes frequent crashes during the rise.

So long as exchange rate doesn’t stay below the cost of mining Bitcoin for very long, the bubble won’t pop and Bitcoin’s positive feedback loop will quickly begin to push the exchange value up again. So long as the capital gains are still better than returns on other investments, portfolio compositions will continue to shift to holding more Bitcoin.

At the same time, as long as the return on capital gains of Bitcoin are greater than real interest rates, portfolios will become more leveraged. Investors will borrow more and more, as the payment of the interest is less than the expected return from the Bitcoin exchange rate going up.

Hyman Minsky describes three kinds of investors, “hedge” investors, which have enough income to pay both the interest and principal on their loan, “speculative” investors, that can pay the interest but not the principle, and “Ponzi” investors, investors who can not pay either the principal or the interest, and depend on the assets that they own to increase in exchange value.

As returns on Bitcoin continue to be greater than other investments, Bitcoin will become a larger portion of investment portfolios, as Bitcoin does not pay interest or dividends, this means that the income of investors will go down as a result. While returns on Bitcoin are be greater than real interest rates, investors take on more and more loans. As a result, more and more investors will “go Ponzi.”

Every time there is a crisis of confidence of the greater fool, the Ponzi investors will go bust, as they can’t pay their loans, even after they sell off all their Bitcoin. As more investors go Ponzi, these will cause deeper and deeper crashes in Bitcoin, each crash will make Bitcoin a little less pretty, eventually Bitcoin will start losing the Keynesian beauty contest, perhaps to other alt-coins, perhaps to other investments completely, and the supply of the greater fool will dry up.

As the bubble bursts, Bitcoin will quickly become a toxic asset, with many holders wanting to sell, but finding few buyers. Miners will begin to abandon Bitcoin, and the positive feedback loop will begin to operate in reverse. Less miners will not mean less Bitcoin being produced, but instead the proof of work will become less difficult and the same number of Bitcoins will be produced. The value of each Bitcoin will fall. Eventually, falling to its “fair price” of zero, as Eric Tymoigne determined, or close enough to it. It will go back to simply being the in-game currency of libertarian capitalist fantasies.

The Austrian idea of money needing to be in fixed supply, drawing inspiration from “the gold standard,” is the undoing of Bitcoin. The coding of this bad idea into the Bitcoin software means, ironically, that the market can’t regulate Bitcoin. As more people invest in mining operations and the mining pool grows, the supply of Bitcoin doesn’t go up, so return on investment can’t regulate its exchange value.

Meanwhile, the bubble in the exchange rate of Bitcoin has made it useless as money. Price instability and high transaction costs have forced many vendors and payment processors who accepted it as payment to drop it as an option. This includes most of its most prominent mainstream supporters, like the digital distribution platform Steam or the payment processor Stripe.

As Bitcoin is still a relatively small part of overall investment portfolios, it’s impossible to know when exactly the bubble will burst. It’s likely that the libertarian capitalist bent of the community will actually work to delay this, as this community is a rich source of the greater fool, and probably is less likely to take on loans. We are very likely a long way away from a “Minsky Moment,” where a large number of Ponzi investors going bust causes a meltdown.

Not only has Bitcoin failed as money, but the asset bubble it has created has diverted investment from real production of goods to speculation, and the mining process consumes a phenomenal amount of energy, with catastrophic environmental effects. Meanwhile, it has done nothing in terms making the economy more fair or reducing the power of either governments, banks or any of the intermediaries it was meant to displace. There is no question that Bitcoin is a failure, a rather disastrous one, even if some speculators have been spectacularly enriched by it.

If there is value in the original vision of Bitcoin, to have a form of money that can be used to make payments across the internet in a way that makes government unnecessary and doesn’t reveal real names or physical location, it needs to be programmed differently. Such a currency would need to work in such a way that the supply of the currency increases when more mining capacity is added to the pool. This allows the market to regulate its exchange value by the natural increase and decrease of investment in mining relative to demand for the currency.

It is possible to create a cyptocurrency with a with a stable value by simply eliminating the feedback loop, creating a rational cryptocurrency with a consistent work:coin ratio. Bitcoin could be made rational by increasing and decreasing the number of Bitcoins produced per block along with the increase and decrease of the difficulty of the proof of work. This way, the number of Bitcoins produced would scale in proportion with the investment in mining.

However, there may not be much interest in doing this. As miners would need to choose to use their hashing power to make a standard rate of profit mining the rational cryptocurrency instead of chasing speculative returns by mining bubble-prone, intentionally irrational cryptocurrencies. Another obstacle would be get attention for it, as a rational cryptocurrency would not attract hype, because it would not have fantastically skyrocketing exchange rates.

Bitcoin was intended to be digital money for an ideal perfect market for libertarian capitalists, instead Bitcoin has turned out to primarily benefit bankers and speculators at the expense of the environment and the real economy.

For any that remain committed to the original vision of Bitcoin, a decentralized money that one could use with out revealing their real name and location, the path forward lies in creating a rational cryptocurrency, based on the Marxist and not the Austrian theory of money.

Yet, even with a rational cryptocurrency, it is unlikely to play a major role in the global monetary economy, given that governments are not constrained by reserves, crypto or otherwise. Even with a “gold standard” governments can still spend more by securitizing future tax obligations. Banks are likewise constrained only by qualified demand for their loans, not their own reserves. This means that the money in the global economy will remain government and bank money at the macro level.

Even if a rational cryptocurrency can not play the sort of revolutionary role that animates the dreams of libertarian capitalists, it can still provide a payment option that is international, convenient and privacy respecting, which remains worthwhile.

However, the institutions that would most likely create a rational cryptocurrency would be the banks or a fintech startup seeking to disrupt payment processing. While hardly heralding in a libertarian capitalist paradise, this would certainly be a better use of work than the misguided and harmful bubble Bitcoin is today.

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