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This Could Change Everything
1. This Could Change Everything
Dick Wagner, JD, CFP and Don St. Clair, CFP, EA
23rd Annual Far West Roundup August 9-12, 2012
!1
2. What is Money?
"Money is the most powerful and pervasive
secular force on the planet. Yet for most,
it's a source of mysticism and mystery."
- Dick Wagner, JD, CFP
!2
3. Textbook Explanation
Money derived from barter
Spontaneously originates in
Private Sector
Replaces clumsy barter
Eliminates "double-
coincidence of wants"
Reduces transaction costs
!3
4. Evolution of Money
Primitive monies
Stones, beads, shells,
feathers, fish, cattle, etc.
Precious metals - coins
Paper with metal
backing
Fiat money - based on
Trust?
!4
5. Textbooks Conclude
Money is what money
does
Unimportant in its
own right
Largely ignored in
many economic
models
!5
6. Graeber: Not So Fast
No archeological
evidence
All money is debt
Roots in penal system
Unit of measurement
!6
7. Credit & State Theories
Anthropologists, Sociologists,
& Numismatists find origins
in credit/debt relations
Palace communities,
Mesopotamia, ancient Egypt
State/Temple/Authority plays
central role
Chartalist/Cartalist
!7
8. John Maynard Keynes
"The age of Chartalist or
State Money was reached
when the State claimed the
right to declare what thing
should answer as money to
the current money-of-
account.... To-day, all
civilized money is, beyond
the possibility of dispute,
chartalist."
!8
9. Regardless of Origin
Today, all money exists as an IOU, representing a social debt
relationship
It is abstract, and like an "inch" or a "yard," it can be
measured, but not seen or felt
In any modern nation, the money of account is chosen by
the national government
A nation's IOUs are recorded in this money of account (e.g.
US Dollar, British Pound, Japanese Yen)
Money is not an object. It exists as credit/debit entries. Coins
and paper are representations of money, not vice versa
!9
10. Today, Sovereign
Governments
Define the money-of-
account
Impose taxes, fees,
obligations
Decide what they will
accept as payment
Choose how they will
make their own payments
!10
11. Taxes Drive Acceptance
Government defines money/
what it will accept as payment
Makes payment (spends) in
that same money-of-account
Requires taxes be paid in the
money-of-account it defines
!11
12. But Taxes Do Not
Fund Spending
Government does not "need"
our money
Not to raise revenue per se
Taxes function to regulate the
economy by regulating
aggregate demand
!12
13. How a Currency
Issuer Spends
By directing its bank (usually the central bank) to
credit someone's account
This frequently (and increasingly) happens without
even writing a check
In the "modern money" era, government spending is
accomplished through electronic keystrokes (Bernanke)
The government neither has, nor doesn't have dollars
in an account somewhere
!13
14. Modern Money
Pelley: "Is that tax money
that the Fed is spending?"
Bernanke: "It's not tax
money. [W]e simply use the
computer to mark up the
size of the account."
!14
15. Hierarchy of Money
Anyone can create
money (social debt Government
relationship)
Trick is to have it Banks
accepted (Minsky)
Non-Financial Business
But private sector
cannot create net Households
financial assets
!15
16. The US Hierarchy
Issues the
currency at the
top of the US $
pyramid
Taxes and spends
in dollars
Non-convertible,
fiat money
!16
17. On Gold Standard
Pre-1973, Bretton Woods
Promised to convert US$
to gold at a fixed price
Gold
Dollars were subordinate
US $
Had to limit spending to
protect gold reserves
!17
18. Other Countries
Did not issue
currency at the top of
the pyramid
US $
Had to limit spending
to protect (US$) Ruble, Peso, etc.
reserves
Sacrificed control of
interest rates
Heavily dependent on
trade surpluses !18
19. Look familiar?
The Euro is
effectively a foreign
country from the "Euro"
perspective of the
individual nations
Greece, Spain, etc.
Currency is
divorced from the
nation ("One Market,
One Money")
!19
20. The Eurozone
No EMU nation issues
the currency that sits
at the top of the
pyramid
"Euro"
Governments can Italy, Portugal, etc.
"run out" of Euros
Must pay market
interest rates
Heavily dependent on
trade surpluses
!20
21. Under Bretton Woods
Promised to convert US$
to gold at a fixed price
Gold
Dollars were subordinate
US $
Had to limit spending to
protect gold reserves
!21
22. Everything Changed!
Except the textbooks
Nobody rang the bell
Dollars no longer
subordinate
Money no longer the
object
!22
23. Sovereign Money Matters
A sovereign currency ISSUER that does not peg to another's
or offer to convert, can never "go broke," or "run out of
money"
It can afford anything for sale in the domestic unit of
account
It does not need to borrow its own currency
It can set the policy interest rate at any level
It has expanded policy space
!23
25. Within Our Means
"The government, just
like every American
household, has to live
within its means"
!25
26. Is the Government
Like a Household?
No - not anymore
Not since we abandoned the gold
standard
We ended Bretton Woods
We have "modern money" created
by keystrokes on a computer
But... we act as if we're still stuck
in a fixed exchange rate world
!26
27. The ISSUER of the
currency can always pay
"[A] government cannot
become insolvent with
respect to obligations in
its own currency. A fiat
money system, like the
ones we have today,
can produce such
claims without limit"
-Alan Greenspan 1997
!27
28. Deficit Hawks want
Immediate Cuts
Opposes deficit
spending on principle
Often favors "sound
money" (e.g. gold
standard or 100%
reserve backing)
Would legislate rules
to mandate balanced
budgets
!28
29. Deficit Doves want
Eventual Cuts
Supports limited deficit
spending in tough economic
times
Want the budget balanced
over the business cycle
Support rules to limit the size
of the deficit
Prefer to wait until after the
economy begins to recover
before imposing austerity
!29
30. More Deficit Aviary
New bird in town, the Deficit
Owl
Modern Monetary Theory (MMT)
Exposes the fallacies in
conventional economic theories
Views unemployment as socially
harmful and economically
inefficient
!30
32. The MMT Deficit Owl
Assigns no arbitrary
limit to the size or
duration of the
deficit
Uses a sectoral
balance sheet
approach to relate
deficit to the rest of
the economy
!32
33. Sectoral Balances
In any given period, sectoral balances show
whether a particular part of the economy is:
Spending more than its
income (deficit)
Spending less than its
income (surplus)
Spending just equal to
its income (balanced
budget)
!33
34. Accounting for Deficits
The laws of double-entry
accounting apply
All sectors cannot take in more
than they spend (i.e. be in surplus)
All sectors cannot spend more than
they take in (i.e. be in deficit)
Unless all 3 sectors are in balance,
at least one sector will be on
deficit
!34
36. Private Sector Balance
As a general rule, the private sector needs to be in surplus
Households and firms cannot continually borrow more
than their income
At some point, lenders will run out of credit worthy
borrowers who are willing to spend
Private debt levels may become unsustainable (Minsky's
Financial Instability Hypothesis)
When an expansion driven by private sector debt reaches
an end, sales soften, jobless claims trend higher, and
economic activity falters
!36
39. Achieving a Private
Sector Surplus
Unless/until we run a trade
surplus, the government
must run a deficit
Only countries with trade
surpluses can avoid running
government deficits
Not everyone can be a net
exporter!
!39
40. But We're Terrified
of Deficits
What if people lose
trust in the dollar?
What if China
refuses to buy our
bonds?
What if interest rates
skyrocket?
!40
45. Quantitative Easing
Despite decades of
it's own QE
Inflation in Japan
is non-existent
!45
46. What Have We Learned?
The government's deficit is
equal to the non-government
sector's surplus
The US can never go broke or
forced into bankruptcy
Sovereign constraints are Real,
not Monetary
Deficits do matter
!46
48. Observations
MMT CFP
Money is No Money is Not the
Object
Object
Constraints are Constraints are
never Monetary
often Imagined
Views Full Prioritizes
Employment as Numerators over
Socially Desirable Denominators
!48
49. Entitlements
Payroll tax creates new
Government "Debt"
Constraints are Self-
imposed
Medicare Parts B & D
"adequately financed
into the indefinite
future"
!49
50. A Borrowed Theory
Cost of Capital
Infinite Time
Horizons
Lack of Spending
Opportunity
No Spending
Imperative
!50
52. Policy Choices
Raise taxes, cut
spending - or both
Prudent advice for
an OVERheated
economy
Why then, are these
the only policy
options on the table?
!52
53. What's Our Role?
In the National
Debate?
In macro-economics?
In educating our
clients?
Our community(s)?
!53
56. So Why the Weak
Recovery?
Policy makers significantly
underestimated the severity of
the crisis
They don't understand banking
They think deficits are under
the government's control
They think "confidence" will
improve if we shrink the
deficit
!56
