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This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
This Could Change Everything
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This Could Change Everything

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  • 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, its a source of mysticism and mystery." - Dick Wagner, JD, CFP !2
  • 3. Textbook ExplanationMoney derived from barterSpontaneously originates inPrivate SectorReplaces clumsy barterEliminates "double-coincidence of wants"Reduces transaction costs !3
  • 4. Evolution of MoneyPrimitive moniesStones, beads, shells,feathers, fish, cattle, etc.Precious metals - coinsPaper with metalbackingFiat money - based onTrust? !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 FastNo archeologicalevidenceAll money is debtRoots in penal systemUnit 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 OriginToday, all money exists as an IOU, representing a social debtrelationshipIt is abstract, and like an "inch" or a "yard," it can bemeasured, but not seen or feltIn any modern nation, the money of account is chosen bythe national governmentA nations 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. Coinsand paper are representations of money, not vice versa !9
  • 10. Today, Sovereign GovernmentsDefine the money-of-accountImpose taxes, fees,obligationsDecide what they willaccept as paymentChoose how they willmake their own payments !10
  • 11. Taxes Drive AcceptanceGovernment defines money/what it will accept as paymentMakes payment (spends) inthat same money-of-accountRequires taxes be paid in themoney-of-account it defines !11
  • 12. But Taxes Do Not Fund Spending Government does not "need"our money Not to raise revenue per seTaxes function to regulate theeconomy by regulatingaggregate demand !12
  • 13. How a Currency Issuer SpendsBy directing its bank (usually the central bank) tocredit someones accountThis frequently (and increasingly) happens withouteven writing a checkIn the "modern money" era, government spending isaccomplished through electronic keystrokes (Bernanke)The government neither has, nor doesnt have dollarsin an account somewhere !13
  • 14. Modern MoneyPelley: "Is that tax moneythat the Fed is spending?" Bernanke: "Its not tax money. [W]e simply use the computer to mark up the size of the account." !14
  • 15. Hierarchy of MoneyAnyone can createmoney (social debt Governmentrelationship)Trick is to have it Banksaccepted (Minsky) Non-Financial BusinessBut private sectorcannot create net Householdsfinancial assets !15
  • 16. The US HierarchyIssues thecurrency at thetop of the US $pyramidTaxes and spendsin dollarsNon-convertible,fiat money !16
  • 17. On Gold StandardPre-1973, Bretton WoodsPromised to convert US$to gold at a fixed price GoldDollars were subordinate US $Had to limit spending toprotect gold reserves !17
  • 18. Other CountriesDid not issuecurrency at the top ofthe pyramid US $Had to limit spendingto protect (US$) Ruble, Peso, etc.reservesSacrificed control ofinterest ratesHeavily dependent ontrade surpluses !18
  • 19. Look familiar?The Euro iseffectively a foreigncountry from the "Euro"perspective of theindividual nations Greece, Spain, etc.Currency isdivorced from thenation ("One Market,One Money") !19
  • 20. The EurozoneNo EMU nation issuesthe currency that sitsat the top of thepyramid "Euro"Governments can Italy, Portugal, etc."run out" of EurosMust pay marketinterest ratesHeavily dependent ontrade surpluses !20
  • 21. Under Bretton WoodsPromised to convert US$to gold at a fixed price GoldDollars were subordinate US $Had to limit spending toprotect 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 anothers 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
  • 24. But isnt the US Broke? "Were out of money" !24
  • 25. Within Our Means"The government, just like every Americanhousehold, has to live within its means" !25
  • 26. Is the Government Like a Household?No - not anymoreNot since we abandoned the goldstandardWe ended Bretton WoodsWe have "modern money" createdby keystrokes on a computerBut... we act as if were still stuckin a fixed exchange rate world !26
  • 27. The ISSUER of thecurrency 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 CutsOpposes deficitspending on principle Often favors "soundmoney" (e.g. goldstandard or 100%reserve backing)Would legislate rulesto mandate balancedbudgets !28
  • 29. Deficit Doves want Eventual CutsSupports limited deficitspending in tough economictimesWant the budget balancedover the business cycleSupport rules to limit the sizeof the deficitPrefer to wait until after theeconomy begins to recoverbefore imposing austerity !29
  • 30. More Deficit AviaryNew bird in town, the DeficitOwlModern Monetary Theory (MMT)Exposes the fallacies inconventional economic theoriesViews unemployment as sociallyharmful and economicallyinefficient !30
  • 31. Within Our Means?Unused energies. Unmet needs. !31
  • 32. The MMT Deficit OwlAssigns no arbitrarylimit to the size orduration of thedeficitUses a sectoralbalance sheetapproach to relatedeficit to the rest ofthe economy !32
  • 33. Sectoral BalancesIn any given period, sectoral balances showwhether 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
  • 35. !35
  • 36. Private Sector BalanceAs a general rule, the private sector needs to be in surplusHouseholds and firms cannot continually borrow morethan their incomeAt some point, lenders will run out of credit worthyborrowers who are willing to spendPrivate debt levels may become unsustainable (MinskysFinancial Instability Hypothesis)When an expansion driven by private sector debt reachesan end, sales soften, jobless claims trend higher, andeconomic activity falters !36
  • 37. Private Sector Debt !37
  • 38. Unemployment Follows !38
  • 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 Were Terrified of DeficitsWhat if people losetrust in the dollar?What if Chinarefuses to buy ourbonds?What if interest ratesskyrocket? !40
  • 41. What About Inflation? !41
  • 42. Japan is Instructive !42
  • 43. Bond Vigilantes? !43
  • 44. Devaluation? !44
  • 45. Quantitative Easing Despite decades of its own QEInflation in Japanis non-existent !45
  • 46. What Have We Learned? The governments deficit is equal to the non-government sectors surplus The US can never go broke or forced into bankruptcy Sovereign constraints are Real, not Monetary Deficits do matter !46
  • 47. So What?ObservationsEntitlementsOur Own TheoryCurrent Policy OptionsWhats Next? !47
  • 48. Observations MMT CFPMoney is No Money is Not theObject ObjectConstraints are Constraints arenever Monetary often ImaginedViews Full PrioritizesEmployment as Numerators overSocially Desirable Denominators !48
  • 49. EntitlementsPayroll tax creates newGovernment "Debt"Constraints are Self-imposedMedicare Parts B & D"adequately financedinto the indefinitefuture" !49
  • 50. A Borrowed TheoryCost of CapitalInfinite TimeHorizonsLack of SpendingOpportunityNo SpendingImperative !50
  • 51. LifeCycle of Household Learn, Earn & Borrow Earn, Invest & Deleverage Divest, Spend-down & Consume !51
  • 52. Policy ChoicesRaise taxes, cutspending - or bothPrudent advice foran OVERheatedeconomyWhy then, are thesethe only policyoptions on the table? !52
  • 53. Whats Our Role?In the NationalDebate?In macro-economics?In educating ourclients?Our community(s)? !53
  • 54. Want More?@DeficitOwlWWW.NewEconomicPerspectives.org !54
  • 55. Complemetary Currencies?Time BankingUMKC BuckarooDenison VolunteerDollars !55
  • 56. So Why the Weak Recovery? Policy makers significantly underestimated the severity of the crisis They dont understand banking They think deficits are under the governments control They think "confidence" will improve if we shrink the deficit !56
  • 57. Owls Doves Hawks !57

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