Satyajit Das: Extortionate Privilege – America’s FMD

Yves here. I’m putting myself in the rather peculiar position of taking exception to a guest post. One might argue as to why I’m featuring it. Das gives an articulate but nevertheless fairly conventional reading of views of market professionals about the US debt levels. For instance as you’ll see, it conflates state government deficits (which do need to be funded in now skeptical markets) with the Federal deficit. And this sort of thinking, due to fear of the Bond Gods, is driving policy right now.

In addition, he posits that depreciation of the US dollar continues apace. I’m always leery of what amount to trend projections. Complex systems often have unexpected feedback loops. There is an interesting question of whether markets have over-anticipated QE3. In addition, the dollar has fallen to the point where it is becoming attractive for manufacturers to repatriate activities. But given the loss of managerial “talent” (and here I mean people who know how to run operations, not executives) and infrastructure, there will be a marked lag before the weakened dollar produces the next leg up of domestic production.

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2006 and 2010)

Extortionate Privilege…

Given the magnitude of the US debt problem and the lack of political will, the most likely policy is FMD – “fudging”, “monetisation” and “devaluation”.

US states and municipalities demonstrate “fudging”. In the boom years, local government revenues increased from rising property values and taxes allowing additional services and larger payrolls. When the housing bubble burst and property values dropped an average of 35% reducing tax revenues, these entities found it difficult to cut expenses or increase taxes. Instead, some cities and states relied on fiscal “magic tricks” to close budget gaps each year but at great future cost.

Illinois, which has not made the required annual payments to its pension funds for years, borrowed $10 billion in 2003 and used the money to invest in its pension funds. When the recession sent investment returns below their target, Illinois sold an additional $3.5 billion worth of pension bonds and is planning to borrow $3.7 billion more for its pension funds. US state and local government have unfunded pension liabilities nearing $3.5 trillion. Others are selling off assets to temporarily plug budget holes, without viable plans to permanently fix finances.

There is no shortage of creative ideas of financing government debts. Bankers suggested the US issue perpetual debt, that is, the government would not be obligated to pay back the amount borrowed at all. Peter Orzag, former director of the US Office of Management and Budget under President Obama and now a vice-chairman at Citigroup, suggested another creative way to correct the problem – lotteries. To encourage savings, banks should offer lottery-linked accounts offering a lower rate of interest, but also a one-in-a-million chance of winning $1million for each $100 deposited.

As governments printed money to service their debts, US Post issued 44-cent first class “forever stamps” that had no face value but were guaranteed to cover the cost of mailing a first class letter, regardless of how high that cost might be in the future. Between 2007 and 2010 the public bought 28 billion forever stamps. The scheme summed up government approaches to public finance – US Post was cleverly hiding its financial problems, receiving cash up-front against the uncertain promise to pay back the money somewhere in the never, never future.

Debt monetisation – printing money – is the second option. The US Federal Reserve is already the in-house pawnbroker to the US government, purchasing government bonds in return for supplying reserves to the banking system. Expedient in the short term, its risks debasing the currency and setting off inflation. The absence of demand in the economy, industrial over capacity and the unwillingness of banks to lend have meant that successive rounds of “quantitative easing” – the fashionable moniker for printing money – have not resulted in higher inflation to date. But the longer term risks remain.

Monetisation is inexorably linked to devaluation of the US dollar. The now officially confirmed zero interest rates policy (“ZIRP”) and debt monetisation is designed to weaken the dollar.

On 19 October 2010, US Treasury Secretary Timothy Geithner told the Financial Times: “It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity and Competitiveness. It is not a viable, feasible strategy and we will not engage in it.” The facts show otherwise.

Despite bouts of dollar buying on its safe haven status, the US dollar has significantly weakened over the last 2 years in a culmination of a long term trend which with minor retracements. In 2007 alone, the US dollar weakened by about 8% improving America’s external position by $450 billion, as US foreign investments gained in value but its debt denominated in dollars were unaffected.

On a trade weighted basis, the US dollar has lost around 18% against major currencies since 2009. The US dollar has lost around 30% against the Swiss Franc, 25% against the Canadian dollar, 37% against the Australian dollar and 16% against the Singapore dollar over the same period.

US dollar devaluation makes it easier for the US to service its debt. In the balance of financial terror, it forces existing investors to keep rolling over debt to avoid realising currency losses on their investments. It also encourages existing investors to increase investment, to “double down” to lower their average cost of US dollars and US government debt. The weaker US dollar also allows the US to enhance its competitive position for exports – in effect, the devaluation is a de facto cut in costs. This is designed to drive economic growth.

Valery Giscard d’Estaing, French Finance Minister under President Charles de Gaulle, famously used the term “exorbitant privilege” to describe the advantages to America of the role of the US dollar as a reserve currency and its central role in global trade. That privilege now is not only “exorbitant” but “extortionate”. How long the rest of world will allow the US to exercise this “extortionate privilege” is uncertain.

A World Without the US Dollar…

Winston Churchill famously observed that Americans can be counted on to do the right things but only after all other possibilities have been exhausted. Unfortunately, it is doubtful that the US debt problem will be resolved by resolute American actions. The deployments of FMDs seem more likely.

America remains the world’s only military super power and constitutes a quarter of the global economy. This means that what happens in America is unlikely to stay in America. The world must prepare for the denouement of the US debt crisis. At best, actions by America will usher in a prolonged period of stagnation for the US economy reducing global economy growth. At worst, continuation of a strategy of FMD and maintaining the balance of financial terror will create a volatile and dystopian economic environment.

As a significant amount of US government debt is held outside the country, foreign investors will suffer significant losses, through depreciation of the US dollar. These investment losses will limit the financial flexibility of these countries, limiting their future growth.

The damage may lead to political instability. In China, the blog-o-sphere has seen fierce criticism of the central government and its management of its reserves.

Foreign lenders may simply give up on the US, write off their existing investments (either explicitly or implicitly) and withhold further investment. This would trigger a major collapse of the US dollar and US government bond prices, triggering a different kind of financial crisis.

A policy of devaluation of the US dollar may trigger trade and currency wars. Many emerging markets have already implemented capital controls. These will be strengthened and supplemented by other measures such as trade sanctions. There are already accusations of protectionism, currency manipulation and unfair competition. This is reminiscent of the trade wars of the 1930s and will retard global growth.

US dollar devaluation is also destabilising for emerging markets and commodity prices. Low interest rates and the falling US dollar have encouraged investors to increase investments in emerging markets, offering better returns and higher growth prospects. These flows have pushed up asset prices and currency values distorting economic activity in these countries.

As most commodities are priced and traded in US dollars, the lower value of the currency causes price rises. Low interest rates have encouraged speculation in and stockpiling of commodities.

Higher commodity prices and strong capital flows are fuelling inflation in emerging markets. Central banks in these emerging countries have been forced to increase interest rates and restrict bank lending to reduce price pressures. Given that emerging markets have been a key driver of economic growth globally, this risks truncating the recovery.

Any problems with the US dollar and unequivocal acceptance of America’s creditworthiness are amplified by its pre-eminent role in economic activity and financial markets. There are limited alternatives to the dollar in global trade, especially given the problems of Japan and the Euro-Zone.

US government bonds are traditionally seen as a safe-haven as well as the preferred form of collateral used widely to secure borrowing and other obligations. If the quality of US government bonds were to fall significantly, then this would affect the solvency of the banking system which have substantial holdings.

US government bonds are used as collateral to raise funding (in the “repo” market) and secure trading in financial instruments. Falls in the value of US government bonds or a loss of confidence in their value as surety would lead initially to a global “margin call”, as the value of the collateral is marked down setting off a “dash for cash”. In an extreme case, where US governments bonds are not accepted as collateral, it would lead to a contraction of liquidity and financial activity generally.

Many of these problems are not new. Politicians and policy makers have persistently refused to deal with the role of the US dollar as a reserve currency and large global financial imbalances for many years. Recent proposals, such the use of Special Deposit Rights (“SDRs”) or introduction of Keynes’ Bancor, are impractical.

No Exit …

The US is in serious, perhaps irretrievable, financial trouble. There is a lack of political or popular will to take the action necessary to even stabilise the position. The role of US dollars and US government bonds in the financial system mean that the problems are likely to spread rapidly to engulf other nations. As John Connally, US Treasury Secretary under President Nixon, beligerently observed: “Our dollar, but your problem.”

Minor symptoms, often increasing in frequency and severity, can provide warning of a life threatening problem in a key organ, such as the heart. Since 2007, the global financial markets have been providing warnings of an impending serious crisis. Private sector credit problems have spread to sovereign nations. Debt problems of smaller nations have flowed on to larger nations. The problems are gradually working their way to the issue of US debt. Without rapid and decisive action, which seems to be unlikely, a major organ failure within the global economy may now beinevitable.

Th magnitude of the problem and its effects are so large, market participants would do well to heed Douglas Adams famous advice in The Hitchhikers Guide to the Galaxy. Find dark glasses that go black in the case of a crisis and a towel to suck on.

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  1. Darren Kenworthy

    “Who owes what to whom?. The person who pays the person with the gun usually gets to answer this question. Nonviolent direct democratic mass movements might propose, and realize, an alternative answer. Enough people will need to participate that nobody is left to hold the gun.

  2. alex morfesis

    urgh…quoting churchill, the man who helped create the depression because he thought putting the british pound back on the gold standard would solve all its problems…sounds a bit familiar…where have I had that notion of the gold standard helping a currency…hmmm….

      1. Blissex

        The Greatest Briton of All Time was whoever in the Japanese government decided that prodding the USA into the war earlier than later was a good idea :-). UK WWII history books mention the Finest Hour, USA ones mention the UK as a soggy island where some airports were built and the natives were OK even if they spoke American with a funny accent. :-)

  3. Dan Nile

    Nobody is repatriating manufacturing to the US, the labor and regulatory arbitrage costs far exceed dollar devaluation.

    Even if they did, pinning hope on economic growth to solve everything misjudges the magnitude of the immediate debt problem. Increased exports might generate +$50B in a year. That will buy you half a month’s Treasury auctions these days. Debt growth is far outpacing any feasible economic growth.

  4. Venkat

    The clear view every one has but is suppresses by MSM and even blogs is this – there are austerity programs all over the world except in USA just because dollar is the reserve currency. This will end – how soon or how bad is the question, whatever crap people with UNENLIGHTENED SELF INTEREST spin to continue deficits, unemployment benefits, payroll tax cuts. And USA should devalue $ instead of asking China to float/appreciate yuan.

  5. TROLL

    The fact that he has a fundamentally flawed bssis for his thinking makes me question any conclusion to which he has arrived. I am a shaken individual.

    1. jake chase

      This post is probably another attempt by Das to ingratiate himself with fellow financial fillators. All you hear day and night is bond trader and corporate poohbah bilge about America going broke. Our bigger problem is the theft of American prosperity by the financial fillators and corporate poohpahs and media stooges and political stooges, an organized crime gang all of whom should be behind bars and making license plates at the slave wages we pay other felons. Between 1914 and 2008 the dollar depreciated by a factor of 20. The Fed is the greatest engine of currency depreciation in world history, and these idiots continue claiming our problem is the social safety net. Nothing will stop the propaganda barrage except making it a crime to lie on television. Just disregard bunk like this post.

    1. Blissex

      «Even if you disagree with MMT»

      It is impossible to disagree with MMT because it is a series of useful truisms, and it is something that has always been understood as a banality in countries which have less corrupt economists.

      «you need to answer it instead of just repeating this “unsustainable government debt” narrative.»

      All that MMT says is that a sovereign issues of currency that is able to borrow in that currency can always monetize the resulting debt as an alternative to defaulting on it.
      Neither is a cost-free option — monetizing debt simply substitutes exchange-rate risk for default risk. The two are not equivalent in consequences, but neither is cost free.

      MMT does not say that government debt denominated in a currency issued by that government is sustainable, which is a very different concept, merely that it is repayable in nominal terms, which may not be that useful.

      Also, the problem with the USA and other countries is not so much “unsustainable government debt”, but unsustainable *private debt*, which has been growing faster than GDP for decades:

      Private debt is a government problem because it will be bailed out (because the creditors are untouchable, being in large part pension funds), and will turn or has turned into public debt. A government cannot very much let the whole private sector go bankrupt and survive unscathed.

      The overall debt is unsustainable for two reasons:

      * Interest must be paid on that debt. What matters is the risk-adjusted real interest rate, not just the nominal one. If that real risk adjusted interest to be paid is larger than real GDP growth, and that usually happens when total debt is 80-100% of GDP or over, very bad things happen.

      * Loans are deferred, temporarily sterilized purchasing power. They are not cancelled purchasing power, and eventually they have to be paid back with cash so the creditor can spend it. So it cannot growth indefinitely faster than GDP. Eventually it must be monetized, either with existing numeraire (e.g. taxes) or with newly assigned numeraire (e.g. inflation).

      1. geerussell

        “that usually happens when total debt is 80-100% of GDP or over, very bad things happen.”

        Japan says otherwise.

        1. Fiver

          It has also run a continuous, large (sometimes huge) surplus since 1980, with the exception of 2009. They are horribly exposed to any extended trade disruption.

      2. briantheprogrammer


        “It is impossible to disagree with MMT”

        But you are disagreeing with it in this very post, you just don’t know it. For example,

        “Neither is a cost-free option — monetizing debt simply substitutes exchange-rate risk for default risk.”

        MMT does NOT accept that exchanging bonds for reserves increases exchange-rate risk, or causes devaluation of the currency. You are out of sync with MMT here. It might be right or wrong, but MMT says that bond purchases by the central bank actually reduce the supply of nfa’s (money) by reducing interest payments that would have otherwise gone to the private sector. But bond market operations are themselves just a sideshow in MMT, and have nothing to do with funding the government. I suspect that you would disagree with this claim as well.

        As for private debt being too high, my interpretation of MMT on this is that the private debt levels are too high for the current level of public debt, since public debt is kind of like the equity that supports private credit. So, rather than risk a deflationary collapse of private credit, government can inject public debt/NFA’s to better support the credit structure.

        My broad point here is that accounting tautologies are merely argument 1a) of MMT. Not the whole thing.

        1. mansoor h. khan


          The reason most people have a huge problem with MMT is because MMT is accounting of some reality. But you haven’t explained the reality itself (i.e., the relationship of currency to the production process).

          We need to come up with a very simple childlike explanation of Keynesian economics. Something like:

          step 1: spending of currency generates demand (does not matter where the currency comes from, existing from savings or printed by government or printed by a bank).

          step 2: entrepreneurs react to this demand signal in step 1 above and make stuff and provide services. Entrepreneurs (and workers) can and will work just to accumulate currency itself (for future buying).

          Mansoor H. Khan

          1. briantheprogrammer

            MMT is as simple as understanding that public debt are private sector assets. When the government spends the money actually goes somewhere, it does not disapear. It becomes wealth in the hands of the private sector. It is much easier to understand than mainstream economics.

            But that simplicity won’t change the fact that it is dissonant with the consensus view that government debt is an evil. Therefore it is annoying to people and will continue to be annoying for some time until it becomes widely accepted or discredited.

            Ideas do not spread without evangelists. Evangelists are universally annoying. It’s just the way it is.

  6. Blissex

    «the dollar has fallen to the point where it is becoming attractive for manufacturers to repatriate activities.»

    It was cost arbitrage too, but it was also a deliberate government industrial policy to ensure jobs in unionized industries were exported to other countries where they were not unionized.

    The USA-based industries that were not unionized (or are in the military-industrial complex) have been defended and subsidized by the USA government as “national champions” (trade and I.P. treaties, Medicare expansion, …) or “too big to fail” (several trillions of free capital, guaranteed spreads and profits, accounting relaxation, …).

    «But given the loss of managerial “talent” (and here I mean people who know how to run operations, not executives) and infrastructure,»

    Well, you can always import chinese and indian operations managers to the USA to sort that problem, and infrastructure can be built.

    Lots of USA operations managerial “talent” were told by their USA employers that they would be fired but they had to go to China and India before that to train their replacements, if they wanted some notice and some severance, and the same could be done the other way around.

  7. William

    In response to Yves preface, yes I think there will be a scramble for higher-enchelon technical talent, for teachers as well as by industry. This will be a 2nd chance for skilled older workers who have kept up their knowledge but lost their good jobs for poor ones.

  8. Susan the other

    Is Das getting more and more poetic, or is it just me? His writing is pleasing when he is not analyzing things (derivatives which I do not understand anyway) like a quant. Not that I agree with him here. I think John Connally was right for starters. We were burdened by being the world’s reserve currency. Maybe some of our decisions were really bad; most of them were good. And right now, today, we are still keeping things together. Albeit it’s a tad scary.

    I like Das’s comparison of the Fed to a pawnbroker. Shades of the movie and that awful scene of the hand being intentionally run through by the receipt spike. That might well be the position we now find ourselves in. But fudging, monetizing, and devaluing, imo, are good tactics. Especially in view of the fact that the rules have always been up for grabs.

    The big thing I want is for the banks to confess and do penance. And I’d let them fudge a little, if we get a new currency that is nationalized, finally.

  9. Valissa

    Another very informative post, thanks!

    It is quite fascinating to observe the responses of the MMT believers, and those responses (including Yves’ odd up front disagreement/dismissal to both of Das recent posts) look to me like the blinders that True Believers tend to put on when they are emotionally invested in a theory/belief system. Personally, the more I see these MMT type believer biases in action the less inclined I am to learn more about MMT or to take it seriously. Please note I am not saying anthing about the correctness or incorrectness of MMT as a theory, as I do not have enough knowledge to comment on that aspect. It’s the evangelism that’s offputting.

    To increase my knowledge of the world of money/finance/economics I try to read from diverse sources and opinions in order to get as broad an overview as possible… so am fine with learning something about MMT as part of my general knowledge base. I appreciate that there is a reasonable diversity of views here (thanks Yves!), although as with all blogs there are limits to what is acceptable to the group that hangs out there. I hope that this blog does not become more hardcore MMT but continues to offer intelligent diverse viewpoints.

      1. Valissa

        Perhaps “odd” is not quite the correct word. The problem that I see is that Yves upfront disagreement seems to trigger the commenters to focus on her disagreement and her beliefs rather than the substance of the article that is being offered, and therefore takes away rather than adds to the broader discussion of issues. Then people being how they are, will cater to her view as she is the blog owner. Since this is Das’ post I would prefer if commenters would focus on his post and discuss that on it’s own merits (or not) without all the MMT projection.

        I have no problem with Yves (or anyone else) being an MMT believer, but IMO it would be better if she offered short comment up front simply mentioning that MMT would look at this differently (limited to a sentence or two, keeping a positive tone) instead on the long paragraph or two pre-dismissal. ThenYves or one of the other MMTers could then write a separate post discussing how an MMTer looks at debt. I think this would make for better comment discussion and keep people focussed ont he topic of the post rather than yaying or naying some particular belief system.

        1. Foppe

          I think you are doing the other commentators a bit of a disservice by positing that they are simply parroting back to Yves what she says is wrong with the post. (The same holds for your comment on the previous post.)

          As I suggested there, it is fine to want to be empirically-minded, but the problem with that is that, given the trade deficits and the way the US has been pushing globalization/off-shoring, there is really no way for it to return to a trade surplus in even the medium term. The only reason it could last time around was because all competing industries had been reduced to rubble. As such, the only ways that are left to get out of the current debt problems are a. Debt forgiveness/Jubilee, b. voluntary defaults, c. inflation, and d. inducing a depression via austerity, and letting lots of people go bankrupt (and probably die), and that way reducing the debt levels. This last option is probably what the market fundies prefer, since it “respects the market as an institution”, but I would venture that it is hardly the most rational.

          1. Valissa

            “given the trade deficits and the way the US has been pushing globalization/off-shoring, there is really no way for it to return to a trade surplus in even the medium term”

            That sounds about right to me, and that seems to be a common opinion today from what I’ve observed. Not sure what that has to do with my comment so I’m not sure what you think I’m saying. Personally I have no idea how the current economics situation will play out, and I have no attachment to any special outcome… I am practicing “beginner’s mind” the best that I can with as much detachment as I observe history in process. It’s a totally fascinating process, IMO! Perhaps that fact that my viewpoint/attitude is based on my spiritual perspective and values makes it harder to gauge.

            I do not mean to do the other commenters any disservice, and was merely sharing my own observations based on my prior experiences as a research of believer behavior both in politics and in spirituality. Feel free to ignore me and/or disagree with me :)

          2. Foppe

            Ah, that was a rough reiteration of my reply to your comment on the previous Das post, sorry for the confusion.

    1. geerussell

      The correctness or incorrectness of the theory is everything. An operational description of the monetary system has no intrinsic merit or usefulness beyond its ability to accurately describe reality and policy consequences.

      Diversity for its own sake is not only inapplicable, it’s harmful. If a theory is wrong, put it down like a lame horse before it steers you into a ditch.

      If this is evangelism, it’s evangelism for the cause of acquainting yourself with the ideas well enough to make a choice between the ones that are mutually exclusive.

      1. Valissa

        “The correctness or incorrectness of the theory is everything.”

        Indeed many people do feel that way. The problem is proving that something is correct or true (and in what instances it is) and in all academic disciples credible researchers or scientists often strongly disagree with each other on theories, esp. ones which are hard to completely prove (and that’s most of them).

        Personally I focus on gaining knowledge through variety and through observing the different theories in play and trying to understand the plusses and minusses of each. In most subjects I do not take sides but prefer to observe and learn as much as I can keeping my worldview broad. It is my epistemological preference, and admittedly I am in a small minority, and I realize that many prefer to anchor themselves to a certain view of reality (via belief) and then defend that anchor.

        1. geerussell

          I can see where you’re coming from, I just can’t identify with the idea of being a neutral observer.

          I feel like a participant with vested interest, asked to vote for and support politicians, policies and proposals that have a material effect on my economic well being.

          I need some basis on which to evaluate their claims beyond whether the speaker is wearing the team jersey I like.

          1. Valissa

            Thank you for explaining further, that’s very helpful to me right now in my own thinking about how people and societies create, maintain and modify their worldviews. From my point of view as a student of life walking my own spiritual path, neutrality is a practice I cultivate because there are many benefits, but there are limitations to it as well and I certain don’t practice my values perfectly… LOL… I can be pretty UN-neutral some of the time :)

          2. Valissa

            To clarify a bit about the practice of neutrality… the purpose of practicing neutrality in learning is be able to get the most out of whatever one is reading or listening to or observing. Biases cause the mind to ignore information that disagrees/contradicts the bias which means information or knowledge lost (yeah I know we all have filters of various kinds). So the (admittedly impossible) ideal is to practice neutrality until the point where you have to make a decision or take an action… at that point having maximized your knowledge will hopefully help you to make a wiser decision or action.

          3. Foppe

            Biases cause the mind to ignore information that disagrees/contradicts the bias which means information or knowledge lost

            I personally find it more useful to be aware of my own biases but to feel free to display that bias (fine line between bias and preferences/opinions) than to try for neutrality and hope I can avoid being stymied by my own preconceptions and preferences that way.

          4. Valissa

            @Foppe, I would not say it much differently. Having a different point of view is not necessarily disagreement… more a matter of perspective and means of expression.

  10. Tao Jonesing

    All monetary theories– modern or otherwise– are irrelevant. All that matters is what speculators (i.e., financiers and traders like Das) believe to be true, which makes Das right in reality, regardless of what you think of the theoretical underpinnings of his beliefs.

    Debt monetisation – printing money – . . . is inexorably linked to devaluation of the US dollar.

    The implicit foundation of Das’s statement is the neoclassical quantity theory of money, which relates the quantity of money to the value of money as MV = PT, where M is the supply of money, V is the velocity of money, P is the price level of money and T is an index of the real value of transactions in the aggregate.

    By assuming that increasing the money supply ALWAYS decreases the value of a unit of money, however, Das assumes that the velocity of money is always greater than zero.

    Das is wrong on several levels. First, the quantity theory of money has been proven to be false because, among other things, it assumes that the supply of money is exogenous when it is actually endogenous. Second, the velocity of all that new money that the Fed “printed” was essentially zero: all of it is sitting on the banks’ balance sheets as reserves.

    But Das is correct that the dollar has been devalued, that there is a correlation between Fed money printing and dollar devaluation. Correlation does not equal causation here, however, because the velocity of money has been zero.

    So what caused the devalution of the dollar? The answer is financial speculators who believe that he increase in the supply of money always results in inflation and placed their bets accordingly.

    MMT provides no answers to speculators today because MMT does not describe the money system we have but a money system that MMTers aspire to have. The MMT primer that briantheprogrammer links to above illustrates my point quite well:

    Modern Monetary Theory (MMT) is based on the following principles:

    The Federal government is the monopoly supplier of currency.

    The modern floating exchange rate system helps to maintain equilibrium and flexibility in the global economy.

    The currency unit created by the state via deficit spending can only be extinguished by payment of taxes. Therefore, a modern monetary system can best be thought of as a system of debits and credits where government deficit spending credits the private sector and payment of taxes debits the private sector.

    MMT does not apply to our current system because the federal government is NOT the monopoly supplier of US currency. The initial principle of MMT is merely a restatement of the QTM’s assumption of an exogenous supply of money, but again our money supply is endogenous, i.e., the banks create money by lending it into existence. Oh, and then there’s the pesky little problem that all our currency is actually issued by a private bank, the Federal Reserve, as banknotes.

    So, Das and MMTers are both wrong about the macroeconomics, but Das is right about the devaluation of the dollar (albeit for the wrong reasons). Finance (the politically correct word for speculation) is normative and renders all economic theories irrelevant.

    1. Valissa

      Bravo! Very educational analysis, thanks!

      All monetary theories– modern or otherwise– are irrelevant. All that matters is what speculators (i.e., financiers and traders like Das) believe to be true, which makes Das right in reality, regardless of what you think of the theoretical underpinnings of his beliefs.

      This fits my empirical observations, but I could have never stated it so succintly. Economics does not rule money (though it wants to!), money rules economics! That’s why I think it’s more useful to study the world of money and the related power games (“follow the money”) in order to make sense of the current economic climate.

      1. Foppe

        I don’t know if you have yet, but I have found it extremely clarifying to read David Graeber’s Debt: The first 5000 years. Provides a fairly unique perspective on/teaches an insight into the kind of historical construct our current modes of economic organization are.

        1. Valissa

          Yes, I have the book but haven’t started it yet… I got distracted by these two…

          The Shallows: What the Internet Is Doing to Our Brains, by Nicholas Carr

          … and excellent book! much better and less superficial than the title suggests… every chapter is rich and the book is not long.

          The Pursuit of Glory: The Five Revolutions That Made Modern Europe, by Tim Blanning.

          So far this is also a great book! AS soon as I finish it I plan on finally gettting down to Graeber’s book. Whether you call it money or debt, the game is mostly about power and I look forward to Graeber’s viewpoint on debt and power, as well as general anthropoligical insightfulness.

          1. Valissa

            Correction, the full title of the book by Blanning is…

            The Pursuit of Glory: The Five Revolutions That Made Modern Europe: 1648-1815, by Tim Blanning

        2. geerussell

          That book was an impressive piece of work if only for the way it takes a wrecking ball to the myth of barter that is baked into mainstream economics.

    2. geerussell

      “MMT does not apply to our current system because the federal government is NOT the monopoly supplier of US currency. The initial principle of MMT is merely a restatement of the QTM’s assumption of an exogenous supply of money, but again our money supply is endogenous, i.e., the banks create money by lending it into existence.”

      MMT describes two types of money. Vertical money, which is spent into existence by the government currency monopolist. This type of money appears as new net financial assets for the private sector as it is spent into existence by the government.

      Then horizontal money, which is created within the private sector as credit money. The critical distinction here is credit money expands the gross total money in the private sector but is always accompanied by a liability on the other side of the balance sheet and never creates new net financial assets.

      The loan is an asset for the lender, a liability for the borrower and the two net to zero. The deposit created in tandem with the loan is a liability for the lender and an asset for the borrow, again they net to zero.

      1. tiebie66

        Forgive the question, but if I borrow $100 and must pay back $110 (principal + interest), how does that net to zero? If not zero-netting, would small discrepancies not over time accumulate and engender systemic consequences?

        1. briantheprogrammer

          Someone’s account has to be reduced by 10 dollars in order for you to pay back the bank. Another way to think about this is that the aggregate total net worth of the economy (public and private sector) is zero. Private sector can only have a positive net worth because the public sector net worth is negative.

        2. geerussell

          On the bank’s balance sheet, it’s a $100 deposit (liability) and a $110 loan (asset)–net +$10 for the bank. On the borrower’s balance sheet it’s a $100 deposit (asset) and a $110 debt (liability)–net -$10 for the borrower.

          Netting together the lender and borrower, those items resolve to zero new net financial assets for the private sector.

          Only the government can introduce new financial assets to the private sector that don’t have a corresponding private sector liability.

    3. Karen

      “…but again our money supply is endogenous, i.e., the banks create money by lending it into existence.”

      This isn’t strictly true. Bank lending only creates the ILLUSION of more money, temporarily. Money itself, using the age-old definition (as opposed to the confusing array of “money supply” terms invented by the modern economics profession), is created only by the one entity which has the legal right to do so, which in our country is the Federal Reserve.

      The difference between money and debt was easier to perceive when money consisted of gold coins rather than computerized book entries. Banks didn’t mint coins, they simply gave their depositors’ coins to borrowers, so the depositors obviously only THOUGHT they had money.

      “Oh, and then there’s the pesky little problem that all our currency is actually issued by a private bank, the Federal Reserve, as banknotes.”

      The Federal Reserve is not a private bank. The policy-making Federal Reserve Board is government-appointed and is charged with meeting government policy goals for controlling inflation and unemployment. The regional member banks are nominally private banks, but the U.S. government charges them a fee every year that is designed to take away their profits.

      And the whole Fed system exists at the pleasure of Congress, which can change the rules or even abolish the Fed any time it wants, with just an Act of Congress (no constitutional amendment necessary). Congress repeatedly threatened to strip Paul Volcker of power while he was trying to pull the plug on inflation by raising interest rates, and probably would have done so if Ronald Reagan hadn’t supported him very strongly.

  11. PaulArt

    I thought Das’s piece was really great despite the caveat by Yves. Well written and easy to understand. I thought his focus on the debt part of the equation could not be faulted. We cannot continue to spend $800 billion on Defense every year and shovel equally large chunks to the Medical-Industry complex.

  12. mozzie

    Thanks Yves.
    I enjoy and appreciate Das’s analyses, especially his conversations with Philip Adams on the Australian ABC Late Night Live segments. But, like you I found this analysis a bit hard to swallow.

  13. Fiver

    I think viewing this from an MMT or NOT TO MMT slant misses most of his critical points re what is happening NOW in the system we have, in particular, the HUGE negative effects on both the US and other economies of past and current US efforts to devalue/inflate, and especially so in this digitized, global, lawless and predatory casino financial system – the one with Auto Destruct button up front where everyone can see it. Europe has already been flattened no matter which way they go. Japan is on shaky ground (Kyle Bass just the latest shark to publicly elaborate). China, Brazil, India and others are looking long and hard at all the options. Many weaker countries simply could not survive another major round of global reserve currency dollar “Easing”. These things are all happening in a world where capitalism has entered a truly cannibalistic period of fearsome magnitude. The stronger, threatened with losses (paper, real, or imagined), are absolutely determined to stick it to the weaker both within and among countries.

    It’s a form of war. And it’s going to get a lot worse for as long as US policy is decided by what “markets” want.

  14. Fiver

    Here’s a piece which speaks to my previous point, which is simply that given the pace and severity of events it doesn’t matter so much as to who is hypothetically correct re an MMT that may or may not ever be implemented somewhere, when so many people handling big money are making huge decisions based on thinking like this, even if it is wrong (some is, the part on demographics being way overblown for instance, but much isn’t). Again, we cannot easily escape how GLOBAL this is, nor how akin to war:

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