Tom Ferguson: Monetary Policy Can’t Levitate a Broken Economy

By Thomas Ferguson, Director of Research, Institute for New Economic Thinking. Originally published in the International Economy magazine’s symposium New Tools for Central Bankers?  Cross posted from the Institute for New Economic Thinking website

Central bankers today irresistibly bring to mind the Wizard of Oz. not just because of all the barely disguised political and economic cognates Frank Baum stuffed into his classic—William Jennings Bryan as the cowardly lion, “Oz” as an abbreviation for an ounce of gold, and so on. No, it’s the characters’ missing virtues that grab me: a heart, a brain, and courage. Central bankers today lack all three.

First, the brain. Two generations ago, almost every economist knew what a catastrophe a deficiency of effective demand could create. And in a real crunch, they knew what to do about that. They realized you couldn’t push on a string, so somebody — the government — had to borrow and spend when private markets would not. From the 1980s on, though, the fundamental Keynesian point — the Principle of effective Demand —disappeared in a cloud of statistical double-talk that, when you deconstruct it, turns out to imply estimating potential output as a lagged function of whatever foolish policy is being pursued.

Central bankers didn’t take this giant step backwards to pre-Keynesian economics by themselves. In that sense, it’s unfair to say they have only themselves to blame. But they swallowed it whole, helped subsidize it, and cheered it on. Now that they have rediscovered that monetary policy can’t levitate a broken economy, except by beggaring the neighbors, it’s time they admitted their errors and stopped acting like they could control everything. They could also admit what Gerald Epstein and I pointed out in the December, 1984, Journal of Economic History, based on the evidence of the Great Depression: that if you cut rates to zero and the yield curve collapses, banks get squeezed and financial instability increases. It’s amazing how many economic historians writing about the Great Depression since then missed that simple point.

Next, courage. In the good old days, central bankers were given to heady talk about “taking away the punch bowl” before the party really got going. That may have been mostly rhetoric, but it at least paid lip service to some value bigger than banking. Contrast the Fed and the European Central Bank in recent decades. The European Central Bank barely moved a muscle as banks in the center moved wave after wave of money to the European periphery in the heady run-up to 2007–2008. The failure to take even a baby macro-prudential step to restrain the capital flow, along with the purely political decision to treat every country’s debt the same, were crucial in bringing on the disaster that is still unfolding in the eurozone. Ditto the Fed, waiving details, under Greenspan and Bernanke, especially in regard to real estate lending. They just kept cheering on deregulation, until the whole world collapsed. Is it any wonder so many people no longer trust “experts”?

Finally, a heart. The European Central Bank aided and abetted the move to throw the costs of the bank crisis onto the unsuspecting populace of Europe. That was quite a trick: to have the states assume the debts then start beating gongs about excess debt. The Fed took risks to save the banking system, but is already telling us we are close to full employment and professing to be alarmed about “inflation,” when anyone can see that banks, insurers, and pension funds are clamoring for rate rises, just as in the 1930s. Both institutions need to start thinking about someone besides the financial community. If they don’t, I do not doubt that we will not have seen the last of the anger that Donald Trump and Senator Bernie Sanders mobilized in such disparate ways in the United States, nor the upheavals now visibly threatening the European Union’s very existence.

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  1. flora

    Always wondered where ‘the Great and Powerful Oz’ got his name.
    Yes, two generations ago people knew about demand. Then central bankers and minions started saying “this time it’s different.” That should have been the tell, even for them.

    Great post. Thanks.

    1. WendyS

      I read somewhere that Frank Baum got the name from his filing cabinet. The last drawer was O-Z. The Oz books are great, lots of pretensions get punctured and it goes over the kid’s heads.

      1. barefoot charley

        I do believe that Baum wrote a hard-money allegory for children of all ages–however, he wrote it a block from Oz Park on Chicago’s North Side. Was that the golden inspiration?

        ps, great piece!

  2. Goyo Marquez

    The issue isn’t monetary policy, i.e increasing or decreasing the supply of money, the issue is that the way we’ve decided to do it is by increasing and decreasing interests rates. So we end up in this bazzarro world where, according to the way the FED measures money supply, we should be drowning in inflation, instead they’ve had difficulty even getting inflation high enough to hit their inflation target. Maybe the problem is the way the FED is counting dollars.

    If we accept that only the Federal Government, through spending and taxing, can increase or decrease the supply of dollars, then monetary economics meets MMT, meets Keynesianism.

    That might explain how supposed hyper money creation by the FED while the Federal Government is decreasing its spending of dollars into existence, doesn’t produce even minor inflation.

    1. djrichard

      “instead they’ve had difficulty even getting inflation high enough to hit their inflation target. Maybe the problem is the way the FED is counting dollars.”

      Ah, but they did stop deflation. Which was all they really cared about. Everything else was theater. Bottom line, Federal Reserve is the counterparty to all the private interests naked shorting the US dollar. Which always works unless that counterfeiting process starts to go into reverse. Just like naked shorting in the stock market can go into reverse and put a big deal of hurt on the naked shorters. But with naked shorting in the stock market, the party that is doing the counterfeiting of stock doesn’t have a way to prevent the play from going into reverse. In contrast, the Federal Reserve does, through QE and whatever else they can do. Believe you me, if things got bad enough, they would have done a true helicopter drop. Whatever it takes to get their “liquidity pump” working again.

      And … they got their liquidity pump working again and stopped deflation. (So hey they were heros, yay! /sarc) And along the way, dollars (either newly borrowed or already in the economy) ended up in assets. And those assets keep going up through more inflation. So while they may not have “levitated the economy”, they did levitate the demand for their liquidity pump. (What’s not to love? /sarc)

      It just hasn’t reached high inflation because main street isn’t a player. Otherwise, if main street was a player too, like they were for the dot com bubble and housing bubble, well then look out. But everybody on main street is just trying to survive. As far as the Federal Reserve is concerned that’s a perfect “wall of worry” to provide them all the cover they need to make sure inflation doesn’t get out of hand. To use the words of Adam Smith, “it’s a virtuous cycle”. Assets go up, the plebs aren’t at the party yet, so no need to take away the punch bowl.

      (And hey look at all the temp jobs that main street has now. Who says the magic of the Federal Reserve isn’t doing good things? /sarc)

      1. OpenThePodBayDoorsHAL

        Ah yes, “stopping deflation”, what a disaster it would be if rent, food, health care cost less. The horror: people might be able to put a little away as “savings” and maybe even “invest”. Can’t have that now can we.
        So we have a system where the Fed controls interest rates (domestic policy) and Treasury worries about exchange rates (trade and international). Their objectives align probably 20% of the time.
        Meantime “bank underwriting” is a distant memory, just sign the deal, get your bonus, if/when it goes south Papa (Momma) CB will just smash the value of the scrip some more

        1. craazyboy

          Post 2008 they decided banks had to securitize everything and sell it, then the financial system would be stable. Your portfolio – not so much.

      2. RobertNYC

        yes djrichard that is a nice synopsis of how this all works but where does it end? How long can it go on? It is the world’s biggest Ponzi scheme and it almost ended in 2008 when the plebes could no longer take on the increasing amounts of debt to keep it going. A normal Ponzi scheme ends when it runs out of fools to fleece but this one is different because it involves central banks which can step in to keep it all going once mainstream is tapped out. That’s where we are now; they ginned up massive amounts of base money that was used to prop up asset prices on behalf of the elites. This whole thing has to be the biggest fraud and crime in human history but it is so esoteric that most people can’t see it. The masses get buried under inflated costs associated with the asset bubble, inflation and interest payments while a small sliver at the top lives in a rentiers paradise.

        They have added massive debt to the system since the 2008 debt crisis and things are now fine? Low interest rates mask the burden but at some point this must and will end. Once they stripped the gold out of the system in 1971 they set the groundwork for an explosion of debt. It’s a very scary situation.

        1. Yves Smith Post author

          1. What you should worry about is private debt to GDP, and that is below pre-crisis levels in the US:

          However, there has been a lot of unproductive private debt issuance even so, such as companies issuing debt to buy back stock and student debt financing overpriced college costs.

          This is a good explanation of why private debt, particularly unproductive household debt, is the danger:

          QE is widely misunderstood as printing money when it isn’t. It’s a way to lower long term interest rates and spreads (as in lower the spread of prime mortgages relative to Treasuries).

          2. China continues to have a massive debt bubble. And no major economy has made the transition from being investment and export led to consumption led without having a major financial crisis.

          1. Robert NYC

            Are you suggesting that the U.S. monetary system is healthy and sound?

            Completely agree that the creation of unproductive debt is the real problem in any economy. Michael Hudson has written brilliantly on that issue. Most debt/money creation should be closely tied to productive investment.

            As for private debt to GDP, I have no basis to comment on whether it higher or lower than pre-crisis levels without doing a lot of work. Those types of figures are fraught with complexity based on source data, assumptions and methodology. Would love to see those figures by sector, student loan, credit card, auto loan, mortgage, corporate, municipal, etc. In any case it is unambiguous that government debt has increased by nearly $10,000,000,000,000.00 since 2008. Does anyone think that is a good thing? And that excludes retirement and medical costs which dwarf the funded debt. Federal deficit went up by $1.4 last year, 9/30/16 year-end, after a 7 year supposed recovery when tax revenues should be peaking. What’s up with that?

            The U.S. may be able to borrow in its own currency but because of its current account deficit it is dependent on foreigners to play along. How long is that going to last?

            Any thoughts on the 1974 deal whereby the Saudis agreed to secretly support the dollar. What happens to dollar hegemony without those kinds of deals.


            What is going on with Russia right now, why the new cold war? Russia runs a pipeline through Ukraine and is the leading supplier of natural gas to western Europe. It’s not dollar based. Qatar sits on the world’s largest supplies of natural gas and wants to run pipeline North through Syria. Asssad said no. U.S. then unleashed a proxy war to unseat Assad. Qatar is a U.S. client state, like Saudi Arabia, and they allowed U.S. to build massive air base outside of Doha. Qatar plays along with U.S. and in return the Al Thani family remains in power.

            I am afraid this is all a bit more complicated and fragile than meets the eye.

            What is your definition of printing money? Is there no such thing in your mind? Does a central bank ever print money in your view of the system other than when they ask the U.S. Treasury’s Bureau of Engraving and Printing to create some federal reserve notes?

              1. Robert NYC

                I have read two of Randall Wray’s books on MMT and Warren Mossler’s Seven Deadly Innocent Frauds. I am fairly well acquainted with MMT. As for Mossler I wish he had a good editor because his stuff could read much better. As for Wray’s TWINTOPT (“that which is needed to pay taxes”) definition of money, you can also argue for TWINTOPP (“that which is needed to purchase petroleum”) as a definition of money. Pricing the world’s most important commodity in “something” is an even more effective of way of causing that something to be used as money.

                As for MMT I like some of the ideas but it seems to suffer from the same fundamental problems that the current system does. If the government has a monopoly on producing money, it is a given that they will overdo it at some point just like what happens with the current private system where the banks over did it. You end up with the same rudimentary questions/problems under MMT or the current type system:

                1) what are the rules governing its creation?
                2) and who is in charge and gets to decide?

                Either system can work if it is intelligently and honesty run but of course that is asking a lot. Unfortunately men can not be trusted to run an honest system for any length of time because creating money is the world’s greatest privilege and it will always be abused at some point; war, greed, stupidity, it doesn’t matter, at some point discipline is lost. That in summary is the entire history of money.

                1. Mel

                  There’s a lot of history behind the MMT conception.

                  David Graeber, in Debt the First 5000 Years describes kings creating money in order to pay the army, and creating impersonal markets (pp. 226-227) where money was good in order to feed the army without
                  a) trundling huge convoys of grain all over the country all day, every day, or
                  b) letting the army feed itself, and stripping the country bare.

                  The way this had to be done without impersonal markets is described by Pierre Loti in Au Maroc (not sure where to find a version in English.) Loti was part of a French diplomatic mission to the depths of Morocco. To feed the mission, the Sultan sent word in advance to the people near each nightly stop, ordering them to provide a sufficiently larg feast. Without the modern features of civilisation, that was the only way.

                  One of Gandhi’s early campaigns was against a move by the British governmennt in India to licence all mango trees. The situation had been that there were feral mango trees growing all over India, and anyone who was going by such a tree, and felt like a snack, could pick a mango and eat it. This scheme provided no role for the government. The plan was for each tree to be licenced, for a fee, and to destroy any un-owned, unlicenced tree. Then everybody would be obliged to pay rupees for their snacks. The government’s control of society through the impersonal market would be strengthened. Pity that people would get less to eat. ISTR Gandhi won that one.

                  I could entertain the doubt that without pre-existing money and a global impersonal market there would even be petroleum to buy. Who would drill down to the petroleum, pump it out of the ground, and ship it halfway around the world to where you happen to be in the hope that you even exist, and, if you exist, that you even want petroleum and have something worthwhile to give in exchange? It takes a global impersonal market to aggregate personal whims and accidents into something that we call demand, and find we can count on in making far-reaching decisions on what to do. I wonder, could we even have industry without it? Hmmm…

                2. djrichard

                  Check out History shows abuse of the money supply primarily comes from two places: 1) true illegal counterfeiting by outside parties, 2) true legal counterfeiting (ahem borrowing) by inside parties who are simply shorting the currency when the economy is publicly biased towards increased private debt (think Wiemar Republic or Venezuela).

                  In contrast, Fed Gov fiat (MMT) is not based on a fractional reserve system. At least not the ones I hear people talk about. So the magnitude of debasement/debauchery is a lot less compared to fractional-based currencies. Plus the monetary base can always be shrunk by issuing bonds if the will power to tax is weak.

                3. Yves Smith Post author

                  MMT is not “a system”. It is an empirical description of how fiat currencies work.

                  Saying you don’t like MMT is like saying you don’t like gravity.

                  1. Robert NYC

                    Not sure what your point is other than to be argumentative. And forgive me if my comments aren’t perfectly articulated but this a comments section to a blog which is not conducive to long detailed explanations. Fiat currencies can “work” different ways; I assume we can agree on that. Wray’s conception of how a fiat “system” should be run calls for a government to spend money into existence.

                    There was a period of monetary history where the sovereign had complete control over the system but that changed in the 1600s to a formulation where the sovereigns delegated most of that authority to a third party, i.e. central banks, over which they have only limited control and influence.

                    Our current fiat system is based on banks lending money into existence. Monetary system are different depending on where that locus of control is situated. Wray couldn’t be more clear about his preference for the former. My point is that both are fiat currency systems and either can work perfectly fine in theory; the issue is who controls the issuance. We just went through an episode where the banks created an excessive and unhealthy amount of credit/money which caused a massive crisis.
                    We seem to agree that too much money/credit creation which is not tied to productive investment causes problems.

                    Wray views his idea a preferable because it is more democratic and that is certainly true on the face of it. My views have nothing to do with “liking” one design or the other. They are both valid ways to manage a fiat currency but in my opinion they are both subject to the same problems.

                    1. Yves Smith Post author

                      No you do not have this at all right. You’ve got many conceptual errors in what you have written above, such as your assertion re petroleum, which is really bogus. The convention of pricing petroleum in dollars is no different than the convention of pricing other currencies versus the dollar in trading markets. The dollar is the reserve currency because we are willing to run sustained trade deficits and there is no credible replacement in sight for at least 30 years.

                      MMT is not “an idea”. It is a description. This is another misconstruction.

                      The fact that you are so worked up about Federal debt is a sign you really do not understand MMT. I’m really not about to engage in a long form tutorial. Even if you have read the books you say you’ve read, you do not appear to have absorbed the information.

          2. steelhead23

            Thanks for stepping in, Yves. But I have a minor quibble with that Private Debt to GDP graphic you linked. Because the graph’s Y-origin begins at 195%, the 7.5% reduction since 2008 looks like a 500% decrease. Bottom line – private debt to GDP remains very high and the economy is much weaker than it was in 08. Unless GDP picks up quickly (less the Ponzi-esque growth in equities), our financial future does not appear strong.

            Is it OK if I hope (against my better judgement) that Trump is serious about improving U.S. infrastructure through deficit spending and the loony conservatives in Congress go along?

        2. djrichard

          “but at some point this must and will end”

          If this ends, the only way it does so is through deflation. But the Fed Reserve is always on hand to do “whatever it takes” to prevent deflation.

          If the Federal Reserve loses that fight (and it’s hard to think of a scenario where they could ostensibly lose), then deflation would take out everybody who is in debt. Which is pretty much everybody, except people who have no debt and are holding cash. The Fed Gov would certainly have to step in to provide 3 hots and a cot.

          Instead, we have an outcome where the deflation monster is kept at bay, but everybody is up to their eyeballs in debt (I’m speaking private debt here. By the way, notice how private debt forgiveness never enters into the conversation). Except for the elite, they’re not in debt to their eyeballs because the height of their eyeballs can keep getting higher and higher. The elite know if the wall-of-worry disappears, forcing the Fed Reserve to raise rates, they’ll be caught with their pants down. But they also know they’ll be rescued again (the ol deflation monster must be defeated once again. We do this for you little people don’t you know). So that’s where the economy is thriving – for the elite.

          1. Robert NYC

            In aggregate terms the elites hold the other side of all the debt that was created, that is why they won’t tolerate deflation, everything implodes under such a scenario. The masses are buried under the debt, while a small minority holds the asset side of it. Therefore everything will be done to stave off deflation. System is very fragile, teetering between deflation and potential hyper inflation. They have threaded a needle so far to keep it stable but things are not normal. It will be some time before we know how this resolves itself.

    2. craazyboy

      The issue isn’t monetary policy, i.e increasing or decreasing the supply of money, the issue is that the way we’ve decided to do it is by increasing and decreasing interests rates. So we end up in this bazzarro world where, …………….
      Stop! I know the answer!

      Fed Chief Mariner Eccles explained that long ago – “pushing on a string won’t work”

      Keynes explains it in English – This doesn’t work when in a “liquidity trap”

      Our current Fed are Monetary_keynesians working in the Mariner Eccles building.

      Someone tell Ben and Janet!!!!!!!!!!!!!!!!!

    3. TosTrader

      “If we accept that only the Federal Government, through spending and taxing, can increase or decrease the supply of dollars”

      the vast majority of dollars in the economy are actually created by banks in the form of deposits generated by making loans. The central bank (Federal Govt.) seeks to control the level of reserves in the interbank market and has very limited control over the the supply of money in the economy as a whole. banks do not lend reserves, which is why there can be reserves sloshing all around the system without causing inflation. As long as there are idle resources in the economy the danger of inflation is overblown.

  3. Ranger Rick

    Just follow the money. How does monetary policy influence influence the average person’s finances? They don’t have access to the discount window. Business investment is at an all-time low. Just witness the famously large cash hoards currently collecting dust in the Fortune 500 and companies like Uber setting billions of dollars on fire trying to get into new markets instead of developing new products. Instead they’re using cheap debt to buy competitors and fire all their employees. Small businesses are disappearing and there are fewer new ones to replace them — nobody has collateral.

    Until financial policy starts seriously considering “helicopter money” the economy is just going to sit there spinning its wheels, going nowhere on the backs of a vast underclass with no money to spend. Government contracts are and remain the only way the average person might even catch a glimpse of the world of finance, a fact that must seem appalling to any financial conservative.

    1. animalogic

      “Until financial policy starts seriously considering “helicopter money” the economy is just going to sit there spinning its wheels, going nowhere on the backs of a vast underclass with no money to spend. ”
      You are quite right. And this needs constant emphasis: austerity, QE, ZIRP, are POLITICAL decisions. These policies advantage a minority over the majority. This distribution of resources/money is the ESSSENCE of politics.
      Of course an Administration has the power, through any number of fiscal/social policies, to alleviate the gross shortfall in general demand. But, why would they ? Neoliberalism is a political strategy of sucking in the maximum amount of money & surplus into the highest 1% or so levels of the Elite.
      MMT is a theoretical opportunity for a more democratic economy. In other words, it’s revolutionary….

  4. Ivy

    Inflation is hidden in plain sight for many consumers. Just take a trip to the grocery store, or a home improvement big box, or any number of other retailers. From personal, anecdotal, small-sample, and otherwise qualified observations, retailers held prices low until the election and then started to raise them. That will add some pop to their fourth quarter earnings, while people adjust budgets accordingly.

    1. djrichard

      See which is another refutation of the Wizard of Oz as any kind of allegory to monetary theory.

      But look at the poem that’s repeated in there. It’s fairly clear that Frank Baum had opinions on currency. Now that particular poem is a peon to Mckinley and “honest money”. Which would make one think that Baum was a hard money advocate, as McKinley and “honest money” was the counter William Jennings Bryan (WJB) arguing against the “cross of gold”. But WJB’s campaign for silver had the same failings as gold, they were both banker’s money. Perhaps Baum saw the disadvantages either way.

      In any case, Bill Still provides what I think is the better currency allegory from Frank Baum’s story, in that it’s an advocation against both silver (the silver shoes) and gold (the yellow brick road) and was for “paper money” issued by the Fed Gov (the emerald city). See . Now this is purely Bill’s interpretation, just like the refutation you’re linking to was admitted to be an interpretation too. I happen to think Bill’s allegory works better and there’s strong reason to think that this is where Baum’s head was at (given he was opinionated on currency and an advocate of the farmer’s vulnerabilities to issues related to currencies).

  5. Jim Haygood

    This chart from Citibank shows the eye-popping expansion of central bank balance sheets, from roughly $3 trillion in the year 2000 to $20 trillion today.

    Evidently the “EM” band in green is dominated by China, which accumulated over $4 trillion in forex (primarily US Treasuries) through 2013. Now it’s having to sell Treasuries to prop up the yuan exchange rate.

    But Haruhiko “Mad Dog” Kuroda at the Bank of Japan is picking up the slack from China with a ferocious buying binge, as Mario “Whatever It Takes” Draghi closely pursues him.

    Common sense would tell you that expanding central bank assets at many multiples of economic growth is neither sustainable nor even sensible. Central banksters are giving ol’ John Law a run for the money. With any luck they should be able to produce an epic calamity, since their bubble blowing is global rather than confined to one country.

    1. jsn

      Actually, the Fed is just laundering crap from our TBTFs and supporting the purchasing power of the dollar:
      The grey is crap being invisibly written down at taxpayers expense (actually holding a very small percentage of its face value, but embarrassing for Jamie and Lloyd if admitted in public), the baby blue is keeping the imports made abroad by our multinationals “affordable” without them having to re-patriate the cash.

      1. craazyboy

        I’m pretty sure “grey” is the “good” MBS. They swore up and down it was Fannie&Freddie MBS they were buying as part of QE – these are supposed to be the high quality end of mortgage instruments and I think it really did turn out that way.

        The drek mopped up from Bears and others is called “Maiden”, and is the nearly imperceptible dark blue on this chart. If they properly wrote them down immediately, then they wouldn’t show up on a current chart! This is why “audit” sounds cool. Then we could have a completely different chart showing how much they did give away to their buddies.

        1. jsn

          No doubt they did say that, I guess I’ve just grown less trusting.

          Given the proTBTF tilt of all else that transpired I just can’t believe Timmy and The Fed really took possession of anything it would have pained Jamie and Lloyd to give up.

          It would be interesting to see an audit!

    2. RobertNYC

      “Common sense would tell you that expanding central bank assets at many multiples of economic growth is neither sustainable nor even sensible. Central banksters are giving ol’ John Law a run for the money. With any luck they should be able to produce an epic calamity, since their bubble blowing is global rather than confined to one country.”

      It’s inevitable and will make John Law look like a rank amateur when this thing comes apart.

      1. jsn

        Personally, I’m looking forward to what happened next: the Regent toured France with a detachment Dragoons collecting gold from hoarders at bayonete point!

  6. Matthew G. Saroff

    I agree with your basic assessment, but your analysis of OZ was created by high school history teacher Henry Littlefield in the 1960s as a metaphor:

    Littlefield himself wrote to The New York Times letters to the editor section spelling out that his theory had no basis in fact, but that his original point was “not to label Baum, or to lessen any of his magic, but rather, as a history teacher at Mount Vernon High School, to invest turn-of-the-century America with the imagery and wonder I have always found in his stories.”

    1. Yves Smith Post author

      Wikipedia points out:

      Biographers report that Baum had been a political activist in the 1890s with a special interest in the money question of gold and silver, and the illustrator Denslow was a full-time editorial cartoonist for a major daily newspaper. For the 1901 Broadway production Baum inserted explicit references to prominent political characters such as President Theodore Roosevelt….

      Littlefield’s knowledge of the 1890s was thin, and he made numerous errors, but since his article was published, scholars in history,[7] political science[1] and economics[11] have asserted that the images and characters used by Baum closely resemble political images that were well known in the 1890s. Quentin Taylor, for example, claimed that many of the events and characters of the book resemble the actual political personalities, events and ideas of the 1890s.[10] Dorothy—naïve, young and simple—represents the American people. She is Everyman, led astray and seeking the way back home.[10] Moreover, following the road of gold leads eventually only to the Emerald City, which may symbolize the fraudulent world of greenback paper money that only pretends to have value.[10] It is ruled by a scheming politician (the Wizard) who uses publicity devices and tricks to fool the people (and even the Good Witches) into believing he is benevolent, wise, and powerful when really he is a selfish, evil humbug. He sends Dorothy into severe danger hoping she will rid him of his enemy the Wicked Witch of the West. He is powerless and, as he admits to Dorothy, “I’m a very bad Wizard.”[12]

      Historian Quentin Taylor sees additional metaphors, including:

      The Scarecrow as a representation of American farmers and their troubles in the late 19th century
      The Tin Man representing the industrial workers, especially those of American steel industries
      The Cowardly Lion as a metaphor for William Jennings Bryan

    2. ekstase

      There’s a fascinating interview with Yip Harburg, the lyricist for “The Wizard of Oz”, from Democracy Now:

      In it, there is some discussion of who Frank Baum really was. And other stuff, like how Yip’s song, “Brother Can You Spare a Dime,” was regarded:
      “Roosevelt and the Democratic Party really wanted to tone it down and keep it off the radio,”

      And why the songs stop in the film:
      “on their way to the wicked witch, when all the songs stopped, because they wouldn’t let them do anymore. OK? You’ll notice then the chase begins, you see, in the movie.


      Why wouldn’t they let them do anymore?


      Because they didn’t understand what he was doing, and they wanted a chase in there.”

      Art fights life, or something.

  7. LD

    Heartless, yes, but very clever if the goal is to enrich the already rich and squeeze the population.

    And courageous, too. As Mark Blyth points out, the Hamptons aren’t a defensible position.

  8. RabidGandhi

    I hope Bill Mitchell isn’t reading, as Tom Fergueson saying

    And in a real crunch, they knew what to do about that. They realized you couldn’t push on a string, so somebody — the government — had to borrow and spend when private markets would not.

    could lead to one of my favourite political scientists getting smacked around by one of my favourite economists.

    1. jsn

      Strictly speaking, when the Sovereign spends, the currency it spends then becomes the asset of it’s new holder while remaining a liability, a debt, for the Sovereign. That debt is extinguished when the Sovereign exacts taxes.

      That debt just takes a trade-able form when “sterilized” with Sovereign debt issue, having adhered only to the currency itself up to that point, but it was a debt none the less.

      Maybe I’m wrong, but I think Tom and Bill are both right.

      1. BecauseTradition

        Fiat is a debt of the monetary sovereign but being risk-free (except for physical fiat, aka cash, which can be lost, stolen, etc.) it should yield less than 0% (less than 0% because of overhead costs) otherwise it is welfare proportional to wealth, not need.

        Btw, if fiat is a debt of the monetary sovereign then why is the FED allowed to create fiat for the private sector, foreign banks, etc and thereby bypass the need for Congressional appropriations?

        1. Yves Smith Post author

          This is not correct and I hate to tell you but your comments on this topic are very confused, and worse, you are terribly self confident about your erroneous beliefs.

          A fiat currency issuer can deficit spend without creating debt instruments. You do not take your dollar bills in a fiat regime to the Treasury and get them redeemed for something material. The only use you can make of currency with the Treasury is to extinguish your tax liabilities.

          The Fed can only ‘lend’ fiat. They don’t ‘spend’ fiat, unless Congress authorizes the purchase (e.g. Tarp). But note that even foreign currency purchases of the Fed have to be cleared by Treasury (which happens behind closed doors and no one notices). So no, the Fed does not bypass Congress.

          And if you mean that Fed offers deposit insurance on deposits (created via private lending) but that’s still an authority given to it by Congress when FDIC was created. And the FDIC has a ‘line of credit’ with the Treasury, not the Fed, so again Congress is not bypassed. In fact, the credibility of the FDIC only exists because of that line of credit from the Treasury, since it means they are de facto linked to the currency issuing entity directly.

          The Fed NEVER creates fiat for the private sector. It exchanges green paper money for bank reserve balances–$ for $ exchange. There is no cost to the Fed or the govt. Not to mention that the Fed’s overall operations are a cash cow for the federal govt (due to its profits via interest income on securities owned vs. costs of its liabilities and salaries, etc.), so it never needs Congressional appropriations. As an MMT expert said of your BTW “This question in the first place shows that this guy has no idea how any of this works.”

          1. Steven

            … a logical definition of wealth is absolutely needed for the basis of economics if it is to be a science.”

            Frederick Soddy, WEALTH, VIRTUAL WEALTH AND DEBT, 2nd edition, p. 102

            The trap here is the focus on money. It is natural for someone like Yves, who’s business IS money, to believe it is something, conceptually, besides debt:
            A fiat currency issuer can deficit spend without creating debt instruments.
            No, indeed, a (100 – 1000, etc) dollar bill may not be de jure debt, though it says right there on the currency “this note is legal tender for all debts public and private”.
            You do not take your dollar bills in a fiat regime to the Treasury and get them redeemed for something material.
            And no, you take them to the marketplace to redeem them for “something material”. That’s what ultimately gives money its value, not its ability “to extinguish your tax liabilities.”

            So while the creation of money may not be creating legal “debt instruments”, it is creating at least conceptually, a ‘debt’ of the marketplace (i.e. the general public), an obligation to have available “something material” if and when the holder of money wishes to cash it in.

            Yves and others tell us it is OK for this country and other Western governments to run persistent current account deficits because There Is No Alternative to an international monetary system based on the ability of the banks, financiers and government of a global hegemon to create money as debt far beyond the wealth it creates for its own people and the rest of the world to purchase with that money. (‘The world needs the money’ and besides ‘the party’ can last another 30 years.)

            In the meantime, the West can keep the money presses going, cranking out money that will allow its 1% to roll up ever higher scores in their money games by stripping the populations in their host countries of the ability to support themselves by creating wealth their banks and governments are ‘borrowing’ from ‘developing’ countries. (There is a delicious irony in all this. A century ago the West subjugated China by selling its people drugs. Today China subjugates the West by making it dependent on Chinese credit to buy electronics, etc. – yes, at less cost because ‘Communist’ China can pay its people less and are willing to poison its environment.)

            P.S. Soddy defines two of the ingredients of wealth as: “natural energy” – think “ancient (oil) and modern sunlight – and “discovery”. You can’t discover something if it has already been discovered and you are too uneducated or unhealthy to be able to see what is new, what is really ‘wealth’.)

        2. jsn

          Because corruption.

          There’s this story conservatives like to tell about republics failing when the “people get hold of the monetary system and start giving themselves free stuff.” The more you look into it the more the opposite is true: some powerful cabal gets hold of the monetary system and creates a plutocracy that degenerates into an authoritarian oligarchy. TaDa!

  9. Tom Bradford

    Yay! This article and its comments exemplifies why I spend far longer on NC than on any other site on the Web. Not only had it never before occured to me that The Wizard of Oz was an allegory of anything – tho’ it’s obvious even to the dim-witted like me once pointed out – it helped me understand the concepts and relationships that underlie ‘money’. In short, how a pound note can be, as it says, “worth one pound”.

  10. Robert NYC

    The author’s critique of modern central banking seems dead on, the fallacy of pushing on a string etc, but he seems to think their response was a mistake because what we really lack is fiscal stimulus. Pardon me if I am confused but didn’t the government just engage in the biggest fiscal stimulus in the history of the world as evidenced by its massive deficit spending to the tune of ten trillion dollars. Was that not a fiscal stimulus? What is the author’s point? That we need even more of this! If Mr. Ferguson would clarify that would be great.

    I happen to think everything they have done is mistake and that what we need is a debt jubilee which is what William White, one of the world’s foremost monetary theorists and former chief economist of the BIS also thinks.

    1. Yves Smith Post author

      No, the bailouts were not fiscal spending. They were done mainly by special facilities and those loans were paid back. QE is also not fiscal spending.

      The US engaged in only about $800 billion of fiscal spending. China did the most, IIRC about $2 trillion.

      William White was very good in the runup to the crisis in identifying the housing bubbles but is really clueless about the debt of fiat currency issuers v. that of non-fiat issuers, like US states and countries in the Eurozone.

      1. Robert NYC

        Never said or implied that QE was fiscal spending. It’s not. And never said a word about the bailouts. My comment has nothing to do with monetary policy and was only speaking of the fiscal budget deficits that amounted to nearly $10 trillion in aggregate over the last 8 years.

  11. RBHoughton

    There is a slight upside to the frightful monetary policy we have been obliged to pursue – by creating military mayhem all over the world we have attracted savings to the US economy for fear it might be lost any where else.

    Even UK has proved unsafe and western media is making the EU look dodgy too.

    So regardless of the reality of a dormant national economy the money keeps coming in.

    Don’t forget the tax havens either – they invest in New York.

  12. Sound of the Suburbs

    Monetary policy follows the person that got it wrong, Christina Romer.

    Christina Romer made a mistake analysing the Great Depression thinking it was monetary that bought about recovery.

    Richard Koo explains her mistake clearly (first 12 mins):

    Richard Koo has been studying the Great Depression and Japan since 1989 after its monumental real estate crash.

    He knows form theory and experience only fiscal policy works and monetary policy doesn’t work. Western experts told Japan to stop fiscal policy and every time they did the economy got worse (this is the real world).

    He explains why QE doesn’t enter the real economy; it’s all clear and easy to understand. We know it’s true because there is no inflation around the world, the QE money hasn’t entered the real economy.

    Keynes studied the Great Depression and worked out monetary policy won’t get you out of a severe recession and you need fiscal policy. The real world shows the New Deal does the trick.

    Monetary policy follows the person that got it wrong, Christina Romer.

  13. Sound of the Suburbs

    Everything is in the money supply.

    We all have the idea that Central Banker’s have these hugely complex economic models that are somewhat defective.

    See what they missed in one tiny graph:

    M3 is going vertical before 2008.
    Money = debt and a credit bubble is blowing up.
    2008 bang.

    Steve Keen understood and saw it coming in 2005.

    Look at that tiny graph ………

    Everything is reflected in the money supply.

    The money supply is flat in the recession of the early 1990s.

    Then it really starts to take off as the boom gets going which rapidly morphs into the US housing boom, courtesy of Alan Greenspan’s loose monetary policy.

    When M3 gets closer to the vertical, the black swan is coming and you have a credit bubble on your hands (money = debt).

    Watch the whole thing and realise how the money supply controls the economy.

    Fiscal stimulus increases debt when the private sector isn’t borrowing, increasing the money supply (money = debt). This is why the “New Deal” worked.

    It’s that simple.

    How to read the money supply to judge the state of the economy and what needs to be done if certain conditions occur.

    It’s a delicate balancing act where the ideal is a steady rise in the money supply (debt) showing a healthy and growing economy.

    When this increase is too slow or it is flat-lining, the economy will be stagnant. Like most economies round the world today.

    When the money supply is going down you are heading into debt deflation. The private sector is not borrowing enough to maintain the money supply and this is a very serious problem. The Government is the borrower of last resort and needs to step in to fill the gap and keep the money supply up.

    Now, if the Troika had looked at the money supply in Greece they would seen the money supply decreasing as the private sector wasn’t borrowing. Cutting Government borrowing with austerity was just going to make the situation worse. In this situation the Government needs to step in as the borrower of last resort to keep the money supply stable. The Troika did the opposite of what they should have done and killed the Greek economy.

    The Maastricht Treaty actually prevents the only known solution being applied.

    What about when the money supply is increasing very rapidly and going exponential?

    A credit bubble is forming and the economy is running out of control, e.g. US money supply leading to 2008.

  14. Robert NYC


    Contrary to your assertions, I do understand MMT and agree that it provides a sound intellectual framework for describing,understanding fiat based currency systems. Certainly better than anything that can be found in a conventional money and banking textbook. The problem I have with it, and I thought I was reasonably clear about this, is that fiat based systems are inherently unstable because someone, somewhere has the power to create money from nothing. I need to go back and look at Wray’s books but my recollection is that his basic answer to that problem is not much different to that of todays central bankers; i.e. you just mange it based on the needs of the economy. We just went through a situation where banks created too much “unproductive” credit/money which is no surprise given that they could. If you design a system where the sovereign retains that right for itself you will, in my opinion, end up in the same place. At some point too much money will be created, war, palaces, etc. Again, I don’t recall Wray and others having much to say about this issue although I may not remember correctly

    MMT’ers say the government can always stimulate the economy because they can always create stimulus via spending and that fiscal deficits don’t really matter much etc. Of course MMT says this is true because a sovereign issuer of currency can never default but that is total bullshit because inflation is just default by another name. To be fair the MMT people admit this, but they also throw around that “can’t default” line a little too flippantly. Fiat systems are fine in theory as long as the credit/money creation grows in proportion to the real/productive economy, but as we have seen over and over again there is a lack of control problem.

    Not sure why we are even arguing. The semantics and language to discuss this get tricky but I assure you I understand it as you do as well. As for the oil argument we will have to agree to disagree. If the oil producers decided they wanted to be paid in chickadee feathers, chickadee feathers would become money overnight.

    As for your argument that:
    “The dollar is the reserve currency because we are willing to run sustained trade deficits and there is no credible replacement in sight for at least 30 years.”

    “Willing”, oh how generous of us. Of course we are willing to run trade deficits ad infinitum. It would be daft not to! The Arabs give us oil, the Japanese give us cars and electronics and the Chinese give us everything needed to stock a Wall Mart store and what do we give them in return? Modern day WAMPUM! The U.S. monetary system is the physical equivalent of a perpetual motion machine. The French called it, “an exorbitant privilege” and it amounts to the ultimate free lunch. It’s great for the U.S. but it amounts to a pyramid scheme in many ways, which is precisely why the system is such a mess these days. There was, and is, in fact a credible replacement. It is called the SDR and the Saudi’s pushed for the SDR in the early/mid 70s but of course the U.S. had no interest in losing its “exorbitant privilege”, so Kissinger and Bill Simon twisted the royal family’s arms to support the dollar. I suggest you read the “Hidden Hand of American Hegemony” by David Spiro. Happy to lend it to you as it is out of print and a bit expensive to buy.

    Time will tell what happens and we should revisit this thread at some point in the future.

    We need a monetary system, fiat or otherwise, where money/credit grow in proportion to the real economy. It’s basically that simple. To suggest that we just gin up a massive fiscal stimulus as the MMTers seem to believe we should is a questionable proposition in my mind with all kinds of complicated consequences. As you rightly point out it can be done, there is no barrier to ginning up the money/debt under the current system, but lets see what happens if they do.

  15. Spencer

    We will soon enter a protracted economic depression – as our policies are designed to move backwards, not forwards.

    4th qtr. R-gDp will be lower than the 3rd qtr. 2016. And the economy doesn’t bottom until the 2nd qtr. of 2017. Then the bond vigilantes will prevail in the 3rd qtr. 2017 as inflation accelerates.

    There is no way out. Solutions to our problems are not remotely possible. It would require adequate knowledge combined with an unquenchable desire to foster the common good, the power of which would transcend, indeed conquer, all special interest greed.

  16. Robert NYC

    “MMT is not an idea. It is a description. This is another misconstruction.”

    My comment was not a “misconstruction”. MMT is a “description” and it is also “an “idea”. I have gone back and re-read Wray’s: Understanding Modern Money, which was even better upon a second reading so thanks for the motivation to do so. 1) it is an excellent description of the philosophical and practical underpinnings of money and more specifically fiat money. Far better than anything one would find in a typical money and banking textbook. 2) MMT is also an “idea” wherein they lay out an entirely new framework for how to design and manage a fiat monetary system. You can’t rationally dispute that. It has to be an idea because what they describe does not exist. They make very grandiose claims that they have found the economic Holy Grail, i.e. the secret to true full employment and price stability. Maybe they have, but all I know is that it is a theory because it has never been tried and tested. Without going into all the details it involves the government spending money into existence and managing its supply through careful calibration of spending and taxes. Modest deficits are fine and desirable for reasons I will pass on explaining. It also relies on the concept of some type of “buffer stock” which serves as a standard of value and reference point for prices. They propose a labor pool as the buffer stock with the government being the employer of last resort. This they claim is the secret to full employment and price stability. If that isn’t an idea than I don’t know what is. Interestingly Wray acknowledges that gold or oil could serve the role of the “buffer stock” but he believes low skilled labor is an even better source. In other words the monetary standard would be tied to a commodity but in his formulation that commodity would be a unit of basic labor. My brief summation may not be articulated perfectly, this stuff is esoteric and doesn’t led itself to simple descriptions, but his ideas are pretty clear in my mind. Fascinating and thought provoking ideas.

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