Government Prints Money, Arabs Raise Price of Oil. Checkmate. Thank you.
["The solution is redefining happiness." Read this post, and then read the next stickied post by Ohio. They're related! --lambert]
Those who forget George W. Bush, are condemned to repeat his mistakes. Bush engaged in massive give aways to the wealthy, a war for oil, and dramatic increases in domestic spending. How did he pay for this? He had Greenspan print the money. The US dollar depreciated, though not by as much as some doomsayers thought, because the Chinese and others bought dollars. However, one group of people did not have to put up with the devaluation tax: energy producers. And so they raised prices. The average price per barrel of oil reached over $100 USD, and the spot market peaked at over $140 dollars a barrel. The US trade deficit surged, as the monopoly of oil out ran the weakening of the dollar in helping exports.
The global economy rattled apart, and global trade dropped by the most since the Great Depression: 25% for many countries. Those preaching that the US can "just print money" have to realize that the US cannot "just print oil." One can repeat the magic phrase of full industrial utilization over and over again, but sit down, take out an envelope and figure out just what the price of the last barrel of oil will be - the marginal barrel of oil - if that is the case. North of $300 dollars a barrel. Or $15, dollars a gallon for gasoline, with wages being about what they are now. The US simply cannot afford to run the trade deficit that will take. This leaves aside that the Chinese can print Yuan and undercut the US. There is more idle Chinese steel production, than there is capacity, total, in Europe. The Chinese are already experiencing inflation in their coastal economy, but their bet is that whatever government in the US prints money will have to face an election, before they do.
These are simple things, and calling yourselves "Owls" when in fact, what you are is carbon ostriches, is not going to change them. The right wing was talking up "deficits don't matter" and monetary policy can be white hot, because they were in charge. Now they are not, they preach deficit reduction. Not because they abhor deficits, but because they abhor what the left would do with the money. Sadly, the left does not yet have the vision or the courage to do what is needed by well understood and orthodox measures, such as those provided by Macro-economics of the stimulus, or climate science of efforts to slow global warming.
However the reality is not in that direction because of some other empirical facts. The first one is that more production, per se, will not generate more happiness. The divergence between GDP, that is to say, monetizable production, and happiness, is already quite large, and getting larger. One can only "print more money" and get more happiness, if the two are relatively closely aligned. In fact, the more they are not aligned, the more the monetary instrument will break, rather than heal, the economy.
The real issue then, is taxation. That is, who gets to decide how to invest in the long term the surplus productive capacity of the world economy, and on what. The problem, since the Arab Oil Embargo, is that the US has found no long term stable way to tax those who own their own countries, and produce oil while having a low stake holder population. Think of Saudi Arabia: it engages in import substitution in the form of religion, and spends 10% of its GDP on its military. The wealthy of these places can accumulate money. If the US inflates, then the value of its capital base decreases, to the point where the arabs can buy US assets, and then shut them down.
This is the source of the Red Queen's Race that is Reaganomics: cut taxes on our rich, so that they can continue to bid for assets against their rich, and allow a series of asset bubbles, hoping each time that more damage will be done to their rich when they burst, than to ours. The only real victim of this strategy was Japan, who suffered the nose in the book penalty when they held US assets at bubble prices, when their own economy imploded.
The solution is not in monetary policy, nor in driving production, but in demand. Demand is the key to almost every economic crisis, in that either there is insufficient demand for what can be produced, excessive demand for what cannot be produced, or, in the worst cases, both. The solution, as FDR stated forcefully in his 1932 acceptance speech, and in his 1933 Inaugural address, is to redefine happiness. We can build more cars than we can run. We can, and in fact have, built more houses than we can power. We can build more planes than we can fuel. The energy bottleneck is severe, and it will only be compounded as carbon dioxide continues to heat the hydrosphere, and create climate instability.
No generation then has had a clearer choice in a very long time: stop overconsuming what makes us fat, unhappy, and needing a war, and invest in a radical restructuring of the US and global economies. This is why carbon has a hypnotic attraction: a Pigou tax regime on carbon reaches everyone, everywhere, who is attached to the mechanized economy. This is also why dealing with global imbalances in trade, which Keynes attempted to block in his original design for Bretton-Woods, is also crucial: the United States overconsumes, other countries under-consume, and many misinvest. The mechanism to engage in both was proposed by Tobin: taxes on financial flows, specifically currency exchanges and money transfers. Krugman at first attacked this, but has since come closer to admitting it is possible. No large transactions can really occur without going through a very small number of clearing mechanisms, most specifically, the giant money center banks.
The revenue side of the regime then is Keynes-Pigou-Tobin tax: a tax on imbalances of trade and externalization, collected through the global monetary system. This gets at the heart of the present problem directly: namely the profit motive is presently encouraging people to burn more carbon, and profitize the externalities that this inflicts, on the present and on the future.
A large part of the problem of the present however, is that elected elites, not just in the United States, but across the developed world, are still devoted to the idea that there is one more pure play on carbon. In the United States, this would be based on the production of non-conventional natural gas, through a process known as "fracturing." This way out is very similar to the technological shift which bailed out the Reagan-Thatcher play, in their case "tertiary extraction" of oil, which doubled the amount of oil that could be extracted from fields already found. We have not found that much new oil, we merely are much better at getting it. However, most of this tertiary extraction is played out, and that is why the world scrambles for resources, and oil is still north of $70 a barrel, six times what it was at the peak of the Clinton boom, despite being locked in a global depression.
And here is the real political why of "MMT." Basically, it says that liberals are not going to be good to bond holders, as Rubinomics says they should, but will, if the bond holders do not loosen their iron grip on policy, behave the way Republicans did from 2001-2008. It is a move in a game of chicken. The problem with it as a gambit is that it is too sane. The key part of the Bush play was the "brilliant" war for oil. Everyone knew that Bush's policies would blow up the world, even Bush did. That's why he hired Ben Bernanke as an economic advisor, and then put him on the central bank, with a fast track to being the next Chair of the Federal Reserve. Bernanke was the "Plan B" of the Bush era, someone who would use the central bank to engage in fiscal policy. That is what special facilities are: the fiscal policy of giving money to banks, and calling it "monetary policy at the zero point." It fooled many people, some of whom ought to have known better. Without a positive wedge, some extrernal source of wealth to plunder, overheated economies, overheat, and their political regime falls. In France the fall of the Ancien Regime was closely tied to their inflationary monetary policy, and the near collapse of much of Europe during the Napoleonic Wars stemmed from the disaffection caused by high inflation, and arguably instances of hyper-inflation of paper against gold.
"Printing money" in almost unlimited quantities is a sprint, there must be a clear goal at the other side which allows for the repaying of that sprint. In Hitler's case, the conquest of Russia. In Bush's case, the occupation of Iraq. In the case of the United States during World War II, the defeat of the axis. Every money glut bets on a pot of gold at the other side based on conquest or ignition of a new economy. Every money drought bets on the converse: that other economies will collapse under the lack of liquidity, or that the lack of liquidity will force expansion by those inside the society who otherwise would starve. Both are high risk gambles, and only pay off when there is a clear connection between the monetary move, and a social and technological move. The people, left or right, who want to print money, are betting that somewhere, someplace, there is a country full of brown people to kill.
In short, the monetary lever is what you pull, when you already have the tracks laid down. The United States does not, at the present time, have these tracks laid down. Instead, before their can be a train, there must be the hard work of laying the line. If the United States is to survive this moment as a global power, there must be a resolve to do this work, that resolve will be visible on the day that it elects a leader who will raise taxes on the global wealthy, and the global wealthy will embrace it as necessary to avoid certain catastrophe. Neither of these to factors are in place.
Since there will be one, and perhaps two, pulls of the monetary lever, it is not time to waste one on an elite which is incapable of even restraining the very forces that nearly brought the global economy to ruin. Do not give blank checks to those, who fill them in with zeros, and hand them to Goldman Sachs.