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Government Prints Money, Arabs Raise Price of Oil. Checkmate. Thank you.

Stirling Newberry's picture

["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.

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Tony Wikrent's picture
Submitted by Tony Wikrent on

Forgive me for being dense, but would a correct policy be to print money to finance a "Manhattan Program" of wind and solar energy generating capacity, and a massive shift in transportation infrastructure in the U.S. to high-speed rail and urban rail mass transit? Does such a crash program qualify as "a clear goal at the other side which allows for the repaying of that sprint"?

The other key, then would be the Keynes-Pigou-Tobin tax. To get there, we need to counter the wrong-wing narrative that usurers, speculators, and rentiers are glorious, entrepreneurial creators of wealth. I sense that the majority of unterbussen are already there, but how to get the elites to that view when the political elites are so dependent on campaign financing from the financial elites? Citizens United v FEC is now making the problem almost intractable, is it not?

Dude, brilliant, as usual. I wish your contributions were regular and much more frequent.

S Brennan's picture
Submitted by S Brennan on

this line came up:

"This is why carbon has a hypnotic attraction: a Pigou tax regime on carbon reaches everyone, everywhere, who is attached to the mechanized economy."

and then the usual idiocies of "progressive group think" sprung forth.

Waste of words. Tell me Sterling one MAJOR problem solved by private initiative?

Stirling Newberry's picture
Submitted by Stirling Newberry on

Governments create the basis for a market, which then supplies the solution.

Examples:

Automobiles. Created privately, but requiring public infrastructure of roads, credit, and access to resources, as well as labor and trade law.

Computers. Development driven by government demand, but made accessible to consumers through the private market.

Railroads. Built and developed by private companies, but with public laws and credit.

Modern medicine. Developed with government money, productized by the market, and best delivered through individual actors, under a public insurance structure, for example France's system of public insurance.

Electrical power. Developed privately, and provided in profitable areas privately, but stabilized and universalized by public regulation.

The best analogy is the cart and horse. The market is the horse, it draws the cart. But the horse, left to its own devices, will only head for the nearest hay to eat and will drag the cart with it there.

At the present, our leadership has an abhorance of creating functioning markets, and instead props up existing non-market rents. The various "reform" bills based by this Congress and signed by this President all boil down to protecting existing rents by curbing some abuses, but not by fundamentally altering the incentive system. However, this does not alter the reality that emergent orders are more efficient than centralized ones with a few exceptions.

It is also important to remember that the people who run the largest concerns in a market, and the interests of the market as an abstract entity, are almost completely in opposition. Show me a man who has won the game of the market, and I will show you a man who wants the market shut down.

S Brennan's picture
Submitted by S Brennan on

To my "Tell me Sterling one MAJOR problem solved by private initiative?"

Stirling provides these examples by

Automobiles. Created privately and had limited use until the industry convinced congress to aid in the destruction of public mass transit systems while funding development of roads for the exclusive use of private vehicles. Great dude...except, there wasn't a major problem that autos solved, rather they created a problem which they then solved. Next

Computers. They exclusive use of government, by specified contract let out to three companies by US Army scientist, who took US Army technology and rented it to large corporations. Popularity of computers does not happen until microchips developed to support SLBM/ICBM's/NASA are in production at rates that allow for some pilot commercialization projects. So, this completely backward, completely wrong

Railroads. were built with the largest government confiscation of land, which was then given in perpetuity to private individuals favored by those in power. The companies were allowed exclusive franchise in their respective areas allowing for non-competitive pricing, which allowed those so favored by government to go to Europe's royal elite to secure funding. So, Government money, acquired through eminent domain [stealing] given to the wealthiest tiniest sliver of the US is your shining city on the hill? Next

Modern medicine. In the US, all basic research is done with public money, northward of 75% of research is performed with with out private money. Generally drug companies take over at stage 2 trials of promising drugs that have a market [read, people with money]

Electrical power. Piecemeal development until the US government began electrification in earnest.

And these examples are what Stirling trots out for MAJOR problem solved by private initiative? Jeebus, the sheer ignorance of industrial development by the blogging class is staggering.

BDBlue's picture
Submitted by BDBlue on

Or at least increase government spending. I agree that more taxes on the right things/people need to be done, too, to reallocate resources and rebalance the economy. Spending in some areas need to be cut, again because of resource allocation. And all of that might change the amount of money the government has to "print", but that doesn't change the fact that government spending is part of the solution here. It's not the only part, but creating functioning markets isn't going to be free. Just as that interstate highway system wasn't free, but required government spending.

madamab's picture
Submitted by madamab on

I am not sure how any plans can be made without spending money. Less money than actually executing the plans, of course, but there will need to be money spent for the planning.

Cutting deficits willy-nilly is not the answer either. If we really want to save money, we could instantly put billions a DAY into our treasury by ending the wars in Iraq and Afghanistan, and wherever else we're sending our troops these days. Remember, there are as many private contractors in Iraq as there are U.S. Military, and they cost quite a bit more per person. Those people should be GONE and should never come back.

The fact is, that our current leaders are morally bankrupt and would rather create more unterbussen than be true stewards of the public resources.

We're in a tough spot, no question.

CMike's picture
Submitted by CMike on

Back in July of 2008 Brad DeLong wrote:

Robert Pear of the New York Times called, looking for a soundbite on McCain's budget policy. I blathered on, while the perfect soundbite was waiting in my email in-box, unread.

It was:

Underpants Gnomes.

You all remember the plan of the Underpants Gnomes from South Park:

1. Collect underpants.
2. ?
3. Profit!

That's the perfect analogy for John McCain's budget policy:

1. Cut taxes and spend more on the military.
2. ?
3. Balanced budget!!

BDBlue's picture
Submitted by BDBlue on

I do, I do!

1. Print money, raise taxes, restructure wealth
2. Develop renewable energy resources and infrastructure
3. Create more stable, less war mongering, post-oil US

As I understand it, one of the goals of MMT is to get people to recognize that government spending money is not directly related to the taxes it collects. Instead, money is a way to allocate real resources. So long as there are slack resources, you can "print" money without inflation. The problem is that when it comes to oil, there is not any slack resources. So "printing" money aimed at this problem will only lead to higher oil prices (which kills the oil dependent economy).

The key is to cut the oil dependency because it strangles demand and prevents the other slack resources from being used.

At least that's my elementary school level take on it.

So I don't think there's this unresolvable tension between what Stirling says and the MMTers. The issue is in what you do when and how you do it. I get and largely agree with Stirling's argument that you can't just print money because it will be poorly allocated in our current economic structure (at least I think that's what he's saying). That taxes are better at first because it's decreasing the power of the elite and that has to be done before you can print money or else all the money you just printed will be siphoned off to help maintain the current imbalances. And all of that would be bad enough but add to that the ways we spend resoruces is critical to our survival as a species. It's not just about whether steel will go for some sleek office building or section 8 housing, it's about how to deal with our changing climate and drastically dwindling critical supplies of oil and water and food and other necessities. Once you misallocate those resources by "printing" money and giving it to the wrong people, they're gone for good.

But that doesn't to me, undermine the basic MMT idea that taxes and government spending aren't directly related. They're both just ways of using money to reallocate resources. Or the basic MMT idea that government's shouldn't necessarily balance their budgets or run surpluses. The issue is, as always, what do government's spend their money on.

CMike's picture
Submitted by CMike on

Go ahead, let's hear what some of the numbers would be if you were King. (I'm not looking for estimates any closer than $25 billion/yr. for any project you would propose - make that $50 billion/yr. but provide some specificity as to the nature of the projects you would propose.)

I'm wondering, are you assuming that we can ramp up some sort of Manhattan Project and, for $100 billion, we can come up with some sort of new energy source that will save us tens of trillions of dollars in the coming century or that every dollar spent on energy conservation will save the economy two dollars worth of oil consumption in the short term?

Now then, if you were not King how would you imagine this would end up? Should we take it for granted that 39% is going to be the top bracket income tax rate because of the political clout upper income people have? And, is 15% is going to be the max tax rate for most of unearned income for the same reason? If so, what spending programs do you think you could get through Congress if you opened the spigots on money creation? How much of that government spending would end up as take home pay for workers and how much would end up as windfall profits for corporations?

You say:

Once you misallocate those resources by "printing" money and giving it to the wrong people, they're gone for good.

Well yeah, there's the rub. As you know, we recently had a one to two trillion dollar round of quantitative easing to support asset prices. There's no argument as to whether fiat money can be created ex nihilo, at least not from me or Ben Bernanke. The question is what exactly what should we do with such money. How can we grow the real economy faster than the debt and nearly as fast as the money supply because there are inevitable consequences if we don't.

You write:

So long as there are slack resources, you can "print" money without inflation.

Now hold on. When the economy is operating at a lower than its full output potential you can print money without inflation as long as either 1) people are going to hoard it and not spend it (liquidity trap behavoir [added on - or foreign governments are executing mercantilist strategies]) or 2) people are going to spend it and stimulate additional domestic production. If people are going to use that money to buy foreign goods or speculate with it, you will have inflation.

Aeryl's picture
Submitted by Aeryl on

To guarantee full employment, create demand?

I appreciate the concerns you bring here, Sterling, no new ideas should go unchallenged, but I don't see anyone here advocating MMT, and not advocating " a clear goal at the other side which allows for the repaying of that sprint."

I understand that in our current political climate, such decisions would not be made to our benefit. But no such thing will be possible, until we educate people to the possibility.

MMT teaches that governments sovreign in their own currency, need not worry about inflation, until the money output overtakes their production capacity(right, lets, warren?) Which is what the elite already believes, despite their play acting that they don't(as you pointed out Sterling, the right says deficits don't matter when they control the money). It's educating the citizenry, and educating them that using the money to benefit the citizenry, is how you avoid the dangerous traps of inflation.

So I would say that no one here is advocating "Just Print Money" we are advocating "Just print money, and use it to help us"

Submitted by jawbone on

From Wiki:

A Pigovian tax (also spelled Pigouvian tax) is a tax levied on a market activity that generates negative externalities. The tax is intended to correct the market outcome. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. A Pigovian tax equal to the negative externality is thought to correct the market outcome back to efficiency.

In the presence of positive externalities, i.e., public benefits from a market activity, the market tends to under-supply the product. Similar logic suggests the creation of Pigovian subsidies to increase the market activity.

Pigovian taxes are named after economist Arthur Pigou who also developed the concept of economic externalities. William Baumol was instrumental in framing Pigou's work in modern economics.[1]

Workings of Pigovian tax
A Pigovian tax is considered one of the "traditional" means of bringing a modicum of market forces, and thus better market efficiency, to economic situations where externality problems exist. More recently, particularly in the United States since the late 1970s, and in other developed nations since the 1980s, an alternative to Pigovian taxation has arisen: the creation of a market for "pollution rights." Pollution rights markets are not generally more efficient than Pigovian taxes but are often more appealing to policy makers because giving out the rights for free (or at less than market price) allows polluters to lose less profits or even gain profits (by selling their rights) relative to the unaltered market case. Markets for emissions trading have been set up to bring better allocative efficiency and improved information sharing to the pollution externality problem. Pollution rights markets are a part of the field of Environmental Economics generally, and Free-market environmentalism specifically.

One difficulty with Pigovian taxes is calculating what level of tax will counterbalance the negative externality. Political factors such as lobbying of government by polluters may also tend to reduce the level of the tax levied, which will tend to reduce the mitigating effect of the tax; lobbying of government by special interests who calculate the negative utility of the externality higher than others may also tend to increase the level of the tax levied, which will tend to result in a sub-optimal level of production.

Pigovian tax effect on output.The diagram [go to link] illustrates the working of a Pigovian tax. A tax shifts the marginal private cost curve up by the amount of the tax. Faced with this cost increase, the producers have an incentive to reduce output to the socially optimum level by reducing the marginal externality to the marginal tax. The total tax revenue (which could be used to mitigate the effect of the negative externality) is equal to the size of the tax times the new output (the shaded area).

A key problem with the Pigovian tax is the "knowledge problem" suggested in Pigou's essay "Some Aspects of the Welfare State" (1954) where he writes, "It must be confessed, however, that we seldom know enough to decide in what fields and to what extent the State, on account of [the gaps between private and public costs] could interfere with individual choice." In other words, the economist's blackboard "model" assumes knowledge we don't possess — it's a model with assumed "givens" which are in fact not given to anyone. Friedrich Hayek would argue that this is knowledge which could not be provided as a "given" by any "method" yet discovered, due to insuperable cognitive limits; chaos theory argues for other cognitive limitations.

A counter-argument is that perfect knowledge of the gaps between private and public costs is not necessary: So long as a tax level reflects a negative externality better than no tax, it should increase efficiency. Sometimes these differences are obvious – for example the effect of petroleum use on pollution, global warming and traffic congestion. In such a case, the levying of a Pigovian tax approximating such costs would be better than no tax at all.

Aside from efficiency, Pigovian taxes may increase the equity or fairness of how costs of negative externalities are borne. For example, even if a tax on air pollution is not at the perfect level to achieve optimal efficiency, it transfers cost associated with pollution from the public (e.g., via reduction of other taxes or benefit from public spending of the pollution tax proceeds) to the polluter.

Like all taxes, Pigovian taxes can encourage smuggling and black markets, especially if they create large differences in the price of popular products in neighboring jurisdictions. If lower income individuals tend to spend a greater portion of their income on the product with external social costs, such as cigarettes or electricity, then the corresponding Pigovian tax is regressive.

And, yes, there's more!

S Brennan's picture
Submitted by S Brennan on

Note to self: Rewriting of history into Friedmanesque sound bites is very effective, it's got Stirling's generation completely snowed. Since Newberry is rewriting history in reply to my comment above...let me recycle this.

----- Original Message -----
Sent: Wednesday, June 03, 2009 7:57 AM
Subject: President Eisenhower signed into law the "Roadless Offset Act"

Dateline, 29 June 1956

"...today President Eisenhower signed into law the "Roadless Offset Act" whereby people who do have roads need to pay those who don't have roads. President Eisenhower has expressed his doubts stating "well...the whole idea sounds kind of silly if you ask me, I mean, why do we have to be such ninnies about it, if we could wade ashore on the beaches of Normandy, surely we could tax the people for this national improvement?"

But the "zany" Dr. Teller, who built an H-Bomb and time machine, convinced Dwight D Eisenhower to let him go into the future and find how they were managing their national improvements and that's where the "offset in to the future" got it's start.

The once promising "Federal-Aid Highway Act of 1956" was canned and the new "Roadless Offset Act" was penned. The President took some convincing as he was pretty sure this bill could be easily "gamed" stating, "what's to stop the population from moving away from areas that have roads...to areas that don't and picking up a check for sitting on their duffs" Again, Dr. Teller, who built an H-Bomb, convinced the President that the conventional wisdom of the economics profession was always right in the years between 1980 and 2009. Not wanting to be a "stick in the mud" Eisenhower green lighted the project saying "this really sounds wacko to me...but Teller tells me that the people that came up with this cockamamie idea are the "best and the brightest economic professors of their time".

Dateline, 25 May 1961

"...today President John F. Kennedy announced before a special joint session of Congress that the dramatic and ambitious goal of sending an American safely to the Moon before the end of the decade was to be modified, rather than raise & expend taxes to achieve this goal an "Anti-gravity offset" would be used where people who do not have...

cenobite's picture
Submitted by cenobite on

The oil price increase was a reaction to monetary or fiscal policy in the US.

I think it was mostly a scam, just like the electricity scam foisted on us in California.

I seem to recall reading that the price runup was accomplished by futures contract speculation (contracts that were never delivered, etc), and "speculators" like Goldman Sachs ran away with a big bag of money as usual.