Chartalist Sense and Nonsense

I have been struggling with economics and economists for many years—I'm a slow learner. Recently I have been trying to figure out neo-chartalists and neo-monetarists, and watching their interchanges on the blogs. [Note: I need to quit using "neo"]

Today I want to focus on the Chartalists (Wikipedia). I want to lay out what I believe to be sense from their writings and what I believe to be nonsense. The nonsense, if it is indeed nonsense, stems from where Chartalist reasoning departs from Garrett Hardin's first law of ecology, paraphrasing: "You can never do just one thing." Hardin's law ought to have guided the US Federal Reserve's failed attempts to control the money supply and later interest rates. But it didn't, as we are painfully learning, living through the worst contraction since the Great Depression.

To compliment Hardin's First Law we need to add two more from Barry Commoner: First, "Everything depends on everything." It comes with a corollary, "Every thing comes from something." Second, "There is no such thing as a free lunch." Again with a corollary, "Everything must go somewhere." Now we need to see how things work in our world.

I suspect that Chartalists will correct me on my allegations of nonsense, and tell me that they are not guilty of falling into the narrow-focus trap that other economists fall into—that they don't violate laws of ecology. But I remain puzzled. Sometimes, at least, they sound like they do. First let's note what the Chartalists get right.

Chartalist Sense

Chartalists provide an accurate picture of how money and credit operate in banking. As such they can — and we can too, following their accounting — easily point out silliness, even danger in trying to "balance the budget" by, say, cutting government spending. All that single move will do is to drive private saving further into the red. Again, "You can never do just one thing." Now, let's see what Chartalists get wrong.

Chartalist Nonsense (or not?)

I have been trying to wrap my mind around government "deficits" and "debt" for some time, (e.g., here). I remember my anger when Dick Cheney said "deficits don't matter. Now it seems there are more and more economists who at least pretend that deficits are a positive good. See posts from, e.g. Jamie Galbraith, Marshall Auerback, Randall Wray, among others. These are economists who I follow, so I'm struggling to better understand how they could come to conclusions that seem untenable.

My guess is that most Chartalists agree with me (maybe they don't?) that there is only so much "papering over problems" that is acceptable in a society, and to other societies that any society is indebted to. Internally, people will only accept so much inflation; externally, too much debt and/or too much debt evasion via inflation (or devaluation) will also be met with hostility. But Chartalist writings — particularly their popular writings — lead to the opposite conclusion that "deficits are always good." This certainly can't be the case, as Heilbroner and Bernstein so aptly demonstrate in The Debt and the Deficit.

As I understand it, if a government seeks to expand its monetary base under what is commonly called Modern Monetary Theory (MMT) (via Bill Mitchell,YouTube video) there is a likelihood of expanding future job production. I get that. But we must pay attention to the word "likelihood." Assuming that new jobs actually happen and are beyond "subsistence level", expanding future job production provides a bigger base from which to extract taxes to pay for government services and government debt. Such is the nature of growth economics for countries that have their own currency. But problems arise when jobs are being destroyed in epoch numbers via Schumpeter's Creative Destruction (Wikipedia) and are not being replaced with similar quality jobs, and when jobs are sent to other countries too rapidly.

There are also problems when finance gets too far out in front of the so-called real economy. George Ackerlof and Paul Romer call it looting. As does Joseph Stiglitz. So does Michael Hudson, and so do the Chartalists.

Financialization-of-Everything

The US has recently played hegemon on the world financial stage and has presided over a world of financial bubbles. US-led financialization-of-everything allowed money to flow to wherever speculators felt they could inflate the next bubble make a quick buck. All in the name of efficiency. There were no, or at least not enough productive distribution channels for the liquidity that the US was providing (as a base) to the world's money markets. So being good bad "capitalists," CEOs and top traders kited markets and took the booty. Many economists and politicians were cheer-leading this as a new era of globalization, a new-found economic miracle. As we are now learning, however, it was neither. And now we are in the middle of a credit bust, with a major-league private debt hangover.

A big problem was that the "new world order" was achieved by destroying high paying jobs in the developed world. This may have been inevitable. But a question lingers as to whether or not it might have happened rather slowly, rather than all at once. I'm inclined to believe that given world and US psychology/politics it had to happen as a crisis. The question that lingers is,"What next?"

I'm going to give second-to-last words to Heilbroner, as a challenge to Chartalists in terms of better "framing" (Wikipedia) for their arguments that I call nonsense above:

Public investment creates public debt, exactly as private investment normally creates private debt. One hears much these days about the "burden" this public debt will impose on our children. We hear less about the consequence of removing that burden by retiring our debt. Retiring debt means that there will exist fewer and fewer government bonds, which are our debt. When there is no longer any debt, there will no longer exist any securities backed by the full financial capability of government. In what bonds will our children then invest the Social Security retirement trust? What will their banks, or businesses, or they themselves use as giltedged securities? Zero public debt would not be a blessing; it would be an unmitigated catastrophe

I get the last words, and they are simply these: I am trying to learn what I can from economists, ecologists and more—in recent days particularly from Chartalists. I apologize in advance for errors I make in the process of "writing to learn."

Comments

[tjfxh]

Hi. I got here through a Google Alert on Chartalism. When I first encountered Chartalism, it was referred to in a blog comment I happened onto, and I had a similar impression. However, I followed up on the link to Randy Wray's Understanding Modern Money, and found that it was seriously argued. Turns out that Wray was a PhD student under Hyman Minsky, and he fully appreciated the financial instability hypothesis.

Then I found the various blogs, where encountered Bill Mitchell, Warren Mosler, Marshall Auerback and others personally, and found them happy to respond to comments and queries. There is an abundant literature on the web, too. Since researching this, I have become a "card-carrying member." I do think that they the Chartalists have hit upon a vital piece of the puzzle in articulating the actual operations of the post-1971 monetary regime based on non-convertible flexible rate currency.

I strong suggest asking questions and commenting on Bill Mitchell's blog and Warren Mosler's blog. They are gathering spots, and there are a lot of knowledgeable folks there in addition to Bill and Warren. Your views would be most welcome.

Best regards,
Tom Hickey

[Too Much Fed]

I believe the question you need to ask is what is the difference between deficit spending with currency and deficit spending with debt.

[Too Much Fed]

"In what bonds will our children then invest the Social Security retirement trust?"

Assuming this quote means finding an asset with a risk free return (under the right circumstances, gov't debt won't default "per se"), I believe the better question is how can a risk free return be achieved for savings.

[Too Much Fed]

"Zero public debt would not be a blessing; it would be an unmitigated catastrophe"

Zero public debt without increasing currency in the right amount would probably be a disaster. However, I don't see any reason an all currency economy is not possible other than the bankers won't like it if there are no interest payments.

[Frank]

I'm trying to understand Modern Monetary Theory also as explained by Bill Mitchell, Randy Wray, Warren Mosler and others. The main thing I don't understand is how they deal with interest payments on the national debt. They claim that regardless of how high the debt got, the government, I guess the Fed, can just keep interest rates low to make servicing that debt easy. Might not there be instances where the interest rate paid rose, or had to be allowed to rise.

[Dave Iverson]

Frank,

If I understand Mitchell, Wray, and Mosler, (also Marshall Auerback) they suggest that maybe the gov. doesn't even have to incur debt. Instead, just adjust the accounts and be done with it. I do NOT share their ideas on this front. I know that governments can do this, but I find it inadvisable on several fronts. Other chartalists are less inclined to go as far as these four.

I think that the chartalists have given us some very good intel as to the way modern finance works, but I do not go along with ideas of just ignoring the ramifications of non-debt money-making. In a private discourse on Auerback's site, Marshall suggested that the problem (maybe not the "only" problem, but we didn't get that deep) with, say, California (or Greece) was that they didn't have their own currency (or the independence of such in Greece's case). I wondered then whether, when Los Angeles gets into trouble later this year why they too might not have a currency. How many of these are there to be, and how is anyone ever to keep track of it all?

Here is what Auerback had to say re: my question about California: "Arnold should lead a campaign for secession and become California’s first President. He could issue a new currency and solve Calfornia’s problems once and for all!" Was his answer tongue-in-cheek? I don't know...
Here's the reference: http://www.newdeal20.org/2010/02/11/greece-signs-its-national-suicide-pact-8251/ I suspect that the answer was tongue-in-cheek, following an earlier answer, but only partially so. Here is the beginning of the dialogue I initiated here, http://www.newdeal20.org/2010/02/11/greece-signs-its-national-suicide-pact-8251/#comment-4346 :

Marshall says, “…Greece, Portugal, Italy, yes, even Germany, functionally remain in the same position as American states, unable to create currency and therefore always subject to solvency risks which the markets may question at any time.”

OK.. So how do we fix, say, California? Likely you’ve covered this before. A quick link to earlier work would help me better understand. Or Maybe it is as simple as letting each American state have its own currency, but somehow I can’t quite see that working out well.

Posted by Dave Iverson | February 11th, 2010 at 4:59 pm

Dave,

I have written about this before:

http://www.newdeal20.org/?p=3091

You’re right. A parallel currency is not an optimal idea, but given the reluctance of Obama to embrace the optimal solution (revenue sharing with the states on a per capita basis), then what I’ve proposed here might be the only realistic alternative. Unless, of course, people want to see California go down in flames.

Marshall Auerback

my response:

Whether the issue is Greece or California I suspect that few of us wants a country or a state to fail. On the other hand, being one who lived for 62 years in Utah and watched all the attention/money flowing to CA for way too many years while other states starved, and now watching folks exit that state bringing money back to mine (to help our real estate market from collapsing as much as CA’s did), I wonder what might have prevented the “bubbles” and the over-the-top salaries, etc. that accompanied them in CA in the first place? Are there preventative medicines?

I’ve been following several schools of thought in economics and I haven’t figured out who might have an answer. On this site, Henry Liu suggests that we need better regulation of “capital flows” as part of the answer. Maybe. Certainly “hot money” isn’t really the best thing going if it is ever-more-prone to flow into Minsky-like ponzi finance arenas (e.g. CA real estate during bubble times, or worse ill-conceived securitized instruments).

So beyond the kind of after the fact “bailing out” that may have set a stage for even bigger bubbles, that many (including me) chided Greenspan/Bernanke about, how do we deal with the perversities that led us into “irrational exuberance” during the go-go years? Any ideas?

Posted by Dave Iverson | February 11th, 2010 at 7:29 pm

end of comment string

Incidentally, at the end of the comments to that post, is a long, but interesting challenge to the chartalists by "element":
http://www.newdeal20.org/2010/02/11/greece-signs-its-national-suicide-pact-8251/#comment-4447

I suspect that Auerback was trying to make the point that (although he didn't say so) that if there were a free-er market in currencies, then folks would migrate to those that were managed well and leave the others to die or figure out how to better live in the world. I agree with this line of reasoning in theory, but in the world we live in find it poor second-best to the system we now have -- and that is still evolving -- where "big governments" work with one another (and sometimes, against one another) to effect trade, deal with "border issues", etc. with smaller governments embedded in the bigger blocs.

I'm still a believer in government currencies -- even though we've botched it horribly once again as we did in the 1920s - 30s. Incidentally, I do intend sometime to read more of what Hayek had to say about free-market currencies. I think that ultimately, say, three currencies (one Europe-centered, one America-centered, one Asia-centered) might serve the world better than 300 or 3,000. And three might serve better than one, in keeping currency-managers more honest.

Finally, I admire Hyman Minsky's reasoning that governments ought to use both fiscal and monetary policy to effect social betterment. But they ought to be vigilant as to what is going on, and lean against the winds when blowing too strongly in the "irrational euphoria" direction as well as in the "irrational depression" direction. AND: governments ought to be keenly aware of what other governments are doing and effect whatever measures/counter-measures are needed to deal with issues domestically and internationally. This proves doubly true if said government is a "super power" like the US.

[Ralph Musgrave]

I don’t agree with Heilbronner and Bernstein that cutting government debt to zero would be an “unmitigated catastrophe”.

They worry about what pension funds will invest in. Well H & B do not have much of a grip on reality: a substantial proportion of pension schemes already invest in NOTHING! That is, they are what is called “unfunded”: i.e. current pensions are paid for by current contributors. For example the U.K. state pension scheme is totally unfunded, and same goes for a proportion of private pension schemes.

H&B then beg the question with this question: “What will their banks, or businesses, or they themselves use as gilt edged securities?” Well that’s a bit like objecting to the conversion a hundred years ago from sailing ships to steam powered ships with the question “What will steam powered ships use for sails?”

Banks only need government debt where banks are required to hold reserves. If there is no government debt, banks can hold monetary base instead. Indeed, a significant proportion of bank reserves already consist of monetary base.

On the basis of the above, I’ve no intention of running out to buy H & B’s book.

[Vincent Cate]

The MMT guys don't handle bonds in a similar way to how they do taxes and spending. If you fix that then hyperinflation becomes a clear problem in MMT as well.

http://pair.offshore.ai/38yearcycle/#chartalism
http://pair.offshore.ai/38yearcycle/#mmthyperinflation