The Ensuing Chaos

I was at an economics presentation a few days back.  It was one of those things where the speaker had the audience all terrorized and running scared from the national debt, the current size of the deficit and waxing poetic about the budget surpluses generated by the Republican Congress in the late 90’s.  One of the things he said stood out at me:  “The Government can create jobs, but it can’t create wealth.”  I took a moment to assess that statement, and began thinking about vertical and horizontal money.

Bank Credit is what is termed by Chartalism as “horizontal money.” ( This is really a Post-Keynesian concept developed by Basil Moore)  That is to say, when bank credit is created, there is an asset and a liability that are equal.   So within the private sector (Banks, Businesses and Households), when bank credit is created, no “net” financial assets are found or created.  There is no equity.  One person’s asset, or savings, is equal to another person’s debt.

Government spending, however, is “vertical money,” that is, it is dropped into the private sector without a corresponding liability in that sector.  A Government liability adds net financial assets, or equity, into the private sector.  Most people think that Government debt is a liability of the private sector.  This is false.  In fact, it’s just the opposite.  Government debt is an asset of the private sector entity which holds it.

By spending into the economy, the Government “creates wealth.” It creates savings in the private sector which would be absent in a purely private credit economy.  Of course, the Government doesn’t determine the distribution of that savings other than it’s initial expenditure.  Where it ends up is a function of spending and savings decisions by private sector actors.

So it’s important to remember that the overall savings of the private sector will exactly equal the Government overall deficit (total debt).  This is vertical money.  Any other savings which is created by the private sector will be dis-savings of another private sector entity.  This is horizontal money.  It’s a critical concept for understanding our money system.

European leaders announced the latest and greatest solution to their currency problems yesterday. This will kick the can down the road a ways, but ultimately they have not identified the only real solution–true fiscal union with a backstop of the Euro-states by the European Central Bank-which will cause the markets to back down from higher rates on State debt. We will be back talking about problems with the Euro in short order without a doubt.

Greg Mankiw, Harvard professor, and the guy who wrote the book on economics (literally), is in the New York Times yesterday, proclaiming inflation to be right around the corner.  Mankiw begins:

“AS the economy languishes, politicians and pundits are debating what to do next.”  You’re the expert Greg, what should we do next?

“as we search for answers, it is useful to keep in mind those fates that we would like to avoid”

Mankiw then goes on to describe the recent fates of four countries: France, Greece, Japan and Zimbabwe.

He starts with, and brushes over quickly, Zimbabwe, whose currency fell apart in a heap of hyperinflation in 2008.  Mankiw knows we are nothing like Zimbabwe, but it doesn’t hurt to remind the public occasionally of what happens with excess money printing.

He moves on to Japan, whose fits of recession and deflation over the past 20 years have American policy makers wary –rightfully so, in my opinion—of the same thing happening here.  This is why the Obama administration is pushing for fiscal stimulus, he says.  But then quickly warns:

“Yet this fiscal policy comes with its own risks. The more we rely on deficit spending to keep the economy afloat, the more we risk the kind of sovereign debt crisis we have witnessed in Greece over the past year. The Standard & Poor’s downgrade of United States debt over the summer is a portent of what could lie ahead.  In the long run, we have to pay our debts — or face dire consequences.”

And this sums up everything that is wrong with mainstream macroeconomics today, as well as the disgusting fear-mongering and mis-education the media—including the New York Times—engages in to confuse the public and keep them ignorant of the way economics really works.  First off, Greece is a currency user.  They have to tax or borrow their way to Euro’s, while the US is the issuer of the dollar. The notion that sovereign governments can only borrow their currency from private banks is a red herring with no basis in reality. There is no need to tax or borrow our way to dollars, as we can issue as many as we like at no cost.

I find it hard to believe this is a distinction Mankiw is not able to make, as markets around the world have been screaming it for some time now.  The same applies to Japan.  Markets know currency issuers can always pay their debts, and so they trust them and demand their currencies.  Not so for currency users like Greece.  Second, in the 350 year history of the United States, we have always “paid our debts.”  But only one time—with disastrous consequences—did we pay it off completely.  So it’s a nonsensical statement to suggest that we should pay off the national debt. If we did then the private sector would have no savings.  Mankiw likely knows this as well, but saying so doesn’t serve the interests of those who pay him to write fearmongering articles on the dangers of government spending.  These dangers have very little basis in reality.

There is a lot more that is wrong with this article, including trite statements like getting “our fiscal house in order,” and suggesting that if we don’t reform entitlement spending “in the next several decades, taxes will have to rise.”  I don’t know about you, but when we’re 25 million jobs short of full capacity, worrying about whether my tax rate is going to be 10% higher in 20 years seems chiefly the concern of fools and charlatans.

And so Mankiw goes back to teach his macroeconomics at Harvard.  It’s too bad, such prestigious and expensive schools deserve a better education than Mankiw is likely providing their students.

Real median wage growth has been stagnant since the early 1970′s as productivity gains have flowed to the top income earners.  What this is creating is a feedback loop, whereby low income workers –those with a job–cannot buy their production, so sales drop.  Increasing the wage share of national income is going to be necessary for real recovery.

History has proven time and again that policy makers will only consider alternative solutions to existing policy when the people demonstrate en masse.  From the Labor movements of the early 20th century,  to women’s suffrage,  to the Civil Rights Movement, Vietnam and Gay and Lesbian marches of recent memory, all great change starts with people practicing their inherent rights to dissent.

I don’t wish to demonize the honest brokers of Wall St.  Most of them are hard working, not excessively wealthy, and truly working in the best interests of their clients, and to the best of their ability.  But when the crisis took hold, policy makers also made a choice.  They put all their effort and expenditure into helping the financial industry in this country, while all along it was a crisis of Main St.  It was as if they were making an oil change on a car which was also out of gas, and they didn’t realize the tank was empty.

Much of the debate in this country is obscured by dissonance and half-truths.  The mainstream media, economists and politicians want us to believe there is no alternative.  ”We are out of money,” they say, while military operations are launched on a whim, with no congressional approval and at great expense.  ”We can’t pay our debts,” we are told, as if I was so foolish as to believe that.  I know better.  I know that there is a policy agenda which can lead us back to prosperity in short order, and with little collateral damage, either for the upper or lower classes. For Wall St. and Main St.  What we are doing now is no solution.  It is allowing entrenched unemployment, poverty and mental illness take hold of our country on an unprecedented scale.

That is why I support Occupy Wall St. and hope to see it prosper and grow.  So that policy makers will see an alternative and act on it, for their sake, and for their country.