L. Randall Wray - Modern Money Theory for Beginners

so I tried to put together a show with the minimum number of slides to provide a basic introduction unfortunately it's still kind of long I'll have to move a little bit quickly through some of them to get done in time and I will try to watch the time but you can get a copy of the slides afterwards in case I go a little bit too fast for you let me start off with the way that everybody is introduced to money whether you studied economics or not I'm sure you got this story I can remember when my daughter was in first grade and she came to me and told me this story and I said well actually that's not quite right that yes it is daddy that's what the teacher said so you get it from a very young age it begins with barter we've got Robinson Crusoe he's shipwrecked he meets Friday Crusoe knows how to grow grain Friday knows how to fish so they barter but this can be very inconvenient because it requires that on the day that a Friday wants to deliver a fish Crusoe actually wants a fish and he's willing to trade grain for it so the story is that it requires a double coincidence of wants so it's inconvenient they search around for something to act as a medium of exchange they might begin with seashells but through some evolutionary process they end up with gold which has some nice characteristics that make it a very good medium of exchange it's very valuable it doesn't rot and on and on and on so this greatly reduces the transactions costs involved in barter there is one problem with gold it is extremely valuable you got to worry about people who will try to take away your gold stock so you start storing it with Goldsmith's the Goldsmith's already had that problem they had to protect the gold stock that they're using to make jewelry they have safes and so on and so would deposit your gold with the gold stuff with the goldsmith the goldsmith gives you a receipt people discover that they actually can use those receipts and payments rather than using the gold because individuals who accept them know that they can go get the gold out of the Goldsmith's safe whenever they want the Goldsmith in turn realizes that he actually doesn't have to keep the gold in the safe he only needs to keep a little bit because those receipts are not all gonna come back on the same day okay so he discovers what we now call the deposit expansion process you can issue lots of receipts and hold just a little bit of gold maybe 10% for safekeeping to redeem on demand those Goldsmith's become the banks so that's the story in the conventional approach the money supply is exogenous I'm getting into a little higher level of analysis now this is what you would get in your money in banking textbook with that has a multiplier because you only have to keep 10% of reserves for withdrawals and for clearing with other banks on hand so we get a money multiplier the idea is that the central bank that issues the reserve can control the quantity of money that's created by controlling the quantity of reserves that they supply so there was a belief for a very long time really pushed by Milton Friedman and other monetarists the central banks can and should control the rate of growth of money supply in order to control inflation and so for a long time the idea was we will target money supply really nobody who understands how banks and central banks operate believes that anymore all the major central banks around the world have moved away from money targeting toward interest rate targeting but the goal is still the same the idea is that the central bank because it is the issuer Irv's can control the price of the reserves that it issues and thereby control the interest rates and that allows it to continue to fight inflation even though it's recognized they can't control the money supply okay what is money in this view I want to say something about the nature of money and I'm going to contrast it with the MMT view money comes about to lubricate the market it's more efficient than barter specific money denominated assets fulfill that function medium of exchange exactly which kinds of things fulfill that function changes over time for a very long time it was supposedly was gold okay but gradually we have changed those money things that fulfill that function but still today the focus is on money as a medium of exchange there are other functions that money serves but those derived from the medium of exchange function so medium of exchange is the most important function of money continuing on in the textbooks so in every macroeconomics textbook within the first two or three chapters you're going to get a picture like this one the circular flow diagram okay and this is focusing on the use of money as a medium of exchange in something like a real capitalist economy the firm's higher the factor services they need to pay wages to households the households use those wages to buy the output of the firm's so the money moves in a flow between households and firms in this very simple economy if you think about it for a minute and if you ever asked your teacher where did the firm's get the money that they use to pay the wages to the household they say oh well the firm's use the money that they get when the households buy the consumer goods that the firms produce oh okay where did the households get the money well they got it from the firms that pay their wages you can see that this is a circular argument with an infinite regress there is no story of how the money got into the economy okay you finally move on to somewhere around chapter 9 where you start studying money and banking in your macro textbook and they put financial institutions into the circular flow now this one is more complicated because we also have the government we have the foreign sector and so on but the point is that now we've got banks in the story the banks lend to firms which use the loans to invest okay the payments go to the workers and the investment Goods sector that are producing the investment goods they can use that money to either save or to consume their savings in the banks gets lent out to the firm's to finance their investment so the banks are intermediaries between savers and investors so you ask the question where did the money come from well the bank's got it from the savers so that they can lend it to the firms where do the households get the money well they got it from the firm's who are spending on production of the investment goods it's the same infinite regress the same circular flow okay a circular argument there is really no story of how the money got into the economy okay what is wrong with this Orthodox story I know that I am being very quick explaining the dominant paradigm on money and banking but what's wrong with it first there's actually no evidence of barter based markets I don't know if any of you have read David Graeber book this was just a fantastic success and unimaginable success det the first 5,000 years everybody bought this book okay it was a runaway bestseller it's like 5,000 pages long it's the kind of book everybody buys and probably hardly anybody reads including me I've got it on my shelf maybe when I retire I'll finally get the time to read it okay but what David shows is that as when we look around the world as far back as we go you just do not find any economies anywhere based on barter they just do not exist and what we actually find when we look at history and I knew this long long long before Graber is that money actually pre-exists markets money was not invented as a transactions cost minimizing device for markets that already existed money pre-exists markets okay money is as old as writing how do we know that the very first written records are all about money okay basically writing was not invented by poets it was invented by accountants to keep track of money values so money exists before markets so there's something wrong with that part of the story and even the Austrians who pushed for a very long time this barter story they now admit that once you get beyond about ten people and ten different commodities it's very hard for market higgling and haggling to settle on a a single commodity that will serve as money if you're talking about many commodities and many people involved unless you had modern computing power you're not going to select a single commodity to serve as your money commodity and finally from the very beginning the evidence shows that authorities were always involved in the monetary system in creating the monies of account I'll come back to so authorities were always there it wasn't Robinson Crusoe and Friday that invented money it came out of the authorities another problem story is modern money has no intrinsic value this is a little bit hard to explain when your whole story was about choosing a commodity that was very valuable that could serve as your money commodity okay today's monies are not attached to any commodities they have no intrinsic values and neither did ancient money in spite of the goldsmith story as far back as you go the money things did not have intrinsic values usually okay there's an infinite regress problem what people will do then is they say well yes in the past it was gold that gave money value but today it is trust asking what is the trust and the money they say well I trust that Billy Bob will take it from me in payment I trust I can go to the grocery store and someone will take it okay in my view that's a very thin argument to base the most important institution we have in modern economies which is money on trust and also there is no circular flow they can explain where the money comes from how does it get into the economy so I'm going to present an alternative it's sort of a summary of the topics that I'll cover origins in nature the role of the state the role of taxes what sovereign currencies are all about and what that has to do with fiscal policy okay if you look at what archeology is found and what anthropologists have found we can start with this one so this is fifty thousand years old this was some kind of humans and if you can see it from your seat they have put scratch marks in there it's a rock they put scratch marks in that so archaeologists have dug sup and they can date it okay what is it we don't know they're keeping track of something we don't know what it is over here sorry this is five hundred thousand years fifty thousand years those bones harder for you to see from the seat but you can look at it later much more complicated scratch marks on it keeping track of something fifty thousand years ago what did they keep track of we don't know okay let's dug out of the ground they didn't leave a written record because there was no writing clay balls which are gradually transformed into the cuneiform tablets what are those okay five thousand years we know we can read them it's all about money and debts it's keeping track of money and debts okay we can read those things what are these does anyone know they're made of wood they are tally sticks tally sticks we still use the terms stock and stub tally sticks were Hazelwood sticks that put the hash marks that look an awful lot like the bones they're fifty thousand years old okay these were used in Europe until 1919 tally sticks hash marks innum split into stock and stub this is how most European Kings spent they spent tally sticks they didn't spend coins they spent tally sticks the majority of their spending and the majority of their tax revenue was in the form of tally sticks why did you split them to stop counterfeiters when you paid your taxes they had to literally match the stock and stub to make sure you didn't cut a few or hash marks we still use the terms what's a score four score and twenty sorry four score and seven years ago score it's twenty twenty pounds it was a thick cut in the stick that's a score Raisa tally all the Americans have heard that term Raisa tally okay it means go out and cut some tally sticks off the trees that's how the king raised revenue okay so where do money come from we do not know and we will not know nobody sat down and wrote a memo today I invented money in this house this is how I did it we're not gonna find that because money pre-existed writing as I said the first writing already is talking about money so we're not gonna know we have to speculate the most convincing speculating I've ever seen is done by the most famous coin collector in the world who's I mean he beyond collecting studied coins was a guy named Philip Grierson at University of Cambridge in England when he died he donated all the coins which were worth a fortune to the University of Cambridge he speculated that actually money came out of the ancient tribal practice that's called vert gild now that was applied to the Germans Roman society was civilized Germany was still a tribal society the Romans studied the German tribal society so we know a lot about how it functioned but anthropologists find that every tribal society they come across also has this very geld tradition if you cause an injury to someone else okay here whoops killed the guy a fine is imposed on you and you have to pay a fine to the victim's family okay these fines were in kind it would depend on what the injury was that would determine what you had to pay whether it's a goat or a cow or a horse or sheep or chicken Oh as far back as there was tribal society and humans came out of tribal society so it's as old as humans okay when did they come up with the idea and why did they come up with it we don't know when but it's obvious why they did it to stop blood feuds otherwise you have the Hatfields and the McCoys killing each other so this is to stop retribution you had to pay a fine so Grierson's notion was that the concept of valuing things came out of the very guild tradition it was a huge jump because very guild you pay a cow versus a chicken depending on the damages you had done money allows you to compare those things Oh chick it takes a hundred chickens value to equal one cow he thinks that's where money came from it's a big intellectual jump bigger than any measuring jump we had ever done before because the measurements before money always were length what's the link foot whose foot the King's foot okay or cubed and so on those were those are relatively easy now a hint is that every ancient money unit was the name of a great grain weight unit shekel lira pound those are all weight units they all came out of measuring grain so someone had the idea let's use the grain measurement in order to measure the value of everything by Babylonian times this is exactly what they did and then the price lists the equivalents to the mina which was a grain weight unit was posted at the temple that is how you knew the value of everything it was set by the temple's authorities I'll come back to religion because it's important for money okay alternative what is money yeah I will it is a state monopoly it is a social unit of measurement if you're in America you can point to anything you can ask people what is that worth they're not gonna tell you in terms of chickens they're gonna tell you in terms of dollars almost everything can be valued in terms of dollars now not quite everything but as capitalism develops a greater and greater range of things are measured in terms of money it is a state money of account almost without exception the money unit of account that we use comes from the state every time a new country is formed it chooses its own money of account why did we get the dollar in the u.s. because we didn't want the pound okay we just revolted we chose the dollar and we modeled our currency after the Spanish currency to thumb our nose is it England and then we have money records there's a hierarchy of these IOUs denominated in the state money of account there is bank money okay and there are your io u--'s they're all denominated in the US dollar in America the form that they take depends on technology I'll come back to this paper money coin money electronic money that is just the technological way of recording the tally sticks it might seem like that's a pretty primitive technology but actually the tally sticks were a very advanced technology it was hard to counterfeit the problem with early coins and early paper money was counterfeiting wasn't all that hard to do counterfeiting was a tremendous problem when paper money started to be used okay a lot of the technological advance is to reduce counterfeiting what backs up our money today when I first started teaching the majority of the students in the class would say gold now this was in the early 80s okay we had gone off gold under Richard Nixon so it was all read a decade that we had completely abandoned gold it wasn't true then today students rarely raise their hand because they all listen to Ron Paul who wants to go back to gold and they know that we're not on gold okay so now it's very obvious so I like to take the notes out and read what it says on the note okay and probably you've all seen this on dollar bills says this note is legal tender for all debts public private Canadian dollar Australian dollar okay they all say virtually the same thing so a lot of yourself it's legal tender laws but you know that that's false okay when it says it's legal tender for all debts public and private you many times your cash is refusing not you don't take cash right so it's just not true and there are plenty of currencies that never had legal tender laws what does the British Pound say well they don't have pound notes so you have to look at a five pound eye this is the picture of the Queen and this is what she's telling you I promise to pay the bearer on demand the sum of five pounds what does that mean you take a five pound note to the Queen she will give you a five pound note that's what it means it's five pounds okay that's all it says the older people will remember who this is alternative the use of the currency and value money are based on the power of the issuing authority not on the intrinsic value okay the currency does not have to have any intrinsic value it's based on the power of the issuing authority the the currency itself R is a record of debts whether it's printed on paper or stamped on a coin it's a record of a debt it is a promise to redeem and I'll say more about what Redemption means the state played the central role in the evolution of money from the very beginning it always has played the central role what we typically find when we look around the world today and we look back as far back as we can go about five to six thousand years into the past what we find is the one state or one nation one currency rule each nation or state has its own currency when the Soviet Union falls apart every one of the former members chooses its own currency okay in the past the exceptions to this rule were extremely small and virtually irrelevant the Vatican state used the Italian lira okay that was an exception minor the only major exception to this rule is euro land it was an experiment in an exception and it's been disastrous okay before the euro this is what we find it's not a coincidence it's tied up with sovereign power political independence and fiscal authority this is why every new nation adopts own currency and finally taxes drive money taxes are what gives value it's money it is the power to impose taxes that is the important sovereign power that assures the currency has value I'll say more about this too okay you don't have to take my word for it you can take the written records at the time okay let's look at the colony of Virginia the colonies were not allowed to coin the colonies had to use the crowns coins okay the colonies were always short of money in order to to hire the armies to fight the Indians and the French Canadians so they started issuing paper money's okay paper money was created and directly spent by the legislature every paper money included a new tax so when they passed a law to authorize printing ten thousand pounds Virginia pounds they also impose a tax that they expected would raise ten thousand pounds they imposed the tax the same time that they issued the notes now why would they impose a tax because it created a demand for those notes the colonial regular people had severe shortage of coins too they couldn't have paid the new tax with the coins there's not enough now they they were allowed to pay taxes with coins of course the Virginia colonial government was glad to have the coins okay but they typically paid most of the tax in the form of notes when the colonial legislature received the tax revenue what did they do with it they burned it they did not spend their tax revenue they burned it so as the notes come in they burn them what did the King of England do when the tally sticks came in and tax payments burn them you always burn your tax revenue you do not spend tax revenue you burn it in fact they finally outlawed the use of tally sticks in England and around 1840 all the tally sticks were brought in and the the people at the Exchequer which is the Treasury the IRS they were so glad they didn't have to use tally sticks anymore matching them they threw them all into the stoves at the same time they burned down Parliament there's a very famous painting of parliament burning down it's because they burned the tally sticks okay anyway so anyway the revenues received were burned the notes that were not received remained out and were used in the markets and actually were preferred over the coins people preferred to use the notes rather than the coins okay the taxes were paid in notes or specie about 3/4 of the taxes were paid with notes and one quarter were paid with the coins the this tax that was imposed by the legislature when they issue the notes was called a Redemption tax it was called a Redemption tax ok that's written right into the law they knew what they were doing the purpose of the tax is to redeem the notes it gives a demand for the notes and then the notes are brought back and burned that prevents them from causing inflation the purpose of the tax was to get most of the notes out so there wouldn't be any inflation Adam Smith 1776 wrote about this you know there's a strange thing going on in the colonies they're issuing paper money but it retains its value as long as they don't issue too much of it okay so you use the taxes to make sure they don't stay out there and cause inflation another example this one's a little bit different okay this is the Yap Islands and economists use this as an example all the time of primitive people using money that is a commodity so they decided to use these stone wheels as money to reduce the transactions costs of barter nobody's laughing here's how tall they are here's their coin okay when you want to go to the market to buy a fat pig you have to get 10 strong guys you put a log through here you pick it up and you carry it to the market and you buy a pig that reduce the transactions costs it turns out on the Yap Islands they don't have any stones like this they have to get their dugout canoes they paddle across open ocean 200 miles to go get the stone they carve it they put it on the canoe and they try to paddle back and a lot of the stones the canoe flips over and they end up on the bottom of the ocean but when the Yap Islanders consider their wealth of stones they include all the ones that fell on the bottom because it doesn't matter they know they still have them I mean they don't have them on the island but they know where they are more or less they can't get them but it doesn't matter okay so anyway economist wrote this up as this is primitive money okay they don't tell you the second part of the story so the Germans are trying to colonize the Yap Islands the Germans want some roads built so they go to the island you know and they say hey we need the road built we'll we'll pay you currency to build the road and I don't know what the German currency then was but let's say it's the mark you know well pay you five marks an hour to build the road the Yap Islanders look at them like they're crazy say you want me to work for pieces of paper and of course the Germans look at them like they're crazy you guys are so lazy you won't even work for money okay so they wouldn't work for the German currency so some bright colonial governor said I know what we'll do go through with a can of black paint and paint a big axon about half of the stones so that's what they did so they go through they paint a black X and the Islanders say what's going on say well we tax those okay those are ours now how can we get them back say well you build a road so they reverse the sequence but the tax the tax turned these into money they were not money before they were what we call primitive valuables all tribal society as primitive valuables they're usually things that are completely useless and that's on purpose and then they attach great ceremonial value to them okay so this is a typical tribal thing that Europeans could not conceive of so they thought they must be money but they were turned into money only by attacks that the colonial government put on them okay again you don't have to believe me here is Beardsley rummel I'm not gonna read the whole quote bearsy trauma was an extremely important person he was the chairman of the New York Fed they used the New York Fed used to be called chairman not president okay that was the indicate how he was more important than the chairman of the Fed okay still is but we pretend like it's Janet Yellen okay so anyway he writes an article at the end of the war and the title the article is taxes for revenue is obsolete we do not need tax for revenue we need them for other purposes we need them to fight inflation we need them to change people's behavior so we tax cigarettes and so on we don't need them for revenue purposes he says that is what the war taught us and the people okay how did it teach us that we were running budget deficits of 25 percent of GDP with no negative impacts on the economy at all okay here's an exchange between the head of the Fed so this one is the chairman of the Fed and right Pakman who was an important representative the during the war the Fed bought lots of government bonds to keep the interest rate near zero okay and so here's Pavan how did the government sorry how did you the Fed get the money to buy those two billion of government securities 2 billion sounds like little now but it was a lot back then we created it out of what out of the right to issue money credit and there's nothing behind it except the government's credit well we have the government bonds that's right that's good was credit in other words the only thing you have is another government debt okay so we've created money that is a government debt and all that stands behind it is another government debt so they go on Patman do you believe that people should pay their debts generally when they can I think it depends a good deal upon the individual but of course if there were no debt in our money system there wouldn't be any money whoops sorry I'm proud to show you there wouldn't be any money mr. Patman suppose everybody paid their debts would we have any money to do business on ok and of course the answer is no if everybody repaid their debt there would be no money mr. Eccles says he sees what directions I says that's correct in other words our system is based entirely on debt ok yes it is or finally here's Bernanke the the Fed lent and spent about 34 trillion to save Wall Street 34 trillion dollars so he's interviewed on 60 minutes is that tax money the Fed is spending you notice is virtually identical to what was asked at the end of World War two it's not tax money we simply use the computer to mark up the size of the account if they have somebody at the Fed who has a finger that is how they do it keystrokes it's just keystrokes that's how you do it okay I think I'm gonna skip over some history of thought here implications fiat money is not worthless it's valuable due to the state's promise to redeem it in payments to the state you can find this in the economic literature the very best place to start is with a Mitchell Ennis who was the Queen's ambassador to Washington he was an autodidactic he wrote something on beekeeping and then he wrote the two best articles ever written on money okay how we figured it out I have no idea Keynes reviewed it and said we might quibble with some of the details but the argument is sound okay money and dad are linked debts are denominated in the state money of account my professor Minsky used to always say anybody can create money the problem is to get it accepted creating money is a matter of writing I owe you five dollars your problem is to get somebody to accept that now banks have an easy time you have a harder time all monies are created as liabilities are the issuers and here's the key point that Ennis makes all issuers must accept their own liabilities back in payment if you refuse to accept it you have defaulted why was the Bank of England created the king defaulted on his tally sticks one of the King George's I don't remember which number he defaulted on his tally sticks so they had to create the Bank of England because nobody trusted that King anymore okay he refused to accept back his own tally sticks in payment all money is credit money the state money approach might appear to be inconsistent with the credit money approach but even state money is credit money the state's money is the government's debt the government's IOU and they must accept it back in payment Redemption then means delivering an IOU in payment to its issuer all right it doesn't matter whether the IOU is printed on a gold coin or printed on paper it's an IOU okay it doesn't need to have any intrinsic value or not but even if it does it is still an IOU so sovereignty is a set of institutions there are many other aspects of sovereignty but the important one for money is that the sovereign has the power to impose fees fines taxes and to a name what it will accept in payment of those obligations to the state when the fees fines and taxes are paid the currency is redeemed its accepted back by the sovereign issuer some sovereigns also agree to redeem their io u--'s for gold when you're on a gold standard but that's not necessary now we know it's not necessary because we gave it up a long time ago skip through that so in almost all religions debt is a sin but being a creditor is an equal sin okay so your sinful on either side of the equation the debts are paid by delivering back an IOU to the issuer's that is what we call Redemption these terms of course came from religion because money came out of the temples so it's not a coincidence that many of the terms we use when we talk about money are terms we use when we talk about religion I'm gonna say you can read this slide on your own which comes first creation or redemption you've got to create first before you can redeem if you aren't in debt you can't redeem yourself Redemption can't come first debt has to come first government has to spend first which is getting him the government itself in debt before the government can redeem itself collect back in taxes the colonial governments had to spend the notes before they can collect them they have to be in sinful debt before they can be redeemed this is true for everybody government bank household you can't redeem your debts until you have created the debts so how does the government really spend okay things are more complicated than they used to be our government does not spend paper money into existence the paper money is issued only because you go to an ATM machine and make withdrawals our government doesn't spend the way the government's always had spent in the past why because there are two things in between you and the government one is your bank and the other is the government's bank which we call the central bank okay so you are what do you say three degrees of separation away from the government the government imposes a tax on you but you pay taxes by writing a check or electronic deduction from your bank account the central bank D Ducks your bank's reserves and credits the Treasury's account at the central bank when the Treasury wants to spend it cuts a check when you deposit it in your bank your bank credits your account sends the cheque on to the Fed the Fed credits your bank's reserves and then debits the Treasury's account at the central bank okay so it's more complicated and it's more complicated than that because we have a whole bunch of what are called tax and loan accounts and special depositories and so on and so on and so on that complicates the procedures and makes it a lot harder to see how things actually work but the logic remains it's still the same you can't deduct reserves from banks unless they have them they can only get them from the government so the government either has to spend or lend the reserves before the banks can have their reserves debited when you make your tax payments all the logic remains one of the first things that mmt did was to get into the details of how everything operates today which I can tell you no economist knew none before we looked into it now of course there were people at the Treasury and the Fed who knew because they had to do it okay but academic economists had no idea how the government really spent some of our earliest articles 20 years ago were how does the government really spend so we have gone through all the details and we've done it for other countries too and it's the same okay I mean minor detail changes but otherwise it's the same policy implications government cannot go bankrupt in its own currency it can issue more through keystrokes it can make all payments on government bonds through keystrokes okay you don't take that money away from taxpayers as Bernanke explained how did they spend and Len thirty four trillion dollars to save Wall Street it was all keystrokes there is no limit the government can always afford to buy anything for sale if there are unemployed people around the government can always afford to get them jobs and pay their wages the only economic constraints government faces are full employment resources once you've employed all of them okay except for imports the resources are already all used and any further spending will be inflationary okay so full employment and then an inflation constraint other constraints are political so during the global financial crisis Obama comes in okay and things are getting worse and worse and worse and worse and Obama wanted to spend more okay we finally got a fiscal stimulus package of 800 billion which was 400 billion spread over two years okay four hundred billion and then for inability any economist who study the economy other than extremely ideological ones knew that wasn't enough Obama knew it wasn't enough so he goes on TV and What did he say we're out of money we would like to do more but we ran out okay we're on an unsustainable debt path okay this is what many condoms were claiming we gotta borrow from the Chinese we ran out of money so we're gonna we got to get the dollars from Beijing which is ridiculous if you think about it the dollar all dollars came from the United States will become Weimar or Zimbabwe hyperinflation and look at euro land that could happen to us will be just like the next Greece burden our grandkids all the stuff all of this is false it's absolutely false okay none of this could possibly happen Paul Samuelson who was the most important textbook writer for your grandparents was interviewed in 1974 it's very interesting interview you can find it on the web interviewed by Mark black blog he says I think there's an element of truth in the superstition that the budget must be balanced here he said at all times but later in the interview he's talking about balancing the budget over the cycle and he said it's like the old fashioned religion was to scare people by sometimes what might be regarded as myths so the purpose of these kinds of statements is to scare you that is the purpose it's not true it's a superstition it's like old-time religion we know it's not true but economists you know are in the business of dishonesty because we got to scare you this Paul Samuelson who was the greatest according to many greatest economist here's the st. Louis fad the st. Louis Fed is the second most conservative fed in the United States it's the home of Milton Friedman's monetarism here's the same Lewis fan I won't read it all you can read the quote and what they say is the government can never run out of dollars it can never be forced to default it can never be forced to miss a payment it is actually never subject to the whims of bondage a lot days all of that is false this is the same Lewis fed Greenspan said the same thing when he was asked will Social Security really go broke he said no of course not the government has this thing called a printing press okay we don't use a printing press he should have said we have this thing called the computer and it has keys on it we can't run out King of France I'm afraid I'm gonna have to skip the sexual bouncy which is very interesting but let me conclude so there are two views on the origins which all the origins of money story that you adopt tells you what you think the nature of money is okay do the Orthodox economist really believe Robinson Crusoe story probably not they tell that story because it focuses your attention on what they want you to focus your attention on the idea of markets and money as a medium of exchange okay the alternative to that is a social relations story very Gill debt role of the authorities choosing a money of account the state money the currency and taxes drive money again the story of the origins we don't know this the truth okay but very geld focus your attention on debt okay it's in the nature of money that it must be debt there's a movement now called debt-free money it's a non sequitur it's impossible money is debt bitcoins are not money can't be money money is not primarily a medium of exchange money is a state monopoly a unit of account driven by obligations to the state typically now it's taxes banks make payments for their customers and bank IOUs that are denominated in the state's money deficit spending creates financial wealth that's the part I didn't get to do the sectoral balanced approach and a sovereign cannot run out of its own IO use so I'll stop there and hope we have time for questions money is a debt denominated in the money of account and it's almost always state money of account even the few possible exceptions to that it is still a socially determined money of account now you could choose your own money of account say okay my money of account is glocks well the problem for you is you got to get other people to accept it right having your own idiosyncratic measure of value is not gonna be accepted so at all it comes from the authorities and since the development of nation-states it always comes from the nation-state even if you are a country say Ecuador that adopts the US dollar you're still choosing a national money of account you've just chosen to give sovereignty to the US rather than to your own country once you reach full employment if you continue to increase government spending you're gonna be trying to bid resources away that are already employed and if the private sector can match you then you get into a bidding war and you will drive up prices you can cause inflation in fact and you will cause inflation if you reach full employment and you continue trying to increase spending you can get inflation before full employment which is something that Keynes ian's didn't realize in the 60s depending on what you're spending on okay so whether there's you know six eight percent unemployment out there but if what you're doing is picking off say the high trained engineers and so on you can cause inflation long before you get those six to eight percent employed because they don't have the skills the government as is hiring so you can get inflation even before full employment okay so we admit that I mean and we warned about it that that's what Beardsley Rummel was saying okay taxes are to fight inflation so if you're going to continue to increase government spending you also need to raise taxes because what the taxes will do is reduce the private sectors ability to compete with you so what do you do in wartime you raise taxes you try patriotic saving you put rationing on all of those are to prevent inflation we know how to do it now there are no cake zero of modern developed capitalist countries using their own currency who get hyperinflation zero hyperinflation is extremely rare phenomenon and you you can list the three of them okay that have happened that everybody knows about so everyone is worrying about something that is extremely rare and when you look at the causes of the hyperinflations it had nothing to do with government deficits what was Germany's problem war reparations and the seizure by France of most of their industrial sector so they had to make reparations they were not able they would have had a export almost all of their output in order to get the pounds and gold they needed to make the payments okay so they did print money but they already had these conditions put on them okay so now the government of course is worried about the population and the government needs to make the payments so a deficit resulted because of this if you look at the deficits what the government is trying to do is to keep up with the rate of price increase because when you have high inflation your tax revenue will never keep up because taxes are always calculated after the fact and if prices can go up by a hundred percent per day and your taxes are collected maybe every quarter by the time you are collecting taxes it's on income that is in a currency that was you know ten times more valuable than it is today so a deficit will result in those conditions when you look at Zimbabwe what you find that this was a result of a collapse of their agriculture because they had possibly very good intentions of land reform they put the land into the hands of people who could not produce as much output so it was this a collapse of supply in both of those cases really it's a collapse of supply because the production had to go to pay war reparation case wrote about this right at the end of World War one he said if you if you the Allies put these payments on Germany okay they can't possibly make those payments and his first famous book he was absolutely right so it was predictable and it was foreseen what was going to happen okay so the hyperinflations are evidence of other problems they are not evidence of budget deficits budget deficits will occur just because everything the government is buying is gonna be going up in price at the rate of inflation and their tax revenue lags way behind so in in the United States and every country I know of we have a budgeting process what does the budget do it limits it puts limits on the spending now some kinds of spending are a bit more open-ended because of its unemployment compensation you can't predict exactly how many people are gonna be unemployed and in a downturn that spinning will go up but it is limited because the people have to qualify right something like one third of American workers will qualify for unemployment compensation if they lose their jobs through no fault of their own and so it's limited by that there's always a limit okay in addition to that the US alone has an absolutely crazy limit it's called the debt limit we're the only country that does this okay that one in the past never proved to be a limit because Congress always raised the limit every time routinely they would just raise the limit but then the Republicans decided they could get a lot of political capital out of postponing the approval so they could make even though you've already budgeted all the social programs and they agreed to the budget they think they get a second chance to get rid of some social programs that they don't like so they always try to do this so it became a political issue but yes you need limits okay and if you're moving into a situation where the government is going to need a lot more resources so typical it's war but it wouldn't have to be war let's say that Trump was serious when he proposed infrastructure okay well now if the government is going and we need about three trillion just so we have safe infrastructure to to catch up and keep pace with the Chinese it's probably more like five or six trillion dollars now if we were to go out in a campaign to do what China is doing we're gonna be bidding away you know the whole construction sector of the economy in order to try to catch up to China that's gonna be very inflationary so we would have to put rationing on the private sector say sorry no more Trump Towers because we're gonna do infrastructure now so you would have to ration it all right but the the fact is that outside of World War two the US has never been close to capacity never we have never had a problem of excessive demand we've never even had a problem in the labor markets in Europe possibly they achieved full employment and did get inflation because the labor marks were too tight us we've never had that we've always had plenty of unemployed people okay so what you had to do was target your spending because if you spend all of it on aerospace and military you'll cause inflation long before you run out of resources you just run out of the kind of resources your your bike we always could have spent more government money but we needed to target it at the unemployed not targeting at the most unionized workers with the highest skills and the highest pay which is what we always did everything I said about modern money theory applies to every country in the world that she's its own currency and doesn't pay gets exchanged rate everything I just said applies to them to every virtually every country in the world has a big government debt ours is not big relative to many other countries in the world ok japanses was three times bigger ours is growing maybe two and a half times bigger than ours relative of the size of the economy ours is not big Americans have this conception we have a big government debt but it's not true it's because the media and Republicans harp on this all the time but it's just not true okay so why don't we do more I think is the right way all of us should do more the countries that don't have big government debts and budget deficits are exporting countries exporters can get away without government deficits the reason is because they get their demand from other countries so China their central government can run a balanced budget okay Singapore can run a budget surplus because their demand comes from abroad and that keeps their economy growing even though their government is actually draining the economy so that is the only exception if you are a current account surplus country you don't need a budget deficit but all other countries have them we actually were gonna subtitle ours we're not doing it a government centered approach because every other textbook the government comes in in chapter 10 right you see that's pretty bizarre because the government is by far the biggest entity in the economy by far nothing comes close to the size of the government okay and the government is the issuer of the currency and you wait till chapter 10 to tell the students oh by the way there's this thing called government - that is very bizarre of course you should start with the government it's got to be there in chapter 1 it's the most important thing about our economy ok and although everyone said well but now we're a free-market capitalist counting the governments of capitalist economies tend to be much bigger than the governments of pre capitalist economies capitalist economies need big government's tends to be true that as you go down when you rank countries by size of government as you go down when you get to the ones with government's smaller than ours they do not work well so Mexico has a government is about 13% of the economy is Mexico more successful economy than the United States which has a federal government about 20 to 25 percent of the economy almost twice as big No France has a government is 50 percent of the economy France used to work pretty well before they gave up their currency so anyway the governments of capitalist economies are big and there's a reason for it the medieval European governments were tiny tiny little things okay now there are exceptions Rome had a big government i I don't really have an opinion on that you see very well performing economies say the United States until about the mid 70s performed very well and it's a it was the biggest economy in the world and it performed very well the Chinese economy now is probably the biggest in the world and by many measures it performs like the world has never seen before the world has never seen anything like China before okay now there there have been other miracle economies the Italian economy in the 60s grew at 7% per year but China started from very very poor underdeveloped economy I don't know how many of you been there it is absolutely amazing what you see that's why I said where we need six trillion of infrastructure we're going to be left so far behind so I I don't know small economy some small economies also do very well so I'm not sure that it's an economic issue it might be a political issue it might be that you can get more cohesive politics when you have small economies as small well nations maybe it's not an economic factor it's a political factor not in most are not there anymore not anymore ten years ago yeah no but they they are developed further and further west you land in a city I'm not saying the Far West but well away from the east and the cities a few years old and it's 8 million people and you've never heard of it and they've got subways and they've got you when you fly in it makes Manhattan look tiny tiny tiny with tiny little buildings compared to what they will have out in the middle of nowhere in China they they are transitioning so I think they have about 40% of rural and they tend to be older and China has decided that it is much they can provide much better services to the elderly if they get them out of the rural areas and so there is a transition process and they have not figured this out yet I know my wife is Chinese I go to China all the time I I see the problems you're talking about China has big problems and they're trying to solve them I was focusing on how quickly they have developed from you know horse carts to now you go to a train station and they have 25 bullet trains sitting there ready to go they everyone is full always always in fact more than four and they're going 300 kilometres an hour the train stations the airports you've seen nothing like this if you've ever used JFK and then you go to Beijing which has three airports you will be absolutely amazed and yes you know who is flying in China well it's a lot like the way the United States was twenty years ago yeah you're talking about people with more money and educated you go to the center of cities and everybody's driving cars that are a hundred thousand dollars because they cost twice as much there but they're all luxury cars in inflation in the u.s. is under two percent now for senior let me finish for seniors inflation is higher than that okay Social Security the colas are not taking account of the prices seniors pay and they need to adjust that and the the lower income so Social Security is based on your income over your working life at the lower income levels the Social Security that you will get a retirement is not nearly sufficient okay those are problems can we solve those of course we can is it affordable of course it is so what I am Telling You actually gives you the solution if you take the Orthodox approach there really is no solution because they believe we're very constrained we have to take more from working aged people and young folks to take care of the retirees they they have created this whole story of intergenerational warfare and they're trying to turn young people against Social Security saying you guys will never get it as good as old people now Social Security is going broke we would have to raise your taxes to twenty five percent just the payroll part in order to take care of seniors it's all false completely false we don't have to do any of that the only thing that really matters is our of capacity if that grows young people today will have a better retirement then people are now okay as long as our productive capacity continues to grow if it grows at a normal pace their standard of living should be between two and four times greater then retirees today without any changes to Social Security just making the commitments we already promised to them all right but we got people running around trying to tell all the young people that Social Security is a bad deal we need to get rid of it they should have their own private retirement plans okay so they can lose all their money in the stock market and end up living in poverty in their old age okay that's the mainstream story my story is completely different affordability is not the issue okay productive capacity is the issue and by not spending now we will not have the productive capacity in the future if we continue to just let everything deteriorate we won't be able to take care of seniors in the future I think Martin needs to talk [Applause]

Channel: St. Francis College

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Id: E5JTn7GS4oA

Length: 70min 19sec (4219 seconds)

Published: Wed Apr 25 2018