Money is power. And so like those other loci of power, politics, tribalism, and religion, the discussion can sometimes obscure rather than illuminate the facts and issues, such being the emotional state of people.
The discussion can sometimes become very heated, and very particular over the finer points, in a vacuum. A system becomes rigorous and hardened by usage, and effete and elaborate the longer it is parked on the bench.
I am thinking of course of the recent case of Krugman v. Sachs. It tends to strike someone outside their sacred profession as a nerdish slap fight. There are no quarrels so petty and yet so vicious as those in the faculty departments, precisely because there is so much and yet so little at stake. It is where people who are essentially without the power to implement their ideas in the real world must leverage the power of their reputations.
I will not get into the specifics of this particular squabble, except to say that out of frustration Sachs was needlessly provocative in penning an op-ed in collaboration with a deficit hawk. And Krugman has been similarly provocative, out of frustration, in answering objections to deficits by ardent austerians by saying things like 'deficits don't matter' in public forums. Yes, yes he modifies this in the footnotes. But he lowers himself to the level of economic luddites and that is a mistake.
This lowering of the discussion is an understandable outcome given the staged performances, little more than wrestling matches pitting talking head against sound bite adversary, that passes for information on the Sunday morning talking shows and the mainstream news. It is the age of not of reason, but spectacle.
I suggest that the real reason that Krugman and Sachs are 'at each other' is because the standard bearer of the progressives is at best playing rope-a-dope, and at worst is little more than a cynical deal maker. I speak of course of Barack Obama, whose position is always hard to discern from the standpoint of principles if one watches what he does rather than what he says. And I suggest that this is because he has few principles, rather than perhaps sentiments, that get in the way of his pursuit of the deal, and his own power.
Now I turn to the curious situation of the Modern Monetary Theorists.
Let me state, unequivocally, that there is nothing new to be seen here. There are no new discoveries, there are no new wonderful theories that make things possible that were not possible before, in the manner of an invention like the transistor, atomic fission, or flight.
What is presented as 'new' is the notion that the state can simply print and distribute its own funds as needed, determined by it. And in doing so there will be no serious consequences.
I am willing to suspend all other discussion and objections, and bring this down to the absolutely critical point in any monetary system. And that is, 'where is the flywheel?' Or for the less mechanically inclined, where is the constraint, the restraint, the governing factor, on expanding the money supply?
In the case of an external physical standard, like gold and silver, or a hard peg to another currency, that constraint is easily seen. The 'flywheel' that governs how fast the printing presses may go is the amount of gold and silver one can obtain, or the level of value of some other currency, that is hopefully stable but may not be.
One can expand the money supply beyond the metal supply, but only with a conscious and obvious devaluation of the units which each ounce of gold and silver represents. Or one can cheat and lie, but that is another matter, and a facet of all human systems which lack transparency.
In the case of a debt based market system, the flywheel is the willingness of the market to take the government debt at some value which 'works' for the monetary authority's purposes.
It is undeniably true that Bernanke is gaming this mechanism in what is purported to be the short term by buying that debt, the government bonds, at non-market, artificial prices. And it shows up in the Fed's balance sheet, for all to see.
As I have pointed out at some length before, as long as the Fed has at least one Primary Dealer in on the scheme, the money machine can keep turning until the market is revulsed by the stated valuations, and the machine breaks down.
And this is by design. It is the principle of 'lender of last resort.' And it is supposedly what provides the Federal Reserve System more flexibility to address currency shocks than a hard external system. That the Fed has caused those currency shocks by its own policy errors at times is another matter.
But at least I understand why the Fed and the board of governors are doing what they are doing now, and it is obvious what they are doing despite the enormous lengths to which some may go to say otherwise. And since it requires the agreement of a number of different, somewhat independent parties, it may very well stop before it goes too far.
So I would ask, where is the flywheel in Modern Monetary Theory, in which the government spends at much as it wishes, and simply issues the currency to 'cover' its expenditures?
And if the answer is the checks and balances of the Congressional appropriations process and the policy of the Treasury Department, you will understand if the general public runs screaming towards the exits, given our recent experience with the budgeting and spending levels. Or if the answer is that it is 'in the cloud' and that a restraint is an old-fashioned concept that is no longer applicable, then we will know that as it stands it is another new era idea like efficient market theory.
So, with regard to Modern Monetary Theory, what acts as the restraining factor on the expansion of the money supply? Where is the flywheel?
Answer that honestly and straightforwardly in less than two paragraphs, and it might be said that MMT at least has a system. And if not, it is something that needs to be done to take it from sophistry, which dodges and changes as required by the turn of the debate, into the realm of a real system that can be examined and critiqued.
