This Could Change Everything

Dick Wagner, JD, CFP and Don St. Clair, CFP, EA

23rd Annual Far West Roundup August 9-12, 2012

!1
 What is Money?

"Money is the most powerful and pervasive

secular force on the planet. Yet for most,
it's a source of mysticism and mystery."

- Dick Wagner, JD, CFP

!2
Textbook Explanation
Money derived from barter

Spontaneously originates in
Private Sector

Replaces clumsy barter

Eliminates "double-
coincidence of wants"

Reduces transaction costs

!3
Evolution of Money
Primitive monies

Stones, beads, shells,

feathers, fish, cattle, etc.

Precious metals - coins

Paper with metal

backing

Fiat money - based on

Trust?

!4
Textbooks Conclude

Money is what money

does

Unimportant in its
own right

Largely ignored in
many economic
models

!5
Graeber: Not So Fast

No archeological
evidence

All money is debt

Roots in penal system

Unit of measurement

!6
Credit & State Theories

Anthropologists, Sociologists,
& Numismatists find origins
in credit/debt relations

Palace communities,
Mesopotamia, ancient Egypt

State/Temple/Authority plays
central role

Chartalist/Cartalist

!7
John Maynard Keynes

"The age of Chartalist or

State Money was reached
when the State claimed the
right to declare what thing
should answer as money to
the current money-of-
account.... To-day, all
civilized money is, beyond
the possibility of dispute,
chartalist."

!8
Regardless of Origin
Today, all money exists as an IOU, representing a social debt
relationship

It is abstract, and like an "inch" or a "yard," it can be

measured, but not seen or felt

In any modern nation, the money of account is chosen by

the national government

A nation's IOUs are recorded in this money of account (e.g.

US Dollar, British Pound, Japanese Yen)

Money is not an object. It exists as credit/debit entries. Coins

and paper are representations of money, not vice versa

!9
 Today, Sovereign
Governments
Define the money-of-
account

Impose taxes, fees,

obligations

Decide what they will

accept as payment

Choose how they will

make their own payments

!10
Taxes Drive Acceptance

Government defines money/

what it will accept as payment

Makes payment (spends) in

that same money-of-account

Requires taxes be paid in the

money-of-account it defines

!11
 But Taxes Do Not
Fund Spending

Government does not "need"

our money

Not to raise revenue per se

Taxes function to regulate the

economy by regulating
aggregate demand

!12
 How a Currency
Issuer Spends
By directing its bank (usually the central bank) to
credit someone's account

This frequently (and increasingly) happens without

even writing a check

In the "modern money" era, government spending is

accomplished through electronic keystrokes (Bernanke)

The government neither has, nor doesn't have dollars

in an account somewhere

!13
 Modern Money
Pelley: "Is that tax money
that the Fed is spending?"

Bernanke: "It's not tax

money. [W]e simply use the
computer to mark up the
size of the account."

!14
 Hierarchy of Money

Anyone can create

money (social debt Government
relationship)

Trick is to have it Banks

accepted (Minsky)
Non-Financial Business
But private sector
cannot create net Households
financial assets

!15
 The US Hierarchy
Issues the
currency at the
top of the US $
pyramid

Taxes and spends

in dollars

Non-convertible,
fiat money

!16
 On Gold Standard
Pre-1973, Bretton Woods

Promised to convert US$

to gold at a fixed price Gold
Dollars were subordinate
US $
Had to limit spending to
protect gold reserves

!17
 Other Countries
Did not issue
currency at the top of
the pyramid
US $
Had to limit spending
to protect (US$) Ruble, Peso, etc.
reserves

Sacrificed control of
interest rates

Heavily dependent on
trade surpluses !18
 Look familiar?
The Euro is
effectively a foreign
country from the "Euro"
perspective of the
individual nations
Greece, Spain, etc.
Currency is
divorced from the
nation ("One Market,
One Money")

!19
 The Eurozone
No EMU nation issues
the currency that sits
at the top of the
pyramid "Euro"

Governments can Italy, Portugal, etc.

"run out" of Euros

Must pay market

interest rates

Heavily dependent on
trade surpluses
!20
Under Bretton Woods

Promised to convert US$

to gold at a fixed price Gold

Dollars were subordinate US $

Had to limit spending to
protect gold reserves

!21
Everything Changed!

Except the textbooks

Nobody rang the bell

Dollars no longer
subordinate

Money no longer the

object

!22
Sovereign Money Matters
A sovereign currency ISSUER that does not peg to another's
or offer to convert, can never "go broke," or "run out of
money"

It can afford anything for sale in the domestic unit of

account

It does not need to borrow its own currency

It can set the policy interest rate at any level

It has expanded policy space

!23
But isn't the US Broke?

"We're out of money"

!24
 Within Our Means

"The government, just

like every American
household, has to live
within its means"

!25
 Is the Government
Like a Household?
No - not anymore

Not since we abandoned the gold

standard

We ended Bretton Woods

We have "modern money" created

by keystrokes on a computer

But... we act as if we're still stuck

in a fixed exchange rate world

!26
 The ISSUER of the
currency can always pay

"[A] government cannot

become insolvent with
respect to obligations in
its own currency. A fiat
money system, like the
ones we have today,
can produce such
claims without limit"

-Alan Greenspan 1997

!27
Deficit Hawks want
Immediate Cuts
Opposes deficit
spending on principle

Often favors "sound

money" (e.g. gold
standard or 100%
reserve backing)

Would legislate rules

to mandate balanced
budgets

!28
 Deficit Doves want
Eventual Cuts
Supports limited deficit
spending in tough economic
times

Want the budget balanced

over the business cycle

Support rules to limit the size

of the deficit

Prefer to wait until after the

economy begins to recover
before imposing austerity

!29
 More Deficit Aviary
New bird in town, the Deficit
Owl

Modern Monetary Theory (MMT)

Exposes the fallacies in

conventional economic theories

Views unemployment as socially

harmful and economically
inefficient

!30
Within Our Means?

Unused energies. Unmet needs.

!31
The MMT Deficit Owl
Assigns no arbitrary
limit to the size or
duration of the
deficit

Uses a sectoral
balance sheet
approach to relate
deficit to the rest of
the economy

!32
 Sectoral Balances
In any given period, sectoral balances show
whether a particular part of the economy is:

Spending more than its

income (deficit)

Spending less than its

income (surplus)

Spending just equal to

its income (balanced
budget)

!33
Accounting for Deficits
The laws of double-entry
accounting apply

All sectors cannot take in more

than they spend (i.e. be in surplus)

All sectors cannot spend more than

they take in (i.e. be in deficit)

Unless all 3 sectors are in balance,

at least one sector will be on
deficit

!34
!35
Private Sector Balance
As a general rule, the private sector needs to be in surplus

Households and firms cannot continually borrow more

than their income

At some point, lenders will run out of credit worthy

borrowers who are willing to spend

Private debt levels may become unsustainable (Minsky's

Financial Instability Hypothesis)

When an expansion driven by private sector debt reaches

an end, sales soften, jobless claims trend higher, and
economic activity falters
!36
Private Sector Debt

!37
Unemployment Follows

!38
Achieving a Private
Sector Surplus
Unless/until we run a trade
surplus, the government
must run a deficit

Only countries with trade

surpluses can avoid running
government deficits

Not everyone can be a net

exporter!

!39
But We're Terrified
of Deficits

What if people lose

trust in the dollar?

What if China
refuses to buy our
bonds?

What if interest rates

skyrocket?

!40
What About Inflation?

!41
Japan is Instructive

!42
Bond Vigilantes?

!43
Devaluation?

!44
 Quantitative Easing
Despite decades of
it's own QE

Inflation in Japan
is non-existent

!45
What Have We Learned?
The government's deficit is
equal to the non-government
sector's surplus

The US can never go broke or

forced into bankruptcy

Sovereign constraints are Real,

not Monetary

Deficits do matter

!46
 So What?
Observations

Entitlements

Our Own Theory

Current Policy Options

What's Next?

!47
 Observations
MMT CFP
Money is No Money is Not the
Object Object

Constraints are Constraints are

never Monetary often Imagined

Views Full Prioritizes

Employment as Numerators over
Socially Desirable Denominators

!48
 Entitlements

Payroll tax creates new

Government "Debt"

Constraints are Self-

imposed

Medicare Parts B & D

"adequately financed
into the indefinite
future"

!49
A Borrowed Theory
Cost of Capital

Infinite Time
Horizons

Lack of Spending
Opportunity

No Spending
Imperative

!50
LifeCycle of Household

Learn, Earn &

Borrow

Earn, Invest &

Deleverage

Divest, Spend-down
& Consume

!51
 Policy Choices
Raise taxes, cut
spending - or both

Prudent advice for

an OVERheated
economy

Why then, are these

the only policy
options on the table?

!52
 What's Our Role?
In the National
Debate?

In macro-economics?

In educating our
clients?

Our community(s)?

!53
Want More?

@DeficitOwl

WWW.NewEconomicPerspectives.org
!54
 Complemetary
Currencies?

Time Banking

UMKC Buckaroo

Denison Volunteer
Dollars

!55
So Why the Weak
Recovery?
Policy makers significantly
underestimated the severity of
the crisis

They don't understand banking

They think deficits are under

the government's control

They think "confidence" will

improve if we shrink the
deficit

!56
Owls Doves Hawks

!57