A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Saturday, May 26, 2012

Relay: Peter Schiff dancing with the media wolves, plus MMT

We're going to start subtitling the podcast, "Legitimate economics."

You would think all these years after "Inside Job" and the patent absence of accuracy and effect from the orthodoxy, there would be some soul searching or at least fact checking. Not to be.

Now, years after Stiglitz, Roubini and others, including Demand Side identified the austerity prescription as madness, we hear analysts coming around. There is the fiscal cliff and the realization that pushing Greece out of the euro would not be such a fine thing for the European banking system.
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Today we're going to relay another podcast—Bloomberg on the Economy—and an interview with Peter Schiff, one of the few who got the Great Financial Crisis right. We're doing it to show how legitimate economics is marginalized.

We have our issues with Schiff, particularly on the opportunity for productive investment in in public goods. But he did see the debt bubble, he does see the error of further debt explosion, and the patent mistakes of monetary policy. Quoting here:
" When looking back from a point in the future, I believe that the years immediately after the credit collapse of 2008 will stand out as a period of dangerous economic negligence. We have bought ourselves some time by sweeping enormous problems under the rug. Through a combination of political cowardice, economic ignorance, and false confidence, we are digging ourselves into a hole so deep that it may take generations to crawl out."
The unlikely place Schiff has taken us, however, is into Modern Monetary Theory. Schiff and his "We're going to bankrupt the Treasury and debase the currency" and so on does not look like a likely impetus, but when I ran into this audio, the whole issue demanded to be settled.

Modern Monetary Theory, as I understand it, sees no constraints other than inflation to government's ability to create money and spending. Simply make entries into bank accounts with a keystroke and proceed to economic activity. This is true. It is almost self-evident.

But it is true in the sense that the mechanics are true.

As I understand it, MMTers admit inflation is a constraint. We have as a given the history of endogenous money creation, given to us by Minsky and those who went before. Money is created and destroyed through the banking system's lending. The counter in illegitimate economics is that the Fed is creating money and sooner or later there will be a passive money multiplier effect, and explosion of inflation.

So with these as givens, the nut of the matter is this. The economy is a full contact sport. While MMT may be absolutely correct, it cannot be executed in a vacuum. The institutions currently in place, the banks, bond markets, stock markets, political parties, and unfortunately above all the entrenched economic orthodoxy, however illegitimate, on Wall Street and in Academia will not go away. These institutions operate for the benefit of their constituencies, not by any fealty to objectivity or even intellectual honesty. That is why they are as a science or discipline illegitimate.

Were an experiment of MMT allowed, it would fail, not because the results would be other than its advocates predict, but because the cacophony of criticism and spin from those with real power to affect policy would drown out the truth. We forget that the Fed was defeated at one point. During the Depression it was reorganized and until 1951 operated as a function of the Treasury, keeping interest rates low and stable, even through the great commodity inflation following World War II. It was only with the Treasury Accord of 1951 that the Fed gained its independence as the fourth branch of government, giving full control of monetary policy over to the bankers. With the Humphrey Hawkins bill in the late 1970s, they were required to add the mandate of full employment and make a few appearances before Congress, but the policy has been theirs and their constituency in the banks ever since.

Which point is mainly to demonstrate the practical reality of trying to impose a modern monetary theory policy in the real world.

But let's let it happen. Investment or spending produced by an MMT experiment would first set off hysteria among the actors at the Fed, the bond vigilantes and the banking system. Any recovery or growth occasioned by an MMT experiment would quickly spur inflation fears. No. Inflation panic.

In the hyperinflation of Germany, with people rushing to the store with their wheel barrels full of currency, it was not just the volume of currency. It was the fevered rush to the store. Money times velocity. On the other side, it is not the great volume of cash supposedly being created by the Fed, but the fact that it is stuck in the banks and by hoarding that creates the current non-inflation. But adding to panic would be the creation of credit money by the banks, as a recovery will spur investment. If demand picks up, lending will pick up.

We should not fear inflation, but we do.

That is a very easy target for my MMT advocate listeners to hit, and I welcome your response on that issue. It needs to be settled.

Whenever we get around to employing our people first again, then inflation will pick up, and it will be the dusty errors of illegitimate economics that will be accepted as the reasons for it. No matter what has actually happened.

Demand Side is not innocent of naiveté. We love economics and would love to see it practiced right. Our virtue is only that the schemes we espouse work when they are tried. Our fault is that we don't like the hurly burly. We don't like the full contact. We want the rational to be acted upon because it is rational. We share this with the advocates of Modern Monetary Theory. When the story comes in different that the prediction, we want some honesty. We bailed out the banks, we made the corporations profitable. The operation worked. So where is the recovery? If there is no recovery, then bailing out the banks and making the corporations profitable is not the road to recovery. When Ayn Rand takes welfare for her lung cancer, we want that to be part of the story.

If we've learned anything over the past four or five years, it is that a crash with a serious bust will not sort out the truth.

Hitler employed Germany in a depression. It could happen again.

The financial casino will shrink as soon as we stop feeding its players the chips, but the shrinking could be devastating because of the institutional dynamics. And the official historical explanation may well not be, "It was a casino." It may be, "We should never have stopped feeding them the chips." We let Lehman fail. Never mind we bailed out the rest and it solved nothing. To many it is the Lehman failure that is remembered.

So it will be the institutions that determine economic policy. Academic and Wall Street economics is among those institutions. Academics invested in their own careers and in the failed Neoclassical paradigm continue to dominate this institution. On Wall Street, Milton Friedman still has currency, pardon the pun. But really.... Economists there do a dance of data. When the inevitable arrives, it arrives as a shock. The response is not, "Why was this inevitable?" but "How can we blame or dance around it?"

Our federal government has kept things afloat with deficits that would not be allowed in the Eurozone. At the same time, the federal government is led by men who really don't get it, starting at the top. More on that in the next podcast. That president's rival in the next election is—believe it or not—an outspoken advocate of the very practices that created the bust.

So when you see no institutional backing for hiring people to do things that need to be done, you know there is no Demand Side Faction on the field. When the madness of austerity is executed to keep profligate lenders whole and the financial casino first in line rather than last, you know there is no early end of trouble.

So, at the end of the day, Modern Monetary Theory demonstrates convincingly that there is no budget constraint, but I believe that this is something to be kept on the back pocket of progressive reconstruction.

We cannot let finance get in the way of fully employing people. Government can do that with infrastructure, climate change mitigation, public services and so on. We don't have to be afraid to tax, though. The sense of sacrifice is needed to reassure the population, a population which is intuitively conservative and educated into fear of government spending. That broad population might also be educated into coherence and become the institution to carry the day.

Plug book. Demand Side Books Dot com. Coming on June 1.

But as I said, this is about Peter Schiff.

Hardly a Modern Monetary Theorist.

Peter Schiff got the housing bubble right, wrote a book, made money. But as John Maynard Keynes said, "It is better to be wrong conventionally than right." In this expanded exchange, you hear Schiff getting no—zero—respect. And that is what made it so troubling to us.


We should note that Schiff is right on again with regard to the Fed's continued attempts to blow up a bubble. Their mandate is full employment. To them, this means full profitability for corporations and banks.

We note also that we do not agree with Schiff that the only investment is on the private side. Demand Side—as you see in DSE the book—final version June 1—makes the point that the productive investment is on the public side. Private capacity for the consumer economy is at record idleness.

But that is not what is scary about this Bloomberg on the Economy. It is the myopia and self assuredness of the lemmings.


Peter Schiff, author of "America's Coming Bankruptcy: The Real Crash: How to Save Yourself and Your Company" discusses the book. Schiff speaks with Bloomberg's Carol Massar and Michael McKee on "Bloomberg On the Economy."


  1. Thanks for the relay I'd forgotten about Peter Schiff. For me, the appeal of MMT is pretty broadly based. First, by providing a framework for standardizing fiscal and monetary policy in a coordinated way based on the accounting framework that underpins how MMT views of how the economy actually works. Proving more efficient than the financing to spend model that allows the Fed and banks to skim off their pre-arranged percentage. Second, taking money creation and payment for public goods back from the banks increases the return and provides another avenue for money to enter into the economy that doesn’t necessarily increase inflation. Especially when viewed against the tendency for banks to currently take cheap money to finance an escalation of asset and commodity prices. Finally, the understanding that managing inflation by taking money out of the economy through taxation could prove to be a far more accurate and timely method relative to the lag and often times severe interest rate adjustments that once again primarily benefit banks.

    1. Thank you for this comment. I still want to press the point that however well it may work in logic, the practice of it will be demagogued to death by those currently in control, and they don't even have to lie. They believe their stuff to the bone. Then you have the spectacle of a fringe new theory trying to take over from the old boys who are saying "This is the end of civilization as we know it."

      There need to be institutions, if only symbolic, that replicate what people understand, "federally sponsored infrastructure bonds," "guaranteed federal bonds," that for instance, may attract participation from private people at very low rates, but place the granite columns of respectability in front of the operation. My point is that economic policy is political policy, and so needs to be politically, not just logically defensible. I don't think we're going to get anywhere by leafleting Times Square and convincing people one at a time. It has to be done, work, and then be able to be pointed at. This works. This is how it worked.

      That said, I cede your points on its utility. I see we need to resurrect taxation as a moral exercise, though. You ask for a lot.

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