Money in the 21st Century

There is inevitably going to be debt in our society. To succeed you must take on risk. How else do you get a house? Or go to college? Or start a business? Debt is the method by which we get cash, and cash is the method by which we get everything else. While debt may be bad, it is necessary. Even within my social circle we have that mentality microcosom’d in. In order to be the gracious consumers we are, there exists ‘the circle of debt’. Over the years our group has taken, dropped, earned and lived with different jobs, money and expenses. Someone always has money and someone does not. While we do not keep any blockchain ledgers of purchases there is always that ‘hey get me I gotchu next time’ mentality.  It may be rudimentary but our system works. The world as a whole is less kind… with over 300% debt to GDP, we as a planet owe more than we make. The anthropocene is indebted.

 In my squad someone must be willing to cover the other. At a certain point a creditor must be, so a debtor can exist. But with Japan owing twice its GDP, the US owing at bit over 100% of its own,  and both of them owning much of each other’s debt, who is the creditor? The truth is they are both. Not just them but most nations. Unlike my buddies and I, nation states do not just use money but they create it. We very regularly think of debt as a problem but how do we justify that when governments are making the cash? This is the quandary of my scrutiny.

Central banks around the world have the ability to print cash in their own currency. They then release that cash into the financial system. Like a balloon if they release too much it will turn into hyperinflation (see Zimbabwe or Venezuela) or deflation (sort of Japan). They mainly do this by buying debt from their country. The Fed buys US treasuries, Bank of Japan buys government bonds, same with all others. This is quantitative easing. This is monetarism.

On March 23rd the Fed took to the heroic stance, proclaiming they would do ‘whatever it takes’ to keep the economy afloat. With debt already at incredibly high levels the unprecedented move by the Fed has injected a third of US GDP into the market through the buying of debt, both public and corporate. Money to the bond markets now has no actual cap. If necessary they could buy up all eleven trillion of corporate debt. That would be releasing eleven trillion in cash! Just like that. So what of inflation?

In the fourteenth century the Malian king Mansa Musa made pilgrimage to Mecca as part of the Hajj. On his way the fabulously wealthy king (candidate for richest human being ever) stopped by towns all over the meditteranian. On a visit to Venice he spent so much gold it caused runaway inflation. Giving away gold to the poor, buying food and lodging, he added so much Malian gold that the economy could not take it. Instead of black kings its central banks, and instead of medieval Venice its the whole world.

Whether West African gold or American greenbacks, there is always a risk of inflation. Right? Well not so much today. In her book the Deficit Myth economist Stephanie Kelton makes a similar observation:

‘The unemployment rate fell from 10% to 5% by the end of 2015… in December the Fed raised interest rates. It did so another eight times despite undershooting its inflation targeting’

 Even as unemployment dropped inflation did not rise as the Federal Reserve expected. The underlying idea is as more people get wages and higher wages (which was happening), then a sort of ‘bidding war’ should push up prices, causing higher inflation. This is what happened when the King of Mali went to Venice. So why isnt that happening today?

According to Stephanie, The Fed does not understand unemployment at all. By assuming all employment the same the Fed did not account for the growth in part time and casual work, jobs that pay much less than full time work. Japan, for all its debt, has been keeping interest rates low and doing massive quantitative easing, yet suffers from the opposite of inflation! They are having persistent deflation issues. That’s a sign of low spending. Mixed in with an aging population , Japan has nearly 40% of its workforce part time. That is 40% of a workforce not receiving inflation pushing wages.

With people driving ubers and doing contract work, full time jobs are becoming rarer. And why not? The top companies of today do not need to hire tons of people. Amazon can hire robots to do many types of work. Ubers’ whole premise is ‘lets not actually hire people’ and even more importantly: you can make more money playing stocks than producing almost anything. Most wealth today is made in finance rather than actually producing goods. A giant departure from our twentieth century production economies. The majority of the world’s billionaires made their money in the finance game. Same with last year too!

So as the Fed continues to print money in the trillions. buying debt on bond markets, it looks like inflation is not a problem to worry about. So that begs the question: if the Fed and other central banks can just keep printing money why are we so worried about debt? Well not all of us are. A new class of economists known as New Monetarists (as opposed to the old) believe debt is just a fact of life, and as long as we print our own currencies we can print money all the time. This is a major break with what we know about economics. The rules governing 14th century Venice do not work in 21st century Tokyo. Debt may be here to stay, and that may not be such a bad thing.

At a certain level inflation still happens. Yet there is an ingenious fix. Say the Fed dips into fiscal policy directly, instead of going through treasury markets (that’s monetary policy). What NM’s (new monetarists) call an auto job stabilizer, is a process where the Fed funds a public jobs program for anyone who wants one. As they gain these jobs money will fill the economy. As that money flows private business will start stealing jobs from the program. The reduced public employment will bring less money into the economic system, keeping inflation in check. When a downturn in the private sector occurs the jobs program can pick up slack. It sounds like a crazy idea, yet very plausible.

 Understand, this does not fix the rampant consumerism that harms not just our mental health but also our environment. It is more like a way to stop the bleeding, but a goddamn miraculous way. It is pragmatic radicalism. Not just an American answer, but a South African and Vietnamese and Costa Rican. A solution for a world in which cash rules everything around me.

The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy, by Stephanie Kelton, John Murray, £20 (UK); PublicAffairs, $18.99 (US)

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