I Call Bullshit

56
Sun, Feb 17, 2019 - 12:34pm


I remember playing Monopoly by the hour with my friends throughout the early 1970s. We loved that game! I recall one rule in the game that we actually had to invoke because our games would get so long:

Just write on a piece of paper! What a great idea! Maybe I just think about this a lot because I have a millennial daughter that really likes the idea of free money. But something does not smell right. Isn’t it interesting that it was JP Morgan’s image used for the banker and monopoly? Decades ago, kids were being taught about Modern Monetary Theory--also known as MMT, and currently the rage among socialists and academics (pardon the redundancy).

I work in a university full of young people. I would estimate that 90% of them will vote Democrat in the next election, and will also be highly motivated to get out and vote. Meanwhile my more conservative generation is retiring and even passing into the night. As the pendulum swings left, this younger generation, a generation that does not understand economics, will be seduced into demanding free money.
In short, Modern Monetary Theory MMT is the mechanism that explains why and how a nation can extend the national debt infinitely. It is a “theory.” And we are acting upon it already. If it is wrong, disaster will follow. If it is right, we can all relax, go back to our pre-prepper lives, and cheer on Socialism in the hope that it will solve society’s problems.

Common sense and a plethora of pundits tell us that you just cannot keep printing money in real life. Yet our youth, and many politicians, don’t see it that way. They don’t read ZH or blogs like this. They are sophisticated, but also immersed in their own world, concerns about careers and activist agendas to make the world a fairer place. They listen to their own teachers, and what academics are teaching about economics these days enables the youth to put their trust in Socialism. A recent presentation by Dr Stephanie Kelton provides a fine example.

IN fact, since she was Bernie Sanders economic adviser the 2016 election, she may be the leading voice on this matter. The heart of her argument is just over 20 minutes long. After watching it the other day, I sat there scratching my head. Could she be right? I was confused. Her thesis is that you CAN just keep printing more money.
Trying to dispel my confusion, I watched it again, and again. Slowly, the truth began to emerge—like watching a magic trick over and over, one begins to notice the skilled sleight of hand of the magician, and the hidden mechanisms that make the trick possible. My university training in rhetorical criticism (bullshit detection) began to kick in.

In what follows we will look more closely at Kelton’s central argument, and show how obfuscation, failure to mention relevant facts, blended with solid facts, and just a dash of sophistry can produce a strong argument promoting socialism that will be ravenously devoured by weaker minds.
I hate it when people lie to my kids!

Kelton begins by pointing out the big question posed by critics whenever we consider new government programs: “How are we going to pay for it?” She believes we can move past this question and get onto to discussing solutions for the future. But a good persuader must refute the arguments against their proposal prior to presenting a new plan.

She has edited a video montage of politicians saying the debt will harm our children & future, followed with images of cartoons & headlines from 1937 to date, bemoaning the debt. We’ve all seen it. No need to panic, she suggest. We just need a paradigm shift to see debt in a different light. We all need “therapy” to get us past this hang-up about spending too much.

She asserts that we are mistaken to understand the USG as a household that cannot continue to spend more than it makes (taxes). Kelton claims that the Federal budget does not work the way a personal budget works—a Federal deficit isn’t the same as when I run up my credit card.This claim is warranted, in her view by distinguishing between currency users and currency issuers—a nice play on words. These sort of linguistic devices always seem to have a ring of truth to them.When I borrow, I am a currency user who borrows from a bank—who is the currency issuer. But the US Government is both the issuer and the user, thus, according to Kelton, “can never go broke, can never have bills coming due that it can’t afford to pay, can’t become insolvent, can’t end up like people you know … forced into bankruptcy.”

Next, she demonstrates the concept by pulling 10 one dollar bills from inside the lectern and saying, “suppose I’m the federal government and I’m going to spend ten of these into the economy. She gives 10 dollars to a volunteer, then immediately takes 4 back as “tax.” She defines the federal deficit as “the government spends more into the economy than it taxes back out.” Thus, in her example, the government has a $6 deficit.
Following this, she claims that the money remaining in the economy is a “surplus” for the economy, which I’ll concede is true—that money pays salaries, hires contractors who build infrastructure, funds Medicare and other socialist programs, but is also handed out to people who won’t work so they can buy fentanyl manufactured in China, mixed with Mexican heroin and smuggled into the country to enrich MS-13 and other such parasitic organizations.

When that money is spent on the wrongs things, taking it out of our economy, even the socialists admit that the economy can get in trouble.

Thus the government borrowed the amount of the deficit. To illustrate the borrowing Kelton “sells” 6 treasury bonds to the volunteer to get back the $6. She then mentions paying interest on the T-bonds—interest that goes the fine gentleman from the audience. Here is where things get more interesting: Kelton defines the 22 trillion on the national debt clock as the “national savings—dollars in the form of treasuries in somebody’s savings account.” I wonder whose?

To wrap it all up, she brought Greenspan out, putting his pic on the screen as he responded to Sen. Paul Ryan in a Congressional hearing, asking how we will pay for all of it: Greenspan “There’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.”
So we are back to the key issue: In the case of the US Federal Budget, is the issuer (printer) of the money the same person as the user of the money, as Kelton claims?

Decidedly not!

As we are aware, the Federal Reserve Bank is not part of the Federal government, but a private a corporation owned by large commercial banks with its USG influence only in the form of the appointment of three of the nine FED governors, who are not beholden to the USG in their policy decisions. Greenspan should have said, “There nothing preventing the FED from creating as much money as it wants, and loaning it to the US government so they can spend it.” All of Kelton's other claims, supported by charts & graphs, mistake correlation for causation. Her clever wordplay--calling a deficit for one a surplus for another simply distracts us away from the nature of this FED & USG relationship. In fact, she never mentions the Federal Reserve bank, always suggesting that the government prints the money.

Sometimes it is difficult to follow someone’s convoluted argument and point to the key fact where it breaks down. But this time it is clear. The FED and the USG are not the same entity—the “Issuer,” as Kelton assumes and Greenspan states. That is why Kelton never mentions the FED. She employs the misleading quote from Greenspan to make this point.

I have been taught recently, by pundits and bloggers, that the Federal Reserve is not “federal” and is owned by private interests. Not wanting to assume these bloggers are correct, I did a bit of digging and found lots of confusion about ownership of the FED. I will err on the side of caution if I must, attributing “partial ownership” to the USG, but majority ownership in private hands. More importantly, the USG cannot dictate policy to the FED.

As a corporation, the FED admits that “member banks” of each of the 12 districts own stock and receive dividends. These “member banks” are privately owned. But the remainder of the earnings of the FED are paid the US Treasury, indicating at least a partial ownership by our government. The private banks received 30 Billion in dividends in 2017 while the Treasury received 80 billion in dividends.
But then, the USG paid the FED 62 billion in interest for the treasuries they hold. That 18 billion difference that stayed with the USG, only represents 38% of paid dividends, compared to the 62% paid to the member banks—all private corporations.

This relationship is obfuscated. Oh! It’s so much easier for Kelton to just let her listener assume the USG and the FED are one!

What is most important is that the FED’s majority owners—the “member banks” will never “call the note due” for the US government borrowing. I was not so lucky when I defaulted on a home loan.
For Kelton to say that the US government issues the money it uses is patently false, even if a portion of dividends do find their way back into the US treasury. While the point is that the note for 22 trillion will never be called due, an equally problematic issue for MMT is that the US government pays 550 Billion in interest on the 22 Trillion it has borrowed each year, and must borrow to pay it.

Question: So can the FED keep “printing money,” allowing the USG to use it by selling bonds to the rest of the world?
Answer: Only as long as the treasury bond owners value the bonds.

While the FED may never start dumping bonds, I wouldn’t count on other nations to do the same. Kelton does anticipate my argument here, saying it doesn’t matter if China stops buying our bonds. But she fails to mention that China only holds 5% of the USG debt. If one nation quits the game, it may not matter much indeed. But what if half follow China’s lead and begin selling?

When multiple bond holders, responding to the same conditions and fearful for their investment, decide to begin dumping, it will force interest rates higher on new bonds as the unwanted existing bonds have to be discounted to find a buyer. And if the buyers’ appetites for US bonds are satiated altogether, and there are only sellers… ? The resulting economic chaos worldwide is too horrible to think about. But just like the bank that repossessed my home in 1988, and became the owner of my most valuable possession—though they had to sell it at a loss into a weak economy—those who own the Treasuries will own this country’s assets, whatever they may be, if they can collect.

And any socialist-style budget will be in the toilet long before this happens, with government shutdowns and funds withheld.

In conclusion, the FED isn’t going to call the loan to the USG due, or panic sell their 10% of the bonds. They will keep enabling the deficit spending by the USG. But Kelton’s MMT claims that the USG owns the FED is false, thus she concealed it. And her claim that the current system can continue indefinitely depends on the rest of the world to be foolish with their money--trusting and investing in an organization that throws fiscal responsibility out the window.

No wonder the central bankers of the world are beginning to hoard more gold! No wonder China and Russia are hoarding gold. Gold is the only security with no counterparty risk, if it is safely in your hands.

I think I’ll hoard more too.

And I call bullshit on Kelton, suggesting that she is a mercenary sophist in service of the central banks. And if she is genuinely mistaken, teaching a flawed Monetary Theory to the world, pity her, and those who believe her teaching.

MMT: perhaps we should call it Monopoly Monetary Theory

About the Author

  56 Comments

mike97
Feb 17, 2019 - 3:32pm

Good article Doc J

You mean we can’t ignore our debts forever.

silver66
Feb 17, 2019 - 3:40pm

First

mental slight of hand debunked by someone taught to think rather than feel

Excellent

Silver66

WingsofGold
Feb 17, 2019 - 4:04pm

Great Job, Doc

I would love to see her debate you or maybe......Mike Maloney, Chris Martenson, Ron Paul, or a few others I know would blow her out of the water. Thanks

Texas Sandman
Feb 17, 2019 - 4:11pm

petrodollar

that one creates a demand for the currency and the bonds. as that one goes away, underpinnings for the dollar do also.

that's why we let MBS get away with the murder of a permanent us resident ("green card holder") in their embassy in Turkey. House of Saud has us by the testicles. So our hearts and minds will surely follow. What's the life of one man when the petrodollar is at stake...

Marcus
Feb 17, 2019 - 5:24pm

free stuff

As far as "free stuff" goes, not much in life is free except for bullshit or some type of venereal disease, neither of which is very desirable (unless you're into that sort of thing). Socialism is nothing more than the forced redistribution of wealth at the point of a gun (a "gimme your stuff or I'll hurt you" way of thinking). Socialism failed in the Soviet Union, and in 1930s Germany, and in Maoist China, and in Pol Pot's North Vietnam, and in North Korea, and in Zimbabwe, and in Venezuela, and in every other place it has ever been tried (in its more virulent forms, it also provided a heap of bodies to go along with the misery it dished out). Really, socialism is going to work in America this time? Uh-huh.

NW VIEW
Feb 17, 2019 - 6:47pm

Well Dr.,

the 50+ % of Americans do not care about the national debt, nor what the true definition of fiat paper is, nor if the government finally is totally bankrupt. They do not lose one moments of sleep over owing 22 trillion fiat bucks. They have little, pay little in taxes, receive free XYZ, and know where to fish on opening day. They see the upper 25%, worrying about the economy, taxes, banksters, etc. and see it as a waste of time. They do not read the WSJ, nor follow Jim Kramer. jmo

(We all know that over 50% of Americans cannot raise $1000 fiat. Do we actually think they are concerned over the national debt?)

RickshawETF
Feb 17, 2019 - 6:53pm

Great Post!

Two points:

1. I don't believe the USG is in any way a part-owner of the Fed! They hold none of those [ownership] equity shares. They do get to select three members of the Fed Board of Governors, but that is mere window dressing, since they do not have majority control, and can easily be outvoted. I consider the Treasury "remittance" [of earnings above the statutory 6% the Fed is allowed to earn on its "investments"] as more a "licensing fee" the Fed is more than willing to pay to the government to keep their monopoly privilege.

2. That leads to the greatest "theft" by the Fed since it was created in 1913. It happened in October, 2008. On that date, the Fed announced it was to begin paying interest [to their member banks] on reserve deposits held [for the member banks] at the Fed. My Spidey senses perked up (ok, it was actually my CPA senses):

A) The Fed begins paying interest to the banks (on their deposits)

B) "Interest" payments are an expense of a corporation (which the Fed is)

C) That reduces the Fed's profit

D) Since the Fed is allowed to earn 6% by law, they continue to get that 6%

E) Those interest payments to their member banks merely reduce the amount of profit (left over after that 6% is grabbed by the Fed) which is turned over to the Treasury!

It's as if the Treasury just took money given to them by the Fed's annual remittance, and handed it back out to the Fed's member banks -- thus depriving the government (us!) of that money. Talk about greed!

And how much are we talking about here? Well, in 2015 the Fed's remittance to Treasury (for the year) was $97.7 billion. And how much was the Fed's interest payments to its member banks, which came out of that remittance? $7 billion! And surprise, surprise -- in every year since, the amount of the Fed's total annual remittance to Treasury has gone down . . .

Feb 17, 2019 - 7:09pm

Rickshaw...

Thanks for your post.

If I can document your claim about ownership, I think I could publish an extended version of this short essay in a national journal. Kelter made many sophistic moves in her short lecture that will gt the attention of my colleagues. I am a out of my expertise somewhat here, not knowing everything about the FED, but my gut says that the argument is correct, and your expertise is supporting it.

I need to find a statement from within the FED that establishes its independence from the USG, admiting it is privately controlled. THAT will refute MMT.

I should also mention a correction here. MMT goes beyond socialism. The theory holds that we do not need to tax the rich, but can simply print the money needed for Sanders', or Ocasio-Cortez's plans for our nation.

Angry Chef
Feb 17, 2019 - 7:11pm
RickshawETFDoctor J
Feb 17, 2019 - 7:46pm

Here's the reference from the

Here's the reference from the Fed's own website, that they have shareholders, and pay a dividend to them:

https://www.federalreserve.gov/aboutthefed/appendix-b-dividends.htm

Obviously, the U.S. Government has no shareholders, as it's not a corporation . . .

My two references that got me to this source was either David Morgan or G. Edward Griffen, as I recall. Nose around that area of the Fed's site, and you may find more evidence.

Good hunting!

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Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
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