Monday, July 11, 2016

The Democratic Platform Debate On the Federal Reserve: Be Afraid

As I write, the final version of the Democratic Platform is still not available online. However, a shocking focus on the Federal Reserve at the platform committee meeting signals the danger of calling for audits and changes at the Fed. End the Fed, or a 100% gold backed dollar, are the only positions that sound money advocates should take.

Opening the Fed up to audits or populist control could take the Fed in an extremely dangerous direction, as evidenced by what went on in Orlando at the Democratic platform meeting.

The Center for Popular Democracy reported last week:
The first draft of the Democratic Party's 2016 platform calls for a historic reform that would make the Federal Reserve more representative of the American people and eliminate the power of executives at financial institutions to appoint or serve as directors of the regional Federal Reserve banks. 
In response to this draft, Ady Barkan, the campaign director of Fed Up, released the following statement:
“This draft is a major step in the right direction. For the first time in living memory, the leadership of the Democratic Party is calling for major reforms to the governance of the Federal Reserve. Hillary Clinton, Bernie Sanders, and the DNC Platform Drafting Committee should be commended for their work. 
Not good.

The Democratic Federal Reserve " historic reform" is all about replacing bansters with an even worse group, crazed money printers. And I mean crazed.

I am lifting the sound and important comments made by Bob Roddis at my post,  Democrats Debating on Whether Federal Reserve Should Be Put in the Platform, and placing them here so readers can get a sense for the dangerous direction Fed change is going in (my emphasis):
This is a much bigger and much more ghastly turn of events than most libertarians and Austrians realize. The MMTer “Modern Monetary Theory” monsters have infested far more universities that have Austrians, especially in the U.K. To replace the left’s infatuation with Marx and socialism, we have MMT (Keynesianism on steroids) which proposes that EVERYTHING that governments “spend” should be funny money created out of nothing. Taxes are not for “revenue”, but to extract money from society to keep a lid on inflation. These monsters are relentless and impervious to concepts like private property, economic calculation, The Road to Serfdom, etc……

The University of Missouri at Kansas City has an entire economics department infested with these monsters. Bernie Sanders appointed one of them as a Senate economist, Stephanie Kelton. See, for starters, this creep, L. Randall Wray. 

Taxes are for Redemption, Not Spending by L. Randall Wray

Fiscal austerity has become the mantra, the solution to the world’s problems. Unemployment and slow growth? More austerity. High interest rates and rising debt ratios? More austerity. Inflation? More austerity. Deflation? More austerity. Budget deficits or trade deficits? More austerity. One size fits all.

In one short article, it is impossible to deal with all of the arguments for fiscal austerity. In this piece I’m going to tackle just one justification: that government faces a budget constraint similar to that of households. Hence, even if we wanted to loosen fiscal policy, we might not be able to do so due to financial constraints. Indeed, by tightening now we create fiscal space that might be needed in the future. In the orthodox view, government’s spending is constrained by the sum of its tax revenue, bond sales, and money creation. Bond sales, in turn, are limited to the nongovernment sectors’ willingness to lend to government; as sales increase, the interest rate required to bring forth buyers rises – which eventually creates a vicious cycle of rising rates and bigger deficits. Running the printing presses to finance deficits raises the spectre of inflation, with too much money chasing too few goods. Hence, prudency dictates relying on taxes to pay for most government spending. The belief that government needs tax revenue to pay for most (or even all) of its spending is nearly universal.

It wasn’t always so. At the end of WWII it was commonly understood by economists from the right (Milton Friedman) to the left (Abba Lerner) that taxes are not needed for revenue purposes. Indeed, the Chairman of the NY Fed, Beardsley Ruml, even wrote a piece entitled “Taxes for Revenue are Obsolete”. None of these economists were arguing that we should dispense with taxes – which can be used for a variety of purposes. Rather, they recognized that unlike a household or firm, government does not need income to finance its spending.

We can go even further and argue that government needs to spend before it can receive income.

Indeed, while everyone looks at tax “revenue” as the government’s equivalent to “income”, this view actually prevents understanding. We should instead understand “revenue” as “redemption”. As I’ll show, from the time of the American colonies through the early postwar period, this is the way that many regarded taxes.

Note that the idea that the market does not require "momentum" will not compute with these people. They have a terminal case of the fatal conceit. Start to worry.

In his “paper”, the awful Randall Wray cites George Knapp and his “state theory of money” which sees money as “tokens”.

In discussing money, G.F. Knapp (one of the developers of the State Money Approach, adopted by Keynes and today by Modern Money Theory) made a useful analogy with the cloakroom token. When you drop off your coat at the cloakroom, the attendant offers you a token, usually with an identification number. The token is evidence of the debt of the cloakroom, which owes you a coat.

In his Appendix to his “Theory of Money and Credit”, Mises explained that the “state theory of money” was “acatallactic”. It completely ignored the concept of exchange and subjective value. George Knapp was the major proponent of the “state theory of money” as noted by L. Randall Wray (who, BTW, is utterly clueless about the concept of catallactic)s. Mises wrote:

Another acatallactic doctrine seeks to explain the value of money by the command of the state. According to this theory the value of money rests on the authority of the highest civil power, not on the estimation of commerce.*13 The law commands, the subject obeys. This doctrine can in no way be fitted into a theory of exchange; for apparently it would have a meaning only if the state fixed the actual level of the money prices of all economic goods and services as by means of general price regulation. Since this cannot be asserted to be the case, the state theory of money is obliged to limit itself to the thesis that the state command establishes only the Geltung or validity of the money in nominal units, but not the validity of these nominal units in commerce. But this limitation amounts to abandonment of the attempt to explain the problem of money.*****

An acatallactic monetary theory is a logical necessity for the empirico-realistic trend in economics. Since this school, unfavorable to all "theory," refrains from propounding any system of catallactics, it is bound to oppose any monetary doctrine that leads to such a system. So at first it avoided any treatment of the problem of money whatever; so far as it did touch upon this problem (in its often admirable work on the history of coinage and in its attitude toward political questions), it retained the traditional Classical theory of value. But gradually its views on the problem of money glided unconsciously into the primitive acatallactic ideas described above, which regard money made of precious metal as a good that is valuable "in itself." Now this was inconsistent. To a school that has inscribed the device of etatism on its banner, and to which all eco nomic problems appear as questions of administration, the state theory of nominalism is more suitable.*14 Knapp completed this connection. Hence the success of his book in Germany.

The fact that Knapp has nothing to say about the catallactic monetary problem, the problem of purchasing power, cannot be regarded as an objection from the point of view of a doctrine which repudiates catallactics and has abandoned in advance any attempt at a causal explanation of the determination of prices. The difficulty over which the older nominalistic theories had come to grief did not exist for Knapp, whose public consisted solely of the disciples of the realistic economics. He was able—in fact, considering his public, he was bound—to abandon all attempt at an explanation of the validity of money in commerce.
For more on MMT, see: Modern Monetary Theory (MMT)



  1. I've been banging on this issue for YEARS now. The MMTers are dangerous but they have not been sufficiently confronted on their BS. They are cranks that use non standard definitions for economic terms, such as "inflation" and "investment" so communication with them is basically impossible.

    They need to be shut down ASAP.

    1. I'm not sure they are any more dangerous than Keynesians but they are promoting the primitive idea that stealing is ok if you can get away with it. And that is exactly the environment in which they have found professional success. Until the educational business is separated from government, until educators embrace voluntary exchange with their prospective customers there will be no end to this argument. And I suspect their commitment to this thieving way of life has been so lucrative that to end it will require prying their dead icy fingers off the neck of the golden goose.

    2. WHAT ??? more dangerous than the 4 decades of neo liberalism ??

      @Brian No one is going to steal your stupidity from you.

  2. What this all comes down to is which money creation story you believe.

    Austrians and Libertarians are guided by their staunch belief that money is a thing that exists in some perfect market arising from barter then the government comes and meddles in things. You are basically guided by the work of 17th century philosophers.

    From this basis stem all your beliefs about money, markets, price etc.

    Until you release yourselves from this flawed understanding of how money works no matter what oddball theories and calculations and models you come up with they will all be as flawed as the philosophers' work on which they're based.

    Why you would give so much I credence to the work of 17th century philosophy anyway is beyond me.

    Locke and Hume have a hell of a lot to answer for, but not as much as people who have allowed their fanciful, unresearched, unacademic waffling to reverberate down the ages like you guys.

    C'est la vie.

    1. The statement that "Austrians and Libertarians are guided by their staunch belief that money is a thing that exists in some perfect market" is utterly false. This is another example demonstrating that ALL of our opponents are clueless and totally unfamiliar with voluntary exchange, subjective value, prices as information AND the implications of the NAP etc...

      Endless nonsense. How can we be losing to these guys?

    2. "All of my opponents are dumb headed dumb heads, why are they winning?" Waa, Waa, Waa.

      That's how stupid all of you sound. Every single prediction your models make have failed, repeatedly, decade after decade. And yet still you cling, desperately.

    3. What I said is not endless nonsense, you're just not going back far enough.

      There are only two options: either money (and therefore markets) are formed by the state (the State theory of money which is clearly refuted above) or it's not. If money is not that, then it goes against the historical Case of Mixed Money and fits in with the vague notions of money and market formation written by Locke and later Hume.

      Anything Hayek or others added on top of that is bound to be false since it begins with a flawed understanding of what money really is.

      I've done enough reading of Austrian (and Positive Money) economics to realise that any theory that begins by rejecting the state theory of money is not worth my time.

      All the bullshit like Catallactics is just sophistry and reads like something L Ron Hubbard would come up with.

      You guys are blinded by science and failing to see how simple macro economics really is, perhaps because you're already heavily invested in a more complex but ultimately erroneous model and changing your minds would be too big of a reversal for your ego to cope with.

    4. Rich R: Yes, all of our opponents are as clever, smart and intimately familiar with our concepts and analysis as you are. Boo hoo.

    5. Iain Dooley has propounded the most devastating critique of Mises and the Austrians ever written. By being meticulously oblivious to the meaning and implications of the term “catallactics”, he kinda sorta implies that it sounds like Dianetics! What a smackdown!

      This cartoon explains the beauty, logic and civilizing implications of the state theory of money:

      The Austrians certainly have no response to that, do they?

  3. Dude, this is a ridiculous and unnecessarily hostile post.
    1st off, there are many, many people who have flirted with Austrian economics and went on to become MMT adherents.

    In the first paragraph of Mises cited above, he reveals he doesn't get it: the monopolist of the currency is a price setter at the margin. The currency is a simple public monopoly. It taxes to create demand for its currency. And has to spend before it can collect taxes. So taxes drive exchange of real stuff for the government's currency so people can pay taxes. If people want to save the currency, that drives further exchange and demand for the currency. The point of this monetary system is to provision the public sector and serve further public purpose.

    1. "The currency is a simple public monopoly."

      That says it all. What can you say to these guys other than to expose them?

  4. Former Austrian fan turned MMT here. I love these articles and comments. Keep 'em coming. Sure MMT peeps are government apologists. But Austrian ppl, get real, money is a social construct for creating political programs. I know it hurts to swallow. Plenty of libertarian values have merit.
    The problem with non violence: "How do we force it on everybody else?" I do not espouse non-aggression, well, selectively only actually. I reserve the right to be aggressive when I feel strongly about something.
    So subjective value? lol. Seriously? your values are cultural, not individual, for one thing. They are memes. Property rights are a social construct/social contract, not an intrinsic part of the world.
    So take a moment and think about the totalitarian program created by the cells of your body. Centralized planning occurs in your nervous system. Still plenty of stuff happens in a distributed way, but a lot of meaningful stuff happens on a system level, not a cellular level.
    I'm not saying human society is the same as a human body. But why must society be so individual based. Why can't it be tribes and cultures and political entities, within which we act out roles? What if our actions as individuals were meaningless except as fulfilling a function within a larger entity, like a liver in a body.
    To be fair, people don't give austrian/libertarians enough credit. We're all so ignorant. Let's just stick to cybernetics people so we don't have to fight over ideology.

  5. I think it is because people such as Stephanie Kelton are clear and logical whereas Mises type theories are not. For example using words such acatalelltic which does not appear to describe what actually happens in the real world even after excluding various elements. It is becoming increasingly clear that rather than markets moving to equilibrium, then tend towards monopoly without some sensible regulation and that in turn creates huge imbalances and increased poverty and flow on effects. I think increasingly even businesses are becoming anti poverty, recognizing that without it they would have more customers. Plus, the other thing I don’t get is why do you not care about your fellow human beings, given countries which have shown more care to its citizens have the stronger economies? Increased wealth through increasing asset values is not the same as wealth through hard work, it's returning to feudal times, isn't it? Surely we can do better?

  6. Most simply, state denominated currency, such as US Dollars, cannot possibly "come from" taxes paid by currency users ... who wouldn't have any currency to pay.
    It's like the Chicken vs Egg question but in this case much simpler.

    As for Unknown's point about asset values, to simplify:

    Given the need for a common currency for commerce to function, not barter nor trading shiny rocks, the question is then whether the currency system should be optimized for (a) saving, hoarding, hoping for speculative gains (b) actual production, consumption, commerce ... what's called "an economy".

    The former (a) asset inflation, doesn't even exist in mainstream neoclassical (including Austrian) econ, yet some 90% of financial transactions are for this form of gambling, while 10% are involved in the latter (b) "classical" commercial activity.

    In practice, a gold "standard" means the Govt subsidizes gold by selling it at a "Fixed" discount price set by politicians. But woe if fixed prices were set for milk, eggs, bread, bologna, or basic human labor. Gold is OK though.

    For who's on what side of the issue, check out the history of the Greenback Party in the 1800s. They lost out to Goldbugs and Elites who voted repeatedly to shrink the money supply, causing Depression conditions which destroyed *real* capital.

  7. In 2013, Taylor Conant contacted MMTer Warren Mosler and they started an online debate.

    My recollection is that at some point, Mosler just walked away. Statists simply will never and can never justify the necessity of the violence their policies require. They cannot differentiate non-violent voluntary relationships from violence and SWAT team based political acts. They do not want to think about the following: If people are so stupid that they cannot voluntarily live together under AnCap, how are they smart enough to vote for the politicians who will direct the SWAT teams to solve all of the non-existent problems the lack of SWAT team intervention will cause?

    Further, since statists have a very low opinion of average people, they will not comprehend how important it is for average people to be allowed to buy and sell freely to create a true and sustainable price structure. Statists thus have an emotional blockage against understanding economic calculation. Libertarians and Austrians trust average people to be able to live their own lives if they have private property protections for their bodies and things, and can enter into enforceable and enforced contracts over time with money that maintains its value over time. There is no role in that scenario for the elitist technocrat or the SJW. Indeed, their view of the poor and minorities as helpless and hopeless is profoundly racist. They are emotionally unable to digest the notion that their endless meddling is the problem because their self image is based upon them gloriously saving the world. They cannot accept the truth, that they are destroying it.

    1. "if they have private property protections for their bodies and things, and can enter into enforceable and enforced contracts " - all of that requires a state that must provision itself


    2. Charles Hayden: You need a population that will respect each other's property rights and an organization that provides governance and responds to violations of the non-aggression principle. You do not need an organization that initiates force, a state.

    3. Impossible, Bob Roddis, since even well meaning people cannot agree on what a property right is (for example Walter Block says slant drilling for oil, while in Texas you could be shot for doing that). People also can't agree on what constitutes a violation of the NAP.

    4. I totally disagree that property rights are incomprehensible or ambiguous. In fact, almost everyone in the USA understands my house, my dog, my car, my lawn, my body, my money and they understand when those rights are violated. The problem is that they have been brainwashed in such a way that there is this simultaneous impenetrable overlay in their minds whereby they believe that the government has magical powers to fix the problems of society by violating those very rights which they, in their own private life, would never think of violating.

    5. With respect, you have been asked about this before but you just come in and drop a comment like a drive-by shooter and never continue the conversation or even answer questions.

      Walter Block says that slant drilling for oil is OK, other people disagree. People like Rick Miller say that a spotter for a gunman is not violating the NAP, only the gunman is violating the NAP. Wenzel says that it is OK to blow the brains out of someone, even a child for stealing an apple.