MMT busting out into the mainstream!

The Abbott and Costello Routine on Unemployment

COSTELLO: I want to talk about the unemployment rate in America.

ABBOTT: Good subject. Terrible times. It's about 9%.

COSTELLO: That many people are out of work?

ABBOTT: No, that's 16%.

COSTELLO: You just said 9%.

ABBOTT: 9% unemployed.

COSTELLO: Right-9% out of work.

ABBOTT: No, that's 16%.

COSTELLO: Okay, so it's 16% unemployed.

ABBOTT: No, that's 9%.

COSTELLO: WAIT A MINUTE! Is it 9% or 16%?

ABBOTT: 9% are unemployed. 16% are out of work.

COSTELLO: If you're out of work you're unemployed.

ABBOTT: No, you can't count the "Out of Work" as the unemployed. You have to look for work to be unemployed.

COSTELLO: But ... they're out of work!

ABBOTT: No, you miss my point.

COSTELLO: What point?

ABBOTT: Someone who doesn't look for work can't be counted with those who look for work. It wouldn't be fair.

COSTELLO: To whom?

ABBOTT: The unemployed.

COSTELLO: But they're ALL out of work.

ABBOTT: No, the unemployed are actively looking for work... Those who are out of work stopped looking. They gave up. If you give up, you're no longer in the ranks of the unemployed.

COSTELLO: So if you're off the unemployment roles, that would count as less unemployment?

ABBOTT: Unemployment would go down. Absolutely!

COSTELLO: The unemployment goes down just because you don't look for work?

ABBOTT: Absolutely it goes down. That's how you get to 9%. Otherwise it would be 16%. You don't want to read about 16% unemployment do ya?

COSTELLO: That would be frightening.

ABBOTT: Absolutely.

COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?

ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?

ABBOTT: Correct.

COSTELLO: And unemployment can also go down if you stop looking for a job?

ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to just stop looking for work.

ABBOTT: Now you're thinking like an economist.

COSTELLO: I don't even know what I just said!

And now you know why the unemployment figures are improving!

Saving Italy

More on Italy! If you've already read the previous post you know about the MMT training course that will be taking place in Italy later next week. In step with that event, the following has been excerpted from '7 Deadly Innocent Frauds of Economic Policy' by Warren Mosler. (draft) Here, Warren gives us a first-hand play-by-play account of his trip to Rome back in the early 1990s, his meeting with Professor Luigi Spaventa, a senior official of the Italian Government’s Treasury Department and the discussion that brought Italy back from the brink of default.

      
 I now back track to the early 1990’s, to conclude this narrative leading up to the 7 deadly innocent frauds. It was then that circumstances led me to the next level of understanding of the actual functioning of a currency.  


Back then, it was the government of Italy, rather than the United States that was in crisis. Professor Rudi Dornbusch, an influential academic economist at MIT, insisted that Italy was on the verge of default because their debt to GDP ratio exceeded 110% and the lira interest rate was higher than the Italian growth rate.

Things were so bad that Italian Government Securities denominated in lira yielded about 2% more than the cost of borrowing the lira from the banks. The perceived risk of owning Italian government bonds was so high that you could buy Italian government securities at about 14%, and borrow the lira to pay for them from the banks at only about 12% for the full term of the securities. This was a free lunch of 2%, raw meat for any bond desk like mine, apart from just one thing; the perceived risk of default by the Italian government. There was easy money to be made, but only if you knew for sure the Italian government wouldn’t default.

The “Free Lunch” possibility totally preoccupied me. The reward for turning this into a risk free spread was immense. So I started brainstorming the issue with my partners. We knew no nation had ever defaulted in its own currency when it was not legally convertible into gold or anything else.

There was a time when nations issued securities that were convertible into gold. That era, however, ended for good in 1971 when President Nixon took us off the gold standard internationally (the same year I got my BA from U-Conn) and we entered the era of floating exchange rates and non convertible currencies.

While some people still think that the America dollar is backed by the gold in Fort Knox, that is not the case. If you take a $10 bill to the Treasury Department and demand gold for it, they won’t give it to you because they simply are not even legally allowed to do so, even if they wanted to. They will give you two $5 bills or ten $1 bills, but forget about getting any gold.

Historically, government defaults came only with the likes of gold standards, fixed exchange rates, external currency debt, and indexed domestic debt. But why was that? The answer generally given was ‘because they can always print the money.’ Fair enough, but there were no defaults (lots of inflation but no defaults) and no one ever did ‘print the money,’ so I needed a better reason before committing millions of our investors funds.

A few days later when talking to our research analyst, Tom Shulke, it came to me. I said ‘Tom if we buy securities from the Fed or Treasury, functionally there is no difference. We send the funds to the same place (the Federal Reserve) and we own the same thing, a Treasury security, which is nothing more than account at the Fed that pays interest.

So functionally it has to all be the same. Yet presumably the Treasury sells securities to fund expenditures, while when the Fed sells securities it’s a ‘reserve drain’ to ‘offset operating factors’ and manage the fed funds rate. Yet they have to be functionally the same--it’s all just a glorified reserve drain!’

Many of my colleagues in the world of hedge fund management were intrigued by the profit potential that might exist in the 2% free lunch the Government of Italy was offering us. Maurice Samuels, then a portfolio manager at Harvard Management, immediately got on board, and set up meetings for us in Rome with officials of the Italian government to discuss these issues.  


Maurice and I were soon on a plane to Rome. Shortly after we landed, we were meeting with Professor Luigi Spaventa, a senior official of the Italian Government’s Treasury Department.  I recall telling Maurice to duck as we entered the room. He looked up and started to laugh. The opening was maybe twenty feet high. “That’s so you could enter this room in Roman times carrying a spear” he replied to me.

Professor Spaventa was sitting behind an elegant desk. He was wearing a three piece suit, and was smoking one of those curled pipes. The image of the great English economist John Maynard Keynes came to mind, whose work was at the center of much economic policy discussion for so many years. Professor Spaventa was Italian, but he spoke English with a British accent, furthering the Keynesian imagery.

After we exchanged greetings, I opened with a statement that got right to the core of the reason for our trip. ‘Professor Spaventa, this is a rhetorical question, but why is Italy issuing Treasury securities? Is it to get lira to spend, or is it to prevent the lira interbank rate falling to zero from your target rate of 12%?”

I could tell that Professor Spaventa was at first puzzled by the questions. He was probably expecting us to question when we would get our withholding tax back. The Italian Treasury Department was way behind on making their payments. They had only two people assigned to the task of remitting the withheld funds to foreign holders of Italian bonds, and one of these two was a woman on maternity leave.

Professor Spaventa took a minute to collect his thoughts. When he answered my question, he revealed an understanding of monetary operations we had rarely seen from Treasury officials in any country.

“No,” he replied. “The interbank rate would only fall to ½%, NOT 0%, as we pay ½% interest on reserves.”

His insightful response was everything we had hoped for. Here was a Finance Minister who actually understood monetary operations and reserve accounting! (note also that only recently has the US Fed been allowed to pay interest on reserves as a tool for hitting their interest rate target) I said nothing, giving him more time to consider the question. A few seconds later he jumped up out of his seat proclaiming “Yes! And the International MonetaryFund is making us act pro cyclical!” My question had led to the realization that the IMF was making the Italian Government tighten policy due to a default risk that did not exist. 

Our meeting, originally planned to last for only twenty minutes, went on for two hours. The good Professor began inviting his associates in nearby offices to join us to hear the good news, and instantly the cappuccino was flowing like water. The dark cloud of default had been lifted. This we time for celebration!

A week later an announcement came out of the Italian Ministry of Finance regarding all Italian government bonds - ‘No extraordinary measures will be taken. All payments will be made on time.’

We and our clients were later told we were the largest holders of Italian lira denominated bonds outside of Italy, and managed a pretty good few years with that position. 

Italy did not default, nor was there ever any solvency risk. Insolvency is never an issue with non convertible currency and floating exchange rates. We knew that now the Italian Government also understood this, and were unlikely to “do something stupid” such as proclaiming a default when there was no actual financial reason to do so.

Over the next few years, our funds and happy clients made well over $100 million in profits on these transactions, and we may have saved the Italian Government as well. We also gained an awareness of how currencies function operationally that inspired this book and hopefully will soon save the world from itself.

As I continued to think through the ramifications of government solvency not being an issue, the ongoing debate over the US budget deficit was raging. It was the early 1990’s, and the recession had driven the deficit up to 5% of GDP (deficits are traditionally thought of as a percent of GDP when comparing one nation with another, and one year to another, to adjust for the different sized economies).

Gloom and doom were everywhere. David Brinkley suggested the nation needed to declare bankruptcy and it over with Ross Perot’s popularity was on the rise with his ‘fiscal responsibility’ theme.   Perot actually became one of the most successful 3rd party candidates in history by promising to balance the budget. His rising popularity was cut short only when he claimed the Viet Cong were stalking his daughter’s wedding in Texas. With my new understanding, I was keenly aware of the risks to the welfare of our nation. I knew the larger federal deficits were what was fixing the broken economy, but watched helplessly as our mainstream leaders and the entire media were clamoring for fiscal responsibility (lower deficits) and prolonging the agony. 

It was then that I began conceiving the academic paper that would become Soft Currency Economics. I discussed it with my previous boss, Ned Janotta at WilliamBlair, and he suggested I talk to Donald Rumsfeld, his college roommate, close friend, and business associate, who personally knew many of the country’s leading economists, about getting it published. Shortly after, I got together with “Rummy” for an hour during his only opening that week. We met in the steam room of the Chicago Raquet Club and discussed fiscal and monetary policy. He sent me to Art Laffer who took on the project and assigned Mark McNary to co-author, research and edit the manuscript which was completed in 1993.

Soft Currency Economics remains at the head of the ‘mandatory readings’ list at www.moslereconomics.com where I keep a running blog. It describes the workings of the monetary system, what’s gone wrong, and how gold standard rhetoric has been carried over to a non convertible currency with a floating exchange rate and is undermining national prosperity.

Will Italy beat Greece to the MMT punch?

MMT Summit - ITALY

Transcribed using Google Translator
Original article (Italian) can be found here

In Italy the training course in Modern Money Theory (MMT) will be held in Rimini, 105 Stadium in a square Pasolini / C, on Friday the 24th (beginning at 21.30 hours) on Sunday, February 26, 2012 (ending at 18.15), with speeches by William Black (JD, Ph.D., Associate Professor of Law and Economics at the University of Missouri-Kansas City), Michael Hudson (President of The Institute for the Study of Long-Term Economic -Trends-ISLET, Wall Street Financial Analyst), Stephanie Kelton (Ph.D., Associate Professor of Economics at the University of Missouri-Kansas City), Marshall Auerback (expert in investment management), Alain Parguez (Emeritus Professor of Economics Ist Class, Université de Franche-Comté at Besançon - France - Faculty of Law, Economics and Political Science), economists of world stature and provided a solid curriculum.

The Modern Money Theory (MMT) is now probably the only existing instrument of economic and social science, which is able to effectively interfere with the process of "financialization of the economy" (which is the transition from productivist capitalism-one that invests money for the production of goods to the drawing-profit financial-market capitalism that derive profit from money through money-) and counter the primacy of the banking system, which is overwhelming politics and democracy.

The main aspect of Modern Money Theory (MMT) is put at the center of the sovereign state's ability to create wealth by issuing currency. In contrast, the euro, that currency is not the sovereign of any of the eurozone countries, forcing states to borrow as an ordinary citizen with the banks. It would be important to make all citizens aware of this aspect, because it is in this context that plays the future citizens. Alain Parguez has so written in relation to the summit Modern Money Theory (MMT) in Rimini: "I will bring the latest research that reveals how the financial coup has been carefully planned by France and Germany who are the masterminds behind the Vatican-Brussels axis .
But since the time of Mitterrand, his advisers knew perfectly well that the entire industrial base of southern Europe would have been destroyed, there to form a new empire "colonial". Now, to come today, it must be said, and I will explain, as European national debts, and the alleged damages resulting, have been greatly exaggerated. Why? Because the big banks should be over-compensated for their losses due to speculation on those debts. In fact, interest rates "shylockiani" (Shylock is the character of the rich jew usurer in The Merchant of Venice by Shakespeare, ed) on eurozone debt is a cornucopia for large European banks and corporations which receive them.

The Euro is still destined to collapse, taking with him the austerity, the destruction of all state spending and productive wild privatization. Coming to your Summit, I bow in front of the Italians, because an event of this kind would be impossible here in France or Germany. "The five economists speakers will illustrate the following themes: Stephanie Kelton and Marshall Auerback (MMT): All that we know money is wrong. The birth of the modern bank in 1971. Currency sovereign vs sovereign coin. We do not have money, the banks have no money, money has no value in itself. So what is money? Who creates the money? The 3 sectors: basic Godley and its fundamental implications for understanding the government's deficit and what they really are. The sovereign state as the creator of net financial assets for the citizens.
Taxes destroy money myths about taxes and how to NOT fund the state with the sovereign currency. What are the fees but not in the Eurozone sovereign. The unpronounceable words: The Debt! The Deficit! They are always the worst ever? Spending in Deficit Spending in Deficit vs Positive Negative. The Deficit Positives are sustainable in a sovereign nation? The Modern Money Theory for reaching full employment, full welfare state, the full education and full production: that is FULL DEMOCRACY. The MMT can help your business? MMT and external debt. The MMT can help us in default from the Euro? As Italy is facing default on the Euro. Alain Parguez: Europe's elites, the genesis of an aberration of democracy: by Schuman, Monnet and Perroux birth of financial tyranny in Brussels.

The origins of the Franco-German and Neomercantile their dream: to get widespread poverty and accumulation of super profits at the top. The European technocrats decide the destruction of European democracies. The true significance of supranational European treaties. The collapse of the European left in the face of neoliberal dogma: a catastrophic deception. The real 'agenda' of the ECB (European Central Bank). The truth about the state of the European economy: the real unemployment, real private debt, the true state of bank balance sheets, the real prospects. What to do now in the Italy on the brink of the abyss. Wlliam Black: The banks are all criminals? The difference between my bank branch and the likes of Goldman Sachs.

The Great Financial Crisis of 2007: Money Manager Capitalism, the Clinton years, the deregulation of finance, the bubble, the explosion of global financial fraud. CDOs, CDSs Toxic assets and explained the grandmother. Nobody on Wall Street has gone to jail, the real conflict of interests of the larger planet. Obama and government-Sachs-Sachs in the U.S.. The contagion from us here: how has destroyed the lives of millions in Europe. The U.S. Wall Street, Italy, the Mafia: Who is worse off? How to prevent the next crisis. Black / Hudson: MF Global & Italy, what you do not know. Michael Hudson: The Triumph of Neoliberal: a historical review of how the Neoclassical killed Marx and Keynes, to introduce neoliberal domination. Clarifying roles and today's protagonists of Capitalism: Imperialism, Multinational Enterprises, Globalization, mega-banks, and how they all worked to destroy democracy.

The rehearsals were done in Eastern Europe: how the Shock Therapy has stripped the post-communist democracies. The Financial Coup d'Etat in Europe: the IMF in the lead the army that has already ravaged Greece, Ireland, Iceland and Italy approaching. And 'possible to keep the financial capitalism in the third millennium? How has degenerated in this way? Black / Hudson: MF Global & Italy, what you do not know. Marshall Auerback: What do the Central Banks with a sovereign currency: what are the reserves, such as controlling inflation BC. The 'ghosts' which frighten us about the operations of BC.

It makes a difference if the bonds are in the hands of domestic or foreign? The BC and the Treasury controls the interest rates by currency sovereign, not the markets. Conversely: the eurozone, where markets have power over life and death over state budgets, as it happens. So who are these markets? What will calm the markets in the Eurozone: The Ability to Pay resulting from the adoption of new national currency sovereign or austerities? Here's what the Spiral of Economic Deflation Sets which comes from the austerity packages, and why things much worse. Unmasking the ECB (European Central Bank) here is what could be done to save us and why it does not.

Who obeys Mario Draghi? Blood in the streets: a projection of the possible collapse of our economies and popular rebellion. Round table on Saturday evening: The 5 economists discuss this issue, "Occupy Wall Street and other movements of 0.1%. The 99.9% is to go shopping - The real tragedy of present-day democracies is that people have lost the ability to react even before the unimaginable made plausible. We riattivarci? ".



For information: http://www.democraziammt.info/ and http://www.youtube.com/watch?v=vanWVMUWF2U