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Kenneth Rogoff


Project Syndicate at - www.project-syndicate.org, March 4. 2019. 8 pgs., with reader comments


Professor Rogoff discusses the advocacy of this Modern Monetary Theory - MMT - and terms it 'nuts'


His assessment: "And this one could potentially destable the entire financial system."


Although MMT is not a new, recent theory being proposed by progressive economists it has recently gained much radical politician's advocacy. As Professor Rogoff notes, these politicians 'advocate using the Fed's balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates."


He describes in some detail why adoption of MMT would be a financial disaster in terms of its impact on inflation and interest rates. And he supports Fed Chair Jerome Powell's view that with the US debt already being so large and continuing to rinse there would be an international reaction because so much of US debt is held by foreigners. He comments that, "the US dollar has become increasingly dominant in global trade and fianance". Still foreigners are willing to 'absorb' this debt, but if the debt becomes perceived as unpayable, unsupported, then the dollar itself could become too risky to hold.


He switches to discuss what the Fed and Treasury should do. "The right approach to balancing risk and rewards is for the government to extend the maturity structure of its debt, borrowing long-term instead of short-term. and "it is far easier to inflate down the value of captive long-term debt (provided it is not indexed to prices) than it is to inflate away short-term debt, which the government constantly has to refinance."

Lovely, this is indeed a policy I have wondered for years why the treasury didnot adopt it. But perhaps the private sector might have some ideas if this became an officially stated policy.


Further, he writes, "True, policymakers could again resort to financial repression, and force citizens to hold government debt at below-market interest rates, as an alternative way of reducing the debt burden".

The key word there is 'again' because the government did exactly this in the 1950-60's as its method for writing off the debt from financing WWII. It by law set the limit for interest rates paid by banks and other financial institutions on the peoples' bank accounts lower than the rate of inflation. The government scheme was thwarted by the creation of the Reserve Fund in which individuals could place savings and receive greater interest.
And governments already are resorting to the same 'financial repression' by holding all interest rates on savings even lower than the low inflation. Already in Europe billions of 'dollars' worth of bonds are set a negative interest rates.


In this discussion Professor Rogoff appears to have changed the subject from MMT and 'Green New Deal', but not really. Because the underlying financial aspect -result - of implementing MMT is to have the Fed issue short-term liabilities in order to buy long-term government 'debt'. In effect the opposite monetary policy that Rogoff proposes.


Now, lets turn to a different, more fundamental, issue, the 'independence of the FED. In his first paragraph Professor Rogoff frames the discussion this way: "the next battle for central bank independence is already unfolding." This sounds like he believes the FED is now independent of government but might loose independence. But in his concluding paragraphs he writes: 'Contrary to widespread opinion, the US central bank is not an independent financial entity, the government owns it lock, stock, and barrel."
And again the following is more important for everyone to understand than is the MMT idea, "Unfortunately, the Fed itself is responsiblefor a good deal of the confusion surrounding the use of its balance sheet, In the years following the 2008 financial crisis, the Fed engaged in massive 'quantitative easing' (QE), whereby it bought up very long-term government debt in exchange for bank reserves and tried to convince the American public that this magically stimulated the economy. QE, when it consists simply of buying government bonds, is smoke and mirrors."
"The Fed's parent company, the US Treasury Department, could have accomplished much the same thing by issuing one-week debt- and the Fed would not have needed to intervene."

Bravo, Bravisimo! But it is not the Fed that is responsible - the entire political establishment from the founding of the
FED in 1913 has insisted on this pretended indepedence, even when Congress delegated the fundamental Constitutional government duty to create money to the FED. Also, this subtrafuge that the FED is 'buying' government debt, is a calculated miss use of language. Actually, the Treasury auctions its bonds and bills to the special set of private banks in exchange for the banks creating 'money' in the form of government credit on bank ledgers. Then the FED transfers (exchanges) those credit instruments to its own ledgers (calling it debt) while rebuilding the private bank reserves that are required by law - plus extra reserves the banks voluntarily hold there.


He concludes, "Misguided ideas may yet drag the issue of US central-bank independence to center stage, wih unpredicable and potentially serious consequences"

What does this mean? From his discussion it appears that he believes the political battle that is begining over a government and FED monetary- fiscal policy based on MMT will reval that the FED IS NOT independent of the Treasury, and if the public then realizes this some establishment heads might meet Dr. Guiliteen.


Several years ago I wrote an analysis of this MMT based on its description in Professor Wray's book - MMT, and posted it to the Internet web site. At that time it appeared that MMT was mostly a child of a small group of progressive economists. Now, with all this excitement over 'Green New Deal' and the proposal that it can be financed by MMT the subject has generated an avalance of commentary in print and via digital media. So I revised my review and added more commentary plus added a very lengthy list of references - this is at - http://www.xenophon-mil.org/politicaleconomy/wrraymoney.htm or use {short description of image} And see the expanding list in my draft article on the history of money and 'value' at {short description of image}


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