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January 05, 2013

FDL Book Salon Welcomes L. Randall Wray, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems

Posted in: FDL Book Salon

Welcome L. Randall Wray (Modern Money and Public Purpose) ( and Host William K. Black, UMKC Economics, Law  (New Economic Perspectives)

Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems

Money as a means to Fix Problems rather than an excuse for Causing Problems

I am hosting the Firedoglake discussion of my colleague Randy Wray’s new “Primer” on macroeconomics. Macroeconomics is the study of the overall economy – economic growth, recessions, depressions, inflation, unemployment, and employment are big issues that macroeconomics studies. The key policies it addresses are usually divided into fiscal (tax and spending) and monetary policies (the growth of the money supply and setting interest rates). The concept of monetary tools has broadened as we have seen the Federal Reserve change what had been a severely constrained “lender of last resort” function of the central bank into the most massive bailout program in history. Similarly, the central bank’s interest rate setting function that was long focused on short-term rates has expanded into large experiments that attempt to lower long-term interest rates (“quantitative easing”).

The part of the book title most likely to cause the reader to ask: “what does that mean” is the phrase “Sovereign Monetary Systems.” It is the Primer’s key concept. The Primer explains to the general reader something that an enormous number of people with doctorates in economics fail to understand – sovereign monetary systems are enormously different than non-sovereign systems. Those differences have profound implications for our real-world economies. The failure of so many policy makers and economists to understand sovereign monetary systems causes massive, gratuitous suffering. The failure to understand how sovereign monetary systems work causes economists to inflict policies that are not simply ineffective, but immensely self-destructive.

The euro provides a good example of the difference between sovereign and non-sovereign monetary systems. The Nations that joined the euro had to give up their sovereign currencies. The euro is not a sovereign currency because it is not issued or backed by a sovereign nation. We can observe the tragic consequences of the twin policy failure – abandoning their national sovereign currencies and adopting an international currency that lacked sovereignty. Eurozone citizens are being told that because they adopted the euro they must give up essential attributes of sovereignty. The situation is not parallel to the sovereign States joining the United States of America and agreeing to a system of dual sovereignty. There is no “United States of the Eurozone” and no political entity is taking over the lost attributes of sovereignty.

The central economic task of a nation state is to provide full employment and economic growth without ruining the world and without producing damaging inflation. The Primer explains how automatic stabilizers work and how they, not the bank bailouts, saved us from falling into a Great Depression. It explains why, particularly in response to the Great Recession, it was normal and vital for the United States and the Eurozone to run very large budget deficits. The Primer explains the paradoxical nature of many aspects of economics. It is economically rational for individual consumers to respond to a recession by cutting their spending, but the cumulative effect is to make the recession more severe and lengthy (the “paradox of thrift”). The Primer shows why it is essential for the government to increase its spending and reduce taxes in response to the Great Recession. These “counter-cyclical” policies reduce the recession’s severity and length, decreases unemployment, reduces the misery that the recession inflicts. By spurring growth, the counter-cyclical policy also reduces the budget deficit. That makes it a win-win-win-win-win policy.

The Primer explains why austerity (cuts in spending and tax increases) in response to the Great Recession has the opposite effects. Austerity makes the recession more severe and longer-lasting, increases unemployment, adds to misery by cutting spending that aids the recession’s worst victims, and can increase the budget deficit. Inflicting austerity in response to the Great Recession is a lose-lose-lose-lose-lose strategy.

The Primer makes clear that Berlin is telling the Eurozone’s citizens that because they abandoned their sovereign systems they must adopt austerity – that there is “no alternative” to the quintuple losing strategy. It is not a matter of some other government providing the necessary increase in spending and tax reductions that Eurozone desperately needs. Berlin insists that there must be no entity created that it is capable of implementing the quintuple win strategy.

The Primer does more than explain why a Nation with a sovereign currency can and should employ the quintuple win strategy. It shows how and why to design a job guarantee program that will end the waste of leaving people willing and able to work unemployed and suffering. The jobs guarantee program would put the lie to the claim that the unemployed are lazy moochers. That is why those that demonize the poor will fight tenaciously to prevent a jobs guarantee program that will destroy their dogma. Berlin is forcing the opposite strategy on the Eurozone – fierce cuts to worker’s wages that are causing ever greater inequality and substantial emigration of university graduates.

The Primer can prepare you to explain why, for a Nation with a sovereign currency, a “balanced budget” (1) is not the norm historically, (2) would often be harmful, (3) is not essential to prevent the national debt from “spiraling out of control,” (4) does not increase economic growth, (5) has nothing to do with avoiding burdening our children and grandchildren, (6) has nothing to do with China “owning the U.S.”, and (7) is not necessary to avoid inflation, much less hyper-inflation. You will love reading Paul Samuelson’s admission of the pride he took in the role his famous textbooks played in helping to create a myth of the desirability of the balanced budget.

“I think there is an element of truth in … the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. [O]ne of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires [p. 200].

“Myth,” “superstition,” and “religion” – functioning to “scare people” – is it any wonder that neo-liberal economists could never take the equivalent of the Hippocratic Oath? They “do harm” as a matter of routine. Keynes explained why economists embraced brutal economic dogmas:

It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

What neo-liberal economists most fear is that we will come to learn how money actually operates and what a Nation with a sovereign currency can accomplish. Please make their worst fears come true – read the Primer.


[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions.  Please take other conversations to a previous thread. - bev]

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