Hidden Truths of Economy and Policy Making. An Understanding which will revolutionise the global economy impacting entire humanity

As economy and economic policy making is full of complex and difficult to understand terms and words,  common people or their representatives are not able to contribute to the policy making with total understanding and conviction, even though it is policies which directly determine their livelihood and survival. The lack of participation of common people, who are the main stakeholders, in this discourse gives space for misrepresentation of facts and fraudulent interpretation, leading to monumental exploitation and continuing fraud on almost entire humanity.

That's how it is possible to institutionalise a system which works to corner the benefits of production and wealth in favour of few people, wrongly citing scarcity of capital as reason. To defeat this diabolical structure, it has to be told in a simple language, so that the truth will reveal itself. 

Whoever understand the system of money creation and supply, they will immediately see the falsehood practiced in the name of monetary and fiscal policies. These are not empty words. I owe to clarify any questions raised about what I state here.

Money plays a predominant role in life and those without money is treated very badly by society. It is real resources including human labour, raw materials, plant and machinery which are the primary resources and backbone for the production of goods and services, without which production is not possible. A country with very high real resources could achieve tremendous real growth, and those human resources, which is the backbone of production, can also attain high standard of living. 

If that is not happening and they are in poverty and distress, while most of the benefits go to those who rent capital, it is so because availability of capital is assumed to be scarce. But, is the capital scarce? It was, with the gold standard fixed exchange rate currency system, which was given up by most of the countries long time back, as currency issue by government was linked to gold reserves in that currency system and restricted currency supply was not meeting the demands of a growing economy.

Does the capital continue to be scarce with the present currency system which is different from the earlier system? A currency system, in which currency has no intrinsic value, no commitment to convert to gold on demand and no fixed exchange rate to protect, is now followed by most countries (India has been operating on a managed floating exchange rate regime from March 1993 - Research Study, RBI). With this currency system, which is not restricted by gold reserves, the currency supply is not limited by that, as there is no commitment to convert the currency to gold on demand. So, the currency supply from government spending and bank lending is not limited any more by the gold reserves.

The spending of the currency issuing government in the present currency system is constrained only by the real goods and services available to purchase with those spent currency in real economy and regulatorily restricted by the parliamentary approval of the Budget and the Appropriation Bill. The government continues to assume that it has only limited capacity to create currency and so is financially constrained to fund production, when productive capacities are available.

It means that there is not even an attempt to have the right understanding of the present monetary system and a structure and practice based on fraudulent interpretation and undue credit to capital have been established, without any repudiation, highly influenced by the previous currency system. Because of this false understanding, majority of people are made to live in poverty forever, as those renting capital get  preferential reverence.

False Understanding 1:

"Government, the monopoly issuer of sovereign fiat currency, must tax, borrow to fund its budget expenditures".

We should first understand that without the currency spent by the government, there won't be any currency in circulation in the country, including the currency to pay the tax liabilities, 'lend' to the currency issuer and save. Government is continuously infusing currency into circulation and removing currency from circulation. Currency removal and infusion by the monopoly supplier are called as revenue, borrowing and spending. We also need to understand what currency is to the issuer and the user. Except the federal government which issues currency, everybody else, including State Governments are currency users. Federal Government issues currency through its Central Bank, the Reserve Bank of India, as legislated by the Parliament. 

We need to note from the above, how does casual naming, the resultant wrong nomenclature and narrative can destroy billions of people's life.

Federal Government has the supreme sovereign power of currency issue (creation) and it is the monopoly issuer of national currency. Let us look at on what basis, currency is created and the quantum of currency issue determined, as it is that which decides whether the government needs external source to fund its expenditure. And why is this aspect not thoroughly researched, studied and taken up for public debate is a trillion dollar question. 

Government adopts a particular currency system which is the basis for currency creation and issue. As currency is the common nominal exchange factor for internal (within a country) as well as external transactions, it is always based on a system agreed upon by all the countries. It could be a fixed exchange rate currency system like gold standard and gold exchange standard or the fiat floating exchange rate currency system presently followed by most of the countries including India.

The currency could be a commodity like gold, silver or even a paper, whatever the government decides to have as currency. If gold or silver coin is used as currency, then the gold or silver reserves determine the quantum of currency in circulation. If it is a paper currency convertible to gold, then also gold reserves determine the quantum of currency. In both these systems, currency supply is limited and the private capital is scarce.

Gold was used as money since the first gold coin was minted around 700 BC. Silver also was used as money along with gold. In 16th Century, paper money was introduced in Europe. As the introduction of paper money posed some problems, the gold standard emerged as an alternative and in the early 1870s, the global monetary system transitioned from bimetallism to the gold standard. 

The gold standard is a monetary system in which a country sets a fixed price for gold and commits to buy and sell gold at that price. And that fixed price determines the value of the currency. The critical factor of the system was the sovereign commitment to convert currency to gold on demand (convertible on demand to a specified quantity of gold) and such commitment was international. (Recent Global Crisis and the Demand for Gold by Central Banks: An Analytical Perspective. DEPARTMENT OF ECONOMIC AND POLICY RESEARCH, RBI, SEPTEMBER 2011). Similarly, other countries fixed the value of their currencies in terms of gold. That is how exchange rate of currencies between countries get fixed. As the exchange rate is fixed in gold standard, it is called fixed exchange rate currency system. 

The main characteristics of gold standard are the commitment to buy and sell gold at the fixed price, the currency having intrinsic value as it is defined in terms of a given quantity of gold and the fixed exchange rate with other currencies. The gold reserves play a predominant role in the economy during the gold standard era. As external trade imbalances were settled with gold, export was a necessity to  protect the gold reserves and that is why, export oriented economic development became the focus of every country, even though exports lead to real loss of goods and services, which otherwise would be available for local consumption. Not only gold reserves are required to settle trade deficit, it is also required to meet the obligation to buy and sell gold on demand. So, it is the gold reserves which determined the quantum of currency in circulation during gold standard era. 

Unless there was new gold findings from mines or trade surplus, there couldn't be any additions to gold reserves and so the government was not able to issue currencies to meet its budgetary expenditures. And so the practice of raising funds from tax imposition and treasury sale was resorted to. When the budgetary expenditures exceed tax revenue, that excess expenditure is called budget deficit. Government sells treasury bonds and securities to fund the excess expenditure. The concept of "balancing the budget" came into being, as inadequate gold reserves failed to meet the demand for additional money supply.

Bretton Woods System which replaced the gold standard also is a fixed exchange rate currency system in which all national currencies were pegged to US dollar, and the dollar, in turn, was convertible to gold at the fixed rate of $35 per ounce. The global financial system continued to operate an indirect gold standard. As dollar replaced gold as common factor among currencies, countries accumulated dollar reserves instead of gold reserves. So, forex reserves, in place of gold reserves, played a critical role in the economy of a country. 

After WWII, forced by the funds flowing to countries rebuilding their infrastructure, many countries starting to convert their dollar reserves to gold and the increasing domestic inflation, trade deficit and declining gold holdings, the US Government suspended the convertibility of US dollars to gold in 1971. With that, the Bretton Woods fixed exchange rate currency system collapsed which paved the way for fiat floating exchange rate currency system to emerge as an alternative. Many countries adopted the floating exchange currency system in which the currency creation is not linked to gold, the currency has no intrinsic value, the exchange rate is floated in the forex market and there is no commitment to buy and sell gold at a fixed price. India has been operating on a managed floating exchange rate regime from March 1993. All foreign exchange receipts could now be converted at market determined exchange rates. ( https://m.rbi.org.in/scripts/PublicationsView.aspx?id=12252). 

Impact of this historic change in the currency system on policy options with potential benefits of unimaginable proportion:

1. Government's commitment to convert the currency to gold on demand doesn't apply anymore.

2. The exchange rates between currencies are not fixed.

3. With the floating exchange rate currency system, the exchange rate between currencies is dynamically determined in the forex market, based on the demand and supply.

4. Gold or dollar reserves are not required to be maintained as there is no commitment to convert to gold on demand and no fixed exchange to protect.

5. CURRENCY SUPPLY IS NOT RESTRICTED BY THE GOLD or DOLLAR RESERVES WITH THE PRESENT FIAT FLOATING EXCHANGE RATE CURRENCY SYSTEM.

This is a development which brings enormous fiscal freedom.

6. Federal Government having the sovereign power to create and issue currency should supply the currency to fund the budgeted expenditure, when Parliament approves the Budget and the Appropriation Bill; that is the approval to supply the currency to fund the budgeted expenditure.

When it happened, no country appears to have realised that it has got the magic wand to eradicate poverty and the ignorance still continues.

7. Federal Government need not mobilize funds from taxation and treasury sale to supply currency to meet budgetary expenditures; movie theatres don't collect back the tickets sold to reissue. There are other reasons for taxation and treasury sale. Unlike the Federal Government, the State Governments are currency users like a common man. So, a State Government needs the tax revenue to fund the States's expenditures. 

8. As the currency creation originates from the Federal Government, federal government spending itself is creation of currency. That is, WHEN FEDERAL GOVERNMENT SPENDS BY CREDITING A BENEFICIARY'S ACCOUNT, THAT CREDITING ITSELF IS CREATION OF CURRENCY. 

9. Scarcity of capital, which emanated from scarcity of gold reserves, is not an issue anymore, as government has the power to spend. Scarcity of real resources including human labour is the defining factor now, not the capital.

10. Spending is a political choice now.

With all the nominal constraints removed, real economy could attain its full potential. With the liberty provided by the new currency system to make available required money supply, the country is in a position to achieve tremendous growth, deploying it's billion strong employable people creating the largest local market and the needed supply.

This hidden truth which could bring about immeasurable benefit to the entire humanity got revealed by Warren Mosler. 

Tax revenue to State Governments:

Federal Government is the currency issuer and the State Governments are currency users.

Tax is a revenue to a State Government that funds the States's expenditures. But, to the Federal Government having the sovereign monopoly power to issue fiat currency, tax collection is removal of old currency from circulation, as the Federal Government funds its expenditures by issuing new currency. Federal Government doesn't need to penalise developed States, by using the taxes collected from those States to fund the less developed States' expenditures, thereby preventing the developed States to progress further. So, taxes collected from a State should be entirely left to that State to spend, as that State's progress would benefit the entire country. Federal Government could provide additional funding to the States who are having lower tax revenue, to bring those States' development to the level of the developed States. 

Addendum on inflation and private sector:

Understand the monumental impact and importance of the above. Instead of staying with the revelation on how the government gets funded, don't jump to inflation immediately.  We are not ignoring inflation at all. We go indepth into the question of inflation and identify all possible causes of inflation missed by other streams.

When we say that government can spend to deploy all available productive resources, we are not at all undermining the relevance of the private sector. Private sector is an integral part of the process, we are only pointing out that it functions within the institutional structure created by the government. When government imposes tax liability, it immediately creates a demand for its fiat paper currency, as it is a tax credit. In the process, government provisions itself with labour, goods and services to serve public purpose, as real goods and services are sold to the government by the non government sector to get the tax credit, so that taxes could be paid with those tax credits. Real tax is paid with those goods and services and not with the nominal currency supplied by the government. It is private sector which supplies those goods and services and it is very much needed to provide those supplies and an inevitable part of the process. Private sector doesn't mean big industries alone, even MSMEs and self employed individuals are the private sector.

Rajendra Rasu 

Warren Mosler: "The purpose of exports is to get imports"

Warren, could you elaborate on your point that the purpose of exports is to get imports? 

https://www.youtube.com/watch?v=Bxt50yigGEM

Warren: The dynamics in Europe with the Euro were that Europe was set up based on the traditional mainstream export model and what an exporter does; what somebody who desires to export does is, they keep fiscal policy tight and the Maastricht Treaty was set up to keep fiscal policy tight, three percent deficit limits, sixty percent debt to GDP with some enforcement provisions for violators; at the same time this is much what Germany did when Germany had its own currency, the Mark and was exporting.

However what this policy does is, it keeps domestic demand down, but it also makes the currency harder to get, so it makes the currency strong and so what Germany did, what Japan did, what China does is, they then go out and buy foreign exchange to keep their currencies weak enough, to keep their real wages and the real cost which is mainly wages low enough, so that they can net export, now this is to the detriment of the population as a whole, but it's to the benefit of certain specific exporters, so the basic model is to keep fiscal policy tight and then sell your currency, buy the currency of your target market to keep your currency & your real wages low enough, so that you can then net export and at the same time you accumulate reserves of the targeted export region, so Germany for example had something like 50 billion US $s, back then that was a lot of money in 1998 when the currencies were irrevocably locked as part of the strategy, Japan probably close to two trillion in foreign exchange reserves and so is China.

So, the Europe what they did was, they copied that model with the tight fiscal policy but they can't go out and buy dollars, so you see they can't buy dollars or yen or anything else because that would be a ideological violation, it would give the appearance that the dollar is backing the euro, if  ECB was building dollar reserves or building yen reserves, then you'd say, oh look, what's behind the Euro, that they wanted their currency to be the reserve currency like the dollar, the dollar wasn't build any, we don't build any foreign exchange reserves and so they just did the tight fiscal policy and didn’t buy the foreign exchange, so what happens, the currency just goes up to the point, where your exports never materialize and as your competitiveness increases and your wages get more competitive, your exports start to go up, the currency just gets stronger and so that's what's been going on now, since the beginning or the euro is eighty five to the dollar at one point, now it's 130 after being as high as 160.

So in general this policy is thwarted, as you know this has kept Europe from becoming the net exporter that it desires; let me add one more thing and that is it if you're gonna be a net exporter, then you've got to own the foreign exchange of the other country, okay and nobody has your currency, so if you want your currency to be a reserve currency, you have to be a net importer because the United States for example we import and we pay for it in dollars and then the rest of the world has those dollars and you had Germany and all the European countries are building dollar reserves exporting to the US and Japan and China and so by running a trade deficit everyone else gets dollars because they sell us tires and cars and we give them dollars, dollar deposits at the Fed and so the dollar becomes the world's reserve currency because they're using it for reserves to drive export, okay Japan now why doesn't the yen reserve currency, big powerful country, second largest economy in the world, because they're a net exporter, so nobody has any yen, everybody is short in yen; when you're an exporter, the world is short in your currency, so here's Europe want it to be a net exporter which means everyone is going to be net borrowed in euros and at the same time they want the euros to be the reserve currency where everybody has euros, well, you're talking out of both sides of your mouth that can't happen, it is a violating the accounting identity. 

You have to separate the real goods and services which would be cars and houses and handbags and personal service you know trainer services from the nominal, which are just data in spreadsheets which is the currency, the currency is not a real, it's just nominal, okay it's just a number, you don't actually eat it or drive it or do anything, it's just a number, so your real wealth is best described as your pile of stuff, so your pile of stuff consists of everything you can produce yourself domestically at full employment plus your pile gets bigger than the rest of the world who sends you real goods and services - your pile gets smaller when you have to send the rest of the world goods and services, so your real wealth is your domestic production plus your imports minus your exports. 

Your exports are the real cost of production, now that doesn't mean they're bad, because but you have to remember the whole purpose of exports is to get imports, so if you can effectively use your exports to get more imports that's called improving your real terms of trade, your real terms of trade is what it's classically been talked about which is how much can you get for what you send out, you're gonna be sending out exports, you want to get as much possible, you want the best real terms of trade for your nation, so if you can send out one Prada handbag and in return get one Mercedes, that's pretty good exchange, your real terms of trade are good and so Italy's always had and with its luxury export, exceptionally high real terms of trade and done very well and however if you were just gonna send out your exports and not import anything what's the point, you can play golf instead of building something to send to somebody and not use it, okay. 

So I don't know if that exactly answers your question and your foreign exchange that you build when you export, the only way you get any real benefit from that is if you buy something with it; just piling up numbers and bank accounts does you no good until you spend it.

Internationalisation of Indian Rupee (INR)

Our response to the RBI report with editorial assistance by Warren Mosler.     

Internationalisation of INR should be a natural progression from strengthening the local economy; that is, without realizing the full productive potential of the country, thereby making the country attractive for investors, internationalising the currency is like putting the cart before the horse.       

Understanding the currency system, as that is the one which determines the fate of the economy, is the basic prerequisite before even thinking about the policy options for the country. Any policy structured without this understanding results in totally wrong direction, affecting the livelihood of every single person in the country, particularly the downtrodden.

If internationalisation of INR is structured based on policy options & market responses of foregone currency system, then it could lead to negative consequences.

Internationalisation of INR happens to the extent non residents want to net save INR, as evidenced by a country that runs persistent trade deficits. That desire to save INR, evidenced by net exports to India, is what makes the INR what's called a reserve currency.

Most important, however, is to keep one's eye on optimizing India's real wealth which 
=Total domestic output + imports - exports. 
So, how do we optimize real wealth?

First and foremost is to optimize domestic output, which means sustaining full employment. India’s lost real output from underemployment and unemployment is beyond imagination. India’s labor force participation rate indicates real output could be increased substantially simply by adapting a true full employment policy, with living standards increasing accordingly.   

Domestic full employment is India's low hanging fruit. Nearly 800 million, out of working age population of 1 billion, being underemployed or unemployed, wealth gain from full employment would be approx. INR 192 Lac Cr ($2.3 trillion) and then the multiplier impact from that wealth means a giant leap forward in the real standard of living, that is what awaits with that fundamental policy change to true full employment.

External economy follows from there. With the leap forward in domestic employment and profitability, foreign direct investment likewise increases as global firms are always on the lookout for profitable investment opportunities, even with relatively higher wages, transforming India from a nation dependent on low wages for exports to one that attracts foreign investment based on its profitable opportunities. The US, for example, with low unemployment and high wages, attracts the most foreign investment due to prospects for profits.  

The dynamics of full employment policy will further result in the exporting nations targeting India for their exports. To do this, their central banks accumulate the currencies of their target nations which would then include the INR, allowing India to further benefit in real terms with increased low cost imports, again following the US model. And as imports increase, exports, though a bit lower, also increase at a high and rapid rate, as a proportion of the INR held by non residents from India's imports are in turn spent on buying India's exports.   

The above model not only makes INR a desired currency to save by Central banks and non residents, but the country would achieve growth of tremendous proportion with full employment, stable prices and high standard of living.

Rajendra Rasu 

Causes of Global Economic Woes and Inflation: A Comprehensive Analysis

 

Causes of Global Economic Woes and Inflation: A Comprehensive Analysis

Published by Save to Mem · 03/07/2023

https://twitter.com/IndiaMmt/status/1589615974021738496

🪄Smart summary:

The thread discusses the causes of the current global economic problems, such as inflation, and how the pandemic has exposed the weaknesses of the current economic model. It also examines how countries like Japan, China, Switzerland, and Zambia have managed to keep inflation low. The thread then goes on to explain how the global supply chain disruption, the OPEC price increase, and the Ukrainian war have all contributed to the current economic woes. Finally, it argues that the mainstream media's attack on Modern Monetary Theory is misguided and that proactive steps must be taken to address

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What is the real causes of the present problems faced by the global economy?

What causes the sudden increase in inflation?

How is inflation low in Japan, China, Switzerland and Zambia?

Why is there renewed attack on MMT?


Pandemic showed the utter brittleness of the structure created by the economic model pursued by most of the countries. Pandemic impact will be prolonged & will not go away quickly. Even when currency was removed almost totally from circulation by India, it left a colossal impact on the economy for many years.

Pandemic brought the world to a standstill and we thought that it is end of the world as we know it; it showed how vulnerable and deficient the countries are, even in basic facilities and supplies. Also, all the ills of the present economic model got exposed explicitly and so difficult questions are going to be raised against it vehemently. As they don't have any answers and also got exposed, they're preemptively going on the offensive.

What they don't understand is that their guilt-trip is not over yet, as the pandemic induced impact will continue for years to come. They will also realize that their path will lead to self-destruction.

While the world is under the pandemic induced impact, it got worsened due to two other major global issues.

As countries are at the mercy of global supply chain totally, even for their essential supplies, when it got disrupted, obviously price rise and other issues followed.

Adding to the upward push to prices from supply constraint, the untimely OPEC opportunistic price-increase dealt a major blow to global economy, as it always does, fuel being a major component of most products and services. That, further increased the general price level.

And the Ukrainian war, an unwise & foolhardy move by many countries, brought many crises to world economy, particularly disruption to food and gas supply. Again, that adds more to the increased price in food and other products.

These three issues, which even individually can cause havoc, are presenting an unprecedented challenge to the global economy, particularly to the vulnerable people living hand to mouth.

The triumvirate is responsible for the present heightened inflation and other economic woes, which got fueled by wrong policy response from central banks and lack of right fiscal move by Governments.

Inflation is low in Japan, China, Switzerland and Zambia. Inflation in Japan is low since 1990s, irrespective of debt to GDP at nearly 250% and presently, the inflation is at 3%. Interesting to note that the policy rate is negative and the Government controls prices.

Switzerland's energy mix dependent less on imported oil & gases and the strong currency protect it from high inflation. Zambia having strong currency and trade surplus reduced its inflation from 24% to 9%, its lowest in 3 years.

How does the inflation dynamics work?

Power of currency monopoly not being understood is one of the factor.

As @wbmosler elaborates, prices paid, by the monopoly supplier of currency when it purchases and when the borrowers pays for their purchases with the bank credit, set the prices of those goods and services.

In addition, the interest rate paid adds to the cost of goods and services.

And policy rate is increased by central banks as a standard response to inflation, to discourage borrowing. But, what happens? Existing borrowing is very high compared to new borrowing.

If consumer borrowing goes down, it leads to corporate stress & additional debt.

With debt to GDP nearly 100% in many countries, Govt being the net payer of interest to the economy, as the non Govt sector interest payments net to zero, rate increase adds income to those who already have money. All these add up and worsen the inflation.

Another factor is the vast stimulus spending by many countries. MMT is categorical that Govt spending should be based on elaborate budget planning & on productive work, so that goods & services would be madea available to match the spending.

The above clearly establishes the causes behind inflation and other economic issues, but the mainstream media and all those anti poor advocates, using the pandemic induced inflation to attack MMT, is doing it at their own peril.

When we are struggling to agree on ways to address these problems and the narrative, spread by mainstream that let deprived continue to suffer, holds sway, what are we going to do if climate catastrophe strikes.

Can we take chance and leave it to the uncertainty of it? Or proactively take protective steps and also bring about full employment and price stability.




Published by Save to Mem · 03/07/2023