Should we debase the currency?

Greg Hannsgen | August 19, 2011

You might wonder if this question is a misguided satire of Keynesian proposals like the ones in this Institute one-pager for boosting employment in a time of weak economic growth. The question is not meant as a satire, though. In a time of increasing recession fears, policies specifically aimed at reducing the value of the dollar have gained some supporters. Many scholars see a deliberate weakening of the U.S. dollar and/or a moderate increase in the U.S. inflation rate as something to be sought after in itself, not just as an unfortunate side effect of monetary or fiscal stimulus.

Kenneth Rogoff, for example, recently reprised the classic argument that the burden of debt falls when prices rise across all industries. (Rogoff’s Financial Times article is here. The New York Times discusses his views here.To wit, moderately higher prices obviously allow firms that have debt in dollars to more easily meet their debt-service obligations. Furthermore, increases in prices often bring higher wages, albeit with a time lag, making it easier for consumers to pay off their debts on time. In the United States, this is a very salient point, in light of high debt levels in nonfinancial business and the household sector, which we documented in this recent post.

Meanwhile, on the other hand, John Plender skeptically reminds Financial Times readers (and perhaps proponents of modern monetary theory [MMT]) of the possible dangers associated with policies that intentionally or unintentionally invite a spurt of inflation.

He somewhat ruefully notes that yields on the debt of some euro nations have been increasing, owing to high levels of default risk. In part, yield spreads have been rising because individual members of the Eurozone, including those that are now tottering on the brink of default, do not control their own monetary “printing presses”, as the United States, for example, does.

Insightfully, Plender points out what an irony in the resulting situation, in which investors have crowded into the U.S. Treasury bond markets–even as federal deficits soar.  He certainly finds nothing wrong with the current view of the bond markets (and MMT theorists) that

no country defaults on its domestic bonds if it retains the right to set the printing presses in motion

But to Plender,

….it seems counter-intuitive that bond markets, with their traditional fear of inflation, should punish a country for not being able to debase its currency.

As strange as it might seem to those who follow the staid and conservative bond markets, fixed-income investors seem to have adopted the MMT view as their philosophy, at least for now.

This seems no less and no more ironic to Plender than overt calls by economists such as Rogoff for policies that intentionally raise or create inflation.

In contrast to our own benign views of sovereign currencies (an example of which can be found here), Plender argues for what may seem like a more balanced assessment of the investment risks associated with bonds denominated in unbacked national monies. Of course, such risks include the risk of devaluation, or “currency risk.” Countries adopting sovereign currencies and open capital markets have to be willing to tolerate changes in their exchange rates in return for greatly enhanced freedom in using macro policies to control unemployment and inflation.

In Plender’s opinion, the U.S. central government should be more concerned than it has been about the effects of such exchange-rate fluctuations on investors’ willingness to hold their debt and hence on bond yields. Indeed, he argues that a deliberate attempt to increase inflation and devalue the dollar, as advocated by Rogoff and others, might prove disastrous for the bond markets and the economy as a whole, instead of averting a debt deflation.

(Raghuram Rajan offers his own critique of the pro-inflation argument in another subsequent FT piece; Krugman blogs Plender’s post here.)

Like Rogoff, we strongly support expansionary macro policies at the present time, though mostly for reasons different than his. In support of our position, we have argued many times (for example, in this brief)  that in the United States, inflation risks pale in comparison to the risks and realities of a very unhealthy labor market. Here we only wish to add a reminder about a third form of investment risk, not explicitly mentioned in Plender’s column: that of recessions or depressions in countries that issue debt, or where private borrowers seek to earn income. This “recession risk” is far greater where governments cannot or do not run deficits as needed to fund policies that maintain high employment, as long as inflation and exchange rates remain at reasonable levels. This is no irony at all.


5 Responses to “Should we debase the currency?”

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  1. Comment by G LammertAugust 20, 2011 at 3:24 am   Reply

    The US is a sovereign nation; it can do with its currency as it pleases. To print money in a controlled fashion to pay for services, products, and security is a reasonable course of action… 300 billion dollars would create 15 million 20K jobs. imagine if that way done as a hybrid function with private enterprise. The US could afford to produce its own microchips… What would the multiplier effect be on the local and global economy? Maybe less flash mob riots and stealing and better security for the super rich….

    The Null Hypothesis and the Science of Saturation Macroeconomics

    On Monday and Tuesday, 22 August and 23 August there will be a global nonlinear equity crash of historical proportions.

    And on these two days one of the greatest hypothesis of the 21st century, ‘quantitative saturation macroeconomics’ will be validated.

    The debt/money/asset macroeconomic system has its own intrinsic very quantitative operating laws that represent ideal fractal time dependent self assembly of asset saturation curves and define the counterbalancing limits of the macroeconomic saturation system. An understanding of saturation macroeconomics as a science with self assembly and self organization laws equal to physics and chemistry and biology can potentially guide global economic policy, monetary policy, and banking money-creation policy, and change rules regarding speculation on leverage assets.

    These very simple laws were empirically observed in repetitive time based fractal patterns of varying time dimensions throughout the time based evolution of asset valuation curves and were defined in 2005 in the Main Page of the Economic Fractalist.

    x/2.5x/2x/1.5-1.6x . The first three fractal phases are asset saturation growth fractals and the final or fourth fractal is an asset valuation decay fractal. X is a unit of trading time whose dimension can be minutes, hours, days, weeks, months, years, or decades. The 1.5-1.6x fourth fractal can itself be composed of a decaying x/2.5x/2x/1.5-1.6x 4 phase fractal series or a y/2-2.5y/2-2.5y 3 phase decay fractal series. The third fractal is ideally 2x in length but can be extended to 2.5x in length if growth is favored by underlying money supply growth or if the preceding valuation decay is significantly great.

    On 11 August 2011 in Alpha’s The Economic Fractalist Instablog a final decaying growth sequence was predicted as a 27 July 2011 3/8/6-8/5 day 4 phase fractal with a potential of a 2.5x 8 day third fractal extension.

    The 20 August 2011 actual fractal progression is currently 3/8/7/3 of 5 days with a dropping of the Wilshire composite equity valuation near the 9 August 2011 interday low.

    The NASDAQ final fractal sequence leading to today’s near low begins its final fractal crash journey with its first base fractal including the key reversal day 3 year high on 2 May 2011. The first base fractal of the ensuing pristinely perfect x/2.5x/2x/1.5-1.6x sequence is a 13 day fractal starting 18 April 2011 and ending on 5 May 2011 intraday low to intraday low. The preceding end of one fractal is the beginning of the next fractal; incipient growth begins in final decay. There is an elegant integration process in quantitative saturation macroeconomics where larger initiating growth time unit, for instance, an incipient growth fractal denominated in the unit of a year incorporates a decay period of the last few of the final lower order time units, for instance, one or two terminal decay months of the preceding monthly low to low fractal series may be incorporated lasting into the follow fractal that last for a 100 months.

    32 trading days later, after the first 13 day fractal end on 5 May 2011, an averaged NASDAQ low was made on 20 June 2011. The intraday low fell two trading days before but the averaged low of June 20 was equivalent to the averaged low of that day and was decidedly lower than the 20 June preceding day’s trading average. Third fractal growth concluded 26 trading days later on 26 July 2011 with lower low gap between the 26 July and 27 July delineating the 4th decay fractal of an expected 26 July 2011 1.5-1.6x :: 20 to 21 trading days. 19 August was day 19 of the expected 20 to 21 day :: 1.5:1.6x fourth fractal.

    Interpolated terminal fractal sequences are everywhere:

    Starting on 14 July 2011 an interpolated fractal series : 3/8/6/5 days:: x/2.5x/2x/1.6x ending on 5 August followed by and starting on 5 August a 2/5/3 of 5 days :: y/2.5y/2.5y decay fractal…..

    Starting on 18 July 8/18 of 20 days x/2.5x …..

    Starting on 27 July for the 18 day second fractal of the 8/18 of 20 day fractal series: 3/8/7/3 of 5 days

    and finally starting on 18 April the reflexic fractal series proportionally identical to the 20/50/40 days x/2.5x/2x series that prospectively was predicted by Saturation Macroeconomics in the Huffington Post to be the Wilshire’s nonminal final high on 11 October 2007, a 13/32/26 day :: x/2.5x/2x reflexic growth fractal with a (decaying) 26th day lower high followed by a delineating gap and a 26 July 2011 19 of 20-21 day 1.5-1.6x 4th fractal which on 20 August 2011 is sitting on the edge of 154 year US Composite Equity second fractal nonlinearity that began in 1858..

    The Null Hypothesis for the Science of Saturation Macroeconomics

    Technically via the Chartist and in the qualitative perspective of a collapsing Euro Union and Euro currency and a polarized, nonnationalistic, corporate owned US government now hawking austerity, the 22 and 23 August 2011 asset collapse in weeks months years retrospectively will be perceived as obvious and expected. But the null hypothesis will remain: Why did the collapse occur on the 20th and 21st day of an ideal 4 phase 13/32/26/20-21 day :: x/2.5x/2x/1.5-1.6x Lammert fractal.

    Why did it end in precisely this time course. It is the implosion of the system’s supporting money supply that is causing the collapsing fractal patterns. This is how the macroeconomic system works.

    Null hypothesis: the collapse on 22 and 22 August 2011 is not related at all to the simple fractal quantum laws of saturation macroeconomics and the easily observed 18 April 2011 Lammert x/2.5x/2x/1.5-1.6x pattern of 13/32/26/20-21 days with the crash coming on days 20 and 21 of the defined fourth decay fractal is occurring by chance and chance alone.

    This null hypothesis can be applied to larger order fractals including the 34/84 of 85 Wilshire x/2-2.5x quarter (3 month) fractal beginning in 1982 and the 70-71/153 year US equity fractal beginning near the ratification of the constitution in 1788-89.

  2. Comment by Steve RothAugust 20, 2011 at 3:39 pm   Reply

    Short answer: Yes.

    Demand Inflation Now!

  3. Comment by Charles Jurcich — August 24, 2011 at 4:42 pm   Reply

    As far as I understand MMT, the point of, say, QE is not to deliberately devalue the currency. The same is true of running a deficit without debt issuance. The point is to either issue less unnecessary debt, or buy the debt back so the interest / principal can be returned to the treasury. MMT tries to educate the forex markets precisely so that they do not devalue the currency excessively and preferably not at all).

    MMT says that whether the government net-spends with a corresponding debt issuance, or without one, either choice affects aggregate demand exactly the same, therefore it is illogical for forex markets to devalue the currency based on a fear of demand-pull inflation. This is true even when the economy is at full capacity.

    MMT does not say we SHOULD create net financial assets out of thin air, it says that we ALREADY DO create NFAs from thin air, every time the government runs a deficit – whether there is a corresponding debt issuance or not.

    Hope this helps.

    • Comment by Greg Hannsgen — August 25, 2011 at 4:23 pm   Reply

      Just to clarify: In my post, I describe the views of Rogoff and others, who have recently caused a stir by advocating economic stimulus on what might seem like rather unusual grounds—namely to deliberately engineer a moderate, but higher, level of inflation. Of course, these arguments contain a kernel of truth: strong aggregate demand (which is nowhere in sight now) sometimes brings about an increase in inflation; and moreover, more-rapidly increasing prices would be of some help to the heavily indebted private sector. On the other hand, in case it is not clear from my post, Rogoff is not an MMTer at all. In fact, the post was meant partly as a report on an interesting and hopefully encouraging case of unusual bedfellows in support of more-stimulative macro policy. -GH

  4. Comment by Lammert fractals | JasonstirlandNovember 23, 2011 at 3:26 pm   Reply

    […] Should we debase the currency? « Multiplier EffectAug 19, 2011 … The first three fractal phases are asset saturation growth fractals and the … 4 phase 13/32/26/20-21 day :: x/2.5x/2x/1.5-1.6x Lammert fractal. … […]

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