Rickards: You can’t print your way out of debt

January 20, 2010

Reader note: This is Jim’s second piece in an ongoing debate with Warren Mosler about the economy. Here are links to previous posts in the series: Writer biographies / Mosler #1 / Rickards #1 / Mosler #2.  There will be one more post from each writer.

by James Rickards

Before I lay siege to Warren Mosler’s remedies, let me say he’s a brilliant guy I’ve admired for 25 years going back to his days at AVM.  I got reacquainted in 2004 when I lived in St. Croix and Warren ran for Congress from the Virgin Islands.  His campaign ads were 5-minute infomercials; tutorials on economics and gems of sound fiscal advice.  But this is a debate, so let’s begin.

Warren makes eleven points and I agree with two – the elimination of payroll taxes and converting banks into utilities.  Payroll tax elimination spurs consumption and stimulates job creation. As for banks, we need them, we just don’t need casinos that call themselves banks.  Bring back Glass-Steagall, separate deposit and loan functions from proprietary trading and banish the latter to hedge funds.  Speculation should survive on its own dime.

I don’t need to take the rest point-by-point because they’re the same thing – an unlimited belief in the Fed’s power to print money.  Warren calls for a $500 per capita state rebate, a federal job for all takers, direct Treasury funding of housing, unlimited deposit insurance, no debt ceiling, Treasury overdrafts at the Fed and federal purchase of foreclosed homes. He doesn’t propose free ice cream for children but I don’t see why not; just print some money and go for it!

Warren’s program would work if the world had as much faith in the dollar as he does.  But it doesn’t, and neither do the American people. If we were all captives of a government dollar monopoly with no alternative, then maybe his plan would work for awhile.  But we do have alternatives in land, art, commodities and the oldest form of money – gold.  It’s no coincidence that when FDR debased the dollar in 1934 he simultaneously banned private ownership of gold.  He knew citizens would hoard gold when he trashed the dollar so he made that illegal.  One of Reagan’s lasting gifts to the American people was a law in 1985 which made U.S. mint gold coins available to average citizens.  Now when the Fed cranks up the printing presses, citizens have a choice.  Foreign central banks have the same choice in terms of gold bullion and commodities such as oil and copper which serve as stores of value and industrial inputs.

Here’s where complexity theory comes in.   Each citizen, company and central bank is an interdependent agent with a threshold for dollar rejection based on the thresholds of others.  Some will not flee the dollar unless many others go first.  But some have already bought gold and others are on a hair trigger.  What does the complete system look like? Are we in the critical state where a small shift brings the entire edifice crashing down – the tipping point? It’s impossible to say, but we’re certainly closer than ever.  Warren’s cavalier approach to printing money as the cure for all ills guarantees the greatest disease of all – destruction of the dollar.

James G. Rickards is a writer, lawyer and economist. Twitter.com/JamesGRickards.


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It seems if any point is consensus among economists, it is that Glass-Steagall needs to come back. I know there is debate on how much it actually contributed to the current financial woes, but I don’t think many are arguing that bringing it back will hurt us.


Are there any prominent economists who are resolute in not bringing back Glass-Steagall. If there are, what is the main argument against bringing it back?

Posted by Sean | Report as abusive

Every one want to save there wealth physically gold bullion is good choice.Thanks for the great reading, we buy gold coins in a recession. I will pass this on to our Ira clients to read.

gold coins

Posted by Gold Coins | Report as abusive

[…] by Happypixel on January 20th, 2010 at 07:19pm Rickards: You can’t print your way out of debt | Analysis … I don’t need to take the rest point-by-point because they’re the same thing %26ndash; […]

Posted by print | Happypixel | Report as abusive

Jim, I respectfully disagree. You see to presume that the government can print “too much money.” There is no such thing as printing “too much money.” How much is “too much?” You seem to be saying that at some point people will feel there’s just too much money and bolt for the door.

There’s only too much money relative to goods when nominal AD exceeds potential AD, that is, the full output capacity of the economy to purchase the goods and services demanded. In reality, if there is adequate NAD, the real output potential of the economy will expand to absorb it without inflation. The government just has to be careful to moderate money expansion so as not to permit more NAD than the output capacity of the economy can absorb through growth. If NAD exceeds real output capacity, then inflation will result as prices rise across the board (price pressure in sectors does not constitute inflation). Conversely, if NAD falls short of real output capacity, then either the economy will contract and unemployment rise, or the public will have to go into debt to maintain lifestyle (presuming a constant current trade account). Previously to the crisis, private debt got out of hand by historical standards, setting up a debt-deflation, which we are now in the process of working through. That would not have happened on Warren’s watch.

It doesn’t make any different whether the government adds net financial assets or the commercial bank system creates too much credit money through extending loans. In either case, balance has to be restored for price stability. If the problem arises from the side of the government, then fiscal policy will have be adjusted. If the problem arises from the side of the banks, then the Fed will have use monetary policy (interest rate) to restrict lending by making it more expensive.

The idea that there is some arbitrary point of “too much money” at which point the system collapses just wrong. In a flexible fx regime, people always have the ability to start voting against the dollar with their wallets by shifting to other currencies, going to gold or other hard assets, or anticipating inflation by driving up equities.

There was reason for a sudden collapse under the gold standard when backing for a convertible currency was limited, but that ended on August 15, 1971. I’m afraid you are still under the influence of the gold standard or are having a hangover.

I agree that separating trading from financial intermediation. See Bo Cutter, Why Are Bankers Paid So Much $$$. The government is giving them an advantage and provoking risky behavior through guarantees. But the problem now is more complex than bringing back G-S, since the arrival of financial innovation that G-S never envisioned. There is huge system risk created by derivatives that needs to be addressed, and Warren has addressed it.

Jim, you also say you agree with Warren about eliminating the payroll tax, but Warren has provided a rationale for it. According to him, taxation should be used functionally to increase and decrease NAD relative to output. As far as I can see, to say that you both agree that the payroll tax should be reduced overlooks this key issue.

In summary, I don’t think that you have addressed Warren’s points but merely given the standard scare tactic of fiscal scolds, which doesn’t bear up under scrutiny under the present $ regime. It is based on scarcity thinking bolstered by arguments grounded in non-empirical or even erroneous assumptions that don’t hold up under scrutiny against facts.

Rolfe, thanks for hosting this debate and putting this important issue before the public. Warren, I, and many others believe that removing the economic blinders is essential to the survival and progress of our nation and world.

Posted by Tom Hickey | Report as abusive

“taxation should be used functionally to increase and decrease NAD relative to output”

i don’t get this at all. is Mosler arguing income tax rates should be tied to some “too hot” model (not the good kind) as opposed to the will of the income earners through their elected representatives?

Posted by million | Report as abusive

Strangely, Jim completely refuses to comment on what changed when the US went off the gold std in 1971. That changed everything, but Jim seems not to have noticed, and refuses to comment on altered operational realities in place for 38 yrs now.

Jim also says, “I don’t need to take the rest point-by-point because they’re the same thing – an unlimited belief in the Fed’s power to print money.” ??? Warren is talking about is the responsibility of the Treasury to spend, not the Fed. All his suggestions do are remind us that the highest cost for any social aggregate is the cost of coordination (not commodity hoarding, and certainly not gold coins). The obvious corollary is that the highest returns are the returns from coordination (aka, public or group spending; not just individual hoarding). Without public spending we wouldn’t have a long list of crucial items, from the Panama Canal to the DoD winning WWII, to the National Highway system, etc, etc. I find Jim’s whole article just skips the operational questions that Warren is at least trying to answer: How can national public purpose be even better organized now that we have 300 million citizens? There’s no going back to simplistic ideology. Instead, it’s time to step up and at least address real operational issues with specific suggestions.

Posted by Roger Erickson | Report as abusive

Million: ““taxation should be used functionally to increase and decrease NAD relative to output”
i don’t get this at all. is Mosler arguing income tax rates should be tied to some “too hot” model (not the good kind) as opposed to the will of the income earners through their elected representatives?”

Million, please read Warren’s 7 Deadly Innocent Frauds for an explanation of this and more. Taxation decreases non-government net financial assets (NFA), while spending increases NFA. Increases and decreases in taxation and spending are used to adjust nominal aggregate demand to real capacity to produce goods and services for purchase. Borrowing simply drains bank reserves increased by deficit spending so the Fed at hit its target rate, otherwise excess reserves will drive the overnight rate below the target rate (Federal Funds Rate or FFR), and vice versa. This is how the accounting works. Sounds a bit complicated at first, but it’s really pretty simple once you grok it.

Posted by Tom Hickey | Report as abusive

Price pressure on individual sectors does not comprise inflation? Then what, precisely, does? Isn’t inflation best measured by a basket of goods, and aren’t these goods all in individual sectors? Who cares about high-and-mighty econ-PhD definitions of inflation, if the truth becomes such that low income families can’t afford to eat or put gas in their car? I don’t give a damn about academic definitions at that point, and you can be damned sure that family won’t either.

The financial innovation that you say the gold standard does not account for has not, on the net, been shown to be a positive thing, I would argue. If derivative contracts worth DECADES of total world GDP can’t be written under a gold standard, then I say, BRING BACK THE GOLD STANDARD. All the more reason.

The fact is that retirement is essentially impossible in an inflationary economy. Everyone cannot outperform the market, therefore, the majority are likely to suffer. What the hey, then, work ’til you die… but don’t pretend that modern management of economics is some kind of panacea for universal good.

Modern debt money is a plague and it has led us into more wars and killed more people while bankrupting our nation. Savings accounts are a modern joke, and they have been since the 70’s. Only dummies actually save money — the best financial advice you can buy will tell you that you are FORCED, yes FORCED, to speculate in the market if you wish to live off of your past earnings sometime in the future.

For all the people who are so wrapped up in “modern” economics, I’ll tell you this: there is nothing new under the sun. This experiment has wrecked the world, and if you can’t see it you are blind. None are so blind as those who *will* not see, and your Harvard/Princeton/Yale economics PhD is the most expensive blindfold money can buy. Enjoy it.

Posted by Justin | Report as abusive

Jason and other gold bugs, please read economic history. The gold standard (convertible currencies and fixed rates) did not prevent booms and bust, or panics and depressions. The idea that returning to a gold standard is somehow the return to a golden age of prosperity for all is an illusion of imagination, not the reality of history. Convertible currencies and fixed rates often led to international monetary crises also, with devaluations (inflation) and defaults. The picture you paint is pretty, but it is not a picture of reality.

Posted by Tom Hickey | Report as abusive

There is no such thing as printing “too much money.”?

Lets see…
Like Argentina in the late 1980s and Zimbabwe today, the US government simply creates more money to fund its plans.What happens when too much money chase fewer goods?

The huge World War II deficits saw inflation peak at almost 20 per cent in 1947

When the printing presses were turned up to pay for the Korean War, inflation moved from negative territory to over nine per cent within the space of nine months in the early 1950s

And when Arthur Burns greased the Fed’s presses after the Vietnam War, inflation soon made a return back to double-digit territory

Oh yeah…
The government just has to be careful to moderate money expansion so as not to permit more NAD than the output capacity of the economy can absorb through growth.

It seems government is not doing such a good job in moderating the money expansion do they?

About Mr Moslers proposals…
“A $500 per capita federal distribution to all the states to sustain employment in essential services, service debt, and reduce the need for state tax hikes.”

Only $500? To be able to pay the generous salaries and benefits of the public employees we will need a lot more money than just $500 per capita

A federally-funded $8/hr job and healthcare benefits for anyone…Yah? If we assume, that they wont pay any taxes on these paychecks people will get about $1300 a month. Good luck sparkling economic activity with that money. Unemployed will prefer to stay on food stamps and welfare and sign up for Medicaid, cause they will get even more than these $1300 and even will not be required to work for it.

I agree with Mr Rickards that we can’t print our way out of debt

…and Mr Mosler, if you become POTUS – do not forget: FREE ICE CREAM FOR EVERYONE, USA CAN AFFORD IT!

Posted by The Cynical Economist | Report as abusive

Cynical Economist, like Mr. Rickards, you are stuck in gold standard thinking. You might want to read this explanation of the job guarantee by Bill Mitchell here. The $500 per capital is a stimulus to increase nominal AD in order to close the output gap. The figure is derived from the amount needed and Warren is proposing dividing it equally instead of through programs that could be seen as political favoritism.

BTW, Argentina defaulted on its debt because the debt was not denominated in its own currency, and Zimbabwe went into hyperinflation after real output capacity collapsed when the whites that were responsible for the bulk of managing production were disinvested, destroying aggregate supply in relation to aggregate demand. As prices naturally rose, the government foolishly increased the money supply instead of contracting it to balance AD with AS. Neither the Argentina example nor the Zimbabwe example are remotely related to conditions prevailing in the US or UK, although the countries belonging to the EMU are not sovereign and could be in big trouble that they cannot fix fiscally.

Posted by Tom Hickey | Report as abusive

A small detail that Mr. Rickards seems to leave out: you can’t pay your taxes in gold, land or any other commodity. You can only pay them in US dollars if you want to live, do business or eat ice cream in the US. That’s what creates demand for US dollars, not the faith in the US government. As long as taxes are enforced, which they always will, there will be demand for US dollars.

Posted by chartalist | Report as abusive