MODERN MONEY

Gradients

Everything goes down.  Downhill.  Life is a flow of high energy in the sun, radiating to the earth, creating all the plants and animals as it continues to flow down.   Electrons want to go to ground too, or at least to a lower energy level.  With the right structures we can use that drop in electron energy to do work, just like with batteries.  Atoms get comfortable with other atoms to create molecules.  Some atoms, like kids going down a slide, get impatient and take another path down, combining with new elements on the way to create complex forms of life.    

Gradients are necessary to move anything.  These physical force such as gravity, electrical forces,  or money and wealth can all be forces that get things done.   A young scientist may point out that energy does not always seem to go downhill.  Refrigerators, air conditioners and heat pumps seem to be moving energy uphill in a sense that does not happen naturally.  A closer look shows that these systems are not closed but actually receive energy from the outside and that they are receiving more energy than what they seem to be saving or expending.  There is no such thing as a perpetual motion machine, and in the natural world, there is no free lunch.  

Some energy works to create organization rather than create heat or motion.  As water freezes it gives up heat energy, but at the freezing point some energy goes into organizing ice crystals instead of a change in temperature.  This energy of organization is real energy that can be measured. 

Capitalism is a kind of engine that uses the downhill movement of money to create goods and services.  Business becomes a way to create organization for people making those things.  Toward this end our metaphors seem to become real and populate the discussions of social life with phrases like “head of state” or the “long arm of the law”.  Pushing these metaphors further, a dollar bill is a lot like a red blood cell (RBC), carrying value – in this case oxygen – from the lungs to the tissue.  This is not far from reality.  When the sprinter crosses the finish line, he or she is in “oxygen debt”, a term used by physiologists to describe a lack of oxygen and that must be replaced.   

Metaphors and mental models can lead to useful ways of thinking about the world around us, but sometimes they lead us off course, actually preventing us from seeing more clearly.  Many people would have a better understanding of climate change if they understood the concepts of “temperature” and “heat”.  How much heat (energy) is required to melt an iceberg or raise the average temperature of the atmosphere by one degree Celsius?  A lot.  

Another example: Some people have the idea that people work in order to pay taxes.  They do not.  People work to have money and wealth for themselves and their family.   Since people do work and do pay taxes it may look as if they are working to pay taxes.  Running a movie backwards does not make time go backwards.  It is important to have clear mental images about the reasons we pay taxes.  We humans are sentient and sensible beings, not robots.  

Economists worry about the ability of a nation to pay its debts and wonder how we can borrow all this money.  In fact, however, sovereign states do not need to “borrow” any money since they can print as much as they need, a point made by proponents of Modern Monetary Theory (MMT).  In testimony before Congress, Alan Greenspan stated that theoretically, there is no limit on the amount of money that can be printed.  He added that the challenge was in creating a system that produces real assets.  Modern Monetary Theory should really be called Modern Monetary Theory and Practice, since it is already being practiced on a large scale with Quantitative Easing (QE) now being done by central banks, plus the Paycheck Protection Program passed by Congress.  It is not money that is “borrowed” but rather “granted” since most of this money being pushed out the door will never be paid back.   

So we must think about how we use language and metaphors carefully if we are to find solutions.  This will have an effect on actions too, such as figuring out where to inject money into the system.  

The site of injection currently is the big banks and the money is essentially pulled from thin air.  The Fed buys a Treasury Bill printed and created by the bank.  That money can then be loaned out to bank customers such as municipalities or other large institutions who can borrow and pay back with interest.   So that money in reality is created out of nothing.  The money is a gift for the first person in line.  All others down river must do real work.  

Modern Monetary Theory proposes that governments make use of this extraordinary power to print money, but only by sovereign governments, since they are the only ones who can legally do it. Local and State governments must still balance the books.  Sovereign governments can simply find an entry point to inject money into the economy. Max Weber (1864-1920), a German social and political scientist, described the nation-state as that entity which has a monopoly on the use of coercive force.  This is what we call the sovereign state, the highest legal power, and mostly supported by people who live within the boundaries of the country as long as they are treated reasonably well.  The sovereign state then, is also the entity that decides on fiscal policy and prints the currency.   Max was not a bad guy or a dictator.  He simply made this observation, but this “Weber Power” pervades much more of our mental models than we might think.  

Money as Metaphor

If language is made up of words that indicate whatwe want, then money indicates how much we want it.  Money is a key element for building human social hierarchies.  Without money, we humans would live in small, isolated groups.  Definitions of money include money being a symbol of value and a method of accounting.  Plus it’s portable, divisible, durable, and fungible.  Less quantifiable, but equally significant, is money as a symbol of the integrity of the agreement between two parties.   

It’s impossible to know exactly when money first came into existence but one can imagine a farmer and a herdsman, maybe 10,000 years ago.  The farmer wants to trade 3 baskets of apples for a goat owned by a herdsman.  The only problem is that the apples will not yet be ripe until the next moon.  What to do?  It may be that the farmer gave a stick with 3 notches to the herdsman as an IOU to collect on the apples.  Someone in the area with a knack for business might have started a local trading system, an exchange between farmers and herdsmen using the stick method.  But woe to him who created a counterfeit stick to steal the apples!  

The stick was a symbol of value but not valuable in itself.  The farmer and the herdsman knew that.  This money, in the form of an IOU, was a symbol for value, adding another dimension to the barter system.   When gold and silver coins came into existence there was value in the coin itself since it was a precious metal that could not be created or destroyed and there was a limited supply.  This was replaced by paper money of a variety of denominations.  So money had returned to becoming a symbol for value rather than having value itself.     

What about digital money and where does it come from?  It’s origin is certainly more obscure and relies on trusting someone that lives too far away for a handshake.   A hundred years ago, when a bank robber stole coins of real value from a bank, everyone knew that when the money was gone, it was gone.  Stealing paper currency was almost as good for the bank robber who had access to a money laundering operation and paid a bit extra for someone to change the bills.  Cost of doing business.  The bank notes could easily be replaced, and so not such a great loss for the banker either.  In an era of digital currency what is a bank robber to say, “Give me all your 1’s and 0’s ?”   

The return to symbolic money (currency) requires Weber Power to guarantee that counterfeiting is kept to a minimum.  Gold and silver do not require Weber Power, though a bodyguard might be advised.  Currency must be part of a common and larger story if it is to have value. When I accept a dollar from you, I know that I can use that dollar to buy something in the next town.  The same is not true of play money or of foreign currency.  The value of those currencies cannot be guaranteed. 

When we measure RBC’s, we don’t really keep track of the total number in the body, but rather the concentration.  These RBC’s must be readily available to the tissue when needed and the body has mechanisms for keeping the concentration of RBC’s within certain healthy boundaries. Living at high altitudes where the air is thin makes the concentration go up.  Concentration of RBC’s is not quite the same as liquidity in the financial system however.  Liquidity describes the ease with which an established institution can get a loan, and most of us are not institutions. 

What should the government want?  What should we want?  A smooth economy.  A growing economy.  We want money to be something that Gets people Out Of Bed (GOOB) in the morning to do their job or task.  If we give too much money away as grants, where will be the incentive to work and create new things?  Without a system like capitalism would we ever have heard of the Steves, Jobs and Wozniak?  

Debt and Free Money

Why buy debt anyhow?  It seems crazy.  Buying a car or boat would certainly be more fun.  The debt instrument is worthless without the power of the state to coerce the borrower to pay up or go bankrupt, or go to jail.  Owning the debt allows one to use the court system and contracts to force the other party to pay.  Holding debt can be a stream of income for the owner of the debt, but of course, it uses Weber power. 

There is a general and well-founded fear that if we just print money and give it away, then people will not show up for work.  The policeman will not protect us, the fireman will not put out fires, the nurse and doctor will not be there when we need them, and the taxi or Uber driver will not stop to pick us up.  This is a fear of everybody, not just those in power, but especially at the neighborhood level where people work with each other every day. 

Questions, Risks, and Decisions

If we are going to print more money, at least two questions follow:  “Will it cause inflation?”  and  “Who will have this power to decide where that money goes?”.   A third and related question is “Will they buy the right stuff?”  This last question is, of course, related to the questions about who will make those decisions and where to inject the money.  The current beneficiaries of monetary injections are big banks.  They may decide to loan the money to fossil fuel companies or loan to tobacco companies if they think their obligation to shareholders is simply to maximize profit. 

Inflation is the destroyer of fiat currency.  Inflation of only a few percent leads to a currency that has half the buying power in not too many years.  Milton Friedman believed that control of the money supply could decrease this risk and made the statement that inflation is the result of too much money chasing too few goods.  This makes sense.  I have a bicycle for sale for $100 but now with extra printed money and my neighbors flush with cash, I can raise the price to $200.  It is people like me, Joe Citizen, and those who run a business, who decide whether or not there will be inflation – or not – sometimes despite measures taken by the Fed.   

If inflation is too much money chasing too few goods, it can be viewed as a ratio of money to goods. If the money supply goes up, inflation goes up.  But we must look at the denominator too.  If I am selling strawberries at $2 per box and customers with extra money show up willing to pay $3 per box, we have created inflation again.  Rather than increasing the price of strawberries however, I can add other product such as peaches or blackberries.  The price of strawberries may stabilize and not go up if people have other things on which to spend their money.  This increases the complexity and the number of goods in the local economy.  The numerator may get larger, but the denominator can also get larger so that the ratio remains the same.  This is one method of creating Resistance To Inflation (RTI).  

The first two questions about inflation and where to inject the money can – and probably must – be answered at several levels: Individual, Small Group, and Large Group.  Each of these levels has its own mechanism to provide Resistance To Inflation (RTI).  On an individual level, both the question about the site of injection of money and resistance to inflation can be done with a Tax-Grant-Account (TGA) or what might be called an IRS Shuttle. Draw a line on the paper with “Government” at one end and “Public” at the other end.  This line represents the flow of money between the two ends.  Tax money going from the individual to the government will tend to cause deflation.  Grant money going from the government to the individual account owner at the other end will tend to cause inflation.  Only the IRS and the individual owner (or family) have access to that account.  At any time, the individual owner can remove money and put into another private account.  It is up to the government to decide how much to deposit.  This requires good feedback and information on a broad sampling of local prices.   

Sensors that gather local economy information and local price levels must be at least as good as the Consumer Price Index.  This will help determine whether the economy is headed toward inflation or deflation.  It can be done on a month-by-month basis and could be different for each state.   For example, if Ohio sees an inflation rate that is creeping up, then money will move toward the government and TGA’s for people living in Ohio will have less spending money in their account.   If Michigan sees their inflation rate dropping, then the government can deposit more money into those TGA accounts in an effort to stimulate their local economy.  

The new ingredient here is communication and it is facilitated by the right structure and a goal or a question.  People will talk if they feel that, as far as TGA accounts are concerned, they are on the same side.  For that reason TGA grants should be flat, the same amount going into each account for all people in that state.  This granted money (G-money) can do real work as it flows downhill.  It can buy groceries, a haircut, clothes for school, and much more.  This velocity of money is called M1 by economists and a large M1 is said to play a key role in economic recovery. 

An example for Small Groups (SG of 10-12 people) is the continuing debate about health care.  United States has fairly good health care for the majority but we seem not to be getting our money’s worth.  Do we need a common socialized medical care system for everyone?  Not necessarily.  Better information for the purchasers of insurance may allow a hybrid system.  If ten people in a group (TG) are able to look at a variety of private health insurance plans and all ten agree on which one they will buy, then they should be allowed to purchase that policy, but as individual subscribers.  Those who cannot or will not join a TG Insurance plan will be covered with Medicare.  This hybrid system requires that consumers actually talk to one another, discuss among themselves what questions need to be answered, and then proceed.  It creates an information filter that can only help the quality of medicine while containing cost.  

Structures, Information, and Tension (Gradients) 

Systems that thrive have good sources of information and feedback. Economies with adequate feedback will make adjustments but not collapse.  Sensors placed in strategic locations and able to give accurate and timely information are a good way to set up the feedback loops.  Feedback loops are everywhere, but a common example is the thermostat for helping to regulate heating and cooling in homes.  It is important to place them in the right locations.  Placed in the garage, a thermostat will take too long to sense the heat and will therefor, will cause extreme cycles.  Acting in a feedback loop, the Consumer Price Index (CPI) may not be able to sense the changes needed to keep the economy on course.  CPI does not include many costs seen by consumers, including the cost of local and state taxes.  How accurate can that be?  

Money not only represents the value of Goods and Services but Information also (GSI).  This information is not simply the dirt that political hacks throw at each other.  It is education and communication.  Information is the answer to “How did you do that?” 

The value of goods and services is relatively easy to quantify and evaluate. The value of information may take more work since it may be anything from very valuable, as Snowden and the NSA showed us, or simply a distraction.  Even worse, it may be misinformation.  The ultimate judge of its value is the listener, the person or corporation on the receiving end, but it may also require time and effort in the search.  Useful information for citizens can sometimes only be found by running it through a filter and adding tension such as competition or a game.  This can be done either in real time or at a later date.

A farmer in Central America despairs because he lost all his coffee crop and blames it on climate change.  Without adequate rain he cannot grow coffee beans.  He says there is no other crop to grow but coffee, but that is not true.  In the Middle East there are farmers who have learned to use drip irrigation with only a small fraction of the water.  This is useful information that the Central American farmer may never hear.  He may not even know of other arid places but useful information is out there if only he or someone from his community can search and share such information.  The farmer certainly has local knowledge but information from outside can help.  

A system can be corrupt without any ‘bad’ people if there is a loss of communication or loss of feedback.  This is not uncommon when institutions become too large and complex.  The Queen’s Question about the 2008 recession was about “complacency” and did the Financial Services Authority have the teeth?  There were economists who saw the warning signs and wrote about it, trying to warn others.  This too was a problem of finding information and running it through a filter, a structure that can use tension or competition to help encourage a real search for information followed by decision-making and balanced recommendations. 

Can we learn from another’s mistakes?  With Covid, the answer seems to be yes.  With Climate Change it will be too late if we wait to see the worst of what might happen to others.  We must not follow others blindly but rather set up structures that can find and filter information efficiently. 

Transition to a Mixed Economy

The government could do some test cases with a Capitalism-MMT hybrid, but relying on the Federal government will not be enough.  We need input at all levels.  Tax Grant Accounts can increase or decrease every month according to whether or not there is inflation or deflation in that state.   Blue and Green Bonds have been started within the financial system, but those will not be enough by themselves either.  The Economist reports that there are not enough buyers to make a significant dent in the Fossil Fuel economy.  

A hybrid Modern Money and Capitalism MMC economy can have a gradient and yet have two levels with different goals.  The Maslow Level insures that everyone has adequate money to survive.  That might be up to $20K for each person.  Above $20K is the Profit Level for people who are motivated by profit.  The gradient between zero and $100K is the same gradient as that from $20K to $120K. Moving everyone up the same amount is called bias.  This can be done with a flat TGA.    

Those in the profit level can borrow money from private banks and pay it back with interest.   The profit motive is important for some to GOOB and create some organization.   A hybrid structure combines capitalism and modern money in a way that does not force everyone to be at the same level.  It will be important to start slowly with small amounts and check the inflation sensors to see if the system will absorb more money in circulation.  Keep it simple.  Avoid obfuscation.  Avoid wasting the time and resources in general.  Ask questions “Do we really need that?  Now?”

Houses are not built from the top.  They need solid foundations.  Maslow needs must be met – food, water, clothing, shelter.  Work toward a Maslow Plus that includes health care and education.   A case can also be made for no federal taxes on essential workers like the food, healthcare, police, and firefighters who are pulling us through the pandemic, but this too should be phased in slowly.  

Testing Information

Is a piece of information trustworthy?  Small Groups (or T-Groups, TG) can become information filters.  If a local economy decides to use bread loaves for their currency (even without the actual loaves), then TG-a might decide that TG-b and TG-d are trustworthy and above board in the Bread Loaves (BL) trade.  TG-c might be judged (by TG-a) to be untrustworthy and so trade with that group is discouraged.  In this way TG’s can help to maintain the integrity of the agreements among the local businesses.  

Bread loaves (BL), like gold, hold true value that has been relatively constant over the centuries.  Bread sustains life.  One cannot eat more than one or two loaves per day and, of course, bread that is more than a week old tends to become stale and lose its value, but it can be replaced and still used as currency.  One could actually exchange 100 loaves of bread for a bicycle.  Maybe 200 for a really nice bike.   Real bread for a real bike is a barter, but the number of bread loaves could be used as a price level, even if not exchanging real bread. Listing the number of BL’s for price would work if, at any time, the paper BL could be exchanged for real bread.  Of course someone in the group must be assigned to keep track of it or write an app to keep track.  Some transparency will be needed to establish such a system. 

Digital currencies, like most of the US dollars sent via wire, remain hidden in their origins.  People will still use them, however, if they seem to function like currency. Facebook’s Libra, another digital currency, does not need blockchain verification since it is a closed system. Each Libra can be tagged and accounted for.  If the system seems to be consistent (no counterfeit or stealing), then Libras can be traded for dollars just like a foreign currency exchange.  Neighborhoods can use local currencies to challenge other neighborhoods to be self-sustaining and use low fossil fuel.   This type of structure can be used to start other MMC systems.  

T-Groups (a small group of 10-12 people) can apply for grant money that could be spent in their local community.  Maybe they want to build a swimming pool.  There application for a grant could be stopped by two other TG’s who point out that members of the first TG are related to a swimming pool contractor. The government grantor may tell them to re-mix their groups and come up with some better plans and also ask how they will evaluate the job.   

The next priority is spending it on the right stuff.  Lobbyists would take it all, and governments that seek no counsel with its citizens on how to spend that money will not do much better. Individuals, small groups (TG’s), and larger groups must all think about where we need to spend our money.  Neighborhoods and small towns can push each other using information games to become self-sustaining and move toward low fossil fuel consumption.   

A common accusation of central planning is that they build bridges to nowhere.  It does provide jobs but in the end, if no one uses the bridge to expand trade, then people, resources, and time have been wasted.  This is another cause of inflation since extra money must be spent to make up for it.  Finding waste is a second point of Resistance To Inflation.  

There are weakness of central governments and the Capitalist system, but there are strengths too and we should use those.  Lobbyists and Bond Vigilantes will resist.  They cannot imagine another way ahead.   A hybrid MM-Capitalist system can help to create a higher tax base for local and state governments.  Once the free grant money is in circulation and can get others to GOOB to do their job, then it is real money.  It can get people to do real work.  Creating a currency is not enough.  There must be an application for the currency, a reason to GOOB and do one’ s task.  A Green New Deal (GND) cannot succeed unless the jobs actually do something that take us toward a greener environment.  Painting things green does not count.  Central sovereign governments can provide the money but most of the work and feedback must be at a local level.  

One can make the argument that climate change will not be overcome without the use of Modern Money.  A group of ten homeowners want to insulate their home to save energy costs.  In a purely capitalist system, the wealthiest among them might have already insulated his or her home.  The poorest may never get around to insulating if he or she cannot find a job.  In a Modern Money system with a Small Group Grant, the homeowners can decide to insulate the worst one first, thereby saving more on energy costs up front and optimizing their expenditures.  

What if there is no Organization?  Can one create a gradient of some kind?  If a gradient is pointed in the right direction, but not too steep, then organization will often follow as people start to talk to one another.  Gradient, Groups, and Organization tend to support each other.  Providing any two of the three will enhance the creation of the third.              

If the US is unable to institute Modern Money, then trials in the developing world can be helpful in getting it going and could be started with private funds.  It is important to approach a cross section of other societies, not simply their local leaders, as this approach soon gets diluted.  This has been a mistake of many NGO’s.  Henry Ford’s dictum that higher wages will allow auto workers to buy his products is an idea that can be applied here.  Giving money to start a Modern Money system can come back in a positive way to support its use by larger nations.  It will become important to push developing countries to think about what money means and how to organize transactions in a more creative way. America’s greatness may find expression in pushing others up the hill – but push we must.