Aug 20, 2020
Welcome to episode 42 of Activist #MMT. Today is part two in another of my ongoing conversation with PhD. political scientist, author, and MMTer, Joe Firestone. Today, Joe gives a basic introduction to how the United States Federal Reserve "defends its interest rate." This episode was recorded on March 24th, only two days after Joe and I recorded episodes 22 and 24. At the time, despite having just entered my third year of studying MMT, I’d always found the concept to be distant and opaque. Yet I’d often hear, "They’re just defending their interest-rate. They’re just defending their interest-rate."
After speaking with Joe, although I struggled to understand the details, I could tell that this seemingly mundane concept was hiding real world problems. In fact, I now believe a major lesson of MMT itself to be that many man-made concepts are used to obscure real world problems – too often immorality, criminality, and mass suffering.
The whole MMT journey to date has been to caution readers about the actual nature of constraints on government spending rather than the false constraints taught in economics courses around the world and wheeled out continually by self-serving politicians and lobbyists.
Bill Mitchell, August, 2019, On money printing and bond issuance – Part 1
Now nearly three months later, as I record these words, I just (last night) finished reading Stephanie Kelton‘s new book, The Deficit Myth. I also re-read Warren Mosler and Mat Forstater's 2005 paper, "The Natural Rate Of Interest Is Zero." So I definitely understand more of the details. More importantly, however, it’s now clear that for a fully sovereign fiat currency issuer such as the United States, the very act of choosing a target rate above zero can only result in inequality being continually and consistently exacerbated.
As I understand it, this is because a higher interest rate means banks must pay more for reserves when transacting in the interbank lending market (also called the banking reserve system). This causes banks to charge more for loans, which means companies take out fewer loans. This in turn increases the chance that the companies will shed workers, and who are the most likely to be shed but the disadvantaged and newly hired? This means that the already unemployed and desperate for work will definitely not be hired, especially since they now have to compete with the ones who were just let go – those obviously with more, and more recent experience. What it all means, is that when the Federal Reserve increases its interest-rate target, it always results in the disadvantaged being ejected from or further shut out of the job market. In other words, it keeps the poor, poor.
The Federal Reserve could defend its target rate by paying interest directly on reserves but they choose not to do that. As described in the Mosler-Forstater paper, the only other way to do it is to offer to sell bonds to the public. United States treasury bonds are interest bearing financial instruments that are, without exaggeration, 100% risk-free. As Warren calls them, bonds are "UBI for the rich." In other words, a positive interest rate further enriches the rich.
Unfortunately, mainstream economics has asserted for decades that the primary cause of runaway, out-of-control inflation, is unemployment becoming too low. Because of this, the concept of full employment was long ago replaced with "maximum employment," the latter of which means "as low as possible unemployment, as long as it does not trigger runaway inflation." Therefore, according to this theory, it is paramount that the rate of unemployment not be allowed to drop below this threshold. That threshold is considered to be the "natural" rate of unemployment – and conversely, it is also the so-called maximum safe level of employment.
But the thing is, the runaway, out-of-control inflation they fear has never happened. So the rate of unemployment required in order to avoid it is anything but natural. In fact, according to a 2017 study by the London School of Economics and Paris School of International Affairs, those who vote to decide on the Federal Reserve’s target rate make their decisions primarily based on personal ideology.
In 1977, during the Carter administration, the Federal Reserve was mandated by Congress to maintain both price stability and maximum employment. As Stephanie Kelton points out in her book (chapter 2, footnote 15), the United States Federal Reserve is unique in that it is one of the only major central banks that is mandated to not just maintain price stability. Unfortunately, the Fed has decided that avoiding inflation is more important than keeping the employed employed, and finding jobs for those who are desperate for a job. These lives, especially those with no money and no power, are sacrificed in the name of avoiding the never-before-seen boogeyman of runaway inflation. The late Columbia University economics professor William Vickery calls the natural rate of unemployment ”one of the most vicious euphemisms ever coined.”
Most unfortunately, however, even if they wanted to, it’s impossible for the Federal Reserve to achieve truly full employment. Only Congress has the ability to do it. As MMT makes clear, the only way truly full employment can be achieved is by implementing a federal jobs guarantee. Under a job guarantee, everyone who wants a job can have a job (and as long as they show up and work hard, they can keep it).
I want to make a final point about the numbers themselves. In December of 2018, the Fed raised its target rate by .25%, which is less than 1%. According to an analysis by Bill Mitchell, of the Fed’s own press release and data, the increase was a conscious choice by the Fed to disemploy at least 1.2 million more Americans. .25 is almost 0! How can a number that small ever be harmful?
By the same token, MMT shows that the inequality of the national debt is always a problem but, in and of itself, the raw size never is. But the national debt is currently $26 trillion. That’s a twenty six followed by twelve zeros. How can a number that big not be harmful?
The truth is that .25 is such a small number, it’s used as a tool to hide the fact that the Federal Reserve will do whatever it takes to ensure that 1.2 million additional, actual human beings lose their jobs. The scaremongering regarding the massive raw size of the national debt is a signal to the public that they will not be given anything they need to survive, because doing so would make that big scary number even bigger.
In 1983, UK Prime Minister Margaret Thatcher informed the world, "The state has no source of money other than the money people earn themselves.... There is no such thing as public money. There is only taxpayers money." What she really meant was that "there is no such thing as public money because we have decided to no longer create it for you." In other words, it was a signal to average people to brace for crushing and ongoing austerity, which so many all around the world have now endured for almost forty years. Thatcher and her neoliberal descendants have been so successful, it‘s increasingly possible that we face worldwide societal collapse in the not so distant future. We can certainly change that path, but the window for doing so appears to be quickly closing.
Here’s one more quote from Stephanie’s book: "MMT fights involuntary unemployment by eliminating it." What this means is that the goal of price stability can be achieved, and with much greater and longer lasting success, by stopping real-world human suffering with truly full employment.
I still have so much to learn, but this interview with Joe was my first step in the journey. Enjoy.
(The insight regarding Margaret Thatcher comes from episodes 25 and 26 with James feal-Martinez. Links to the episodes with James and much more can be found in the show notes.)