Who is in Charge, Governments or Bankers?

A long and interesting article has been published by Bill Mitchell entitled "Who is in charge?" It comes in the wake of further sovereign debt problems, most imminently with the so-called PIIGS of Europe. His message is that the classical monetarist knee-jerk reaction, promoted by the corporate media, has become ingrained in people so that both the public and the experts can no longer see that it is indeed just a construct - and a false one at that. Mitchell is promoting his modern monetarist theory (MMT) in which he shows that the idea that government finances are somehow analogous to our personal finances is wholly wrong. If a government has genuine sovereignty, that is, control of its currency, then the idea that it can somehow be bankrupted by the bond markets is false.

Mitchell sees this as one of many economic 'intuitions' that the public has been led to believe. Like I said, it is a long post and I'm no economist, but I am a mathematician so those formulas don't scare me! However, the message seems clear: "Where might we start exposing faulty intuition which allows policy makers to devastate their populations via fiscal austerity packages at the height of a near-depression?"

Well, one thing is the propaganda that if governments just print more money then inflation will rise. What the public is not told is that this convenient see-saw only applies when an economy is near 100% capacity and full employment. But the conviction that printing money is bad has led governments to issue bonds instead, using the temporary income from their sale to finance their spending. But such loans have to be paid back, usually by issuing yet more debt and thereby getting governments into the cycle of indebtedness to bankers. Up to this point it does all sound very similar to our personal finances, should we choose to live a life of indebtedness. However, unlike citizens, a government can create more money. Ironically, this makes the government merely in debt to its central bank rather than to the public (or rather private) bond markets. Mitchell seems to me close here to blaming the economists and the bankers that run government central banks almost as much as those who work for private banks. The Federal Reserve looms large in this debate as having the powers of a central bank yet being a private operation - the Federal Reserve is about as 'Federal' as Federal Express.

By promoting the idea that governments have to issue bonds so that the bond markets can keep a wary eye on government spending is thus a piece of monetarist ideology and not a law of nature. "But the mainstream have such an ideological obsession against government command of resources to pursue a socio-economic program (because such programs are “wasteful”, “inefficient”, “roads to no-where”; “undermine incentives”; “enslave free people”, etc) that they realise they can pull the emotional strings and invoke this faulty intuition in the public."

And here we come to the title of the article: who is really in control here? And as important, what are governments really for? There are many reasons for people to keep an eye on the activities of their government, but for a sovereign nation to tell its people that it is effectively being controlled by private bankers with no interest in their well-being , well, nobody is going to do that. Instead they hide behind false monetarist policies.

This clash of capitalism and sovereignty was bound to happen. The aim of corporations is to grow, the aim of governments is to (supposedly) look after their people. Capitalism accumulates whereas governments redistribute. According to Mitchell, those governments that still control a sovereign currency are lying to their people when they present a false choice between hyperinflation and austerity. The problem that has surfaced in some European countries is that, having joined the Euro, they no longer control their own currency. But the other problem is that governments are being forced to support bankrupt private corporations. The money being created by the likes of the Fed seems to be largely going into filling unquantified losses of private operations. Thus money is being printed but is not going into the economy and hence not stoking up inflation. According to Mitchell's model, in this time of economic slowdown, pouring money into the economy would still not lead to the dreaded inflation but it would relieve the pain and misery of an oncoming depression.