Beyond the Waste Land

Introduction

Democratic primary voters recently chose a fiscally conservative candidate over other candidates promising huge social program build-up in the US.  This choice was motivated in part by cost fears these social programs provoked.  Shortly afterwards, in response to the economic crisis gathering in the wake of a global pandemic, not to mention a fast approaching general election, President Trump conjured at least $3 trillion of helicopter money out of thin air.  It was as if the putative God-Emperor declared "Let there be money" And there was money.  Trump saw the money, and it was good.  Some Democrats responded with grave warnings about hyperinflation and wheelbarrow money.  Interest rates for US debt  lunged to their lowest levels in generations.    

Why is it Democrats, such as Bill Clinton and Barrack Obama, seem to be better at balancing budgets than in creating social programs?  And why is it Republicans never have any problems at all spending money?

Now President Trump is demanding reparations from the People’s Republic of China for their alleged part in the release and dispersion of the novel coronavirus currently sweeping the globe. One idea being floated is to cancel China’s holdings of US government bonds, valued at $1.1 trillion. Rare indeed is it that a party calling for reparations unilaterally holds the power to enforce their demands. Meanwhile, a leading German tabloid calculated, in stellar Teutonic fashion, exactly how much China should pay Germany in coronavirus reparations. If any country has expertise in both paying and avoiding reparations for causing global mayhem, it would be the Germans.

Some Democrats, feeling a Pavlovian urge to dunk on Trump at any cost, are invoking their long-time nemesis, the “Bond Market” to warn against cancelling China’s abundant T-Bill collection.  The Bond Market is a marketplace where nations offer debt, in the form on bonds, and the market prices this debt by setting the interest rate they are willing to pay to hold this bond.  It is similar to an individual seeking a home loan from a bank where the current and past financial state of this individual will be examined.  The more risk there is, the higher the interest rate that will be charged.  And so it is with nations.  Higher interest rates means debt service costs increase and results in less money being available for social or military spending.  The fear of skyrocketing interest rates has traditionally been used against Democratic Administrations to keep them on a fiscally conservative path and away from new social programs.  

Democrats invoking the Bond Market or wheelbarrow money are committing the classic error of preferring the tactical over the strategic.  This means trying to win a meaningless short term battle by doing something against one's long term interests.  Combined with Trump Derangement Syndrome, this often results in reactionary Democrats employing a rhetorical "spray and pray" tactic, normally used by jumpy insurgents, of  immediately and indiscriminately unloading their rhetorical AK47's against whatever the bad orange man says.  Thus their calls to respect the authority of the big bad Bond Market will be the cost of later jettisoning any social programs in the service of balancing budgets.  

What follows is a study of an economic school of thought--Modern Monetary Theory (MMT)--which argues the Bond Market is a greatly exaggerated constraint.  They assert it's a scare tactic trotted out in order to discipline Democratic Administrations into meekly balancing the budget after the previous Republican Administration has not only cut taxes, but has spent like a drunken sailor on either huge military buildups (Reagan), or savage wars of imperialism (Bush II). As we will see, Democratic kowtowing to the whims of the Bond Market is in fact submission to the interests of a parasitical rentier class.  Obeying the dictates of the Bond Market results not only in unpopular tax increases, worse, the Democrats have  repeatedly been forced to sublimate their voter’s long standing desires for generous social buildups, which would include universal health care, pre-school child care, free universities, and paid parental leave. Addressing climate change is now also a major priority. Enter the Green New Deal, the ambitious and potentially expense strategic vision set out by Congresswoman Alexandria Ocasio-Cortez (AOC) to guide the Democratic Party into a future limited by the constraints of climate change.  Is there a way out of this cycle of Democrats repeatedly playing the political equivalent of a codependent wife--denying her own spending priorities and instead cleaning up the fiscal mess her profligate political partner leaves behind?

A political cynic would say the Democrats are no different than the GOP and both parties are simply tools of the plutocratic class.  While in reality this is no doubt true, let's assume there is hope for them to break free from the plutocrats and become a party representing the interests of other social classes.  So is there a way for the Democrats to respond to Trump on Chinese reparations while reinforcing their own strategic position? What is the strategic cost of promoting the Bond Market boogieman and being forced into a deficit hawk position? Do deficits really matter? 

What follows is critical analysis of MMT, an heterodox economic theory that is suddenly very much in the news these days thanks to the global pandemic.  Taking a cue from intersectionality,  we will examine the intersection of MMT with climate change, regionalization, and pandemic monetary policy and how these intersections inform a robust strategic position.  The Eurozone will be examined as is a perfect laboratory to study the intersection of regionalization and MMT.  But first we will start with a discussion on the ultimate strategic goals imagining a Democratic Party free from plutocratic control in order to understand how MMT could potentially be employed in the service of this strategic vision..  Tied to this will be development of a  theory of the characteristics of an ideal society which is closely tied to a specific alignment of class struggle.  This is an ambitious attempt to guide Democrats towards specific societal results, to identify which social classes they should represent and which economic tools can help them achieve these results.  In short, dunking on Trump at any cost is not a strategy.  The goal is to end "spray and pray" and replace it with a coordinated and directed effort towards a worthy goal.

The length of what follows makes it difficult  to be read in a single serving. It should be approached more as a leisurely four or five course French meal, even spread out over several days.  

Akira Kurosawa’s “Seven Samurai” is a simple but universal cinematographic representation of the birth of civilization. The perpetual conflict between productive and parasitic social classes is at the heart of this film.  The drama starts with a band of roaming bandits planning a harvest time raid on small and defenseless village.  Some of the villagers overhear this and know they only have months to prepare.  Fearing that once the bandits have stolen all their crops, they will be facing starvation in winter and for the survivors, a seedless spring.  So they hire a band of Samurai who were able to organize the village for defense.   Despite some villagers complaining bitterly about having to share their rice with them, the Samurai were able to successfully protect the village  from the roaming bandit raid.  Thus civilization was born.

Kurosawa's film depicts  the village symbolically transitioning from living in what political philosopher Thomas Hobbes  called a State of Nature--where life is famously solitary, poor, nasty, brutish, and short--into a Civil Society by engaging in a social contract with the Samurai.  It's clear that the roaming bandits represent a parasitical class, what is less clear is that the Samurai, who are functionally now fixed bandits, are also a parasitical class.  When given a choice between parasite types, humans prefer a fixed bandit (government) which is intimately tied to and dependent on the host society (productive classes) and thus are limited in their parasitic activities for fear of killing their host.  Roaming bandits face no such constraints and will often plunder to the point of destroying the village.  In reality a governments could end up as a kleptocracy and treat its citizens even worse than the roaming bandits would.  Or the government is so weak that the citizens are getting hit by both types of parasites.  But most of the time a fixed bandit government is preferable to being vulnerable to the roaming bandits.

It seems apt during a pandemic to use a disease metaphor to describe this process.  Both the raiders and the Samurai are macro-parasites.  Although parasite is normally a derogatory term, this example shows that some parasites can be useful.  Governments can be seen as fixed bandits, when working properly can act as a sort of immune system for the body politic.  The immune system is parasitical in nature, but it is very useful when disease strikes.  The same could be said for say a military force when facing a foreign invasion, but in times of peace they are a burden and expense.  An immune (political) system can also be driven into autoimmune overreaction and lead to destruction of its host society, such as in a totalitarian police state.

A theory of class structure and struggle emerges from this foundation myth. Marx's binary model of a bourgeoisie oppressing a proletariat is far too simple and leads to much misunderstanding.  A better model would be of four classes, two of them parasitical, and two of them productive.  And from this alignment emerges the preferred class struggle:  makers against takers.

Government acts in a way similar to an immune system--a sort of benign parasite usually--but inevitably a malignant parasitical class emerges from power node. Using its links to government power in order to amass huge fortunes, they turn that material wealth back into political power in order to defend their wealth and continued access for rent extraction.  This can be called a Rentier class, but it will also be often referred as plutocracy or oligarchy.  The key being this class contributes little to nothing to the productive capability of a society.  Instead of producing, it parasitically feeds off productive society.  This is that old landowning class that now derives its income from their remaining large land holdings, financial titles, stock shares, income-earning assets, and instruments of debt -- from the Bond Market.  The Rentier class sits at the very summit of society. A society whose wealthy elite emerges from production is far preferable to a wealthy elite based on parasitic rent seeking.  

The other parasitical class sits at the bottom.  Roaming bandits transform themselves into Marx's Lumpenproletariat.  This is a low-level criminal class that feeds on the weak and vulnerable.  Think of thieves, pickpockets, grifters, etc. all the way up to Mafias, drug cartels, street gangs, etc.  One could certainly argue that Lumpenproles pose much less of a threat to society than the looting plutocrats do.  But this would be missing the point.  The true danger is a society's immune system overreaction to a strong Lumpenprole infection.  This immune system is manifested in the penitentiary industrial complex, a system of courts, police, jails, and insurance companies-- while indeed at least providing employment--it comes at the opportunity cost of more productive activities. Worse it offers the plutocrats rich rent-seeking opportunities, which ignites a viscous cycle of parasitic activity on both the top and bottom layers of society against the productive middle.  Sometimes society's immune system reaction to Lumpenproles resembles the auto-immune disease Lupus, where a hyperactive police state is triggered into indiscriminately attacking the productive classes as well.  

The productive classes are the farmers from Kurosawa’s masterpiece, the bourgeoisie would be the land owning farmers and the working class, the landless laborers.  Today the bourgeoisie is today made up of educated professionals, for example medical doctors.  The working class is composed of individuals with lower education attainment and who typically engage in physical work, for example a plumber.

A sane theory of class struggle would pit the two productive classes against the two parasitical classes.  But this takes an explicit agreement, a sort of class non-aggression pact, between the bourgeoisie and the working classes because their class interests are certainly not always the same.  For example the plumber would like to purchase the doctor's services for as cheaply as possible and so he may propose a single payer health care system to help keep the price of medical care down.  From her point of view, the doctor wishes to obtain the plumber's services for as cheaply as possible and so she may encourage an abundance of plumbers all competing against each other, keeping their prices low.  The plumber would obviously prefer a scarcity of plumbers so that the supply and demand curve works assures him a higher price for his labor while the doctor prefers a private health system that allows her to keep her income high.

But is such an agreement possible between the bourgeoisie and the working classes?  It's clear the rentiers would prefer the two productive classes to be at each other's throats instead of united and deployed against him.  One way the plutocrats keep the two productive classes at each other's throats   is to launch emotional culture wars between the productive classes.  But history shows such an agreement between classes is possible and this brings us to an example of a society that the Democrats could use as a model to strive towards.

Aspiring to post-WW2 Sweden

Deficits matter politically it seems, only when the opposing party is in office. For example, liberal Paul Krugman is all for deficits when a Democrat sits in the oval office but is against them when a Republican enters.  Dick Cheney takes the exact opposite partisan approach.  But there is an economic theory--Modern Monetary Theory (MMT)--among whose tenets are that the dangers of deficit spending have been greatly exaggerated irrespective of which party is in power. MMT is a theory that tends to unite the two extremes of the political divide. For example, in France both right populist Marine Le Pen and Left populist Jean-Luc Mélenchon support major elements of MMT. In the US, Alexandria Ocasio-Cortez is one of the very rare US politicians to overtly support MMT.  On the right, some MMT insiders have sound reasons for seeing Trump as a closet MMT-case.

Taxes

After rolling out her Green New Deal proposal to great media fanfare, AOC immediately faced the usual, "How are you going to pay for it?".   This killshot has already claimed universal health care and any preschool child care proposals, not to mention free public universities during this election cycle.  Instead of rolling over and dying as Democrats usually do, bravely AOC's response invoked the heretical economic theory of MMT:

I think the first thing that we need to do is kind of break the mistaken idea that taxes pay for 100% of government expenditure.

AOC specifically cited one of the central ideas of MMT: that taxes are not 100% required for government spending.  Now to be sure, this refers to Federal government spending--states and municipalities along with, as we will see, Eurozone countries, do not have sovereign control over a printing press. AOC’s statement is double-edged though and helps expose Donald Trump’s latent MMT tendencies. If taxes are not required for government spending -- and they are not – then Trump’s tax cuts for the wealthy, while economically inefficient and morally deplorable, are not really going to lead the US to economic Armageddon.  The truth is, paying for the Green New Deal is really just as simple as paying for America's forever wars, Congress will authorize the necessary spending, and Treasury will spend.  AOC has specifically endorsed MMT, saying it needs to be, "a larger part of our conversation."

Taxes do play a central role in MMT theory. While not being 100% necessary for funding government spending, a sovereign issuer of currency must force her citizen’s to pay taxes exclusively in the local currency, which in turn creates demand among the citizens to take jobs paid in this currency, and with the sovereign issuer having a monopoly on issuing this currency, the demand for its currency translate into power for the government, and the ability to spend money. This power imbeds value into its currency, at least within its national borders. So under MMT, while certainly required in an amount sufficient to cement demand for the local currency, the amount of taxes collected is not required to match the amount of government spending and so the constraint of deficits remains a false “asocial construct”.

One important aspect, that MMT’ers are reluctant to admit, is that the power of their theory depends greatly on the power of the currency under discussion. So as the global reserve currency with no currency rivals even on the horizon, the US Dollar is in such a dominant position that MMT theory works very well when describing the greenback. One of the keys tenets of MMT is that a sovereign issuer of currency cannot be forced into default on debts incurred in that currency. Closet-case MMT scholar Donald Trump, in his very unscholarly diction, restated this 2016, starting with an exceedingly important qualifier:

“This is the United States government. First of all, you never have to default because you print the money. I hate to tell you. So there’s never a default.”

While technically correct even without Trump’s qualifier, the reality is that many weaker currencies must either accept the valuation of international currency markets, which may not be very flattering, or seek hard currencies in order to purchase imports and this fact can lead to ruin for economies sporting weak currencies.  The day of reckoning is the day they have to obtain a hard currency in order to import food for their populations. Since almost all global trade is conducted in dollars, the US never has any need to convert dollars into other currencies or to take loans in other currencies in order to buy imported goods. So while MMT may very accurately describe the all-powerful US Dollar and the possibilities US policy makers have as a result – MMT is much less useful in describing a weaker currency such as the Argentinian Peso, which must be converted to US dollars in order for Argentina to import services and commodities or to get foreign loans. And so the Bond Market has much more power over these countries. No, Argentina or Turkey cannot literally print its way into prosperity—the sadistic Bond Market rules these countries with an iron fist--while in the US, printing and prosperity do have a relationship. But there are always limits; the primary one being inflation. Many on the left, stuck in an emotionally reactionary “Resistance” mode, were all too ready to dunk on Trump by attacking him as a dangerous profaner of the US dollar and invoking the Bond Market to prove their case. Others, being immune to Trump Derangement Syndrome, were amused that Trump was latently promoting a theory that could be very much in the left’s interest.

It must be again emphasized that ever since Reagan, Republican Administrations--with their policies of tax cuts and war spending--have been deploying MMT-like economic policies while at the same time--in a blatant case of projection--accusing the Democrats of being the big spenders.  This continues today with the difference being that Trump is lifting the curtain on this economic heresy by being just a tad bit too honest about his heterodox tendencies.

Financing Debt

According to MMT the US has no obligation to issue bonds to finance the so called “deficit”. It’s not necessarily a bad idea to issue bonds, there are many good reasons to do so. But it is a political choice, not an economic necessity.  In other words, submitting to the dictates of the Bond Market is a choice -- the Bond Market in fact does not hold any power of US policy makers.   In fact, according to MMT the entire concept of a deficit is an accounting fiction used by the wealthy to damp down government spending. That is not meant to say that there are no limits to government spending – there certainly are and one of them again is indeed inflation -- only the limits are not those imagined by the deficit hawks. Another point MMT’ers quite correctly make is that just as debt is not required to fund a sovereign, monopoly currency issuing government, as AOC stated, taxes are not 100% necessary in order to fund the government. Trump’s tax cuts for the rich would not be the first choice of most MMT advocates -- they would insist that middle class tax cuts would be much more effective in increasing aggregate demand than billionaire tax cuts are. Taxes do play a useful role in tamping down inflation and giving value to a currency but as AOC highlights, tax dollars are not even directly used for Federal spending -- taxes sent to the Federal government are simply destroyed and new money is created independently in order to facilitate government spending. While it is nice to see the relationship between money spent by the government and money taken in – the all-encompassing importance given to the US “deficit” is more about politics and less about economic reality. And so for example, under MMT, middle class tax cuts would not necessarily need to be "paid for" by tax increases on the rich – although there may be sound policy reasons for attempting to do so.

Full Employment and Reserve Labor Pools

The key policy goal MMT advocates are trying to achieve is to pump up aggregate demand (the total amount of demand for all finished goods and services produced in an economy) to the point that full employment results – basic Keynesian theory which is why sometimes MMT is referred as Neo-Keynesian. The usual problem with standard Keynesian theory is that deficit spending during the bad times is supposed to be balanced to some extent with surpluses during the boom but this second part of the deal is almost always reneged on. Americans have found a novel way around this. They deficit spend during Republican administrations no matter where they find themselves in the economic cycle and then bring in the hapless Democrats who sacrifice their own spending agendas and instead nobly concentrate on rebalancing the budget during their time in office and thus failing to deliver on any new social programs. Obviously, a realist realizes that the very same vectors of wealth and power control both parties, but for the sake of argument, let’s assume that at least some Democrats do actually believe in their rhetoric.

One key flaw in the MMT belief that increasing America’s aggregate demand will lead to full employment is globalization – the US is basically a very leaky bucket; pour loads of aggregate demand into it and a large amount leaks out to the rest of the world and creates employment in other countries due to offshoring, particularly China.  Only a certain percentage of US aggregate demand leads to actual Americans getting jobs at American wages. Capitalism is relentless in its efforts to keep that number as low as possible. MMT’ers will admit this is true but will respond by saying all the better if the US is able to spread out aggregate demand to the rest of the world. They do have a point up to a limit – for example in the 60’s, during the peak of the Cold War, the US strategically exported aggregate demand to non-communist areas of Asia – primarily Japan, Hong Kong, Taiwan, and South Korea – in the form of highly favorable trade arrangements, that led to the creation of strongly committed anti-communist Asian Tigers showcasing the splendors and supposed universality of western capitalism.

But this was a calibrated and limited gift of aggregate demand that balanced the malignant wage impact on US worker salaries with the more benign importation of cheaper consumer goods. Post-Cold War globalization has toppled this equilibrium with a flood of cheap imports combined with the destruction US worker wage growth.

One way inflation can arise is if aggregate demand rises faster than the productive capability on an economy.  Say what you will about globalization, but with the entire productive capacity of the globe ready and willing to serve US aggregate demand, under current conditions, there is next to no possibility that rising US aggregate demand could lead to inflation.  But any increase in aggregate demand will most certainly exacerbate the current climate crisis.

The reason the US does not have full employment is not because the plutocratic class has not of yet discovered the magic of MMT. The US does not have full employment because that would mean the wealthy would be getting seriously pummeled in the US' chaotic class war.  Unlike in our Swedish model, there is no alliance within the productive classes.  Class struggle in the US features all classes constantly at each other's throats.  You may see some temporary alliances, but for the most part the Plutocrats are the dominant class and are able to impose their will on the others.  But with no peace treaty, the Bourgeoisie are skeptical of full employment as well -- remember they want their plumber's services to be bought as cheaply as possible while keeping the cost of their services as high as possible.

Full employment--which really means worker scarcity--should indeed be the most overarching strategic goal of any political movement that labels itself left. And so MMT absolutely is on the right track economically and politically in promoting full employment. As we saw in the Swedish example, worker scarcity leads inevitably into worker power, which leads to higher worker salaries, which means lower profits for the wealthier classes, which up to a limit means a more just society with a very favorable distribution of wealth and plenty of resources for social programs. In short, worker scarcity creates a virtuous cycle for the workers but a potentially viscous cycle for the wealthy. 

One potential problem with worker scarcity is that indeed it could lead to "inflation".  This leads to a deeper question as to what is the optimal level of inflation for a society?  Plutocrats will want it very low 1-2%, workers do best with it at around 6-7% as it was in Golden Age Sweden, and the bourgeoisie probably prefer it at 3-4%.  This is an important question that is almost never discussed any more.  The definition of "inflation" had by default been set any level over what the rentier class want it to be.  This is because up to a point, the concept of inflation is a tool of class warfare to tamp down worker salaries.  A more just basic principle for limiting inflation is that salaries should be related to rises in productivity.  In the US, for years productivity has risen but salaries have remained flat.  But everyone can agree that inflation over say 10% is problematic.

Since the wealthy vastly prefer an abundance of labor – workers competing against each other for the lowest wages -- a reserve labor force is sought. On constant standby, they are ready to be deployed in case worker scarcity arise. Historically, during the 19th century, the “huddled masses” in Europe were wealthy American’s reserve labor force.  An unspoken agreement was made, as established Americans in the major cities were displaced by the cheaper huddled masses, these Americans were encouraged to settle the vast interior of the US and were often given free land--land that had been captured from the natives--as compensation. As a new century arrived, immigration was slowed, the amount of free land to give away was running out, and so the reserve labor force of southern blacks was deployed on a northward Great Migration in order to damp down wage increases. As immigration almost stopped in 1924, the  the class war was in a precarious balance, but the Great Depression arrived just in time to create a massive domestic reserve labor pool, for example the Okies and other Dust Bowl migrants. By the time WW2 broke out, FDR had gotten most of the white men back to work, and so the reserve labor force of women were transformed into little Rosie the Rivoters at a moment’s notice, while waves of further westward migrations of blacks were deployed. After the war, women were sent back to the kitchen and blacks were consigned to urban ghettos. In the Sixties as the labor market tightened and as the specter of worker scarcity loomed, women were again deployed although this time as a permanent cheap labor force. This pretty much exhausted any sources of domestic reserve labor and so in a combined Cold War effort to universalize the American Way to all races, third world huddled masses became the US’ reserve labor force and Hispanics largely replaced blacks as agricultural and domestic labor. Segments of the black community were once again relegated to a domestic reserve labor status. Fast forward and today in the US, as a result of the recent pandemic lockdowns, is gathering potentially the mother of all reserve labor pools.

The way many MMT thinkers accommodate the need for a permanant reserve labor force is to explicitly create one through a job guarantee (JG) program.  Basically this would be a reserve labor pool whose members would receive a monthly salary.  Employers would always have the right to hire workers from this low wage pool, whose salaries would be tethered to the minimum wage.  While admittedly the JG idea is a realistic nod towards the class warfare interests of the wealthy -- this remains a very controversial proposal and is not per se fundamental to MMT thought. MMT's JG is different from say Andrew Yang's Universal Basic Income, which would apply to all Americans and is not necessarily an attempt to create a reserve labor pool.  The JG is designed as a tool to tamp down the inflation -- how effective it would be in reality is not clear.

But what about this constraint of inflation? If the Bond Market’s authority is not respected, we are often told that people soon need wheelbarrows to carry their money down to the corner store to buy a sixpack, just like during the Weimar Republic? But how similar were those historic conditions in Germany to the current problems facing the US?  What follows is an explanation, in some detail, of  how this hyper-inflation occurred.

Wheelbarrow Money -- Hyperinflation during the Weimar Republic 

The roots of the Weimar inflation lay in German WW1 financing – war was a speculative endeavor back then. As bitterly as the Germans complained about the reparations placed on their shoulders, had they won the war, they would have imposed extremely harsh reparation on Britain and France. just as China would be demanding reparations for the US if this novel coronavirus outbreak started within a stone’s throw of US virology labs in Ft; Detrick Maryland. So, the Germans did not think the war would last long and since they was no doubt they would win, they were looking forward to getting paid by the Entente powers.

In those days the tools available for financing war were taxes, inflation, domestic borrowing, and foreign borrowing. Germany was a young federal nation in 1914 and the weak central government did not have to power to impose an income tax. The current process of European integration strongly resembles what Germany went through and so think of the weak EU today trying to finance a war with severely limited ability to tax. Also at the start of the war Germany was on a gold standard, their central bank was required to have gold bullion worth 33% of their issued currency. As the war started Germany functionally abandoned the gold standard but dangerously kept the illusion of being on one for foreign consumption. This allowed them to print money in a newly created alternative currency, and ingeniously, the central bank was allowed to count their holdings of this fiat money as gold – not for the last time the Germans were literally printing gold! But for the most part the German war effort was financed by domestic bond buying, patriotic Germans were sure their side was going to win and there was a huge payday just down the road.

Fiat lux is Latin for, “Let There be Light”. Fiat money is created when a sovereign declares, “Let There Be Money”. And there was money.  And the sovereign saw the money, and it was good.

But there was nothing so fundamentally wrong with the ad hoc way the Germans financed their war – France and Britain did similar things, but not quite to the extent the Germans did – the point being that hyperinflation in Germany was not yet inevitable. But in the event the Germans lost the war and the Entente Powers imposed a huge reparations bill on the fledgling Weimar Republic – who took power after the failed communist November Revolution 1918-19. Now it seems the Germans didn’t really understand the religious nature of money since they naively named their currency the "Papiermark." while the reparations specified that the debt was to be paid back most certainly not in soon-to-be-worthless Papermarks but instead, to be paid in “Goldmarks”, which was a special currency the Germans used for exports that was strictly linked to gold. This meant that in practical terms the Germans now had a debt in a foreign currency (gold). The Germans in an attempt to pay their reparation bill started printing Papermarks, once again effectively printing gold, and selling these soon to be worthless notes to foreign suckers and for a short while received in return hard currency they could convert to Goldmarks and send to the allies. Inflation in this case was inevitable and it skyrocketed in Germany at which point the Germans could pay no more. The allies occupied the Rhineland, the industrial heartland of Germany, but this attempt to grab real assets ultimately failed. After eventual currency stabilization, the Weimar Republic was able to secure a surprising number of hard currency loans from Wall Street and so in the end were able to pay back 20 million of a 50 million Goldmark reparation bill before Hitler took power and halted all reparation payments. The 30 million outstanding balance was never paid but post WW2, the German state did choose to pay back the outstanding Wall Street loans. Britain and France accused the Weimar Republic of intentionally creating hyperinflation as a way of avoiding the reparation payments. Today, would China make a similar move today by attempting to destroy the value of the dollar and in doing so destroy the value of their T-Bill holdings that the US is threatening to void? They surely would if they could.

And so there are very few parallels between Weimar and the situation the US finds themselves in today. The gold standard was jettisoned by Nixon in 1971 after several European nations went on a gold bank run against the US dollar – just another example of Republicans rejecting in the real world the hard money, economic thrifty economic orthodoxy they love to cover themselves with in the rhetorical world. Any debt the US chooses to take on, and any export products the US chooses to purchase, will all the in priced in US dollars, the very same dollars that the US owns printing presses for, and so there will be no need for the US to take any extravagant and risky moves.

So where does this lead us regarding Biden and a strategic approach to confronting Trump. Take a holier than the Bond Market approach to counter Trump’s threats to unilaterally impose reparations on China by cancelling their T-Bills?  Taking that approach is looking more and more like a way to reinforce forces looking to limit his ability to deliver social programs if he were to take power. There is also the strategic constraint that must from now on always be considered when developing political strategy: climate change. One obvious criticism of MMT’s obsession with pumping up aggregate demand is that it places them part and parcel firmly in the forever growth camp. So the Democrats will have to be careful in outright embracing MMT.

Climate Change

From the point of view of the earth, humans, and to a much lesser extent all life forms, are damaging parasites—not at all unlike lice on a human head. But not all lice are created equal and in the earth’s case a few of the lice are much rounder, more gluttonous than the others. The few, mostly located in the wealthy industrialized countries, suck much more of the globe’s life blood, than the vast majority of lice, who are much more minuscule. Worse still, these rounder lice have off-shored much of their most damaging manufacturing to the lands of the minuscule lice, thus to some extend camouflaging the actual girth of their obese protruding bellies full of the earth’s precious life blood, the excess of which is dripping down their dirty jaws.

So in initial climate amelioration spitball sessions, the most obvious climate change solution would be to delouse the earth with a massive genocide of humankind. It cannot be argued that this final of all final solutions would not solve the problem but maybe throwing humanity out with the bath water is not the place to start. Several other solutions could be envisioned. Indeed any “humane” diminution of the number of lice would need to recognize that each large round louse probably consume ten times the resources that a minuscule louse does. And so getting these round lice on a diet would also be a great idea, lower their consumption of the earth’s vital lifeblood. There may be low-fat, green versions of lifeblood, they might not be quite as tasty to the gourmand lice, but why not give these a try? There might not be much of this new green lifeblood to go around, so a gradual reduction in the round lice population would certainly help cement green market share.

Climate Solutions

Currently the two competing “green” alternatives are the green energy movement headlined by AOC’s Green New Deal and the Décroissance movement emanating from France but which has now caught some traction in the US through its influence on the recent Michael Moore movie, “Planet of the Humans”. What’s unfortunate about that movie is that in typical binary thinking, it attacks the green fuel movement. There is no fundamental conflict between décroissance and green energy although it is true that Green Fuel + Forever Growth is nothing but a recipe for disaster.

Pitting Green Energy against Décroissance echoes the plutocratic class war strategy of conflict between the working classes and the bourgeoisie.  The cult of GDP and the perpetual debt model fueled by forever growth, are the true enemies of the climate.  Our current debt society provides bountiful rent seeking opportunities for an increasing rapacious plutocratic class.  Reversing this model would weaken the rentiers as a class.

Décroissance would be called Degrowth in English but this sounds clunky and ugly and really hurts the ears. There is no doubt that anglo-saxon words have their utility, but this is a weird hybrid of a latin prefix on an anglo-saxon root. The French word “croissance” originates from the Latin “crescere” which signifies a coming to life. So décroissance is indeed just a fancy way of saying “death”. But in light of the lice allegory, this is not so very far from the truth.

Décroissance is similar to MMT in that, at least in France, it appeals to both the popular right and left. The new-Right French philosopher Alain de Benoist has written a book extolling the virtues  décroissance.  On the left, economist Serge Latouche has published many very small and colorful books on décroissance. The concept could not be more simple, one can argue over the details: both the number of lice and the amount they consume need to be reduced, with particular attention paid to the number and consumption habits of the larger, rounder lice.

Devolution and Regionalization

Ideas are not enough -- they need an appropriate ecosystem to flourish.  But the size and and political structure of the Unites States is increasingly creating a sterile political soil sowed with salt, where progress and new ideas are easily thwarted by either side.  This current US internal power structure and globally dominant position is similar to that in China at the end of its Medieval period.  A powerful empire at that time, China was just becoming aware of stirrings in the far away land of Europe.  A couple centuries later, large swaths of the Celestial Empire were under Europeans control. How could this have happened?

Starting with Montesquieu, many commentators have pointed out that Europe’s great strength, its rich and fertile soil for innovation, was its political fragmentation. This becomes clear if we compare China and Europe after the year 1400. China had already developed the printing press, gunpowder and long distance shipping while Europe was more or less still in the Dark Ages. But because China was a single political unit dominated by an oppressive, despotic, and heavily burdensome elite it never took advantage of these inventions since they were seen as threats to status quo power. Divided Europe, on the other hand, was living in a Darwinian primordial-state stew where disperse elites were competing with each other. It was only because of this decentralization that new ideas, the same that were seen as a threat by the Chinese elite, were seen as seeds of opportunity that could blossom into tools of power in the struggle for European domination. This laboratory-of-power provided a rich eco-system  for new innovations --and if they turn out to be successful – would be adopted by all the others in an effort to keep up. This is how Europe evolved  the technical and ideological power that enabled it to dominate the rest of the world. In contrast, the centralized Chinese Empire limped in into the 20th century only to finally collapse in no small part due to humiliation brought on by the Europeans, echoes of which are heard today.

With the rise of mechanized total war, Europe’s endemic power struggles crossed the delicate threshold from allowing constructive innovation into assuring destructive annihilation.  In the wake of this catastrophe, the EU was created as a way to diminish this destructive competition and try to harness it towards more productive means of progress.  But today Europe is staining under the contradictions of centralization and the current pandemic is forcing a rapid return to regionalization.  

With the current pandemic, we are also seeing stirrings of regionalization in the US, as like minded states band together with different approaches.  In California there have even been calls for independence.  With its huge population and powerful economy there is no doubt California is a viable nation-state.  The problem will be the Currency Question.  In Scotland's recent bid for independence, they simply ignored the crucial question of whether they would keep the Pound (but with no ability to printing it), adopt the Euro (as we will see again no printing), or create their own currency which they would be able to print and therefore be fiscally independent.

Given the power of the dollar, and the spending opportunities the Treasury Department gives, it seems the best strategy would be to push for as much devolution of power from the Federal level towards the states while stopping short of full independence and thus losing the dollar.  I'm not sure how a referendum would go if the California Peso was to be the currency of a newly independent California nation state.  What  follows is an analysis of monetary challenges facing the Eurozone which would be similar to those faced by a newly regionalized America.  These conditions will be set in the context of the current relationship between China and America.

The Bond Market and the Euro

The intersection of pandemic economics, MMT, and reparations can be further understood by examining the Eurozone and current developments in European politics and can help inform the Democrats on a strategic path forward. After all, the Democrats often invoke socially conscious Europe as an example for America to follow. With the outbreak of the pandemic, the Weimar inflation disaster is still impacting European politics today – in fact a major crisis has broken out in Europe over who actually controls the European Central Bank (ECB). To realists the answser was always clear: Germany.  But there was a fictional tale of European Central Bank independence proffered to cover this reality. In any case, MMT scholars are unanimous in their scathing disquisitions on the conception and implementation of the Euro along with the monetary system that supports it. Before joining the Euro, nations were monetarily sovereign – they issued their own currencies: the French Franc, the Dutch Guilder, etc., and MMT theories applied, albeit somewhat weakly since most of these nations did not possess anything close to a powerful currency on the global scale. European nations back then were vulnerable to the ever changing moods and humors of the dreaded Bond Market – which served as a sort of monetary disciplinarian, keeping the Greeks from attempting to print themselves into prosperity by charging them high interest rates for loans (to buy their bonds). But monetizing debt was possible, and it had another, perhaps more important economic impact. If the Greek Drachma depreciated, products manufactured in Germany became more expensive. Bad for German industry, better for Greek industry. Currency devaluations could serve as a very imperfect form of protectionism. Manufacturing powerhouse Germany did not appreciate this – they gradually, over the years as their manufacturing base flourished, adopted the natural ideology of the industrial powerful: free trade.

China today is the global manufacturing powerhouse and as expected have adopted a similar free trade ideology. Of course with China, “free trade” is a one way street – they promote a level of economic nationalism that pretend econ-nats like Trump can only dream of. Fortheir own manufacturing China is protectionist and mercantilist – but to the rest of the world they hypocritically preach to old tired dogma of free trade. Why not, if they can get away with this, all the better! But China has the same concerns currency concerns that Germany had that eventually led to the creation of the Euro: China fears a US dollar devaluation since suddenly their advantage on labor arbitrage could disappear. Cheap labor + strong currency = economic ruin for China’s current model. So China does not float their currency on the free market but instead holds its value within a tight band against the dollar, and other major currencies.

Germany tried a similar strategy, the European Exchange Rate Mechanism (ERM) – it was sold as a way for the more monetarily profligate nations to get a stern dose of sober, German monetary discipline by basically tying themselves to the sage whims of the German Central Bank. The reason from the German point of view was to keep these less fiscally disciplined countries from devaluing their currencies and thus blocking the flow of superior German goods. “Free” trade über alles. But when Germany, always paranoid about inflation, hiked their interest rates in the wake of German reunification all hell broke loose and eventually parasitic plutocratic speculators like George Soros gravely damaged the ERM on Black Wednesday, and in doing so extracted a fortune from Europe.

The need to keep German goods flowing unimpeded by potential currency manipulations did not go away and so eventually the Euro was devised. Germany needed to lock the profligate nations into a regime of monetary discipline, but it most certainly did not want to give these nations any sort of control over the printing presses of this new currency. Yes, perhaps Germany could allow a form of Potemkin control – say create a fictional European Central Bank--but real monetary power must always stay in German hands. But politically, given certain historical unpleasantries, Germany did not want to serve the public role of monetary disciplinarian, and so they delegated that role to the dreaded Bond Market. In order to thrive in the splendor of having a German central banker guiding their economies, European nations were required to relegate their printing presses to museums as the price of entrance into the Eurozone.

From that day forward, in order to spend money domestically, European nations became the equivalent of US states, and were forced to either tax their citizens or go hustle up loans from the Bond Market. The Euro system explicitly increased the risk of default – while a monetarily sovereign nation cannot be forced to default on debts issued in their own currency because they can print this currency – now European nations could indeed default as they had been stripped of their printing presses. But the ever-wise Bond Market saw through this ruse – they assumed that Germany, due to certain historical unpleasantries, would be forced to step in to bail out a European nation on the brink of default and so the Bond Market priced their interest rates accordingly. Nations like Greece, who previously the Bond Market had treated as if they were Greeks and charged them high interest rates for loans, suddenly found themselves in a blink of the eye, with nice low German interest rates. This was basically free money to the Greeks – and they didn’t even have to print it! Productivity in the Greek economy had not improved --with their new found wealth it was quite the opposite--but suddenly the profligate Greeks, and other economically weaker European nations, were living a big fat German lifestyle. Germany did not mind too much; German manufactured goods were increasingly flowing into the suddenly rich Greece -- and of course other previously marginal European nations.

This German – Greek dynamic closely mirrors Chimerica – the integration of the Chinese and American economies. Americans performed conspicuous gluttony while diligent, worker bee China supplied them with a never-ending supply of goods to consume. The difference is that America did not need a German central banker to achieve something close to free money – Americans are proud possessors of the global reserve currency’s printing presses which fuels their big fat American lifestyle. But to China even this was not enough, in the early 2000’s, China started pumping large amounts of money into the US real estat market, helping trigger a speculative bubble that for a short time had Americans living even larger as they took out second mortgages on their now hugely inflated home equity. All this extra disposable income was now available to buy even more Chinese products.

No doubt there were a few sage Germans who realized this Eurozone structure was a disaster in the making but their voices would have been silenced by the manufacturers getting rich and the European integration enthusiasts preaching a 1000 year EU Reich of perpetual peace and free trade. But in the end the Bond Market failed in its duty to discipline the Greeks and in Merkel was forced to step in and do the job the Bond Market refused to do during the ensuing Greek Debt crisis. Interestingly, in an echo of the Democrat’s role in the US, a far-left Greek Government was brought in to impose Bond Market sobriety on a monetary rambunctious Greek population after a center right government had for years been spending like drunken sailors.

There is historic precedent for this paradoxical reversal of roles – for the supposed tax and spend Democrats to be the ones to impose economic sobriety while the supposedly austere Republicans start throwing money around like crazy and soon as they get their hands on power. Otto von Bismarck always held that parties should take the helm to carry out policies which they opposed. “If reactionary measures are to be carried, the Liberal party takes the rudder, from the correct assumption that it will not overstep the necessary limits; if liberal measures are to be carried, the Conservative party takes office in its turn from the same consideration.” This is the “only Nixon could go to China” idea, which recently, somewhat optimistically if not outright delusionary, this has become “Only Trump could do Universal Health”. Others think that only Trump could get an illegal immigrant amnesty through Congress.

During the Greek debt crisis, other weaker European economies started to groan under the weight of a suddenly revitalized Bond Market. Seething with rage from the hair cuts it took in Greece and looking for revenge, the Bond Market started imposing its will on Italy by jacking up Italian interest rates to dangerous levels that threatened to topple the Italian banking system. The Bond Market had the audacity to impose Italian interest rates on Italian debt in lieu of the previous policy of imposing German interest rates on Italian debt. A very serious crisis ensued. There was only one solution shouted MMT advocates: print money! And they were correct and that is exactly what the ECB did. Spitting on German monetary sobriety, they started buying up Italian debt with money created out of thin air. And it worked! The Bond Market understood, crawled back into its cage, and once again went back to charging German rates on Italian debt. The monetary barbarians had won – the ECB was forever lost to German control – or so it seemed.

Helicopter Money -- Pandemic Monetary Policy

Pandemic monetary policy is quite simple – in wealthy countries their central banks rent heavy duty helicopters and starts raining money upon the startled heads of their citizens!  The helicopter money concept started as a parable in a Milton Friedman paper but has since then become a serious policy proposal and is now in many ways actually taking place during this pandemic. In another affirmation of the Bismarckian maxim, Trump supporters, who had been hoping for Pinochet-style helicopter rides for the Rachel Maddows of the world, are instead witnessing Trumpbux showering down as waves of helicopter money. Now of course, this being American, those heavy-duty helicopters are carefully positioned over sticky-fingered bankers on Wall Street, but a few smaller model helicopters are starting to make their way to lockdown Americans sitting in their homes, exiled on Main Street.

In less monetarily privileged nations such as Turkey, helicopter money is not an option due to its potential impact on fragile international exchange rates and so instead of showering his citizens with Lira, President Erdoğan has opened a bank account and is imploring the Turkish people to send him money! 

And Germans look upon this American monetary spectacle in horror. Europe has not had a great pandemic so far. Germany sees an opening here to grab back control over the ECB. Germany is also all too well aware that there will be Europeans calling for ECB helicopters to start being loaded up with cash. The specter of Weimar still looms large in the minds of Germans. So a constitutional court in Germany has committed a grave case of lèse-majesté by ordering a European court, which two years ago had rubber stamped the ECB’s money printing policies, to review this case, lest the German central bank withdraws from participating in any future money printing, oops, bond purchases. This is a very serious crisis in Europe, in the wake of the Brexit trauma, Germany is now implicitly threatening DE-end (DE = Deutschland). This is close to a nuclear option; DE-end would most certainly spell DE-end of the European Union. The Germans counting on this threat will force a weakened EU to keep those ECB helicopters grounded.

Chinese Reparations?

Trump’s rather banal and predictable reelection strategy, besides sending the central bank helicopters out, is the tried and true tactic of tying your domestic political enemies to your foreign enemies – your political opponents are painted as treasonous betrayers of the nation’s vulnerable citizens. As previously mentioned, the Democrats tried this with middling success in their Red Scare campaign against Trump. What they were really doing was expressing the US political establishment’s deep group narcissistic wounding by the election of Trump and lashed out in rage by launching a smear campaign and gaslighting the American public. Trump will now cynically flip the script and launch a similar Yellow Peril gaslighting campaign. Given the origins of the current pandemic, Trump’s campaign indeed has the potential to pay dividends. Thus his call to cancel Chin’s debt. Some Democrats find this laughable, reasoning that since the US owes China so much money, that the US cannot afford to anger China. This would be exactly backwards! In a case where one person owes another a large amount of money, it is the party who is owed the money who must stay polite and it is the borrower who has an incentive to pick a fight that can then be used to refuse repayment of the loan. The question then becomes, does the lender have the power to force the borrower to pay up. Does China have the power to compel the US to respect their debts?

The answer is firmly no. First China are themselves facing a grave international crisis. The global economic system they have ridden to a point where they could imagine world domination in the future is now collapsing before their eyes. The benefit of globalisation to US elites was its ability to drive down wages – it gave them access to an exquisite global reserve labor pool. But this coronavirus and the associated lockdowns is one of the most ingenious tools of class warfare ever invented; far more powerful than globalisation. The US is entering a period of deep wage deflation – architecture offices are already imposing 10-20% wage cuts across the board and we are only in the first inning of this pandemic. With a soon to be 50 million unemployed Americans, Wall Street elites no longer need Chinese wage slaves to drive down American salaries. But worse for the Chinese, the lockdowns are a very indiscriminate tool of class warfare because they also induce demand destruction – the US consumer will very soon not be able to perform her duty as the world’s glutton of last resort – we are already seeing demand deflation as well. Not to mention the US’s highly centralized and therefore fragile food system is tottering and there will likely be an increasing shift away from Big Food and transition to slow food provided by local providers. Berkeley’s Alice Waters being the founding mother of local alternatives when she founded the gourmet industrial complex -- small high-quality branded food producers -- in the Bay Area back in the 70’s. But this will result much better food, much less environmental harm as pesticide based agriculture is replaced by organic production, which is far more labor intensive and a type of work Americans will do.  But this will result in price increases for food, meaning less consumption of shiny Chinese trinkets.

Would China try to crash the dollar if faced with a reparations bill. Weimar Germany crashed their own currency back in the 20’s facing similar circumstances so China may be tempted. But China is also locking its currency to a tight exchange rate band against the dollar and crashing the dollar is going to mean the Yuan will appreciate drastically – a position an industrially privileged nation always fears. If China’s currency did appreciate where would they find enough aggregate demand to digest the proliferate output of China’s industrial base?

With the US facing an extreme bout of décroissance – great for the climate but not great for China’s global ambitions. So the only card the Chinese have to play is to start pumping up consumption in their domestic economy -- to resist décroissance with croissance à outrance. Some of the smallish lice are soon to gain some weight while some of the obese lice and about to be thinned down. So they could reasonably be expected to try to crash the dollar. They will not come anywhere near succeeding – there is still huge international demand for US bonds without even pulling out the MMT howitzer.

With a strategic vision in place; Biden's tactical decision is easy in facing Trump's call for Chinese reparations. Agree and Amplify.  This worked for Biden earlier in the year after a brutal attack from Trump basically calling him Beijing Joe.  In response he cleverly counterattacked Trump for not immediately demanding CDC access to Wuhan, a demand that conjured images of UN inspectors, and was a tough, albeit purely rhetorical, response. Biden out alpha-maled Trump on this exchange.  He can simply reinforce his previous attacks but this time use the occasion to push his own anti-Bond Market political line.  Something like, "Why is Trump dithering with these communists while the world burns?  Not only should he have called for immediate  CDC access to Wuhan back in January, Trump should have backed this demand up by threatening right then and there to cancel China's US debt holdings.  Believe me if I had been President the CDC would have had a red carpet reception because they know I don't believe in any of that Bond Market malarkey.  But now Trump has given them months to remove any evidence.  We are a nation of laws and the evidence we need to justify tearing up those T-Bills was lost by Trump's weakness"

Conclusion

Being a minor oligarch, Trump is paradoxically both a member and therefore free from plutocratic control. His oligarchic wealth and power allowed him the freedom to make economic promises to the working classes that mainstream politicians, totally dependent on the plutocratic donor class, could never dream make.  Much as a narcissist courts his next soulmate, Trump love-bombed the deplorables with economic arguments instead just the standard cultural gruel of God, guns, gays, and abortion that normie Republicans push.  Once in power, most of this rhetoric was revealed to be future faking as Trump now turned his loving glaze towards the plutocracy and dumped the clingy deplorables into devaluation and discard mode.  But a new election lingers and it is sure Trump will attempt to hoover his supporters back into his trustful arms with a new economic nationalist love-bombing campaign, claiming they really were soulmates all along.