A “fiat currency” is a government-issued currency that isn’t backed by anything. Mosler recognized that a government that issues fiat currency has a much different financial situation than that of a household or corporation. Thankfully, the U.S. dollar is a fiat currency and no longer linked to gold... Or else we might be facing another depression. ‘HELICOPTER MONEY’ TO THE RESCUE The Great Depression was devastating... From 1929 to early 1933, wholesale prices declined by around 37% in the U.S. And farm prices collapsed by 65%. By 1933, the unemployment rate had reached 25%. Yet, the yield on 10-year JGBs went negative for much of 2016. It was no anomaly, either... The interest rate on 10-year JGBs spent much of 2019 below zero, as well. The yield is currently hovering around 0%. Mosler’s views, which formed the basis of MMT, helped him steer clear of the widow maker. He knew that some countries’ governments – like that of Japan – have far more capacity to run large deficits and issue debt than most people realize. Thankfully, the U.S. dollar is a fiat currency and no longer linked to gold... Or else we might be facing another depression.
Some of the damage was avoidable, though. A shrinking money supply exacerbated the fallout. At the time, the Fed was unable to reach a consensus on monetary policy. But even so, it couldn’t have flooded the system with an unlimited amount of money because we were on a “gold standard.” Under a gold standard, the government stands ready to buy and sell gold at a set price. And the nation’s currency is backed by some amount of gold. For every dollar in circulation, the Fed needed at least $0.40 worth of gold in the vault. That limited the Fed’s ability to stimulate the economy. However, the constraints imposed by the gold standard are long gone. After 1933, the government disallowed U.S. citizens from redeeming currency for gold. And international convertibility (known as the “gold window”) was ended in 1971. At that point, the dollar became a fiat currency. Now, the coronavirus pandemic has devastated the economy. By some measures, this resembles another depression. For example, some conomists had expected the unemployment rate to reach 20% in May. But this time around, the Fed is unhampered by a gold standard. The Fed also has a clear consensus about what to do: flood the system with money like it did in the aftermath of the financial crisis in 2008. The Fed’s favorite tool during a crisis is now a type of monetary stimulus called quantitative easing. QE is often called “money printing”
42
June 2020
Made with FlippingBook Publishing Software