MMT: Not Modern, Not Monetary, Not a Theory
MMT: Not Modern, Not Monetary, Not a Theory
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Modern monetary theory (MMT) has a new champion, and a new bible. Stephanie Kelton, economics professor at SUNY Stony Brook, is the author of The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy. Professor Kelton was an advisor to the Bernie Sanders presidential campaigns, and her ideas increasingly find purchase with left progressives. It is certainly possible that she has a future either in a Biden administration or even on the Federal Reserve Board, which is a testament to how quickly our political and cultural landscape has shifted toward left progressivism. And left progressivism requires a "New Economics" to provide intellectual cover for what is essentially a political argument for painless free stuff from government.
Kelton's essential argument, first advanced by MMT guru Warren Mosler in the 1990s, is quite simple: federal spending is unconstrained by revenue. Taxes function only to regulate demand and hence inflation; federal borrowing functions only to regulate interest rates. Sovereign government treasuries can create and spend as much money as they like to stimulate growth, especially when the economy is underperforming. If inflation spikes, taxes can be imposed to take money out of the economy.
Thus the only constraints on unlimited government spending are political. Unleashing ourselves from these "self-imposed" constraints, as Mosler puts it, is purely a matter of political will. Revenue is irrelevant to how you fund a government, so why not use government to fund the economy as a whole?
I direct readers to Dr. Bob Murphy's recent substantive review of Kelton's book here, as Bob does a thorough and effective job of debunking MMT and providing Austrian rebuttals to her claims regarding money, debt, and deficits. But I would make three quick points of my own:
- MMT is not modern. Kings have used seigniorage and currency debasement for centuries to fund their endeavors, always at the expense of their subjects.
- MMT is not monetary. It is primarily a fiscal approach to state finance, focused on tax policy as the economic accelerator and brake. Its roots predate the US Federal Reserve Bank, and in fact predate the present notion of "monetary policy." MMT finds origins in early twentieth-century chartalism, whose proponents opposed gold in favor of paper money issued by government and mandated as legal tender. It is also a genealogical heir to the Greenbackers of the late 1800s, who believed Congress should direct the issuance of unbacked paper currency.
- MMT is not a theory. It is accounting. In fact, it relies on an accounting subterfuge which bizarrely claims government deficits represent private (societal) surpluses. Because government is the font from which currency springs, all financial assets (denominated in that currency of issue) exist thanks to government! Thus, under "national accounting," the more government spends, the richer we the people get. When tax revenue is $100 but government spends $120, Americans are richer by $20. And so on. This is not a theory; this is accounting gimmickry almost purposefully designed to obscure what's really going on.
In the relentlessly circular world of MMT, government is the source of all finance and in effect all wealth. Taxpayers don't fund government, because after all government first provides the "tokens" (currency) taxpayers need to pay their IRS bills! Government funds taxpayers, which is broadly speaking what the American left really believes. It's a version of Obama's "You didn't build that" rewritten into policy.
But let’s not kid ourselves: the US federal government already finances its operations, at least in part, using conjured money. 2020 federal spending may exceed $8 trillion as Congress and the Trump administration blow the roof off the authorized $5 trillion budget with COVID relief bills. More than half of that amount, maybe as much as $4 trillion, will be "deficit financed"—a nice way of saying not financed by tax revenue. This is a first in American history, to put it mildly.
This $4 trillion will not simply issue forth from Treasury Department printing machines, as Kelton would prescribe, but the effect is the same: the Treasury issues debt to cover the shortage, which the "public" buys, implicitly understanding that the Fed will always provide a ready market for such debt. And where does the Fed get the money to buy Treasurys? It creates it from nothing, in Keltonite fashion.
Chicagoites, market monetarists, supply-siders, NDGP targeters, and other free market proponents frankly don't have much to say about MMT. They already accept the premise of "monetary policy," i.e., that government or central banks should issue and control money in society. They already accept treating the money supply and interest rates as forms of policy tools. They already accept deficits and taxes as methods to prime or slow the economy. So although they may object to how Ms. Kelton wants to use money politically, they can't much object to whether money is used politically.1
Kelton deserves credit for writing a book aimed at lay audiences instead of for her peers in academic economics. Unlike most of those peers, she seems genuinely interested in helping us understand how the world works. And unlike most left progressive academics, she also seems interested in helping average people improve their lot in life. Perhaps most importantly, she does not display the kind of contempt and anger toward Red State America we see from the Paul Krugmans and Noah Smiths.
It's easy for those of a free market bent to dismiss MMT out of hand, but the impulse to create something from nothing resides deep in the human psyche, and politics is where this impulse finds expression. We should not underestimate the allure of MMT in the midst of our current upheavals, because it appears to make possible every left progressive program: unlimited public works and federal jobs, useless and uneconomic green energy schemes, reparations for black Americans, Medicare for All, free college, free housing, and a host of others. MMT is the perfect economic proposal for those who sincerely and deeply believe wealth simply exists in America, and will continue to exist, regardless of incentives. All we need to do is figure out how to more fairly divvy it up—and so why not through government spending?
The promise of something for nothing will never lose its luster. MMT should be viewed as a form of political propaganda rather than any kind of real economics or public policy. And like all propaganda, it must be fought with appeals to reality. MMT, where deficits don't matter, is an unreal place.
- 1. Austrians have always decried state-ordered or central bank monetary expansion per se, because it produces no new wealth in society but benefits those closely connected to the new money. And Austrians consistently apply Say's law to refute the entrenched idea that demand and consumption form the foundation of a healthy economy.
The Fed’s Study on Our Economic Well-Being
In a 2022 survey of over 11,000 respondents, it was found that:
… 73 percent of adults were doing at least okay financially, meaning they reported either “doing okay” or “living comfortably.”
This is 5 percentage points lower than the prior year and one of the lowest observed since 2016.
These findings were published by the Federal Reserve in the report titled Economic Well-Being of U.S. Households in 2022. The report attempts to examine the financial lives of U.S. adults and their families. With the data collection occurring in October of last year, the time lag is considerable.
Overall, the report shows that higher prices have negatively affected most households and overall financial well-being declined over the prior year…
Notable highlights from the fact sheet include:
- The share of adults who said they were worse off financially than a year earlier rose to 35 percent, the highest level since the question was first asked in 2014.
- Some renters indicated they had difficulty keeping up with their rent payments. Seventeen percent of renters were behind on their rent at some point in the prior year.
- Nearly two-thirds of adults stopped using a product or used less because of inflation, 64 percent switched to a cheaper product, and just over one-half (51 percent) reduced their savings in response to higher prices.
The focus of the report primarily revolves around capturing sentiments, emotions, and perspectives on financial well-being, but it fails to delve into the underlying causes of any of the hardships noted. For example, one finding is that:
… higher-income adults were more likely than lower income adults to mention financial challenges related to retirement…
Yet this is hardly a new concept as the Austrians explained how the expansion of the money supply affects people and prices differently over a century ago. Certainly wealthier individuals tend to be more insulated from currency debasement, but it is also because those who receive newly created money first benefit at the expense of all others.
The report does support the idea that year after year life becomes increasingly difficult as dollar purchasing power continues to decline. This can manifest as unaffordable rents, price increases, and a general sense that the future looks bleak. All the while, the increase in interest rates, as we’ve been told is necessary to combat high prices, has only made the cost of carrying debt even more burdensome.
At best, the findings inadvertently shed light on the merits of Austrian economics, revealing the inherent issues arising from the problem with controlling the money supply and interest rates, both of which fall within the purview of the Fed. It serves as a stark reminder that a fairer world would exist if the global financial system did not rest on the whims of a select few individuals. And so, we find ourselves living under the plan of a central bank that continues to examine the detrimental consequences of its own policies, more for public spectacle than anything else.
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Doubts Raised About Secretary Yellen’s June 1st Deadline
House Speaker Kevin McCarthy (R-CA) and President Joe Biden have nine days left to reach a spending deal before the U.S. defaults on the debt and everything falls apart… or do they? Three weeks ago, Treasury Secretary Janet Yellen announced that the so-called X-date, when the U.S. would begin to default, would be Thursday, June 1st.
As of last week, that projection was widely accepted. Speaker McCarthy told reporters he trusted Yellen: “Whatever Janet Yellen says is the date. I’m not going to argue about that.”
But this week the tune has changed. Today a handful of Republicans voiced skepticism about the accuracy of Yellen’s deadline.
Rep. Matt Gaetz (R-FL): “I don’t believe that the first of the month is the real deadline. I don’t understand why we’re not making Janet Yellen show her work.”
House Majority Leader Steve Scalise (R-LA): “We’d like to see more transparency on how they came to that date.”
Rep. Ralph Norman (R-SC): “June 1st? Everybody knows that’s false.”
In an interview on CNBC this morning, Senator Ted Cruz (R-TX) accused the Biden Administration of trying to “scaremonger” and “threaten default.”
Rep. Chip Roy (R-TX) today called the warnings of default a “manufactured crisis” to force Republicans to step back from some of their demands.
And it’s not just Republicans. Goldman Sachs says the actual deadline is likely June 8th or 9th. Morgan Stanley says June 8th. And the Congressional Budget Office (CBO) states there is an “elevated risk” of payment default in the first two weeks of June.
All this comes one day after a puff piece in Politico celebrated the “civil servants” at Treasury who stand above politics and “whose only real interest is the health of the financial system.” The evidence for this? Secretary Yellen isn’t directly involved in negotiations with Republicans.
The White House is taking a somewhat arms-length approach to how Treasury goes about its work. The two operate closely on messaging, but one White House official told [Politico] that the intention is for Treasury to be seen as having a degree of independence. It’s so Yellen’s default warnings are taken seriously and so the “X-date” — the projection of when the government can’t pay all its bills — doesn’t become politicized.
This is just the latest example of a common cliché in political media whereby some executive agency or federal department staffed primarily with unelected bureaucrats is falsely praised for being “non-political.”
Usually, this depiction is false because it equates being non-political with being non-partisan. But on many of the most important political issues of the day, the two parties are unified. Still, it’s understandable why people fall for the trick.
But here we’re talking about a member of the President’s Cabinet. That’s about as nakedly partisan as it gets.
The debt ceiling showdown is a game of chicken—what in game theory is called a hawk-dove game. The ideal outcome for each player is for the other player to yield, while the worst outcome for all is if neither yields by the time the game reaches a critical juncture—be it a head-on car collision or a debt default.
Thanks to negotiations, the debt ceiling showdown is less binary in its outcomes than two teenagers driving straight at each other. But the basic hawk-dove structure is still at play. As such, it puts one side at a serious advantage if the other side believes the critical juncture will be reached sooner than it actually will.
Is that what Yellen is doing? We can’t know for sure without seeing how Treasury arrived at a June 1st deadline and without knowing what Yellen has been telling Biden’s people behind closed doors. But, at the same time, let’s not pretend the Treasury Secretary—appointed by the President to sit on his Cabinet—is impartial to Biden’s efforts.
A Voluntaryist's Addition to the State Capitalist Tradition
State capitalism is typically viewed as anathema to the voluntaryist tradition. However, there are takeaways from the idea that might prove useful for our tradition. Particularly, I am concerned with our inability to counter certain critiques coming from the “libertarian” left. In this article, I am proposing a new system of governance that would address these critiques.
Well, first let us start with what critiques need discarding. Among those to discard, parents who sell their young into labor and being underpaid or worked overtime. We should not dignify these questions; they detract from one major critique- that our society might empower a business entity to act and serve as a de facto government.
Now if there is no state, there is no rent seeking, and we very frequently point this out to our detractors. However, political ecosystems are organic and that makes self-interest a bending will in anarchy too. So, what is the alternative?
First, imagine there is a charter in the proposed society. A charter is a document that grants rights to the public, to individual constituents of that society. It is essentially a constitution for all intents and purposes. Now, this charter establishes a company. So, a chartered company does not define any limitation or minimum as to its size, but it does establish an unchangeable structure with its board of directors.
This chartered company would be classified as “the government.” It is where the semantics kill, as “the government” would be forbidden from obtaining and exercising police powers, taxation or anything else that implies infringement. It is in essence, a nominal government and placeholder at that. It is a placeholder, to preclude another company from acting as substitute authority and nothing more.
This is important, particularly as it pertains to a lack of power to tax. Why? Not only is taxation theft, but it also means a lack of fiscal responsibility or general merit. If the state can extort to cover its shortcomings, it isn’t incentivized to check itself. So, this problem is averted. This is averted, that matters because "the government" here will be operating like a business.
Why then define “the government” in my proposed system as a chartered company? If it is simply a state without a social contract, that question probably runs through your mind. Easy, it operates as a business does in the way it will sell its services. Think of welfare as a private good that competes with its competition on the market. If it has no power to extort to cover its losses, it must appeal to the consumer.
That is not irrelevant in the system I propose, because there are private businesses all around “the government.” “The government” does not have a monopoly, the way other forms of state capitalism do. So, it is certainly competing inside the marketplace, now it hopes to make a profit. These profits are a substitute for taxation. Profits, not taxation, make sure “the government” stays in-business.So for instance, one of the products that "the government" wants to sell is healthcare. It must do better than Aetna or Blue Cross, that is earn a bigger profit by catering to its audience and double-checking any loose expenses.
Simple enough, right? Aside from establishing “the government,” this charter document establishes a protocol for its own nationalization. Here, nationalization of “the government” means the assumption of direct democratic control over itself. The common public would oversee and operate for each transaction or managerial decision in “the government” by referendum, in other words. The protocol is this- a popular referendum may be called by any citizen, should “the government” fail in keeping its finances from bankruptcy.
This nationalization could only happen at that point. Further, any direct democratic control would be forbidden from changing the terms in the charter document. Purely, it gives them control over its operations and employment but nothing else. It is here, the fun begins as it is not meant to check against power. Rather, it is expected that nationalization could only reinforce a cyclical bankruptcy that empowers a growth of private competitors to outcompete “the government.”
Most important in all of this might be that it gives the “libertarian” leftist a sense of control with which to keep himself comfortable. Further, its "nationalization" protocol ensures that any demand that a state be invented should operate wholly within a controlled paradigm. Because any scandal or failure is easily exploited to that end, it is time that this be planned for.
U.S. Treasury Bailouts Aren’t What They Used to Be
United States citizens are watching a deteriorating tango between banks and the federal government. Bank depositors have been losing confidence in the value of their bank deposits, while credible market signals flag higher concerns about the credit quality of the United States Treasury.
In recent months, credit default swap spreads for Treasury debt have risen significantly. They are based on financial instruments that yield information about the implied probability of default. For the U.S. Treasury, that implied probability remains low, but it has been climbing to recent-record-high levels.
In the latest collection of market information reported at “WorldGovernmentBonds.com,” the United States ranked 16th among 25 countries in terms of the implied probability of default on their sovereign debt. In May 2020, after the market (and credit rating agencies) had begun to digest the implications of the COVID pandemic for economic and government finances, the United States ranked fourth on that list.
Appraisals of the probability, value, and wider implications of future bank bailouts have to consider the decline in confidence in US Treasury credit quality, both in absolute as well as relative terms, in the last few years.
Granted, the recent concerns have been driven in part by a rancorous but possibly temporary debt “ceiling” negotiation process. But these intensified tensions owe no small debt to the real deterioration in the federal government’s financial condition in recent decades.
Can we rely on still-high credit ratings for the US for comfort? Perhaps the wise sages in the credit rating agencies do a good job of “looking through” short-term political considerations in their appraisals of longer-term credit quality. But a careful look at historical experience suggests market signals lead credit ratings, not vice versa. And in the last three years, the distribution of rankings of countries based on the CDS market data did a much better job of anticipating the rankings for current country credit ratings than the three-year-old ratings rankings did in anticipating current rankings on CDS data.
For uninsured bank depositors in a bailout, getting par value may be better than not getting a bailout. But getting paid back “par” value in dollars that aren’t worth what they used to be generates real economic losses – for depositors as well as all of us.
How Much Did They Print?
The story goes something like: In the last few years, the Federal Reserve printed up to 80% of all bills that were ever in circulation. While Austrian economists have long recognized the superfluousness of central banking and understand the benefits of a decentralized monetary system, it's important not to give in to false ideas, even if they appear to support honest ones.
It starts by recognizing the existence of various money supply measures. Perhaps the most shocking is the M1 chart:
In April 2020, the M1 figure stood at $4.79 trillion, then it skyrocketed to $16.24 trillion the following month. To clarify, this surge was primarily a result of the Fed's revised definition of the money supply, without restating the prior amount before May 2020.
This topic was discussed in the article: Why Prices Have Gone Up, published last year. In a Technical Q & A, the Fed explains:
Recognizing savings deposits as a transaction account as of May 2020 will cause a series break in the M1 monetary aggregate. Beginning with the May 2020 observation, M1 will increase by the size of the industry total of savings deposits, which amounted to approximately $11.2 trillion. M2 will remain unchanged.
Meaning, from May 2020 (M1 of $16.24 trillion) to its peak in March 2022 (M1 of $20.66 trillion), the balance sheet grew by approximately $4.42 trillion, representing a growth of nearly 30%. While this may appear significant, it is still far from 80%.
On the same Q & A, the Fed includes a graph illustrating the changes to the M1 money supply, specifically highlighting the revision made in May 2020:
With no revision made to the M2 money supply, it provides a clearer interpretation. Taking the March 2022 peak of $21.70 trillion and going back to February 2020, to coincide with the beginning of the official recession, we have an initial starting point of $15.45 trillion. This two-year period represents an extraordinary increase in the money supply of around 40%. See below:
It may also cause confusion when the term "printed" is used to describe the money supply. The Fed or commercial banks do not physically print dollar bills. Instead, the money supply is increased through the creation of credit (debt), and the production of notes and coins is handled by the Treasury.
Looking at the currency in circulation, which reached its highest point last month at $2.32 trillion, and comparing it to February 2020, when it stood at $1.80 trillion, we see a growth rate of approximately 30%.
In the last several years there has been a significant increase in the money supply. While it’s far from the 80% figure seen on social media, it still appears to be substantial. It’s also important to remember, there is no optimal or ideal amount of money that should be created, and this highlights the inherent flaws of an unsustainable monetary system that has long since drifted away from sound economics.
A few days ago, Frank Shostak reminded us:
Because the present monetary system is fundamentally unstable, there cannot be a “correct” money supply growth rate … Whether the central bank injects money in accordance with economic activity or fixes the money supply growth rate, it continuously destabilizes the system.
However, it ultimately traces back to the Fed. During the same period from 2020 to 2022, the Fed’s balance sheet expanded from approximately $4 trillion to nearly $9 trillion. However, this is $9 trillion too much, and unless the Federal Reserve is completely abolished or prevented from interfering in the free market, we will continue to experience the roller coaster ride known as the boom-and-bust cycle.
The noteworthy headline should read that during the previous recession, the Fed doubled its balance sheet, and if a similar approach is taken in the upcoming recession, then the current high prices of today would pale in comparison to the price inflation that would inevitably follow.
Powell: We Made Mistakes
The formal recession has yet to be declared, and Powell is already offering apologies. Following last week's rate hike amid the ongoing banking turmoil, during the Q & A session, the Fed Chair offered a sort of apology for recent events:
… I've been Chair of the Board for five plus years now, and I fully recognize that we made mistakes. I think we've learned some new things, as well, and we need to do better.
Herein lies just one of the features of the system: it demands expertise to accomplish the impossible, be it an unworkable calculation or striving to obtain unattainable knowledge. Powell and the Fed not only fail to achieve their intended goals but also exacerbate the situation through their meddling in the market.
Given that the problem is inherent to the existence of both the Fed and the fractional reserve banking system, and since a significant part of the issue revolves around customer bank withdrawals, other than lending more money to banks, there are few viable solutions the Fed could do to prevent a banking crisis. Powell doesn’t provide many recommendations beyond apologizing and promising a better future.
He continues to rely on hope as a guide, but his words don’t exude confidence:
So I think that -- I think it's still possible. I -- you know, I think, you know, the case of avoiding a recession is, in my view, more likely than that of having a recession. But it's not -- it's not that the case of having a recession is -- I don't rule that out, either. It's possible that we will have what I hope would be a mild recession.
More hope is offered as a viable alternative to sound economic advice, as seen by the never-ending quest to bring (price) inflation metrics back down to 2 percent. According to the Chair:
We have a goal of getting to 2 percent. We think it's going to take some time. We don't think it'll be a smooth process. And, you know, I think we're going to - - we're going to need to stay at this for a while.
And so, the notion of implementing rate cuts is easily dismissed:
So we -- on the Committee, have a view that inflation is going to come down, not so quickly, but it'll take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won't cut rates.
Beyond his optimistic forecasts, he also commented on the issue of the debt ceiling, even though it falls outside of his job description:
I would just say this: It's essential that the debt ceiling be raised in a timely way so that the US government can pay all of its bills when they're due.
It’s worth noting that raising the debt ceiling effectively undermines the purpose of having a debt ceiling in the first place, yet this is often overlooked by central planners.
With a new banking crisis almost every week, Powell's optimism about a brighter future seems increasingly disconnected from reality. For now, pursuing the inflation target remains a top priority, so the idea of rate cuts is still not on the table. However, we must keep in mind that priorities can and will change at a moment’s notice. Making an apology this early doesn’t bode well, and we should expect many mistakes and apologies to come.
Seditious Conspiracy Is Not a Real Crime
Last Thursday, Enrique Tarrio, a reputed national leader of the Proud Boys organization was convicted in federal court of seditious conspiracy along with three-co-defendants. This conviction in a District of Columbia court represents a victory for the Justice Department which has now charged more than a thousand people with "crimes" related to the January 6 riot at the US capitol. Most of the charges related to the riot have been for small-time offenses that amount to vandalism and trespassing. A handful of those allegedly involved in the riot, however, have been convicted of seditious conspiracy.
Notably, Tarrio wasn't even in Washington, DC on the day of the riot, and thus could not have engaged in any violent acts against Capitol personnel. Yet, he has nonetheless been convicted on grounds that he was involved in some sort of "agreement" to "hinder" federal laws, and thus is guilty of saying things that allegedly led to the riot. The Tarrio case is an excellent example of how federal "crimes" can be spun by federal prosecutors from actions that are neither violence, nor fraud, nor any other act that a normal person would recognize as a real crime.
Seditious Conspiracy Was Invented to Get Around Limitations on Treason Prosecutions
Seditious conspiracy must not be confused with the act of treason legally defined in the US Constitution, however. Generally speaking, while treason requires an overt act of some kind, seditious conspiracy is a charge that a person has said things designed to undermine government authority. In other words, it is a “crime” of intent as interpreted by state authorities. This is fundamentally different from picking up a weapon and using it against agents of a government.
Of course, as we’ve noted here at mises.org before, the very idea of treason is itself problematic, since it assumes that violence against a government agent is somehow worse than a crime against a private citizen. Governments love this double standard because it reinforces the idea that the regime is more important than the voluntary private sector. Ultimately, however, violence against a person or property should be prosecuted as exactly that, and not as some separate category of crime against the “special” human beings who work for a regime.
Seditious conspiracy suffers from this same problem but is even more problematic because it relies primarily on circumstantial evidence to “prove” that a person was saying things in favor of obstructing or overthrowing a government. Indeed, the supposed necessity of such a “crime” is belied by the fact that no such crime existed even in federal law between the repeal of the hated Alien and Sedition Acts and the advent of the Civil War. Nor did seditious conspiracy laws play an important role in the US regime’s military success against the Southern secessionists.
Instead, what we find is that seditious conspiracy is a crime that is both prone to abuse by state authorities and unnecessary in terms of preventing violence to life and property. In cases such as the January 6 riot, crimes against persons and property ought to simply be considered violent crimes and property crimes of the usual sort. Seditious conspiracy, in contrast, is merely a type of “thought crime.”
The Origins of Seditious Conspiracy
The framers of the Constitution defined treason in very specific and limiting terms:
Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the testimony of two Witnesses to the same overt Act, or on Confession in open Court.
Note the use of the word “only” to specify that the definition of treason shall not be construed as something more broad than what is in the text. As with much of what we now find in the Bill of Rights, this language stems from fears that the US federal government would indulge in some of the same abuses that had occurred under the English crown, especially in the days of the Stuart monarchs. Kings had often construed “treason” to mean acts, thoughts, and “conspiracies” far beyond the act of actually taking up arms against the state. By contrast, in the US Constitution, the only flexibility given to Congress is in determining the punishment for treason.
Naturally, those who favored greater federal power chafed at these limitations and sought more federal laws that would punish alleged crimes against the state. It only took the Federalists ten years to come up with the Alien and Sedition Acts, which stated:
That if any persons shall unlawfully combine or conspire together, with intent to oppose any measure or measures of the government of the United States, which are or shall be directed by proper authority, or to impede the operation of any law of the United States, or to intimidate or prevent any person holding a place or office in or under the government of the United States, from undertaking, performing or executing his trust or duty, and if any person or persons, with intent as aforesaid, shall counsel, advise or attempt to procure any insurrection, riot, unlawful assembly, or combination, whether such conspiracy, threatening, counsel, advice, or attempt shall have the proposed effect or not, he or they shall be deemed guilty of a high misdemeanor.
Note the references to “intent,” “counsel,” and “advise” as criminal acts so long as these types of speech are employed in a presumed effort to obstruct government officials. This part of the act, however, was never used by the regime. Those prosecuted under the Alien and Sedition Acts were charged under the section on seditious libel, which was heartily opposed for being obviously and blatantly against basic rights of free expression. Nonetheless, the Sedition Act was allowed to expire, thanks to the election of Thomas Jefferson and the Republicans (later known as Democrats).
For sixty years, the United States government had no laws addressing sedition on the books. But the heart of the 1798 Sedition Act would be revived. As passed on July 1861, the new Seditious Conspiracy statute stated
that if two or more persons within any State or Territory of the United States shall conspire together to overthrow, or to put down, or to destroy by force, the Government of the United States, or to oppose by force the authority of the Government of the United States; or by force to prevent, hinder, or delay the execution of any law of the United States; or by force to seize, take, or possess any property of the United States against the will or contrary to the authority of the United States; or by force, or intimidation, or threat to prevent any person from accepting or holding any office, or trust, or place of confidence, under the United States. . . . Shall be guilty of a high crime.
Given the timing of the legislation—i.e., in 1861, following the secession of several Southern states—it is assumed that the legislation originated to address alleged Confederate treason. This is not quite the case. The legislation did enjoy considerable support from those who were especially militant in their opposition to the Confederacy. For example, Rep. Clement Vallandigham of Ohio—who would later be exiled to the Confederacy for opposing the war—supported the bill precisely because he thought it would help punish those engaged in “conspiracies to resist the fugitive slave law.” But the Congress had initially become serious about punishing “conspiracies” not in response to Southern secession, but in response to John Brown’s 1859 raid at Harper’s Ferry.
Southern secession and fears of rebellion helped enlarge the coalition in favor of a new sedition law. The new sedition law represented a significant expansion of the idea of “crimes against the state” in that the sedition law did not require overt acts against the government, but merely “conspiring,” vaguely defined. Stephen Douglas understood this perfectly well, explaining the benefits of his bill as such:
You must punish the conspiracy, the combination with intent to do the act, and then you will suppress it in advance. There is no principle more familiar to the legal profession than that whenever it is proper to declare an act to be a crime, it is proper to punish a conspiracy or combination with intent to perpetrate the act. . . . If it be unlawful and illegal to invade a State, and run off fugitive slaves, why not make it unlawful to form conspiracies and combinations in the several States with intent to do the act?
Others were more suspicious of expanding federal power in this way, however. Sen. Lazarus Powell and eight other Democrats presented a statement opposing the passage of the bill. Specifically, Powell and his allies believed the new seditious conspiracy law would be a de facto move in the direction of allowing the federal government to effectively expand the definition of treason offered by the federal constitution. The statement read:
The creation of an offense, resting in intention alone, without overt act, would render nugatory the provision last quoted, [i.e., the treason definition in the Constitution] and the door would be opened for those similar oppressions and cruelties which, under the excitement of political struggles, have so often disgraced the past history of the world.
Even worse, the new legislation would provide to the federal government “the utmost latitude to prosecutions founded on personal enmity and political animosity and the suspicions as to intention which they inevitably engender.”
Seditious conspiracy legislation gives the federal government far greater leeway to punish political opponents. Certainly, such legislation could have been used against opponents of the fugitive slave acts, as well as against opponents of federal conscription. After all, opponents of both the Civil War draft and the Vietnam War draft “conspired” to destroy government property—as with the heroic draft-card burnings of the Catonsville Nine, for example. It would be far harder to prove in court that such acts constituted treason. Unfortunately, the new legislation was ultimately approved in 1861, and the United States government had its first permanent laws against seditious conspiracy.
We now have the same reasons to fear seditious conspiracy laws as Powell did in 1861. Such measures allow the federal government to construct laws addressing intent, thoughts, and words, rather than overt acts. This greatly expands federal power and allows for prosecution of mere inflammatory rhetoric against the federal government.
As a practical matter, seditious conspiracy laws are simply unnecessary. A commonsense foundation for addressing violence in the Capitol building would be to simply prosecute those who engaged in actual violence and trespass. It is clear, however, that gaining convictions for seditious conspiracy has been an important goal for the administration because it furthers the narrative that Donald Trump’s supporters attempted some sort of coup.
Unfortunately, these sorts of political prosecutions are just the sort of thing we’ve come to expect from the Justice Department. The FBI can’t be bothered with investigating sex criminals such as Larry Nassar, but they’ll pull out all the stops to prosecute hundreds of those who entered the Capitol on January 6, many of whom simply stood around gawking at the scenery. But when Congress gives the FBI a near carte blanche, as it has done with seditious conspiracy laws, we should expect as much.
Another Week, Another Crisis
To no one’s surprise, there was another banking crisis over the weekend. The Federal Reserve and other large institutions stepped in to allegedly save the day, in what could be considered a highly accretive investment for some very wealthy individuals. As CNBC explains:
JPMorgan acquired all of First Republic’s deposits and a “substantial majority of assets.”
…and that was Monday.
Two days later the Fed raised rates again, moving the target federal funds rate into the 5 to 5 1/4 percent range. With the rise in the Fed's fund rate, America’s central bank will lose even more money as it also increased the interest rate paid on the nearly $3 trillion reserve balance. As explained:
The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 5.15 percent, effective May 4, 2023.
They didn’t have to do this. Just one day prior the Fed was paying 4.90% to banks. Surely if the Fed decided to keep this rate at 4.90% rather than 5.15%, the banking system could hardly be said to be worse off, and it would save the Fed a few billion dollars over the course of a year. Not only did this not happen but it will only further the $52 billion remittances due to the Treasury.
One would think interest rates this high would be great for the banking sector. Yet, CNBC reminds us this was the third banking failure since March, and given the trajectory, there will be more failures to come.
Take a moment to consider the current state of the economy: There is a national debt of $31.7 billion with interest rates higher than few could ever imagine. The Fed is taking losses each week paying more interest out to banks than interest earned from the public. On top of that, war drums in DC are getting louder while the role of the US dollar in international trade is getting smaller. No one has time to consider longer-term issues, which the Wall Street Journal noted last year, such as the $100 trillion in unfunded liabilities that must be paid eventually.
Yet talk of the debt ceiling continues to dominate headlines. Paul Krugman extols the virtues of the $1 trillion platinum coin, per Business Insider:
But as I said, people who really should know better constantly get this wrong, and imagine that the coin would be inflationary.
According to the Nobel Laureate, this monetary inflation would be neutralized if the Fed simply sold $1 trillion of its US Government bond holdings. Of course, the question to follow is: To whom and at what price?
Given that the Fed’s scheduled $60 billion roll off of US Treasuries per month has taken financial markets to the brink of extinction, the act of selling $1 trillion in bonds becomes next to impossible.
If that wasn’t enough to show the current state of affairs:
On Monday, Treasury Secretary Janet Yellen said the government could run out of money and trigger an economic crisis as soon as June 1.
It seems the only person with something good to say this week was Fed Chair Jerome Powell, who opened Wednesday’s press conference with unbelievably great news:
Conditions in that sector have broadly improved since early March, and the U.S banking system is sound and resilient. We will continue to monitor conditions in this sector. We are committed to learning the right lessons from this episode and will work to prevent events like these from happening again.
Between Powell, Yellen, Krugman, and the Austrian Business Cycle playing out right before our very eyes, the only certainty is that not all is well, and that the U.S. banking system is not sound and resilient. This week’s bailout will not be the last. And by the time you read this article, another banking bailout will already be in the works!
The Most Important Factor in The Economy Is Flashing A Huge Warning Sign
Since money is used in all transactions, including investments in physical goods and financial instruments, the supply of money is extremely important to the economy and financial markets.
Accelerating money supply growth typically leads to stronger economic activity and higher prices, while decelerating money supply growth (or decline) typically leads to weaker economic activity and lower prices.
However, the impact of changes in the money supply are always temporary. For example, if accelerating money supply growth always leads to a “stronger economy”, then why not always accelerate money supply growth? The short answer is because there is no such thing as a free lunch in economics.
As Ludwig von Mises, one of the greatest economists and monetary theorists in history noted about the mythical economic benefits of creating money out of thin air:
“If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world.”
And not only does creating money out of thin air not improve living standards, but it actually lowers living standards. This is because it causes the boom and bust business cycle, which wastes scarce resources that were used in failed investment projects undertaken due to artificially low interest rates.
Mises developed this Austrian Business Cycle Theory. As he summarized the problem caused by money creation out of thin air:
“The wavelike movement effecting the economic system, the recurrence of periods of boom which are followed by periods of depression is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.”
Money Supply Is Now Falling Rapidly
As a result of the huge rise in interest rates over the past year or so, money supply growth is now falling at one of the fastest rates in history.
The best measure of money, called Austrian Money Supply (“AMS”), was down 9.7% year-over-year in March, the largest decline in over 35 years of available data, as shown below.
The next chart shows M2 money supply is down 4.1% year-over-year, the largest decline since the Great Depression, when M2 fell over 10%. Let me repeat that. M2 money supply is falling at the fastest rate since the GREAT DEPRESSION of the 1930s!
With short-term interest rates on Treasury bills and money market funds now much higher than on bank deposits, many people have been pulling their money out of banks and investing it in Treasury bills and money market funds. As a result, bank deposits are now falling 5.4% year-over-year, the fastest decline in nearly five decades, as shown below.
In order to protect their balance sheets and limit their risk in the face of declining deposits and a coming recession, banks have cut way back on lending. The result is bank credit is now only growing 2.3%, the slowest pace in nearly 50 years, outside of the Great Recession, as shown below.
Implications Of Falling Money Supply
Money supply growth is the primary driver of the boom-and-bust business cycle and financial markets. With money supply now declining at one of the fastest rates since the Great Depression and the yield curve the most inverted in over 40 years following the steepest pace of Fed tightening since the early 1980s recessions, I believe there is an extremely high risk of a major recession coming this year, if it hasn’t already started. Forewarned is forearmed.