Warren Mosler is our guide today. The New York Times begins its article on Mr. Mosler this way:
"CHRISTIANSTED, V.I. - Warren Mosler is a card-carrying member of the 1 percent. A deeply tanned, tennis-lean hedge fund executive, Mr. Mosler lives on this run-down but jewel-toned Caribbean island for tax reasons…
Mr. Mosler started his career at a small bank in Connecticut, and eventually became a Wall Street trader. It was there, he said, that he developed an intuitive understanding of how the economy works - one very different from that of policy makers in Washington and the vast bulk of academics…
'All debt management is, is debiting and crediting different accounts,' Mr. Mosler said, recalling seeing numbers appear and disappear from his computer at Bankers Trust in New York in the 1970s. 'Can the federal government run out of dollars? No, because the Fed could pipe in a bigger number. That number doesn't come from anywhere. It's like when a player scores a field goal at a stadium. Three points just appear. The government is just the scorekeeper for the dollar.'
In the early 1980s, he left Wall Street and along with a partner, Clifford Viner, who is now the owner of the Florida Panthers hockey team, founded a hedge fund in Boca Raton, Fla. The fund made relatively few, relatively complicated financial bets, said Michael Reger, a partner of Mr. Mosler's for the last 20 years. "He's an urban myth," Mr. Reger said of the affable, talkative and bookish Mr. Mosler.
Mr. Mosler's fund has made a number of bets informed by his theory. For instance, Mr. Reger said, when the Treasury was paying down the United States debt during the Clinton years, many bond traders thought that prices would spike because of increasing scarcity. But Mr. Mosler predicted that no such scarcity would ever materialize, and shorted the bonds."
Now, Mr. Mosler is in "active retirement." One of his avocations is advocacy of his particular view of the economic policy, a view given "the label of 'modern monetary theory,' or M.M.T." His prescription:
"When the recession hit, Mr. Mosler said, the government should have spent and spent until unemployment came down to a comfortable level. Forget saving the banks through the Troubled Asset Relief Program. Washington should have eliminated the payroll tax, given every state $500 per resident and offered a basic job to anyone who wanted one."
How can I describe Mr. Mosler's prescription for economic policy?
Credit inflation! Pure and simple. Credit Inflation has been the unofficial economic policy of the United States government since the early 1960s. And, Mr. Mosler and his fellow proponents of M.M.T. have just followed the prescriptions of the policy of credit inflation to its extremes.
And, what is the investment advice that prospers during a period of credit inflation. Well, basically there are four pieces to the program. First, take on more risk in your investments. Second, use debt leverage as much as you can. Third, finance long-term assets with short-term liabilities. Fourth, when bottlenecks appear, become creative and innovate financially, developing the tools and outlets needed in order to get around whatever rules and regulations that might be in your way!
"Economics is about the allocation of scarce resources," Mr. Mosler said. "If there's a food shortage, you have a real problem in divvying up the food. Right now, we have a dollar shortage because of mistaken notions about how the monetary system works. How does that make any sense?"
Ironic that this article in the New York Times should share headlines with the announcements of the European Central Bank and the Bank of England that committing the ECB and the BofE to "keeping interest rates low indefinitely."
The Financial Times immediately responded: "Open market operations used to be the way the Bank of England sought to influence the economy. Now it is open-mouth operations."
In essence, the central banks of Western Europe and the United States have committed to keeping short-term interest rates at the very low levels that currently exist in the money markets until sometime in 2014 … or possibly into 2015!
If this doesn't establish the foundational settings for credit inflation, I don't know what does. The investment advice of Mr. Mosler is, in my mind, perfect for this kind of an environment. The name of the economic policy game is "pump up the economy," period!
The problem with this advice is, in my mind, that it is a perfect policy for people like Mr. Mosler. As the Times article states, Mr. Mosler is "a card-carrying member of the 1 percent." The article goes on: "But his prescriptions for economic policy make him sound like a warrior for the 99 percent."
Unfortunately, as I have argued many times, his prescriptions really do the most for those that are in the "1 percent" … or maybe in the "10 percent." The credit inflation of the last fifty years has done more to help the income/wealth distribution in the United States to become more skewed that at almost any time in its history.
The current three rounds of the Fed's quantitative easing have already provided substantial benefits to the wealthy. Take a look at a couple of my recent articles like "Bernanke Is Underwriting the Wealthy" and "Evidence of a Bubble Economy." Who else can go into riskier assets, use massive amounts of debt leverage, and engage in financial innovation?
And, as we have seen, credit inflation does not necessarily help the real economy. This is because most of the money created in a credit inflation goes into asset prices and not into consumer or "flow" prices. That is, the money created in a credit inflation tends to stay within the financial segment of the economy and does not flow smoothly into the productive areas of the economy. This is why we saw major manufacturing companies like General Motors and General Electric move to where they received more than one-half of their profits from their financial subs.
Mr. Mosler put his money where his mouth was. He profited greatly from it. A lot of other people, now members of the 1 percent … or of the 10 percent … did likewise. Most of these individuals are not as vocal as Mr. Mosler about their understanding of the government's underlying economic philosophy. These benefits still appear to be available given what the central banks are now doing…and openly state that they will continue to do. If Mr. Mosler is correct in his economic thinking, and you buy onto it, I hope that you can take advantage of it in the way that he has.