Updated: 7 Deadly Innocent Frauds
Posted by WARREN MOSLER on December 10th, 2009
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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.-
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The financial sector is a lot more trouble than it's worth.
Warren’s new book:
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MANDATORY READINGS
♥ The Financial Crisis - Views and Remedies
♥ Full Employment Abandoned Shifting Sands and Policy Failures
♥ Understanding Modern Money
♥ Inclusive Growth, Full Employment and Structural Change. Implications and Policies for Developing Asia Shifting Sands and Policy Failures
♥ Proposals - UPDATED March 2, 2009
♥ Soft Currency Economics
♥ Full Employment AND Price Stability
♥ A General Analytical Framework for the Analysis of Currencies and Other Commodities
♥ The Natural Rate of Interest is Zero
♥ 2004 Proposal for Senator Joe Lieberman
♥ An Interview with the Chairman
♥ What is Money?
♥ The Innocent Fraud of the Trade Deficit: Who's Funding Whom?
♥ JJ Lando on Quantitative EasingLinks
Internet Life
August 3rd, 2009 at 8:41 pm
Excellent. DO you have any plans to look for a publisher when you finish this? It would be great to have it out there, or even better to have you out there on the talk-show circuit explaining it…
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August 3rd, 2009 at 9:28 pm
Yes, ideas for the right publisher welcome!
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August 3rd, 2009 at 10:14 pm
I don’t know anything about publishers, but maybe you should talk to your good friend Steve Leisman – I think that publishers like it if you can arrange publicity ahead of time.
And I think the autobiographical tidbits definitely make it more interesting. I was actually telling my wife the other day (who I think feels like she knows you already, since I’m always talking about “What Warren said…”) that the thing about Mosler is that he has the rare ability to see the obvious, whether it’s about the advantages of catamarans or lightweight cars or the monetary system (of course, part of the trouble is that seeing the obvious doesn’t alway translate into success in a world dominated by trivialities…). So I think little digressions about your cars or your boat, in addition to adding color to the story, would help flesh out where you’re coming from.
I think that with a good editor, this could be quite a good little book, and would probably get a good amount of attention.
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Joe Baiera Reply:
December 7th, 2009 at 6:00 pm
I agree with jim about providing the public with some idea of where you come from and what qualifies you to speak about the matters at hand. I saw an interview you did on wall-street which you posted on your facebook. The person interviewing you did not mention any of your qualifications (harvard, your previous business success, your eco friendly and cost efficient yatch, ect.). I thought the interview was somewhat scattered and hard to understand which can be common when introducing new ideas to a person/interviewer who doesn’t fully understand the idea to begin with. This paired with the lack of your back round info left me feeling like the interview may not have succeeded in getting the point across or winning support. fortunately for me, you explained your ideas once to me in person using an example of buisness cards in exchange for chores (for your kids). This explanation was simple, to the point, and easy to understand and with my new understanding of your theories along with information on your background I was able to give you my full support, which you still have, but I must say I agree with Jim Baird. Good luck! show those Hawkeye’s why you should be in office and then take the nation by storm!!!
Joe
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August 4th, 2009 at 12:48 am
Really good stuff, Warren. Required reading this fall semester, for sure.
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August 4th, 2009 at 2:32 am
Outstanding! Although I’m not a believer in the “public purpose” part, the rest is eye opening (as is this whole site).
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Warren Mosler Reply:
August 4th, 2009 at 8:26 am
thanks!
the point of govt. is public purpose, and i view/criticize policy and outcomes in that light.
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Dissenting Comments Encouraged Reply:
August 5th, 2009 at 8:25 am
Public purpose?
Warren how many of your friends have you asked to put pressure on congress to have hearings on those judges that locked up children for profit? It was your suggestion after all?
Go on youtube or google video and do a search for the “century of self” A little documentary about crowd control and keeping winston from 1984 pacified. Then go watch some “prisoner” with patrick mcgoohan or “blake’s 7″ I am not necessarily against this, I don’t want 7 billion mad hungry humans looking to eat you or me for dinner.
Government is not about public purpose, it is about keeping an elite few in power to stick the boot in everyone elses faces and fear no uprising. Which makes your bid for the presidency disgusting and shows you are just jealous that Michelle Obama has a staff of 20 slaves and you don’t! LOL!
http://yro.slashdot.org/story/09/08/02/0725224/UK-Plans-To-Monitor-20000-Families-Homes-Via-CCTV
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Michael Coburn Reply:
February 26th, 2010 at 5:51 pm
So repeal the 17th amendment and quadruple the House of Representatives while insisting that high school diplomas are issued only to those who understand government and basic classical economics.
October 9th, 2009 at 1:58 pm
Warren is a very smart man, who clearly understands money better than the politicians and most economists. Last year, he helped edit a paper I wrote, that unfortunately wasn’t published. So I’ll share it with you, here:
Is It Time For a FICA Holiday?
Traditional thinking has produced an economic disaster, which the same traditional thinking cannot solve. As the U.S. and world economies slip into recession, we must remember this ultimately is a bookkeeping crisis. The housing “market” was destroyed, but not the actual houses. They still exist. Nothing real has been destroyed. Instead, we are starved for money.
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This problem should be easier to remedy than a food shortage, water shortage or wartime destruction, because a money shortage can be cured by the simple expedient of adding money – something the federal government is uniquely empowered to do.
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We propose a FICA payroll tax “holiday,” whereby the U.S. Treasury will make our Social Security and Medicare payments for us. This will add about $10 billion per week to our take-home pay, and another $10 billion to business income, both of which urgently are needed. When we eliminate this partly double, severely regressive tax, we will give consumers the income they need to make mortgage payments, to pay bills, and to do the shopping American business craves. The FICA holiday also will provide business with money for jobs and investment.
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In contrast, the “top down” approach (saving Fannie Mae, buying toxic mortgages), while necessary, does not directly address consumer/business money needs, and has had only modest effect.
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Common knowledge holds that Social Security and Medicare will face bankruptcy even with FICA. So proposed fixes invariably include benefit cuts, reducing consumer incomes, or tax increases, cutting consumer and business spending power – the opposite of what our economy requires.
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Many people fear federal deficit spending when it supports Social Security and Medicare, but not when it supports the military. Social Security spending for 2008 is approximately $600 billion, about equal to the defense budget. Ironically, both candidates for President believed Social Security will run out of money and the military will not. The $1 trillion in “stimulus” spending was authorized without increased taxes. Both candidates advocated tax cuts.
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Even during the darkest days of the Great Depression, the federal government never ran out of money. Massive government spending, before and during World War II, helped lift us from the Depression.
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In 1971 President Nixon eliminated any risk of government insolvency by ending the last vestiges of the gold standard. At the stroke of a pen, he assured that neither the government, nor any of its agencies, could run short of money. Social Security and Medicare, being two of those 400+ agencies, are immune from bankruptcy.
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If Congress authorizes the Treasury to make our Social Security and Medicare payments for us, thus allowing our take-home pay to rise, the economy will begin to recover. The elimination of FICA deductions would provide consumers and business with more than a trillion additional dollars annually, exactly what a healthy economy needs.
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Won’t this increase the federal deficit? Yes, but President Nixon’s signature guaranteed the government never will run short of money to service its debts. This act removed taxes as a necessary source of federal money. Together with federal spending, taxation became a mere tool to create optimal output and employment. Whatever deficit accomplishes that goal is the right size.
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Doesn’t a large deficit cause higher interest rates? No, interest rates are set by the Federal Reserve. The government can set rates at any level it wishes.
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Doesn’t a large federal debt create a shortage of lending funds? No, the more money the government pumps into the economy, the more lending funds are created.
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Won’t our children have to pay for the increased deficit? No, the government owes the debt and easily services a debt of any size. Our children are not the debtors. (In many cases, they even are the creditors.) Because the “right” size debt will continue to grow forever as our economy grows, it never should be reduced or paid back.
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Meanwhile, each year the increased debt will help keep output high and unemployment low, benefiting our children with additional income, goods and services.
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Won’t increasing the deficit by eliminating FICA, cause inflation? President Carter had modest deficits and high inflation. President Reagan had the highest deficits in American history and modest inflation. Contrary to popular wisdom, federal debt has not caused inflations, recessions, high interest rates or any other negative economic effects. On the contrary, large deficits have been associated with economic growth.
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In summary, we offer new thinking – an accounting fix to an accounting problem: Eliminate FICA and pay for Medicare and Social Security the same way we pay for Congress, the military, the Supreme Court and every other federal agency, by functionally folding these two agencies into the general fund. The economic crisis has presented us with the rare opportunity to accomplish two important goals: Permanently fix the seemingly intractable Social Security and Medicare problems, and energize our economy.
Rodger Malcolm Mitchell
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Michael Coburn Reply:
February 26th, 2010 at 6:10 pm
The reason for FICA taxes is to stop the rightarded from destroying Social Security. We the people must be able to claim that we take nothing from capital and we owe nothing _to_ capital. We must be able to say that it is a savings program. If that is not the case then the representatives of the rich will convince the trailer park trash that Social Security is a welfare program and thus eliminate it as some sort of support for those who were spendthrifts and wastrels and/or those who did not wisely “invest”. This has absolutely nothing to do with reality or economics or money. It has only to do with lying and deceit in the heart of every government hating fanatic.
Your idea is simply a way to put purchasing power in the hands of the _producers_ in the society. This is best done with a stimulus like the stimulus of early 2008 but on a quarterly basis. Just send out the money and have it curtailed for those with higher incomes. You accomplish the same thing without harming the Social Security system.
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October 26th, 2009 at 3:05 pm
Like the piece. This is a really nice extension of the monetary policy implementation “accounting” that we do in money markets on a day-to-day basis to help keep track of where overnight rates and so forth will trade. As we see every day on a really micro level, money cannot be destroyed and always returns to the central bank (barring taking out a lot of banknotes and burning them). The extension of reserve accounting into aggregate economy wide accounting is a pretty simple step when viewed with a money market lense.
It also makes me think a lot about the fractional reserve system and the shadow banking system. The piece works best for me when there is neither a shadow banking system or fractional reserve system (ie. full reserves). Because policymakers have outsourced credit creation to the banking and shadow system the question left for me was the extent to which QE and the Govt deficit can offset the private sector’s credit creation? (or more appropriate perhaps, the private sector’s credit destruction in this environment… of course this could later flip and we have the two working hand in hand but that’s not the question I’m raising here).
Also, I am not sure how we resolve prices using this piece, not just volumes? I appreciate the argument all that matters is volumes and that the rest is just a distribution issue, but I feel like I haven’t quite mentally closed the circle on this yet and would greatly appreciate your thoughts on this.
I also think about the regulation coming in – if banks will be required to hold larger buffers what then for the magnification of this impact via fractional reserves ?
Lastly, all this just my opinion of course, I thought the piece worked okay in an international perspective and you could see the Asian surplus dynamic which, via the FX pegs, ended up adding a lot of USD in USD banks etc but I found I had to suspend the behavioural element, ie. that there could be a run on the currency if policy gets too aggressive. Obviously this creates a big problem for the Europeans who cannot print.
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Curious Reply:
October 28th, 2009 at 8:26 pm
“Obviously this creates a big problem for the Europeans who cannot print.”
Is the ECB the lender of last resort or they don’t have one in Europe?
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warren mosler Reply:
October 29th, 2009 at 10:31 am
Yes, the ECB lends to banks as needed.
But the treaty doesn’t let them directly fund the national govts.
Nor does the ECB insure bank deposits. The National govts do that
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Curious Reply:
October 29th, 2009 at 2:09 pm
Thanks. So what’s the likely scenario in case of a bank run and ECB not willing to lend?
Return to national currency?
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Warren Mosler Reply:
October 29th, 2009 at 2:16 pm
no way to tell.
hopefully it doesn’t happen. would be a total mess.
October 26th, 2009 at 4:09 pm
Texas,
There really isn’t any such thing as a “fractional reserve system”. Loans create deposits, as a matter of accounting, and reserves adjust later. The “reserve requirement” is just a tax on banks, which (in the past, at least) required them to hold a certain amount of assets in non-interest bearing reserves. Countries like Canada have gotten along for years (and, I might add, did much better in the current financial crisis) with a 0 reserve policy.
One of my favorite statements of Warren’s on this: “It’s not some sort of special law that gives banks the power to create money; it’s just accounting.”
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October 26th, 2009 at 7:00 pm
and this is the definitive piece from ‘mandatory readings’ that goes through ‘value’:
http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/
briefly, the currency itself is a public monopoly and the monopolist is always ‘price setter’ whether he knows it or not
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anon Reply:
October 26th, 2009 at 8:35 pm
A price setter if you choose to set the price – e.g. fed funds rate.
But not a price setter if you choose not to set the price – e.g. bond auction
(I know you don’t like debt issuance)
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October 27th, 2009 at 8:17 am
right.
a monopolist sets two prices.
the first is what Marshall called the ‘own rate’ which is how your product exchanges for itself. For the currency this is called the interest rate.
the second is how it exchanges for other goods and services.
the monopoly supplier sets terms of exchange. and with the govt also the creator of the nominal demand via taxes, it controls that side as well.
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October 28th, 2009 at 8:28 pm
Yes, currency is a monopoly, but it doesn’t have to be.
What serves the public purpose better? Monopoly or competition?
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October 29th, 2009 at 10:29 am
Seems the currency pretty much does have to be a public monopoly.
The public purpose is to mover real goods and services from private to public domain.
Any ideas for doing it any other way?
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Floccina Reply:
October 30th, 2009 at 9:20 am
If money were private taxes would move goods and services from the private to the public domain.
Also you could have competing public institutions. Perhaps you could break the 12 Federal reserve banks into 4 groups and allow each to make its own currency. you need carefully designed incentives.
George Selgin and Bill Woolsey have some very interesting things to say about competition in money.
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warren mosler Reply:
November 1st, 2009 at 1:10 pm
If money were private taxes would move goods and services from the private to the public domain.
*true, that’s what happens on a gold standard, for example
but it has other seriously counterproductive issues.
Also you could have competing public institutions. Perhaps you could break the 12 Federal reserve banks into 4 groups and allow each to make its own currency. you need carefully designed incentives.
*what’s to be gained by that?
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Floccina Reply:
November 2nd, 2009 at 11:01 am
what’s to be gained by that?
To reduce the effect of a collapse of one currency. Also to allow for the fed to buy more diverse assets. To give the FEDs something to measure against.
October 29th, 2009 at 2:22 pm
The government can take whatever it wants whether it’s measured in US$ or Mosler$.
Competition among private currencies could also help the economy by keeping base interest rates at 0%.
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October 30th, 2009 at 9:11 am
The problem is that many of these frauds help the politicians. In fact it helps politicians on both sides. Republicans like the fraud that SS is running out of money because the people credit Democrats for the creation of the program. The democrats like the fraud because it fools people into thinking that SS is a retirement program that they paid into and so they deserve the SS checks making it difficult to touch the program and the people like the program and give credit to the democrats. Consider that SS is far less progressive than the income tax and yet if you propose to the democrats that you eliminate the FICA tax make SS a welfare program that pays out the same amount to rich or poor those defenders of the poor will fight you tooth and nail. They love the fraud!
The politicians are like mirrors to the people if the people believe the fraud the way to get elected is to go along with the fraud.
I wonder what your take is on the argument that if you increase the base money that once banks start to lend again, you will need to gather back in the base money to avoid inflation and that is not easy. The people who make that point argue that you should rather buy assets that can be sold if inflation comes than cut FICA taxes.
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Michael Coburn Reply:
February 26th, 2010 at 6:35 pm
The Democrats (or at least the small ‘d’ democrats) know that the rich will do anything they can to eliminate the Social Security system and to make the people totally dependent upon the owners of the means of production (the rich). If the Republicans can paint the Social Security system as a welfare program then they can eliminate it. So long as the system is supported by taxes on EARNED INCOME that is refunded in old age then it cannot be characterized as a welfare program and cannot be eliminated in the same way as a gift to the “welfare queen”. We are all aware of the shuffling of the money and the taking of the SS funds to award tax cuts to the rich while showing smaller deficits. But the fact is that the funds are accounted in the budget and there can be no lying about the source of those funds. If the Republicans can move the source of those funds from the producers to the owners (from wages to rent/interest) then the Social Security system will be destroyed very quickly. And that is the real objective of every entity that wants to “privatize” the SS system.
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November 1st, 2009 at 1:08 pm
Lending is not a function of the quantity of ‘base money’
I hear you on ss but don’t think the politicians are that clever or knowledgeable
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Michael Coburn Reply:
February 26th, 2010 at 6:51 pm
The one thing that _MAY_ finally happen (due to the HCR debate) is the broadening of the Medicare tax (tax on unearned income) and at least a minimal amount of progression in it. Unlike SS, Medicare benefits are the same for all persons over 65 regardless of how much they have paid in. It is truly a welfare system, but one that everyone seems very comfortable with. In politics (real life) it is the distribution that matters as opposed to the aggregates.
Yes, I know that 2.3% of the people over 65 are not enrolled in Medicare. But all over 65 are eligible (resident for 5 years). Those without 30 quarters of wage taxes must pay $2xx in monthly premiums and with less must pay $4xx in premiums. (40 quarters is free) But all are eligible and it is a very good deal for Richy Van Big Bucks who never worked a day in his life but has diabetes and high blood pressure. A very good insurance for less than $700. The private market would be $1200.
And I think your stuff is very good stuff. But distribution is what matters to politics.
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November 1st, 2009 at 2:02 pm
What other seriously counterproductive issues do private currencies have Warren?
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November 1st, 2009 at 5:19 pm
they result in a monetary system that is inherently ‘quantity constrained’ such as the gold standard, which then blows up periodically with high unemployment and excess capacity in general
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Floccina Reply:
November 2nd, 2009 at 10:58 am
I myself do not know but, George Selgin says otherwise:
http://www.econtalk.org/archives/2008/11/selgin_on_free.html
“Falling price level if productivity positive. Less-than-zero argument. If public wants to accumulate more money and stops spending, don’t draw as many checks or pass on their bank notes, decline in the velocity of money, would be a tendency for banks to issue more money, make more loans; their demand for reserves is a function of the flow of payments through the clearing system. When flow goes down, banks can bring it back up again by lending more. Changes in velocity get offset by money stock. Theory of Free Banking, first book. Why is there a Fed at all? ”
At one point Selgin says that if people heldGearge Selgin says otherwise:
http://www.econtalk.org/archives/2008/11/selgin_on_free.html
“Falling price level if productivity positive. Less-than-zero argument. If public wants to accumulate more money and stops spending, don’t draw as many checks or pass on their bank notes, decline in the velocity of money, would be a tendency for banks to issue more money, make more loans; their demand for reserves is a function of the flow of payments through the clearing system. When flow goes down, banks can bring it back up again by lending more. Changes in velocity get offset by money stock. Theory of Free Banking, first book. Why is there a Fed at all? ”
At one point he says that if people held all there money as cash the banks could produce an infinate amount of money. all their money as cash the banks could produce an infinite amount of money. It seems to me that free banking was evolving away from gold to into a system with money backed by assets. In such a system there would be a completely flexible money supply. Banks would be constrained from inflating by competition but in the case bank failures other banks could easily make up the slack. All the money stock could not deflate at ounce. Free banks could get money into circulation by buying assets. If all asset prices could not fall relative to the currency.
But this is all academic because we are not going to see free banking any time soon.
I idea of a FICA holiday is much more reachable. It seems right if people are holding too much debt to get money in the hands of the debtors. Let them buy pay down their debts and hold on to their assets so those assets do not depreciate.
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Floccina Reply:
November 2nd, 2009 at 6:17 pm
“I idea of a FICA holiday is much more reachable. It seems right if people are holding too much debt to get money in the hands of the debtors. Let them buy pay down their debts and hold on to their assets so those assets do not depreciate.”
Should have read:
I like the idea of a FICA holiday is a much more reachable. If people are holding too much debt the goal should be to get money in the hands of the debtors. Eliminate FICA and let them pay down their debts and hold on to their assets so those assets do not depreciate.
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November 2nd, 2009 at 11:18 am
unlike our current institutional arrangements, the above seems to imply a model where lending is somehow constrained by something other than loan demand from credible borrowers?
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winterspeak Reply:
November 2nd, 2009 at 12:20 pm
I don’t get it either.
“When flow goes down, banks can bring it back up again by lending more. Changes in velocity get offset by money stock.”
He seems to assume that banks can force loans on credible borrowers. Ignores the fact that, one sentence earlier, he himself asserts that flow is going down, which to me means that people are not taking on additional debt.
I think it’s an operation-free reading of MV=PT, where you can counteract a fall in V by increasing M. He claims that this would happen operationally via loans, but I think that’s impossible. It could happen if banks just started crediting their depositor’s accounts though. So they would hike up interest rates to enrich depositors, not to generate new loans.
Weird.
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Floccina Reply:
November 2nd, 2009 at 6:04 pm
“He seems to assume that banks can force loans on credible borrowers. Ignores the fact that, one sentence earlier, he himself asserts that flow is going down, which to me means that people are not taking on additional debt.”
I am not the clearest on this but I think he also says that should the bank’s money rise in value relative to other assets (deflation) the bank would buy up assets until the banks money stops appreciating relative to the other assets.
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winterspeak Reply:
November 2nd, 2009 at 7:06 pm
In a deflationary environment (as you describe) the real debt burden on households grows as they try to increase their savings. Debt ends up being written down, which will decapitalize banks (assuming that, in this model, they are extending credit at all).
Banks will find that their equity gets written down as their currency “appreciates” and their borrowers default. To put it another way, if banks lend secured, then in deflation, they simply take over all the collateral. They are welcome to it, as prices fall to what an unlevered buyer would pay.
JKH Reply:
November 2nd, 2009 at 4:49 pm
He says free banking can exist under either a fixed or floating rate system.
He seems very clear on bank capital, but not so on bank reserves. That’s a puzzling combination.
Suggests that free banking operates almost like an automatic stabilizer – when velocity goes down, banks lend more. Hard to figure that out.
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winterspeak Reply:
November 2nd, 2009 at 5:48 pm
Yup. Unless they just hike up their own personal interest rates and start funneling cash into deposits, I don’t see how that would happen.
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November 2nd, 2009 at 12:49 pm
“What other seriously counterproductive issues do private currencies have Warren?”
Also, if creating the currency is based on profitability and not public purpose, or simply qty constrained as in a gold standard, then you can’t handle even relatively simple payments systems crises. The history of these systems has demonstrated time and time again that gold standards and purely private payments systems likely couldn’t have dealt with, say, the disruptions of Y2K or 9/11, both of which the Fed handled with relative ease.
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November 2nd, 2009 at 1:50 pm
1. non-convertible monopoly currency also blows up periodically (Zimbabwe)
2. I have yet to hear 1 rational argument why private non-convertible currency would not work.
(we had a discussion about this here http://www.moslereconomics.com/mandatory-readings/a-general-analytical-framework-for-the-analysis-of-currencies-and-other-commodities/)
3. Is there any reason why private currencies can not coexist with government issued currency? Why not let the individual choose?
Scott,
I can see lending activity stopping in a crisis as trust evaporates, but why would a payment system stop?
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Scott Fullwiler Reply:
November 2nd, 2009 at 3:16 pm
Curious .. . for the same reasons, since payment systems run throughout the day and often overnight via overdrafts. You need an entity with both the ability and the willingness (that is, essentially no concern about the entity’s own profitability . . . recognizing that in a disruption the liquidity and default risk of counterpartys can skyrocket) to lend very large sums for the system to continue on a daily basis, and even more when there is a disruption.
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Curious Reply:
November 2nd, 2009 at 9:40 pm
That makes sense. In a “trust crisis” an interbank payment system without cb would likely shut down.
Which brings up a question. Does anybody know how did the international correspondent bank system handle the recent crisis?
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winterspeak Reply:
November 2nd, 2009 at 5:53 pm
CURIOUS:
1) Zimbabwe had obligations in foreign currencies, and thus was no longer operating on a fiat, floating-fx, non-convertible, no foreign obligation regime. Therefore it was not a “non-convertible monopoly currency”. The country was also run like crap and destroyed 50% of its own output. Gold standards don’t keep people from starving to death if they destroy their own farms.
3) I am declaring winterbucks. They are a private currency of my own making. Will you please choose to swap from for $USD? (As we know that’s DOOMED!) I promise I will not print any more winterbucks after our swap. Let me know how many you want and I’ll fire up my printer.
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Curious Reply:
November 2nd, 2009 at 10:18 pm
Winterspeak,
1) It was non-convertible currency. The fact that they had foreign loans doesn’t change that.
3) You need something to give your currency value (loan will do, as discussed in the link I posted).
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winterspeak Reply:
November 3rd, 2009 at 1:44 am
Curios: Are you really being serious about Zimbabwe? Have you ever lived in a third world country?
1) Zimbabwe probably had very limited tax collection, and it was becoming worse over time. Taxes are a key element to creating demand for currency.
2) Zimbabwe was almost certainly operating on a mixed currency regime where people carried Z$ as well as other currencies, almost certainly US$. People in Zimbabwe made a decision about how much Z$ to carry vs US$
3) As Mugabe destroyed Zimbabwe’s real productive output, there was simply less stuff to buy. This could trigger hyperinflation even if the country was running a surplus.
4) As the Govt disintegrated people’s desire to hold the currency also fell to zero, thus its’ value vanished. You didn’t need the Z$ to pay your taxes, and the armed thugs you encountered preferred US$ or cigarettes. Why hold Z$?
It continues to be bizarre to me that people hold up Zimbabwe as an example of what happens to a currency when the Government “prints too much”. In the list of things Mugabe has done to run his country into the ground, “printing too much currency” probably doesn’t even make the top 50.
If a government disintegrates, its currency will follow, not matter how well that Government has managed the currency up until its point of disintegration.
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pebird Reply:
November 10th, 2009 at 1:54 am
Well, first of all they do currently exist. Consumption points systems (hotels, airlines, credit card usage) act in some ways as private currencies. The monopoly owners issue as many points as they wish (I guess they need to get them from somewhere first, though) based on what behaviors they wish to reward.
You can borrow points or purchase points using other currencies and there have been attempts to consolidate and create point exchanges.
The one thing private currencies do accomplish is velocity. Private currencies by design must have a short life cycle – a solid private currency will be hoarded as bad private currencies drive out good.
The history of the US is the history of state chartered banks which basically issued private money – short life cycles and periods of extreme velocity (which is uncontrollable once it starts) were its hallmarks. It was tried and didn’t work then. What is going to change now?
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November 2nd, 2009 at 6:02 pm
“2. I have yet to hear 1 rational argument why private non-convertible currency would not work.”
It would work fine. Starbucks issues a “private nonconvertable currency” when it credits your Starbucks card. (They don’t issue refunds on unused balances, so it fits.) If Starbucks set up a payments system and convinced everyone in the worl to use StarBucks, everything would be fine, since Starbucks could always honor any draft on the system.
But when you talk about “competing” systems, you are slipping convertibility in through the back door. If I have StarBucks but I don’t like how they’re handling things (Or I just hate their coffee), I might want to transfer them over to my Dunkin’ Donuts card. But if they allow me to do that (or the authorities require them to do that), they now have a fully convertible currency, with all the payment difficulties that entails. By definition, “non-convertability” MUST entail a monopoly.
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November 2nd, 2009 at 11:11 pm
Jim,
my understanding:
convertible currency means convertible by the issuer into something else at a fixed rate.
Non-convertible currency means convertible by the issuer only into itself.
You can trade both types for anything you like (including other currency).
I’m not sure if your Starbucks points are convertible currency or not.
Where does the value of your Starbucks points come from?
Do they fix the value of your points to US$ or specific amount of coffee? If not, why do you accept them?
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winterspeak Reply:
November 3rd, 2009 at 1:46 am
I accept my starbuck points because it’s a convenient way to get a cup of coffee.
I accept my frequent flier miles because sometimes, in a blue moon, I get a free flight or an upgrade.
Can’t speak for Jim.
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November 6th, 2009 at 12:51 pm
I’ve written two diaries at Firedog Lake that owe much to Warren’s thinking in “7 Deadly Frauds.” They are: “Deficit Hawkism and National Suicide: Part One,” and “Deficit Hawkism and National Suicide: Part Two.”
I’ve been familiar with similar ideas for some time having previously read books by Robert Eisner, Rick Boettger and Francis X. Cavanaugh. I see Warren’s work as perhaps closest to Boettger, whose mid-1990s book was roundly rejected by economists. I’m glad to know that there are people writing currently who understand the dangerous myths about the deficit that both conservative Republicans and many progressive and conservative Democrats still believe in.
Btw, anyone can post diaries in the Seminal section at FiredogLake.Com”. If you go there, scroll down on the right hand side of the page until you reach the tool box and then click on Post Diary. It will bring up a page with instructions.
It would be good to have more people there writing in opposition to deficit hawkism. Perhaps Rodger Malcolm Mitchell would like to publish his article there.
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November 9th, 2009 at 8:57 am
Thanks, will check it out later today.
I met Frank at a UMKC discussion.
He had written in his book that old people’s savings fund young people’s mtgs.
I told him it was the other way around.
Young people signing for mtgs create the deposits that become the old people’s savings when the young people buy the house.
He considered it and then agreed, saying he’d never thought about it that way.
He had been in Treasury for over 30 years.
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November 21st, 2009 at 11:05 am
Warren,
Just finished reading Richard Koo’s book and was hunting around the web for some more information. Your white paper is a very interesting take and mostly (I think) supportive of what I was reading in the revised “Holy Grail of MacroEconomics”. Certainly food for thought; I have to digest and read through once or twice before I grasp all of it completely. If Sumners & the Chinese did not grasp these concepts of balance sheet recessions I think we may be in more trouble than we think. Particularly if China does grasp the concept but sees it as a way to weaken us geopolitically (this is being written on the heels of Pres. Obama’s Asia trip).
Circumstances really are auguring for a ‘37 style double dip, aren’t they? Thanks for sharing your opinions, and I look forward to reading your blogposts in the future.
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December 9th, 2009 at 5:38 pm
I have been reading more on free banking because it seems that the median voter will never get the post-Keynsian system right and that is who it depends on. Consider that in 1936 the federal government had to tighten its belt in response to the median voter plunging the country back into depression.
But I noticed that in a free banking system there seems to be no difference between currency in one’s pocket and money in a demand deposit account. (That is especially clear if one’s mortgage is in the same currency as his cash and demand deposit.)
How can the Federal reserve system be made to look more like free banking in this regard? In other words if people decide to hold more cash and or pay down loans shouldn’t the Fed just print more currency and allow the banks keep it on their books like demand deposits?
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December 10th, 2009 at 11:04 am
Any thoughts from this board on Henry Liu’s recent comments on Chartalism. He seems to believe that the FX rate is a bigger constraint for non-US sovereigns than do other Chartalists:
” … But Chartalist theory is operative only in closed domestic monetary regimes.
Countries participating in free trade in a globalized system, especially in unregulated global financial and currency markets, cannot operate on Chartalist principles because of the foreign-exchange dilemma. For a country participating in globalized trade, any government printing its own currency to finance domestic needs beyond the size of its foreign-exchange reserves will soon find its currency under attack in the foreign-exchange markets, regardless of whether the currency is pegged to a fixed exchanged rate or is free-floating. The only country exempt from this rule, up to a point, is the uS because of dollar hegemony”
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Jim Baird Reply:
December 10th, 2009 at 11:35 am
What is an “attack” in a free floating system? For an exporter, such an “attack” would merely make it’s products cheaper (China has been “attacking” its own currency for years…)
Let’s say your Nowhereistan. You have a freely floating currency, and your main export product is the wool of mountain goats. George Soros twirls his mustache (Does he have one? He should.) and says, “I will bring them to their knees!” He proceeds to sell Nowhereistani rube-dollars short, halving their value. Import prices soar, but suddenly they have cornered the market in mountain goat wool. Ralph Lauren buys up the whole lot for his new line of “Mountain Coats”. Exchange floods in. The rube-dollar stabilizes.
The Soroses of the world make their money by forcing forcing governments to defend a too-high peg. How is he going to make money by attacking the nonexistent peg of Nowhereistan?
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RSJ Reply:
December 11th, 2009 at 1:56 am
“How is he going to make money by attacking the nonexistent peg of Nowhereistan?”
He sells Baht and buys dollars enough to move the currency a bit, and then he makes money by selling dollars to and buying Baht from desperate Thai businesses that are scrambling to cover their dollar debts. You don’t need to make money off the government sector when the private sector is highly levered with foreign obligations.
On the other hand, if you prevent both the government and the private sector from having unhedged foreign currency liabilities, then I don’t see how he makes money off the country, although he could still make money from trend-followers.
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Curious Reply:
December 10th, 2009 at 2:06 pm
Fiat currency is an asset, like any other.
Market price of any asset can fluctuate (higher or lower). Why call it a dilemma?
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December 10th, 2009 at 12:28 pm
Henry’s comment make no sense at all:
†… But Chartalist theory is operative only in closed domestic monetary regimes.”
There is no ‘chartalist theory’ beyond the accounting identities and operational realities (govt spends by changing numbers in bank accounts, etc.)that I know of?
If he wants to argue some policy will be inflationary that’s fine, but that’s a different issue.
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Scott Fullwiler Reply:
December 10th, 2009 at 3:36 pm
Agreed.
That’s why, though I like that “MMT” has become an acronym we can use to name ourselves and everyone knows who/what is being talked about, I am still uncomfortable calling it modern monetary “theory.”
The policy proposals are another story, of course, but the operational and accounting realities aren’t theory in the normal sense of the term.
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knapp Reply:
December 10th, 2009 at 4:15 pm
I’m not such a fan of the name “modern monetary theory” – it’s not modern (the basic idea goes back to Plato), it’s not monetary (it’s emphasis is fiscal) and it’s not a theory (for the reasons you site). Plus it’s not catchy.
In contrast, Soft Currency Economics is a brilliant name – audacious, in-your-face, witty and proud to be the antithesis of hard currency economics. What committee decided on MMT vs. Soft Currency?
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warren mosler Reply:
December 10th, 2009 at 5:28 pm
i don’t like it much either but i’ve been called worse.
i suspect it came from the book understanding modern money
Scott Fullwiler Reply:
December 11th, 2009 at 12:02 am
Good points, Knapp.
I never heard MMT until Bill started using it, and it’s caught on a bit since we really don’t have another name and Chartalism has some baggage. And though I’m not opposed to being called a Chartalist, I do think there’s a lot more to what we’re talking about than what most normally think of as Chartalism.
I agree with Warren . . .it’s probably from Randy’s book. I remember when Randy was writing the book, the original title was “Money in the Modern Era” without a subtitle. In fact, I still have a pre-published manuscript with that title . . . . virtually nothing else is changed. I remember being a bit disappointed when the title was changed . . . I thought the original was a bit better (in terms of sounding scholarly and serious). But I’m not the one trying to sell books.
winterspeak Reply:
December 10th, 2009 at 7:51 pm
SCOTT: We totally failed over at Nick’s didn’t we? At least I did, despite truly heroic efforts by you and JKH.
Nick is a gracious host nonetheless. I think we’ll need more than a better name to make any progress ; )
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Scott Fullwiler Reply:
December 11th, 2009 at 12:10 am
Hi Winterspeak,
I suppose it depends on what failure means. Perhaps Nick’s the one that failed. We understand his paradigm and worked through his exampples, but he clearly understood virtually nothing we were saying and couldn’t bring himself to see any significance to it. He was very gracious, though, to his credit, which explains why we stuck around so long.
I’m still baffled that grounding analysis in accounting is such a difficult sell, but here we sit. Had the same problem on Steve Keen’s site and we encounter it occasionally with heterodox economic historians, too. If anyone has any thoughts how to sell the importance of accounting in economic analysis, I’m all ears.
Your efforts were as much or more heroic than mine, for sure, and you fired off a few real doozies that I had to write down so I don’t forget.
winterspeak Reply:
December 11th, 2009 at 2:09 am
Scott: Well, Nick’s the university professor, teaching what’s in the text books written by the guys who are advising the white house, running the Treasury, and running the Fed. We’re no ones punching keys on the internet. There’s definitely failure somewhere in this picture, but I don’t think it’s with Nick!
Economists have a visceral hatred and disdain for accounting. If they understand it, they dismiss it as trivial. When I explain MMT to people, they begin by “that’s impossible” and then switch to “that’s trivial”.
I did not know you spent time with Steve Keen. Steve’s 90% the way to being in paradigm anyway isn’t he?
Scott Fullwiler Reply:
December 11th, 2009 at 9:16 am
Yeah, although I don’t blame Galileo for not convincing the Pope.
Keen’s got horizontal money pretty much down, at least in the sense that he understands it’s endogenous and the money multiplier model is false. Still not on board on vertical money completely, though. But the accounting was a problem philosophically for many on his site, not as much for him, though he wasn’t completely on board on that as being at least necessary even if not sufficient for analysis, either.
Jim Baird Reply:
December 11th, 2009 at 10:08 am
I think that Keen, even though he makes fun of mainstreamers for their obessession with fancy math, still has a bit of a problem with that himself (although to his credit, he actually understands fancy math far better than most “math poseur” economists, who think that 19th century mathematical techniques are hip and happening…) Accounting is just too simple – just addition and subtraction, for God’s sake! Not a derivative anywhere!
jcmccutcheon Reply:
December 11th, 2009 at 11:38 am
Can someone post links to the debates with “Nick” + Keen.
winterspeak Reply:
December 11th, 2009 at 12:31 pm
JM: The “Nick” debates are here and here:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/12/why-do-bad-banks-really-matter.html
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/11/accounting-and-economics-and-money.html#more
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/11/a-monetarist-theory-of-neochartalism.html#more
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/10/what-makes-a-bank-a-central-bank/comments/page/2/#comments
knapp Reply:
December 11th, 2009 at 6:12 pm
Robert Skidelsky vs. Tim Congdon on Keynes
http://www.skidelskyr.com/site/article/what-would-keynes-say-a-dialogue-with-tim-congdon/
Congdon Keynesian-monetarism will likely frustrate readers of this blog.
Matt Franko Reply:
December 11th, 2009 at 9:09 pm
Winter you guys did a GREAT job over there. You guys planted some seeds I’m sure for both him and his readers, that’s all you can do, the truth does the rest, it just takes some time…please keep up the good work there and elsewhere if possible!!! Resp,
December 10th, 2009 at 3:09 pm
[...] No one asks, “Where is the scoreboard going to get six points?†This is explained in detail at http://www.moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/ – THE WELL-KNOWN, PRO-DEFICIT POSITION Many countries – Germany, Italy, Brazil et al – [...]
December 11th, 2009 at 10:45 pm
Thanks for the links Winterspeak.
2 questions came to my mind when reading through the discussion there:
1. Scott mentioned that receivables are not money. Why not? (money = credit)
2. Why include banks in the non-public sector, when they are controlled by the government (licenses, bailouts)?
Reply
Scott Fullwiler Reply:
December 12th, 2009 at 12:05 am
Hi Curious
Regarding 1, it depends on how you define “money.” Most, including Nick, define it as some sort of bank liability + currency. Receivables of a company are not included. MMT’ers prefer not to use the term “money.” I agree with you . . . receivables are a horizontal expansion, albeit lower on the “hierarchy” than bank loans (i.e., you can use bank liabilities to pay down receivables, but not receivables to pay down bank loans).
Regarding 2, your point is not insignificant, but we tend to think of it this way: for the govt sector to expand its liabilities, it creates assets for the non-govt sector, but for the banking sector to expand its liabilities, it creates liabilities (loans) for the non-govt sector (i.e., no net financial asset creation).
Best,
Scott
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winterspeak Reply:
December 14th, 2009 at 3:20 am
Right.
Just to add, although banks are not part of the public sector, they do occupy a special position in the private sector due to their access to reserve accounts. Sometimes you will see PK’s specify “non-Govt, non-bank” sector.
It gets tricky because the Chinese Govt, and state Govt, counts as non-Govt! And to a newbie this stuff is hard enough to understand in the first place!
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December 19th, 2009 at 9:22 am
http://www.youtube.com/view_play_list?p=AC5F06403D07A15C&search_query=money+as+debt
Money as Debt II Promises Unleashed
Bailouts, stimulus packages, debt piled upon debt, where will it all end? How did we get into a situation where there has never been more material wealth & productivity and yet everyone is in debt to bankers? And now, all of a sudden, the bankers have no money and we the taxpayers, have to rescue them by going even further into debt! Money as Debt II Explores the baffling, fraudulent and destructive arithmetic of the money system that holds us hostage to a forever growing DEBT…and how we might evolve beyond it into a new era.
http://www.moneyasdebt.net/
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December 21st, 2009 at 1:19 pm
Money “velocity” repeatedly is mentioned, but I have trouble understanding why velocity makes any difference. “Quantity” I understand, but velocity . . .???
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January 1st, 2010 at 5:16 pm
What happened to sections 2 & 3?
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January 20th, 2010 at 7:10 am
maybe it’s my MS office version but i can’t see part 2 of this excellent piece on the word document following your update link.
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January 29th, 2010 at 11:02 pm
[...] Mosler Economics Website [...]
February 9th, 2010 at 3:13 pm
“…what happens should you go to the Federal Reserve (“the Fed”) to pay your taxes…”
Aren’t taxes paid to the Treasury and not the Fed?
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February 9th, 2010 at 10:51 pm
yes, and they’d send their cash to the fed, i’ve been told.
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February 10th, 2010 at 2:47 am
OK. And does the Fed credit the Treasury’s account balance by that amount before shredding the cash?
Otherwise, why would the Treasury send it over to the Fed, instead of spending it?
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Ramanan Reply:
February 10th, 2010 at 8:10 am
These docs seem relevant
CHAPTER FIVE: Tax Collection Systems
http://www.fms.treas.gov/crm/CASHMGMTChapter5.pdf
Financial Accounting Manual for Federal Reserve Banks
http://www.federalreserve.gov/monetarypolicy/files/BSTfinaccountingmanual2009.pdf
The second link doesn’t work now – though I downloaded the file a few days back. The latter has some detailed accounting about currency notes – such as accounting expenses for printing the cash, Bureau of Engraving and Printing shipment etc!
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selise Reply:
February 10th, 2010 at 9:29 am
ramanan, for your second link, there is apparently a new doc version for this year:
http://www.federalreserve.gov/monetarypolicy/files/BSTfinaccountingmanual2010.pdf
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anon Reply:
February 10th, 2010 at 9:19 am
“does the Fed credit the Treasury’s account balance by that amount before shredding the cash?”
good catch!
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Scott Fullwiler Reply:
February 10th, 2010 at 11:43 am
Of course, that’s been Warren’s point all along . . . spending/taxing is about changing numbers on computer screens.
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anon Reply:
February 10th, 2010 at 1:01 pm
i believe his point was that cash simply “disappears”
instead it’s exchanged for a deposit
Scott Fullwiler Reply:
February 10th, 2010 at 3:37 pm
right. and a deposit is created by changing numbers on a computer spreadsheet. so, you shred the cash and change numbers on a computer. again, that’s his point.
Curious Reply:
February 11th, 2010 at 1:55 am
If my taxes don’t just get shredded, but get credited to the Treasury’s account, the Treasury will spend it.
So aggregate demand is unchanged, the only change is who is doing the spending (it is the Treasury instead of me).
Thus taxes have no effect on aggregate demand.
zanon Reply:
February 11th, 2010 at 2:25 am
No curious.
Treasury can spend irregardless of whether it gets your taxes or not.
If Treasury always spent what was taxed, deficit would be zero!
Curious Reply:
February 11th, 2010 at 7:05 pm
Yes, Treasury can spend regardless of how much it collects in taxes.
My point is that taxes don’t reduce aggregate demand, because whatever is collected in taxes gets spent by the Treasury.
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zanon Reply:
February 11th, 2010 at 7:37 pm
No Curious:
Taxation and Treasury spending are independent. If the Treasury chooses to spend less than it takes in in taxes then US runs a surplus. This happened in the Clinton years. If the Treasury chooses to spend more than it takes in in taxes then US runs a deficit. This happens most years.
Taxation reduces aggregate demand. Govt spending increases aggregate demand. Net effect is change in net financial asset position of non-Govt sector.
Curious Reply:
February 11th, 2010 at 10:51 pm
Imagine that you have $100 to spend.
But the Treasury takes $40 in taxes, so you are left with only $60 and you spend it.
But the Treasury spends the $40 that they took from you. (your taxes get credited to the Treasury’s account)
So the entire $100 gets spent either way.
zanon Reply:
February 12th, 2010 at 12:45 am
Curious:
In your example, yes that is what happens.
But suppose Treasury spends $1M. Or suppose it spends $0. The amount it spends is up to it, and has nothing to do with the amount it taxes you.
Curious Reply:
February 12th, 2010 at 2:04 pm
Zanon,
if Treasury spends $1m and collects another $40 in taxes, it will spend it too, bringing total spending to $1,000,040.
If Treasury spends 0 and collects $40 in taxes, it will spend the $40, bringing total spending to $40.
Treasury always empties its account, doesn’t it?
zanon Reply:
February 12th, 2010 at 2:13 pm
No, Treasury does not always empty its account. It spends what it spends. That is what “independent” means when I say “spending is independent of taxing”.
Curious Reply:
February 14th, 2010 at 11:23 pm
Zanon,
if there is extra money in the Treasury’s account at the Fed, I see 2 alternative scenarios:
1. Treasury can use it to repay some of its debt to the Fed, thus making the money truly to disappear.
2. Politicians come up with new programs and spend it.
Which one is more likely scenario?
zanon Reply:
February 14th, 2010 at 11:38 pm
I don’t know about “likely”.
I do know that what politicians can and do spend has no connection to what is in Treasury’s account. Just like what politicians can and do spend has no connection to what is in your personal checking account. That is what “independent” means.
I cannot help you further on this topic.
Curious Reply:
February 15th, 2010 at 3:00 pm
Does anybody know, if the Treasury has ever repaid any of its debt to the Fed (excluding refinancing)?
February 10th, 2010 at 9:58 am
Re national debt not being a burden on future generations (Fraud #2), I basically agree with Warren, but I prefer putting the arguments a different way. If anyone is interested in a different take on the “future generation” question, see my analysis here:
http://ralphanomics.blogspot.com/2010/02/is-national-debt-burden-on-future.html
It’s 800 words. Obviously I think my analysis is better than Warren’s !!!
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warren mosler Reply:
February 15th, 2010 at 8:24 am
interesting that i’ve been working on that over the weekend some on plane rides as well, adding the part about all our children will have to do is shift funds from one account to another at the fed, just like we do and our fathers did.
to your points, totally agree on the real costs being ‘paid’ by the current generation. In fact, there are many references in mainstream literature to this fact. Regarding govt deficit spending and borrowing to get the current job done- i wouldn’t put it that way. Since you assume full employment, given our current institutional arrangements deficit spending will be the same whether we do something productive or just do wasteful things. So the deficit is not the result of the current infrastructure projects, but a necessary condition for full employment of any kind given our current ’savings desires.’
exchanging cash for another currency and an associated drop in the currency does not lower the standard of living per se unless real terms of trade are somehow altered, as in your case where china buys real goods and services from us. standard of living is all about domestic output and real terms of trade.
so unless real net exports went up- whatever that actually means- standard of living isn’t altered by currency alterations. but internal distribution of consumption is likely to change, as in my draft.
hope this helps!!!
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February 10th, 2010 at 10:42 am
The 7 deadly innocent frauds: Where are the missing chapters?
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February 10th, 2010 at 12:41 pm
Didn’t any of you see Dead Presidents? Of course the old bills go back to the Fed for shredding. :o)
http://en.wikipedia.org/wiki/Dead_Presidents
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February 10th, 2010 at 6:24 pm
How to make things complicated, by Mark Thoma:
http://moneywatch.bnet.com/economic-news/blog/maximum-utility/the-feds-exit-strategy/455/
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winterspeak Reply:
February 10th, 2010 at 7:44 pm
Honestly, the reason I think MMT languishes in obscurity is that it’s too simple. You cannot make an academic career on anything that’s simple and clear — better to ramble on about “expectations” and conjecture on how you can apply a “negative interest rate to cash” etc.
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Scott Fullwiler Reply:
February 10th, 2010 at 10:22 pm
I’ll never get those 10 minutes back I just wasted watching this. Got some things right about interest payment, many things wrong, and completely clueless about the Fed’s “normal” operations. Should have just linked him to these:
http://www.cfeps.org/pubs/wp-pdf/WP38-Fullwiler.pdf
http://www.cfeps.org/ss2008/ss08r/fulwiller/Fullwiler%20Modern%20CB%20Operations.pdf
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warren mosler Reply:
February 15th, 2010 at 8:27 am
the ‘too simple’ notion has a lot of merit. I often get the response ‘it can’t be that simple, there has to be more too it.’
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beowulf Reply:
April 23rd, 2010 at 2:26 am
the ‘too simple’ notion has a lot of merit. I often get the response ‘it can’t be that simple, there has to be more too it.’
“The process by which banks create money is so simple that the mind is repelled.”
J.K. Galbraith
http://en.wikiquote.org/wiki/John_Kenneth_Galbraith#Money_:_Whence_It_Came.2C_Where_It_Went_.281975.29
That page has a lot of great Galbraith quotes.
JKH Reply:
February 10th, 2010 at 10:35 pm
Sorry, Scott. I was going to tag it “fusion of tragedy and hilarity”, but thought I’d give him a break, for some unknown reason. It is pretty funny actually. Reminded me of Ben Stein in Ferris Bueller’s Day Off, as well as his monetary comprehension …
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Scott Fullwiler Reply:
February 10th, 2010 at 10:56 pm
He does do a pretty good Ben Stein, there, though I think Stein probably got more things right in his lecture.
When students used to look at me with no expresssion whatsoever on their faces after I asked a question, I used to say “Bueller? Bueller?” deadpanned and would always get a chuckle. Now, I’ve had to stop because most of them weren’t born when that movie came out (or close to it) and they don’t know what the hell I’m talking about. Feeling old!
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JKH Reply:
February 10th, 2010 at 11:39 pm
In that case, you must default to:
“anyone … anyone?”
It’s timeless.
P.S. let me know when the movie comes out
JKH Reply:
February 13th, 2010 at 8:15 am
discussion with David Beckworth on “exit strategy”, reserves, etc., including comments from Marshall Auerback:
http://macromarketmusings.blogspot.com/2010/02/feds-exit-strategy.html
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Scott Fullwiler Reply:
February 13th, 2010 at 9:18 am
The usual suspects. You’re armed with the facts, but that may not even work. BTW, Marshall was on FOX Biz News yesterday . . .
http://video.foxbusiness.com/#/v/4015119/greece-are-we-next-/?playlist_id=87185
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JKH Reply:
February 13th, 2010 at 9:51 am
Thx – clear articulation of the currency issuance factor there.
jcmccutcheon Reply:
February 13th, 2010 at 10:02 am
Yes that was great. This movement, if we can call it that, is picking up steam.
Ramanan Reply:
February 13th, 2010 at 10:20 am
Marshall’s thermometer analogy was good!
February 15th, 2010 at 9:19 pm
Warren
I have been studying the economy for about 4 years now and could not make sense of what was being said in the press and on the web, the logic did NOT work at all. All the fixes don’t fix the problem, it was getting to be a catch 22 for me. I watched your youtube vids and read your 7 paper—-THE LIGHTS CAME ON— I can see it all know—It all makes sense. I laughed and grinned all the way thru. It’s so simple! Thank you for the knowledge. I once belonged to a barter group and someone HAD to be positive and someone HAD to be negative in each transaction, even in Gold if you are positive the earth/nation is negative, this is a no-brainer.
Thanks again and good luck with getting the truth out.
JerryT
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February 26th, 2010 at 5:02 pm
Your presentation portrays the US government as Stalinist. That simply means that the parents get to rule over the children regardless of what the children might think about it. I don’t know how to allow the kids to tell the parent what they want and to fire the parents should the parents not comply. But your work will be attacked for this.
The “right sizing” of government and the selection of what functions should be assigned to government is the primary problem in the US today. I think people can understand the money system as you are trying to describe it, but there are many who want no government at all ans who would rather have the banks and the financiers be the source of money. We know that banks can and do create money and that this money trades on par with government created (spent into existence) money.
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February 27th, 2010 at 8:59 am
how about if the kids can vote for new parents every 2 years?
also, the currency is defined by what gov demands for tax payment, or it has to be a different commodity of some sort
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March 24th, 2010 at 8:14 am
Where are parts 2 and 3 please?
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March 28th, 2010 at 4:56 pm
Clever in a sense, but really: If our government could just create as much money as it wanted by entering numbers, it could just create enough to pay off China etc, and just “give them the money.” But creditors would consider that phony, they would say our money is worthless if we can make as much as we want. That dilutes their own dollars, esp. since they can’t make more! And so on. There are rules for the money supply. Also, Mosler seems not to get the difference between “can in technical principle” and “may do so based on rules.”
As for no big deal, leave our kids in debt since we can all buy the stuff that’s made. – Heh, REM that money allocates *relative* buying power. And if borrowing is legitimate, the lenders want a cut back (and that is not diluted too much by increase in money supply.) So what happens is redistribution of wealth, as money must be scrounged up to pay lenders (or, we “make more” in Mosler’s glib way which dilutes the buying power and will be soon disdained by lenders as a trick.)
Really, you have to think about stuff like that.
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March 28th, 2010 at 10:51 pm
please re read, i think you missed the point?
i describe how it actually does work, not some theory or philosophy.
all tsy secs do actually get paid off when they mature with debits to securities accounts and credits to reserve accounts.
that’s all there is too it. there is no other way to do it. same as it’s always been done and always will be done.
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April 2nd, 2010 at 4:03 pm
What are securities accounts?
When I send a check for $1,000 to the Treasury to buy a bond, the Fed transfers $1,000 from my bank’s reserve account into the Treasury’s account.
When that bond matures, the Fed transfers $1,000 plus interest from the Treasury’s account into my bank’s reserve account.
Is this not how it works?
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zanon Reply:
April 2nd, 2010 at 6:11 pm
Basically yes.
When you buy Treasury security — how do you book it on your personal balance sheet? How is your purchase of security booked on Treasury’s balance sheet?
That will answer your question
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April 2nd, 2010 at 10:56 pm
Thanks Zanon.
So the securities accounts are at the Treasury, not at the Fed, correct?
If so, then in order to repay the bonds at maturity, the Treasury’s account at the Fed must first have enough money in it.
So repayment of bonds by the Treasury is not just changing entries in a spreadsheet, but it must be preceded by sufficient taxes or borrowing by the Treasury, no?
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April 3rd, 2010 at 2:04 am
Curious:
Treasury banks at the Fed just like everyone else. If you buy a Treasury, you book it as asset, Treasury holds it at liability.
In order to repay bonds at maturity, yes Treasury account must have money in it (as per current rules–if it is allowed to run overdraft like banks then this is not neccessary and it would be trivial change). Of course, when bonds were bought Treasury account was credited by that amount, so repaying bonds is just reversing operation. But Treasury cannot sell bond unless Govt first run deficit. There is no other way private sector can have money to buy them.
You can see why it is better to just do away with Treasuries entirely.
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Curious Reply:
April 3rd, 2010 at 1:35 pm
“But Treasury cannot sell bond unless Govt first run deficit.”
If the Treasury cannot borrow directly from the Fed, how do they run a deficit before borrowing from the public?
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warren mosler Reply:
April 3rd, 2010 at 6:19 pm
i don’t think that was my statement.
the fed can lend to the banking system to cover ‘cash needs’ to buy tsy secs.
in fact, before there were trillions of excess reserves, when the banks paid the tsy on settlement day the fed did repos to add the reserve balances the banks used to pay for the tsys.
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Curious Reply:
April 3rd, 2010 at 7:46 pm
It was Zanon’s statement, not yours. Thanks for explaining it.
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April 3rd, 2010 at 7:54 am
right.
the only purpose served by tsy secs is supporting the term structure of rates at higher levels than otherwise.
and if anyone actually wanted to do that it’s just as easy for the Fed to offer time deposits at the desired support rate.
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April 9th, 2010 at 1:41 pm
Too bad more people don’t get this simple understanding of economies run on fiat money. The Govt will never default – it only has debt denominated in its own fiat currency! Why is that so hard to understand?
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April 9th, 2010 at 2:01 pm
All these Washington shenanigans just detract from the most important task at hand – to direct the resources, esp labor, in the most productive fashion to enhance the productivity of the same. The only factor of import in the nation’s quality of life! Simple? Not quite!
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April 10th, 2010 at 11:16 am
spread the word, thanks!
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April 20th, 2010 at 7:58 am
[...] 7 Deadly Innocent Frauds, by Warren Mosler [...]
April 23rd, 2010 at 9:01 am
[...] 3-2 to Sue Goldman Sachs Over CDONeil Armstrong on SOVS UpdateMatt Franko on SOVS Updatebeowulf on Updated: 7 Deadly Innocent FraudsNeil Armstrong on SOVS UpdateCharles St. Pierre on Email exchange with DanTom Hickey on SOVS [...]
April 29th, 2010 at 3:13 pm
Warren — I picked up a copy at the New Haven Tea Party. I just finished my first reading. Really interesting — I have never read a perspective so totally different than anything else out there. Very much appreciated. You’ve asked me to question my assumptions.
You state that a Federal “deficit” is not bad because a deficit is exactly equal to what private investors have invested. And I agree with that premise. But doesn’t the “deficit” also include what foreign individuals and institutions have invested? That is, a national deficit could be high, and that nation’s savings be low? (And if so, does this even matter?)
But more importantly, these “savings” account investors have with the Federal Reserve, this money lent to government (instead of being spent), well aren’t large deficits still a problem as that is money that the government has to use and not individuals and business. Isn’t there an opportunity cost problem? Doesn’t a problem exist in that the private sector far far more efficiently allocates resources than a government that inevitably picks winners and creates losers? Isn’t this the manifestation of Adam Smith’s fear/prediction of government and big business getting in bed? Isn’t this the real problem? Isn’t it a problem that social security or any other “savings” is “invested” in the government when those funds would help the economy grow if they were invested in the private sector?
Lastly, how do you square a monetary policy that dilutes current dollars with additional dollars the Fed makes up? In my experience as tax attorney, I see many many clients with phony capital gains. For instance, client buys blackacre in 1950 for 2000 dollars. Blackacre is sold in 2010 for 100,000 dollars. Good lord, there was little or not gain —- in any substantive manner from the sale. The intentional dilution of the value of a dollar is caused by government action. And worse, client will be taxes on capital gain as if all his dollars were 1950 dollars. Inflation is caused by the fed and inflation is a taking — it is a loss of purchasing power.
I am trying to reconcile a monetary policy with the framer’s intent of a limited central government that is required to give due process before any taking of property. It seems to me that by changing the scoreboard, no due process at all is given before something is taken from every body who hold dollars via inflation. And it is your argument that this is not just o.k., but you support taxing what already has been taken so thing don’t get overheated (but overheating was caused by the government in the first place, no?). You see to state that the IRS is the antidote to the fed’s inflation. Perhaps it is my ignorance, but would it just be a lot easier and a lot more efficient to get rid of both of them?
Am I thinking about this all wrong? Am I still stuck on an innocent fraud I can’t see?
Thanks again for a challenging book.
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April 29th, 2010 at 5:54 pm
thanks for your interest!
comments in CAPS:
You state that a Federal “deficit” is not bad because a deficit is exactly equal to what private investors have invested.
I DON’T USE THE WORD ‘BAD’ BUT INSTEAD SAY IT ISN’T A FINANCIAL RISK. RISKS, IF ANY, ARE INFLATION AND NOT SOLVENCY, ETC.
And I agree with that premise. But doesn’t the “deficit” also include what foreign individuals and institutions have invested?
YES, IT INCLUDES RESIDENTS AND NON RESIDENTS
That is, a national deficit could be high, and that nation’s savings be low?
RIGHT, HOLDINGS OF SAVINGS (NET DOLLAR DENOMINATED FINANCIAL ASSETS) CAN BE LOW DOMESTICALLY, AND HIGH FOR NON RESIDENTS.
(And if so, does this even matter?)
IT MATTERS FOR SOME THINGS, BUT NOT FOR GOVT’S ABILITY TO SPEND DOLLARS.
IT’S THE NON RESIDENT DESIRE TO ACCUMULATE DOLLAR SAVINGS THAT TRANSLATES INTO OUR ABILITY TO IMPORT MORE THAN WE EXPORT, WHICH IS A BENEFIT IN REAL TERMS.
But more importantly, these “savings” account investors have with the Federal Reserve, this money lent to government (instead of being spent), well aren’t large deficits still a problem as that is money that the government has to use and not individuals and business.
NO, IT TAKES NOTHING FROM THE PRIVATE SECTOR, AND THE GOVT NEVER HAS NOR DOESN’T HAVE DOLLARS. IT SPENDS BY CHANGING NUMBERS UP IN OUR ACCOUNTS, AND TAXES BY CHANGING THEM DOWN.
Isn’t there an opportunity cost problem? Doesn’t a problem exist in that the private sector far far more efficiently allocates resources than a government that inevitably picks winners and creates losers?
THE SIZE OF THE DEFICIT PER SE HAS NOTHING TO DO WITH THAT PROCESS, PROVIDED TAXES ARE SET AT THE RIGHT LEVEL TO ALLOW FULL EMPLOYMENT. IF WE ARE OVER TAXES AND WE HAVE HIGH UNEMPLOYMENT, THEN THE GOVT IS CHOKING OFF THE PRIVATE SECTOR’S ABILITY TO SPEND, ALLOCATE RESOURCES, AND KEEP ITSELF FULLY EMPLOYED.
Isn’t this the manifestation of Adam Smith’s fear/prediction of government and big business getting in bed? Isn’t this the real problem? Isn’t it a problem that social security or any other “savings” is “invested” in the government when those funds would help the economy grow if they were invested in the private sector?
THE FUNDS AVAILABLE FOR PRIVATE SECTOR ARE UNLIMITED. LOANS CREATE DEPOSITS WITHOUT NUMERICAL LIMIT. THE LIMIT IS CREDIT WORTHINESS AND DESIRED EXPENDITURES AND INVESTMENTS
Lastly, how do you square a monetary policy that dilutes current dollars with additional dollars the Fed makes up?
DEFICIT SPENDING ADDS INCOME AND SAVINGS TO THE PRIVATE SECTOR. IF THIS EXACTLY OFFSETS PRIVATE SAVINGS DESIRES, THERE IS NO INFLATION. IT’S ONLY WHEN GOVT ATTEMPTS TO FORCE MORE SPENDING ON AN ECONOMY THAT IS RUNNING OUT OF THINGS IT WANTS TO SELL. THE SIGNAL IS THAT THE GOVT HAS TO PAY MORE FOR THE SAME THING. AT THAT POINT IT’S A POLITICAL DECISION WHETHER TO KEEP DOING THIS OR BACK OFF.
In my experience as tax attorney, I see many many clients with phony capital gains. For instance, client buys blackacre in 1950 for 2000 dollars. Blackacre is sold in 2010 for 100,000 dollars. Good lord, there was little or not gain —- in any substantive manner from the sale. The intentional dilution of the value of a dollar is caused by government action. And worse, client will be taxes on capital gain as if all his dollars were 1950 dollars. Inflation is caused by the fed and inflation is a taking — it is a loss of purchasing power.
YES. THE REAL VALUE OF THE INVESTMENT DIDN’T GROW MUCH IF AT ALL. SO IT WAS A RELATIVELY POOR INVESTMENT.
A DOLLAR DOESN’T BUY WHAT IT USED TO BUY 100 YEARS AGO, BUT ALL THE DOLLARS WILL BUY A LOT MORE THIS YEAR THAN THEY BOUGHT 100 YEARS AGO. SO WE’RE ALL BETTER OFF, BUT ALL HAS BEEN RE DENOMINATED. THIS CAN BE ADJUSTED WITH OTHER POLICIES THAN HIGH UNEMPLOYMENT WHICH REDUCES REAL OUTPUT.
I am trying to reconcile a monetary policy with the framer’s intent of a limited central government that is required to give due process before any taking of property.
THE CONSTITUTION EXPLICITLY GIVES THE GOV THE RIGHT TO CHANGE THE VALUE OF THE CURRENCY
It seems to me that by changing the scoreboard, no due process at all is given before something is taken from every body who hold dollars via inflation.
AGREED.
And it is your argument that this is not just o.k., but you support taxing what already has been taken so thing don’t get overheated (but overheating was caused by the government in the first place, no?).
OVERHEATING IS CAUSED BY OVERSPENDING VS WHAT IS OFFERED FOR SALE.
You see to state that the IRS is the antidote to the fed’s inflation.
THE FED DOESN’T HAVE ANYTHING TO DO WITH INFLATION, IT’S THE TSY SPENDING.
Perhaps it is my ignorance, but would it just be a lot easier and a lot more efficient to get rid of both of them?
HOW WOULD YOU PROVISION THE GOVT?
BEST!
WARREN
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May 1st, 2010 at 1:38 pm
Warren: I’ve been reading your views a lot lately and understand most of them as you explain these clearly for non-economists. I also read the transcript of your interview on Hard Asset Investor. I still have some confusion with this issue: when govt runs a deficit is that adding to the money supply? I realize that taxes and Treasury security sales equal spending so the answer should be no? As you say, there is a “self imposed” requirement for the govt to issue debt to make up the difference between spending and taxes. In the U.S., do you know if this is by Congressional statute or regulation, and for how long has it existed? And finally, is it really possible to keep interest payments sustainable in the face of increasing government debt by the Fed keeping interest rates low? Might not it be necessary to let interest rates rise to rein in inflation or for some other reason, or might not they rise on their own, causing debt service costs to skyrocket? Thanks
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May 1st, 2010 at 6:25 pm
Warren, when is your textbook with Bill Mitchell coming out?
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May 1st, 2010 at 11:27 pm
hi, bill and randy working on text book. no idea when they will finish. already 2 years late.
yes, deficits add to the ‘money supply’ if you use ‘broad money’ which includes all tsy secs. if you use narrower monetary aggregates that don’t include tsy secs they don’t add to that definition of money supply.
last, i suspect low interest rates are deflationary, high rates inflationary. hence, japan.
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July 31st, 2010 at 1:49 am
Alright. I’m reading through 7DIF again, trying to grok this whole thing. Let’s take ‘em one at a time:
#1a. The government doesn’t use my tax money for anything. The IRS is just a “currency sink” to bleed off heat in the economy. All payments to the IRS die at the IRS. The money isn’t “sent” anywhere, my bank account is simply debited and my dollars die right there. They don’t go to the war, the deficit, a slush fund or any other private or govenment destination anywhere on earth or any other point in the universe be it real or abstract. The IRS takes in X Billion and pays the US Government $0.00 Billion dollars and not one damn cent. Dollars check in, but they don’t check out. It’s a literal “The Buck Stops Here” scenario, whether it’s greenback or electronic. It simply doesn’t recirculate to anywhere. Not theory, but simple verifiable fact.
1b. When the US Government spends, it just changes numbers in the appropriate spreadsheets. It didn’t get anything from the IRS, NOBODY got anything from the IRS. It doesn’t care about the IRS unless it needs to cool off the economy and destroy private sector spending power by increasing taxes (which then go into a black hole that no government or private entity or individual ever sees again).
1c. The US Government doesn’t have to GET money from anywhere in order to spend. Not from me, you, any foreign person or entity or any OTHER DOMESTIC person or entity (government or private). It doesn’t HAVE any money in the first place.
1d. When the US Government spends, it moves spending power from the Federal Reserve to the private sector. It has unlimited spending power and only wants to know what numbers to input to which spreadsheet (subject only to bogus Senate limitations that are based on the principals of a dead monetary system). It doesn’t have to GET (nor does it want) money from anywhere in order to spend. Not from me, you or anyone else.
1e. When the US Government spends, the spending power goes into the private sector where it circulates until it is sequestered by the private sector or destroyed by the IRS.
OK. That’s my take home from DIF #1. Did I get it right?
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WARREN MOSLER Reply:
August 2nd, 2010 at 10:40 pm
pretty good!
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August 1st, 2010 at 1:56 pm
Question….
from 7 deadly innocent frauds…
”
And that’s exactly how what are
called “non convertible currencies” work (no more gold standards
and very few fixed exchange rates are left), like the U.S. dollar,
Japanese yen, and British pound.”
I thought that those 3 currencies are convertible…
Could you shine some light on that passage?
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WARREN MOSLER Reply:
August 2nd, 2010 at 10:52 pm
convertible in that the govt itself guarantees conversion at fixed rate
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August 2nd, 2010 at 1:54 am
Just on choice of publishers, have you considered Princeton University Press? They are publishing John Quiggin’s Zombie Economics which has a very similar theme.
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August 8th, 2010 at 9:10 am
Warren, on 1a; can you please just admit the tax dollars are accounted for so that the deficit numbers can be reported to congress? Even if borrowing isn’t necessary, the Feds still needs to keep their books in order to determine what they need to unnecessarily borrow. I think you loose creditability when you leave out information that sets off our BS detectors! I mean that respectfully, because I really think you know what you are talking about.
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Steve Reply:
August 8th, 2010 at 9:11 am
excuse me, 1a from post #63…..
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Ramanan Reply:
August 8th, 2010 at 12:31 pm
Good point.
For example, cash is not shredded by the tax authorities. It goes to the Fed.
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Unforgiven Reply:
August 8th, 2010 at 2:40 pm
Well, one would think that it at least goes to an account at the U.S. Treasury, initially.
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Ramanan Reply:
August 8th, 2010 at 2:52 pm
Yep … the Fed takes the cash, reduces “currency in circulation” and credits the Treasury General Account.
Tom Hickey Reply:
August 8th, 2010 at 2:55 pm
What happens when you pay your tax liability is that your checking account decreases and your bank transfers the amount in reserves to the Treasury account at the Fed. If you pay in cash, the Treasury lets the Fed know and they credit the Treasury account, too. The Fed can decide what to do with the cash, either recirculate it if it is in good condition or dispose of it if it isn’t. If it costs more to sort into usable and disposable than to just dispose of it and print then it will just be disposed of. It is entirely possible that the Fed would just tell Treasury to do the shredding there, since it would be more efficient to do it that way if the notes are to be disposed of. But the cash being Federal Reserve notes, the Fed has the say in how they are handled, I would think.
The Treasury does not hold the cash it receives in a vault for later use. Compare and contrast this to a commercial bank, which takes the cash it receives from loan repayment, for example, cancels the customer’s liability and either puts the cash in its vault for recirculation or else turns it in to the Fed for a credit to its reserve account at the Fed. Pretty much the same thing happens with a check. It gets accounted for by marking up spread sheets, but the cash is handled somewhat differently in that the bank does keep vault cash to meet window demand (not for bank spending) and the Treasury doesn’t keep vault cash.
Warren’s stands in the sense in that what happens is marking up spreadsheets rather than the Treasury saving cash to spend later.
The point is that most people don’t know what happens behind the veil, so they imagine all sorts of things that aren’t true, like the Treasury really being a “treasury” full of money, or not, depending on whether the budget balance is in deficit or surplus.
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Steve Reply:
August 8th, 2010 at 7:45 pm
unforgiven says…
“#1a. The government doesn’t use my tax money for anything. The IRS is just a “currency sink” to bleed off heat in the economy. All payments to the IRS die at the IRS. The money isn’t “sent” anywhere, my bank account is simply debited and my dollars die right there. They don’t go to the war, the deficit, a slush fund or any other private or govenment destination anywhere on earth or any other point in the universe be it real or abstract. The IRS takes in X Billion and pays the US Government $0.00 Billion dollars and not one damn cent. Dollars check in, but they don’t check out. It’s a literal “The Buck Stops Here” scenario, whether it’s greenback or electronic. It simply doesn’t recirculate to anywhere. Not theory, but simple verifiable fact. ”
…and Warren agreed! I just don’t believe it’s that simple (not that I have knowledge to the contrary).
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WARREN MOSLER Reply:
August 13th, 2010 at 12:56 pm
in any case tsy secs serve to ‘offset operating factors’ as they say at the fed. if the tsy doesn’t sell the right amount to do this the fed will fine tune with open market operations.
none of this involves knowing the actual numbers of taxing, spending, or shifting of reserves to securities accounts (borrowing)
yes, congress want’s to know what the deficit is even though it doesn’t give them any information they should be using to make decisions.
imagine what they’d all do if we started reporting the trade deficits between the states!
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August 8th, 2010 at 2:53 pm
In the spirit of Marshall’s longest, I assume Treasury would accept the notes in exchange for discharging the tax liability, and then send the notes to Fed, who would redeem them in exchange for a credit to Treasury’s account at the Fed.
So the government in the actual world has been a user of the currency issued by the (deconsolidated) Fed, up until presentation of the currency by the government to the Fed.
I doubt that any notes received in this way are shredded by the Fed unless they are damaged beyond further usefulness?
Otherwise, presumably, they can remain in inventory for reuse/reissue?
Or, perhaps payment of taxes with currency is so rare that the notes are shredded as a matter of course, whatever their condition?
In any event, in a deconsolidated institutional structure, the notes while in the possession of Treasury do go somewhere – to the Fed?
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WARREN MOSLER Reply:
August 13th, 2010 at 12:58 pm
I’ve heard that they now do save some of the bills and don’t shred all of them.
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August 8th, 2010 at 3:39 pm
I love all reference to Marshall’s Longest.
http://www.federalreserve.gov/monetarypolicy/files/BSTfinaccountingmanual2010.pdf page 145 of the pdf talks of destruction of unfit notes processed by the Treasury – only. I do not think they will shred fit notes.
A further complication is the fact that someone can pay taxes in cash at a bank which holds the TT&L account. My guess is that the bank takes the cash and credits the Treasury’s account and notifies the Fed about the increase in cash holdings. If some bank customer needs cash, the bank can give the same cash notes which was used for the payment of taxes.
“Unfit and mutilated currency processed by the Treasury in Washington, D.C. is functioned through the books of the Richmond Reserve Bank. On the day of redemption, Treasury will advise the Richmond Reserve Bank by wire of the amount for each denomination, including the Bank of issue for $500-$10,000 notes. The Richmond Reserve Bank will credit the Treasury’s General Account for the total and debit notes outstanding. The Federal Reserve Banks are responsible for reimbursement to the Treasury for retirement of Federal Reserve currency. Each quarter the Treasury forwards to the Board a voucher, indicating the actual cost for services performed relative to the retirement of Federal Reserve currency during the previous quarter. Board staff calculates the pro rata amount of each Reserve Bank’s assessment based on the Bank’s share of the number of notes comprising the System’s net liability for Federal Reserve
notes outstanding on December 31 of the previous year. Reserve Bank assessment entries will be processed via Same Day Settlement by the Richmond Reserve Bank according to information reported on to the Board.”
No currency notes are destroyed unless unfit :-). Thats an ontologically correct statement.
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anon Reply:
August 8th, 2010 at 3:48 pm
“My guess is that the bank takes the cash and credits the Treasury’s account and notifies the Fed about the increase in cash holdings.”
Notification re cash not even necessary – it’s just a standard deposit of cash, to be absorbed into the bank’s cash inventory management overall?
But your example is a far more realistic one than the idea of somebody showing up at the doorstep of Treasury to pay their taxes in currency?
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Ramanan Reply:
August 8th, 2010 at 4:07 pm
Cash notification may be necessary for reserve requirement purposes. http://www.frbservices.org/files/regulations/pdf/rmm.pdf seems to suggest that.
I don’t know about the US, but in India one can pay taxes at the tax collection offices in all cities as well as at the banks. And lot of people use cash.
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Tom Hickey Reply:
August 8th, 2010 at 4:11 pm
But again, the cash doesn’t go into the Treasury’s cash vault, so I think that Warren’s point holds, which is being asserted against claims like the president’s that the government is “going bankrupt” or “running out of money.” One hyperbole against another.
anon Reply:
August 8th, 2010 at 4:17 pm
Right.
All vault cash has to be reported.
But there’s nothing special about vault cash sourced from tax payments.
(Obviously tax payments must be recorded, but not the fact that they were sourced from cash)
anon Reply:
August 8th, 2010 at 4:19 pm
Tom Hickey,
The entire global financial system is a spreadsheet.
Don’t you think people have cottoned on to the fact that their banks use computers now?
Tom Hickey Reply:
August 8th, 2010 at 7:53 pm
Anon: “The entire global financial system is a spreadsheet. Don’t you think people have cottoned on to the fact that their banks use computers now?”
No, anon, I don’t, if only judging from the kerfuffle arising in comments about the claim that “it’s just marking up spreadsheets.” But in talking to people, if find that a lot of people don’t actually get this. They think that their money is somehow “in the bank” and that the government is actually “running out of money” when the president says so.
Many people don’t have clue as to how the monetary system works. They think of money as cash and not as numbers on a spreadsheet. These people think that when government spends it does so by “printing more money.” They also think that the cash has to be there somewhere “behind the numbers” in their banks account. After all, they can walk in and demand cash. That’s why the analogies are so powerful politically.
Then there this the group that knows about reserve banking. They think that banks lend by creating money as a multiple of reserves. They think that therefore, there is “no money there in the bank” behind it. These are the same people that think the government prints notes without banking so it really isn’t money at all.
These two groups comprise most people in the country, I would estimate. Very, very few people actually know how the present system works, even many “sophisticated” people. Just ask some people, and you’ll be amazed at the answers people come up with.
Tom Hickey Reply:
August 8th, 2010 at 8:20 pm
“without banking” should read “without backing.”
Ramanan Reply:
August 9th, 2010 at 3:10 am
Anon : August 8th, 2010 at 4:17 pm
“All vault cash has to be reported.
But there’s nothing special about vault cash sourced from tax payments.”
Yes makes sense.
I had it mixed up with the Indian system where there is no TT&L. In that case, the bank has to report it and have the central bank debit its account and credit the Treasury’s account.
August 8th, 2010 at 8:18 pm
Steve, think of what happens in the Federal Reserve (Settlement) System, where this takes place. You, the taxpayer, send a check made to the US Treasury. The Treasury cashes your check. What happens next is the that your bank receives a demand for bank reserves in this amount in the FRS, which they comply with, reducing their reserves, and your bank debits your bank account.
These bank reserves are now removed from the banking system. Where do they “go”? They go nowhere. In the settlement process, the Fed credits the Treasury account at the Fed for the amount, and the Treasury adjusts its balance accordingly. The Treasury doesn’t “keep the money for later use” in some vault. Treasury spending added bank reserves held by the commercial banking system and taxation withdraws some of those reserves. The reserves that were added showed up as numbers in deposit accounts. When tax checks are cashed, those numbers are reduced correspondingly.
If you, the taxpayer, pay in cash, then the essentially the same thing happens. The cash is withdrawn from circulation. This is is what Warren means by “is shredded.” If the notes are all too used to be fit for recirculation, then they are indeed shredded.
The way that good notes that are kept get recirculated is by commercial banks getting them from the Fed in exchange for bank reserves, in order to provide for cash demanded at the cashiers’ windows. There is no different here between the recirculated cash and newly printed cash. It is as though the old cash were destroyed and new cash printed in the sense that there is no connection of the old cash with the banking system anymore. If it is used again, it becomes “new cash” without any trace of its previous history attached to it.
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Unforgiven Reply:
August 8th, 2010 at 9:37 pm
Federal Treasury spending (to fund the private sector) adds reserves to the Federal Reserve banks. Taxes are a way for the Federal Treasury to recall some of those reserves, thereby cooling the private sector economy.
I think I get it now. Never mind the 1st paragraph of my 8:56pm post.
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Tom Hickey Reply:
August 8th, 2010 at 9:58 pm
Exactly. The second part is that issuance of Treasury securities to offset the deficit with “debt” simply drains reserves that the deficit created in order to allow the Fed to hit it target rate. The Fed than adjusts the amount of reserves using open market operations (OMO) to hit the target rate (the FFR) in the overnight market.
Government adds to its budget deficit through disbursements to increase nongovernment net financial assets and cuts its deficit through taxation to decrease nongovernment net financial asset. According to Abba Lerner’s principles of functional finance, the only reason it should do either is to manage aggregate demand relative to the capacity of the supply side of the economy to absorb it, thereby stabilizing growth (investment), supporting the public’s desire to save (not spend income), and maintaining full employment along with price stability.
chiefly through targeted fiscal policy.
Debt issuance is purely a monetary operation having to do with interest rate setting. It is not a fiscal operation because a government running a fiat currency does not need to finance itself with borrowing.
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Unforgiven Reply:
August 8th, 2010 at 11:30 pm
And I’ll understand that after I read it about 50 times!
The Treasury says to the Reserve Banks, here’s too much money in the form of digits. Wow, the economy is getting too hot!! Let’s increase taxes (take actively circulated money away and neutralize it) and offer interest (take inactive money (reserves) away and sequester it for X days or months). The FRB’s can have it back at the FFR if they want it so badly?
Steve Reply:
August 8th, 2010 at 10:55 pm
Tom, I’m not hung up on the physical cash thing. I’m hung up on how the previous post made it sound like my taxes go into a black hole (electronic or cash). But you said the Treasury account gets credited; which to my very primitive economic mind contradicts what Warren says. …I’m really not worried about the deficit, or spending money we don’t have, etc,,,,. I’m just trying to understand the process well enough to preach it; and I’m not there yet. ..I’m also trying to square what happens when government securities come to term. Does the debt disappear, or is it rolled over to a new security? …why can’t the Fed just make it all magically go away with its computer. Would it really hurt anything to retire 10 trillion dollars of debt by exchanging saving account numbers for checking account numbers?
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Scott Fullwiler Reply:
August 8th, 2010 at 11:42 pm
Steve,
While I can certainly understand your point regarding “destroying cash,” and you’re definitely not the first to make this point, I don’t think it contradicts Warren’s argument at all.
Warren has been very, very focused like a laser all along on the fact that what really matters is that all government spending/taxation is manipulating numbers on a spreadsheet–the physical cash doesn’t matter.
His point about “they put it in a shredder” is to again point out that the physical “money” doesn’t matter. Yes, the Tsy’s account at the Fed would be credited if someone were to pay their taxes in cash and the money were shredded, but from Warren’s perspective this is simply the changing numbers on a spreadsheet that doesn’t constrain/enable the federal govt whatsoever aside from the federal govt’s own self-imposed constraints (such as not allowing the Tsy to run overdrafts at the Fed).
Also, when Tsy’s mature, new Tsy’s are issued in their place, except for when the govt is running a surplus. Overall, whenever the Tsy’s account is drawn down–whether due to spending or due to settling a maturing Tsy–beyond what can be called in from tax and loan accounts it holds at the banks, the Tsy must issue new Tsy’s as long as it is not legally allowed to run an overdraft at the Fed.
And, no, it wouldn’t really “hurt” to change savings accounts to checking accounts, but legally yet again the Tsy can’t overdraw its own account.
In short, Warren frequently abstracts from the details of the self-imposed constraints probably because, well, they’re SELF-IMPOSED. It obviously doesn’t sit well with some that he does this, but that’s the way Warren’s been explaining all this for many years and I suspect that won’t change much. In public settings, questions on these “constraints” inevitably arise and I have seen Warren on more than one occasion respond with an analogy of a person with his shoes tied together complaining that he can’t run.
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Unforgiven Reply:
August 9th, 2010 at 12:27 am
Steve -
I agree that 7DIF could use a rework on this point, as it’s generating a lot of questions. It’s tough to get past what we were taught, so maybe it can only go so far before it DOES generate questions (but generating questions can teach too).
Here’s how I see it: The “digits” that the Treasury funds the FRB’s with came from nothing; they just made it up. There can’t “deficit” of what didn’t exist to begin with.
So, the Treasury says to the FRB’s (and therefore the private sector), you now have 400b “digits”. This technically creates a “deficit” of 400b digits at the Treasury, but the Treasury has no “digits” to begin with. The numbers created when you pay your taxes are just an accounting convienience for the Treasury, to ensure that they pulled that many “digits” out of the private sector in order to control the economy. The taxes aren’t important, it’s the removal of private sector stimulus that’s important.
That’s not to say you don’t have a good point. As I said, I think the 7DIF needs a rework on this. It certainly left me with a WTF…
Tom Hickey Reply:
August 9th, 2010 at 1:16 am
Unforgiven, it’s not quite correct to say that the Treasury “funds” the FRB’s. Congress appropriates funds for disbursement IAW its constitutional prerogative, and Treasury disburses the funds as called for as the executive branch makes the deals, e.g., by sending out checks or more likely directly crediting deposit accounts. These have to clear in the interbank settlement system, in the US, the FRS. The Fed not the Treasury provides reserves, to the Treasury has to get the necessary reserves for settlement from the Fed.
Since Treasury is prohibited by law from running overdrafts at the Fed, it issues Treasury securities equal to the amount to be disbursed. The Fed cannot legally buy these directly (“monetize” the disbursements), so it has to sell them at auction to primary dealers who then sell them to others. This auction sale switches the tsy’s for reserves that the Fed credits to the Treasury reserve account for settlement of its disbursements in the interbank market.
This makes it seem as though the reserves are removed from the system through borrowing from those who purchase the tsy’s, but these funds just get injected back into the system immediately through the Treasury disbursements that necessitated the tsy’s as an offset. So it’s a wash at the macro level, with the funds that Treasury disburses being saved at interest in the form of tsy’s. What actually happens monetarily is that the excess reserves resulting from Treasury disbursements get drained from the interbank market and stored (sequestered) in tsy’s, allowing the Fed to hit its target rate.
When the tsy’s mature, then they are converted to back to reserves, and the debt is rolled over, further sequestering them. The only way that reserves once created through Treasury disbursement “disappear” is by withdrawing them from the system through taxation. Congress does this though the budget, and the Treasury/Fed carry out this policy, as they do with disbursements, only in the opposite direction.
Tom Hickey Reply:
August 9th, 2010 at 12:00 am
Steve, Warren’s point in saying that the cash paid in taxes gets shredded is that after the taxpayers’ accounts are credited and their tax liabilities wiped out, then the cash has served it purpose. It does neither gets saved in a vault for future spending nor is it used to pay back debts, as many presume. Government funds itself with currency issuance, not taxes or borrowing, in a fiat system.
How do maturing tsy’s get paid off? The reserves that were used to purchase the tsy securities just get credited back to a deposit account or bank reserve account, and the debt “just disappears” because it never actually existed as debt. It’s just savings being transferred back to a demand deposit.
For example, suppose you have some funds at an interest rate that is less than a CD, you can put the money into. You therefore move the funds into the CD. Then when the CD’s time period expires, you either roll it over, or put it somewhere you can do better, or just return the funds to your deposit account for use. You could chose to do this with tsy’s instead of CD’s. It’s just moving things around that are already there. Think of tsy’s as CD’s and reserves as deposits. These are just changes in asset composition, the economic difference being in liquidity and interest.
Bond issuance is unnecessary. It’s a hold-over from the gold standard days. Interest on government bonds constitutes a subsidy to bond holders. The Fed could accomplish the same thing by paying interest on excess reserves directly. But that would break the illusion.
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Tom Hickey Reply:
August 9th, 2010 at 12:30 am
Steve, understanding this depends on understanding something of national accounting. At the macro (aggregated) level, government deficits increase nongovernment net financial assets (initially in deposit accounts). Treasury issuance, which is legally required to offset the deficit, just transfers that amount from deposit accounts (aggregated) to savings (aggregated) in the form of tsy’s. Because it is a $-4-$ offset, the numbers are (~) equal. Thus, the national “debt” as accumulated budget deficits is the national (dollar) savings of nongovernment.
While the funds that Treasury disburses circulate at the micro level, at the macro level, the same amount gets saved as Tsy’s due to the offset requirement. This is not obvious at the level of the economy, where the disbursed funds go every which way, but it is obvious at the level of what happens in the Federal Reserve System comprising FRS accounts of the Treasury, foreign governments, and commercial banks, in terms of the aggregates. The reserves that Treasury introduces get saved as tsy’s issued in offset. This also increases the net financial assets added to nongovernment through the interest paid on the tsy’s.
What should be the subject of discussion instead of the national “debt” (really savings) and rising deficits (creation of net financial assets that increase effective demand) is the unsustainable level of private indebtedness that financial austerity will only exacerbate, possibly provoking a debt deflation and resulting depression. People are concerned about the wrong thing — an ideologically manufactured pseudo-problem instead of the real financial problem facing us regarding private debt, which portends dire economic consequences if not dealt with properly.
August 8th, 2010 at 8:56 pm
I wasn’t so concerned about what happened to the printed money. I was more wondering what happened to the funds. It’s just hard to wrap my mind around the concept that my 2 grand gets destroyed (electronically or otherwise) like so many kilos of siezed drugs.
I will admit to buying in to the “reserve banking” thing. I also thought that part of the appeal of pushing credit cards was that they could count your credit limit as a deposit in a twisted sort of way, then lend out multiples of that.
There’s just so much disinformation out there, it’s hellish trying to pick through it.
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Tom Hickey Reply:
August 8th, 2010 at 9:21 pm
Now you get what running a government budgetary surplus implies. The tax money gets flushed, no new funds are created, and the private sector runs a deficit unless exports rise to add the funds that increased taxes or reduced spending withdraw. When the private sector runs a deficit, then either demand falls and there is a pull-back, reducing incomes, or else people go into debt/sell assets/draw down savings to maintain their lifestyle.
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Unforgiven Reply:
August 8th, 2010 at 10:10 pm
I didn’t get it before you said it, but I was still reeling.
So, where could I check out a debunking of the “banks lending out multiples” story without running into a bunch of nonsense? Explainations geared to the layperson are best, of course…..
Thanks Tom!
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Tom Hickey Reply:
August 8th, 2010 at 10:27 pm
You might have a look at Bill MItchell, Money multiplier and other myths and Lending is capital- not reserve-constrained.
Scott Fullwiler Reply:
August 8th, 2010 at 11:46 pm
I also explained this here: http://neweconomicperspectives.blogspot.com/2009/06/dont-fear-rise-in-feds-reserve-balances.html
August 9th, 2010 at 10:08 pm
Tom, Scott, Unforgiven, thanks for the information, I really appreciate the time you put into it.
So to summarize. We need to drop the deficit number and focus on inflation as a measure of a well functioning fiscal policy. …and we need creative big government spending that encourages the efficient use of resources through public/private efforts to create things we need; like…. next gen nuclear energy, battery technology, crime free communities, and services in those communities that appear to be too dumb to provide it for themselves. OR… a big freaking tax cut so I can afford a new hot tub and a hot girl friend! ;-)
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Unforgiven Reply:
August 9th, 2010 at 10:38 pm
Oooohh. There’s something to control inflation; tax “girlfriend income”. Or at least use it as a leading indicator of impending economic collapse.
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Tom Hickey Reply:
August 9th, 2010 at 11:34 pm
Well, more or less. :)
The idea is that the absolute amount of the budget deficit or the national debt is meaningless in itself. So are the oft-quoted ratios, like debt to GDP. These things have to be considered relative to other conditions to have economic meaning.
Did you see the film Amadeus, about the life of Mozart? In one funny scene, the king, prejudiced against the young Mozart by the court musicians who are jealous of him, criticizes a piece that Mozart had just written. Mozart asks the king to be specific. The king, not knowing all that much about music, fishes for an answer and blurts out, “There are too many notes.” Mozart answers, “Your Majesty, there are exactly the right number of notes.”
This is instructive about what is happening today when people claim that the deficit is “too big” or the the debt to GDP ratio is growing too rapidly. It’s just uninformed. There is always a “right-sized” deficit/surplus relative to the sectoral balances. In extreme situations, the fight size of the deficit may be very large indeed, as it was when the US was fighting WWII. Should we have been concerned then that the deficit was getting “too big”? Obviously not. Should we be concerned now, when the US is greatly underperforming at great cost in foregone opportunity and huge degradation of resources, especially human resources, when something could be done to correct this?
Instead being concerned with bogeymen, or appealing to “the confidence fairy” (h/t Paul Krugman), MMT looks at the economy through the macro lens of sectoral balances and the accounting identities that pertain. For example, it is an indisputable accounting identity that the budget balance, domestic balance and external (trade) balance sum to zero. This means that they cannot all be in surplus or all in deficit simultaneously; there are inevitable offsets to maintain balance among the sectors. The relation among the sectors has economic consequences affecting real resources and real people. This is usually overlooked in the uninformed discussion that are now taking place based on ideology and associated myths that have no empirical warrant.
In the end, numbers are just numbers unless connected with data, and data are descriptive of real conditions involving real people and real resources. Economic policy is ultimately about real people and real resources, not numbers, although many “experts” don’t seem to put this into their calculations about, e.g., “efficiency.” MMT informs about the economic policy options based on consequences of stock-flow macro models, guided by accounting identities and operational realities, as models of real consequences.
What MMT adds to the debate is, first, operational reality, so that debate is fact-based rather than myth-based, as it now largely is. Secondly, it shows how to achieve sustainable effective demand through income consistent with the desire to save and growth through investment, so that the economy is operating at full capacity and full employment along with price stability. Thirdly, it shows how to maintain this with constant adjustment for changing conditions, chiefly though fiscal policy.
MMT is not monolithic, however, and there are different ways to achieve the same objective, e.g., lowering taxes and increasing government disbursements both add to nongovernment net financial assets, which supports effective demand when it lags. For example, some might counsel a payroll tax holiday now in order to support the desire to repair middle class balance sheets in what Richard Koo has called a balance sheet recession. Others might favor more disbursements aimed at the bottom, where they will surely be spent immediately, directly affecting lagging demand. These are political choices involving policy differences, but the options are based on MMT.
What options are chosen based on anticipated consequences involves choice. Monetary policy is set by the politically independent Fed board of governors, and fiscal policy by Congress with the approval of the president. Voters get to elect the president, senators, and congressional representatives, but policy specifics are left to the discretion of politicians, who are however accountable at elections.
What a country needs is an educated electorate that stays up to date on events, conditions and issues, so that political debate can be well-informed and deliberative. Different people have ideological views ranging across the political spectrum. Rather than focusing on ideologically based assumptions that do not have strong empirical support, it would seem more intelligent and practical to use knowledge that is grounded in operational reality instead of myths that are not consistent with it.
There are practical policy options for different political persuasions within MMT, but since MMT is Post Keynesian, they tend to be supportive of government action in extreme situations like the present global financial crisis, which not over. Highly ideological people might have to get over it if they are to accept MMT, but the arguments for doing so is strong because they are operationally based.
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Rodger Malcolm Mitchell Reply:
August 28th, 2010 at 4:59 pm
Tom, this is an outstanding response. You should enter it as a post on your own blog. Send it to the media and to your political representatives.
Rodger Malcolm Mitchell
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August 10th, 2010 at 10:16 am
But ideology is much more familiar and (therefore) powerful in the world as a whole. Both for those who depend on it as a tool AND for the masses who end up being the “toolbox” for those in the trade of concentrating spending power as they see fit.
So in the end it’s a question about distribution of latent spending power (wealth) and active spending power.
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Tom Hickey Reply:
August 10th, 2010 at 11:32 am
In the end it is a question of the allocation of real resources. The question is whether real resources, which were initially part of the commons, should be allocated on the basis of wealth/income or on the basis of effectiveness and efficiency in balancing a global economy. This is a political choice, but not a simple one, since wars have been fought over how it should be made.
At the moment, the balance is toward the former, the top quintile having most of the wealth and income and doing most of the spending, enjoying the fruit of most of leisure as well. Some people think that this is as it should be based on meritocracy, others see it as unsustainable imbalance and unfair to boot, since the game is tilted by wealth toward wealth.
This is the dialectic of social, political and economic history, and the historical trend has been toward increasing egalitarian societies. The question now is which direction globalization will take. While the existing Western “free market” capitalistic model dominated by neoliberal and neoconservative ideology is predominant now, it is far from certain that this will end up being the prevailing paradigm. Indeed, we are discussing alternatives to it here.
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August 12th, 2010 at 1:53 am
Hey, maybe instead of a property tax, we could tax ideology! It would be based on projected influence and gross receipts (never take a cut of the net). If you’re talking fact, no tax at all. We’ll pilot on political theory; that should help to cut deficit terrorisim right there!
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