Updated: 7 Deadly Innocent Frauds

Hello! I know this is somewhat off topic but I was wondering if you knew where I could get a captcha plugin for my comment form?
I’m using the same blog platform as yours and I’m having problems finding one?
Thanks a lot!

Reply

After some thought I realized that not all deficit spending leads to inflation. I believe though that much of it does. While I agree social security is not in danger as you say, wouldn’t less people paying it and more collecting it lead to inflation?

Reply

WARREN MOSLER Reply:
July 10th, 2012 at 7:51 pm

Yes, if spending by seniors got ‘too high’ and started driving up prices.
there’s additional discussion of this in ‘the 7dif’ on this website

Reply

Fatal flaw? I’m having trouble getting past your assertion that “The US government is the issuer of the US dollar.” The currency we use has printed on it “Federal Reserve Note” not “U.S. Treasury Note.”

My understanding is that the Federal Reserve is a private corporation, not an agency of the U.S. government. So, just as the states don’t issue their own currency, and Greece doesn’t issue euros, neither does the U.S. control it’s currency. The Federal Reserve does.

Am I misinformed here or has this detail been overlooked?

Reply

WARREN MOSLER Reply:
June 24th, 2012 at 4:55 pm

The Fed is for all practical purposes an agent of Congress. The people are appointed by the president and confirmed by congress, all profits go to the tsy, etc. just like any other federal agency.

what are called private shareholders, functionally, are nothing more than bondholders who get a fixed 6% return on relatively small investments with no say whatsoever in an fed matters. i’m a fed shareholder though my bank and i assure you they’ve never consulted with us on anything…

Reply

Tom Hickey Reply:
June 24th, 2012 at 5:09 pm

@Jeff,

Jeff, all the FRN in my wallet have “The United States of America” emblazoned much larger than Federal Reserve Note, and they are all signed by a US secretary of the Treasury rather than the Fed chair.

This is part of the conspiracy going on since 1913 to defraud the US public about the true situation, that the Federal Reserve is really a private bank masquerading as the US Government in cahoots with the government? Really?

Reply

I think there are many other factors a lot of governments aren’t talking about. e.g. that the dollar and mostly all other currencies are FIAT and no longer run on the gold standard – this creates a very bad space to be in if you’re the government that has sold off gold iou’s and people start claiming them.

Reply

WARREN MOSLER Reply:
April 25th, 2012 at 11:46 am

don’t forget to read the 7 deadly innocent frauds on this website

Reply

Most of the 7 made sense, but #5 about the trade deficit not causing unemployment was a complete travesty. What is so hard to understand about that? When the economy is outsourced, there is less economic activity here and more overseas. Money flows overseas. Businesses that were once here, employing people, do not employ people here. Do you want a long list of businesses that have gone under because of free trade and the trade deficit? It happened in most every state. I just read of an instance where be singling a factory from Wisconsin to China. The data is all there. Look at the graphs. When you look at the graphs it will show you that high trade deficits lead to high unemployment, leading to high budget deficits and recessions. True in the 70s and 80s and true today. How can anyone misread the data so badly as to not see that high trade deficits do not lead to high unemployment? This occurs almost by the definition of a high trade deficit.

Reply

Hugo Heden Reply:
December 6th, 2011 at 10:33 am

@cleisthenes,

Yeah, that’s the conventional view you’re expressing there. But as Warren notes (with my emphasis):

I’ve heard it all, and it’s all total nonsense. We are
benefiting IMMENSELY from the trade deficit. The rest of
the world has been sending us hundreds of billions of dollars
worth of real goods and services in excess of what we send to
them. They get to produce and export, and we get to import
and consume. Is this an unsustainable imbalance that we need
to fix? Why would we want to end it? As long as they want to
send us goods and services without demanding any goods and
services in return, why should we not be able to take them?

There is no reason, apart from a complete misunderstanding of
our monetary system by our leaders that has turned a massive
real benefit into a nightmare of domestic unemployment.

Recall from the previous innocent frauds, the U.S. can
ALWAYS support domestic output and sustain domestic full
employment with fiscal policy (tax cuts and/or govt. spending),
even when China, or any other nation, decides to send us real
goods and services that displace our industries previously
doing that work. All we have to do is keep American spending
power high enough to be able to buy BOTH what foreigners
want to sell us AND all the goods and services that we can
produce ourselves at full employment levels. Yes, jobs may be
lost in one or more industries. But with the right fiscal policy,
there will always be sufficient domestic spending power to be
able to employ those willing and able to work, producing other
goods and services for our private and public consumption. In
fact, up until recently, unemployment remained relatively low
even as our trade deficit went ever higher.

Reply

Hugo Heden Reply:
December 6th, 2011 at 10:36 am

@Hugo Heden, (well I managed to format that pretty ugly, but it’s on page 61)

Reply

Once it is recognized that federal spending is not constrained by a requirement to raise the money by taxes or borrowing, what would prevent all federal employees from going on strike and demanding that their wages be increased by x (take your pick) %?

Reply

WARREN MOSLER Reply:
September 25th, 2011 at 7:03 am

the same thing that prevents them from doing it now?

Reply

Bill Martz Reply:
September 26th, 2011 at 11:09 am

@WARREN MOSLER,

The beliefs with regard to the federal deficit and federal debt create something of a line in the sand that to some extent controls how much we spend. If I understand MMT correctly, and I only just came across MMT, some types of federal expenditures are good and some are not; therefore, the battle in Congress will be over how to classify any given expenditure. But to a lot of people, it will look like Congress has carte blanche. I think federal employees will be able to exploit that perhaps more easily than any other group. But if Congress cannot rein them in, it will have little ability to restrain other interest groups. Chanting “The deficit, the deficit!” is a lot easier than explaining why a certain expenditure will be inflationary and another won’t be. In short, to me, MMT looks great in theory but darned hard to implement successfully in practice.

Reply

Peter D Reply:
September 26th, 2011 at 11:54 am

@Bill Martz,

Bill, I’ve seen dozens of comments like yours. The idea that understanding something better means only bad exploitation of such knowledge which is not counterbalanced by good exploitation of such knowledge is very myopic. It is the same idea that makes people afraid of progress (see Luddites, for example.) By your logic people should be still riding horse-driven carts, because “cars are too dangerous and how on earth you explain all that complicated shifting gears, pressing gas and breaks – holy mess! people would never get it!”
So, you believe that what prevent federal workers from going on strike now is the fear of govt deficits? Seriously?

WARREN MOSLER Reply:
September 26th, 2011 at 2:00 pm

could be, but mmt is how it actually works

Bill Martz Reply:
September 26th, 2011 at 3:08 pm

@Bill Martz,

I am trying to see how MMT would be implemented. Right now the leverage for not spending is that threat that it will drive up the deficit. If federal employees went on strike, the threat of what their demands would do to the deifict is an argument that would be used against them. It’s a simple argument that resonates with voters.

With MMT you can’t use the threat of increasing the deficit. What do you say to get support for resisting a wage-increase demand? Or for any spending proposal, how do you explain or make the case that it will be inflationary rather than being helpful to the economy?

WARREN MOSLER Reply:
September 26th, 2011 at 3:21 pm

the population often seems more concerned about inflation than unemployment.

even now they criticize the Fed for being too easy.

i think that fear should be sufficient

Bill Martz Reply:
September 26th, 2011 at 4:14 pm

@Bill Martz,

Thank you, Warren and Peter.

I will continue studying MMT. The logic seems, as they say, intuitively obvious to the casual observer; yet, the battle over the deficit rages on.

I have begun reading 7 deadly sins again.

My reading of the current USA situation is that a huge amount of savings wealth in the form of US treasuries is being gauranteed by the people of the USA.
Deficit spending by the USA community is unsecured loan creation where the treasury loan asset is guaranteed by the community of the USA and sold inside and outside the community.

As Pete Stark would say the community has wealth because of the loans.

Reply

WARREN MOSLER Reply:
September 5th, 2011 at 11:10 pm

Pretty good! Keep reading!

(And that’s nominal wealth, not real wealth)

Reply

Andrew Reply:
September 5th, 2011 at 11:58 pm

@WARREN MOSLER,

Are we agreeing the community has a liability and an asset? Where the moneyness of the asset only exists because the community guarantees it?

Reply

I appreciate the responses everyone.

If you search thru the internet available quotes from central bankers you will find from about 1960 at least that many central bankers were very bemused or frustrated with the mainstream conceptualisation of the “bank lending channel”. Pretty obviously they thought mainstream ideas were ridiculous. Charles Goodhart who was on the monetary policy commitee of the bank of England was scaving about the money multiplier and also says that any economist who attempts to explain economics with reference to central bank operations is condemed to be cast into outer darkness. The bank of england and other central banks regard money in their countries as being endogenous. Pretty clearly in the USA monetary policy has been aimed to reduce short and long term interest rates and has been very successful at that.
So that is about 95% of MMT as far as i can see.
And due to the nature of money creation if the money creator possesses their money it is not money, so it is by definition true that all government spending creates money. However as far as i know all the countries having credible monetary policies do have accounts and legal constraints on spending – which of course can be abandoned instantly if necessary.
The fact is the current system has been able to create constant inflation for decades on end. If i think of the future and what you guys can offer the world i just see you offer nothing at all that is not already known at places like the bank of England which is now managing to create 5% inflation per annum while having the lowest bond yields for a hundred years or something like that.

Reply

Neil Wilson Reply:
August 28th, 2011 at 3:03 am

@Andrew,

The Bank of England is not creating 5% inflation. Get under the numbers and you’ll see that government cuts and tax rises are causing RPI at 5%.

With the rest caused by commodity demand in other parts of the world.

Very low inflation is another neo-classical myth. That generally doesn’t affect working people – who would traditionally find their real purchasing power unaffected by inflation since they would demand, and get, higher nominal wages.

(Not so at the moment with weak union power).

Very low inflation helps those with a lot of financial assets maintain the value of those assets and the rent extractions they represent.

There’s not really any evidence that 2% inflation is economically any better than 7%.

Reply

John O'Connell Reply:
September 22nd, 2011 at 2:25 pm

@Neil Wilson,

“Very low inflation helps those with a lot of financial assets maintain the value of those assets and the rent extractions they represent.

There’s not really any evidence that 2% inflation is economically any better than 7%.”

Perhaps, for the economy as a whole. However, for individuals, we necessarily go through various stages of life. When we’re young, we work and accumulate financial assets. When we’re old, we retire and are expected to survive on what we have saved during our working lives. Inflation during our working years may not hurt us, if our wages keep up and progressive tax brackets are indexed, but in retirement inflation erodes the value of our savings and reduces our standard of living. This happens to the middle classes more so than to the very rich, who (besides being able to “afford” it) probably have expert financial advisors to find them the loopholes and advantages to enable them to “beat” inflation. The middle classes may be able to buy a few shares of BAC, but they don’t get the preferential treatment that Warren Buffet gets for his BAC investment.

So, I dispute the notion that low inflation disproportionately helps those with a lot of financial assets. They’ll prosper under any conditions, and those with no savings get an indexed income from the government, but those in the middle are very much more harmed by 7% inflation than 2%, and more by 2% than 0%.

Reply

WARREN MOSLER Reply:
August 28th, 2011 at 6:10 am

Yes, I know Charles Goodhart quite well. Yes, he’s one of the best on actual monetary operations. After discussing the ‘taxes drive money’ aspects with him he did his prescient papers on the euro zone way back, contrasting the C and M approaches where I recall I was referenced.

We certainly don’t agree on everything- he continues to believe interest rates ‘work’ in the mainstream mode’ for example, based on his perception of the propensities to consume. But we completely agree on things like there is no channel for qe to work apart from psychological effects. In fact, he suggested the UK stop issuing tsy’s rather than issue them and have the BOE buy them.

Reply

Andrew Reply:
August 29th, 2011 at 1:26 am

@WARREN MOSLER,
This month Goodhart said the BOE should be ready to try more QE at a later point because the correlations between benefits and QE are sufficiently convincing that it would be wrong not to try it.

http://www.reuters.com/video/2011/08/01/more-uk-qe-should-be-back-on-agenda-good?videoId=217782769

Reply

WARREN MOSLER Reply:
August 29th, 2011 at 7:44 am

yes, he probably thinks the portfolio shifting by people who don’t know how it works provides some kind of benefit via the currency weakening, or something like that.

Mario

I cant quite follow what you are saying. Warren said it required no faith. You are saying that if i have faith i would know it works differently and the guys at the fed could show me. Ie they are the experts in MMT? Are you saying that? Most MMTers are saying the feds are fools i think, BB being number one clown

But you are saying you dont need faith because you already know. If you can explain how you know it might move this along a bit.

But when you talk about out of nothing money are you talking about legal out of nothing or illegal? Are you saying i need faith the feds operate an illegal operation? I dont think you can be saying that, but I cant follow you as i said.

Deficit spending impossible? Why? The government attracts savings from the public and spends them and the saving pubic get a newly issued safe alternative form of saving and the opportunity to earn more savings from government spending to enable the government to spend more money.

Reply

Mario Reply:
August 26th, 2011 at 4:49 pm

@Andrew,

I am sorry to confuse you and your mind. ;)

You are saying that if i have faith i would know it works differently and the guys at the fed could show me.

first off no one is asking you to believe anything. I don’t care if you believe in MMT or not. As Warren said, faith has NOTHING to do with any of this. Your faith will not “reveal” anything to you about MMT. This is not church and God does not reign here eternally. I don’t even know how faith is a part of this really…but I THINK I understand why you are talking about faith as I will show below.

What I am saying about you going to the Fed to see for yourself is attempting to address your faith concern as I see it. I haven’t been the Fed and I haven’t seen them mark up spreadsheets, so based on that fact, I guess you could say that I don’t “KNOW” for a FACT that they are doing things that way operationally speaking. So in that sense you could say that I do have “faith” that is what’s happening. So therein lies the “faith” issue I THINK you are struggling with so much, which is why I suggested you go to the Fed and see if you can literally watch them do it yourself. At the same time however I am sure that airplanes are flying in the air right now even though I can’t see them with my eyes or hear them or sense them in anyway…but still I KNOW (or better yet…”I am sure”) that they are there doing that. So can you call that faith or what? I don’t care what you call, it’s basically the same thing.

Most MMTers are saying the feds are fools i think, BB being number one clown

Per Warren’s comments, the operations guys at the Fed and Treasury know how this stuff works, b/c that’s what they do every day. They just don’t talk about it b/c of the ridicule and huge stigma it seems to bring up these days and they could likely lose their jobs. It’s never a good thing when you know more than your boss…or better yet…when you call out your boss in front of everyone. The guys at the top like BB and Geithner and crowd are clearly the clowns running around doing their song and dance and so their motives and agendas must be considered when interpreting their statements, etc. In others words you can’t trust them (faith again?) and what they say simply b/c they say so many patently false things or they contradict themselves depending on the political pressures of the day. I think this is pretty much old hat information considering the trends in the media and politics and finance these days. The lack of trust in their words and information directly relates to your concept of faith again as I see it. The difference between you and me seems to be that you want to trust what they say and what they tell you regardless of the facts about how things actually work. Listen that’s fine with me. Do whatever you want. I am okay with that and it’s all good with me. Faith-based economics need not apply. ;)

But when you talk about out of nothing money are you talking about legal out of nothing or illegal?

legal. It’s how the economy works. Ex nihlio operations, etc.

Are you saying i need faith the feds operate an illegal operation?

no. all money has always just been “created” out of thin air. Back in the day it was the magic of a government stamp on a coin that “made” money. Today it’s the Federal Reserve Note printing or an electronic transaction from the Fed to banks and then to those banking clients, etc. It’s the way currency creation works the world over. What’s illegal is when someone else does it, not the government. So you can conclude that in a sense the government is using force and coercion upon you to live and function in this society. I know it’s tough to swallow but I think we can all get over that sooner than later and make the most out of things today. It really can work out in the greatest favor of all concerned if we just thought about it a bit more and observed alot more. ;)

Deficit spending impossible? Why?

I don’t know. You tell me. I was thinking that your whole line of argument is that there needs to be an already existing figure on the accounting spreadsheet before a transaction can ever occur. So by your logic then, if all the dollars are “used up,” according to the accounting spreadsheet then there’s no more money and nothing more for us to spend right? Until we get more money from the TT&L or from bonds (and update our books accordingly) THEN we can spend again (whew that was a close one!). And if for some wild reason we don’t get any more tax payments or bond holders for that day or week or month or year (and we’re already at the zero line on the books) then we’re at a spending standstill. Right? That’s what you are arguing for when you say that accounting ledgers aren’t abstract and they aren’t “after the fact” no? I think you may be starting to see that accounting ledgers ARE after the fact and are not what’s really IN CONTROL. Accounting ledgers don’t make money or transactions. Money/transactions make accounting ledgers. You see?

Reply

Matt Franko Reply:
August 26th, 2011 at 8:59 pm

@Mario, I was talking to an acquaintance who is a mental health professional about paradigm shifts.

He brought up some experiments that have been done with rat mazes. He said that if you put some cheese at the end of a very convoluted, difficult, physically challenging path, the rat will eventually find it. If you keep putting the cheese at the end of this path, the rat always finds it and if you keep doing it, the rat will be conditioned to always travel this arduous route to get the cheese.

Then if you open up a much simpler route for the rat to follow that is much easier and quicker, without modifying the original path, the rat will never discover that new simpler path you have opened up and will just keep on travelling the more difficult route.

So apparently brains can operate under the “if it aint broke dont fix it” type of approach indefinitely if brains are conditioned to believe just one approach exists and is always successful…. Resp,

Reply

Andrew Reply:
August 27th, 2011 at 2:18 am

@Mario,
Mario

A few people i know who seem reasonably clued up have told me to ignore the accounts – they say it does not work that way and the insiders know that.

I was wondering however if there was a more technically orientated explanation that i could work thru for myself and it is clear now to me that it does not exist.

However there are other ways of knowing and that can come from looking at the bond markets for example.

Reply

Matt Franko Reply:
August 27th, 2011 at 2:14 pm

@Andrew, Try this…Prof Kelton uses T account analysis to show how the different accounts are affected by Govt spending including bond sales:
http://neweconomicperspectives.blogspot.com/2010/11/yes-government-bonds-add-to-private.html

Good luck Andrew…

Resp,

WARREN MOSLER Reply:
August 27th, 2011 at 10:47 pm

also in soft currency economics, full employment and price stability, and a general framework, all under ‘mandatory readings’ on this website

Mario Reply:
August 27th, 2011 at 8:33 pm

@Andrew,

here’s the post Scott mentioned as well Andrew:

http://moslereconomics.com/2010/08/30/mmt-and-fedtreasury-operations/

A few people i know who seem reasonably clued up have told me to ignore the accounts – they say it does not work that way and the insiders know that.

so is that to say that we are all now in agreement on that front or disagreement? It sounds like agreement no?

Cheers!

@beowulf,

Money is abstract so accounts must be abstract. however a line of accounting is not so abstract that we cannot see what that means in human terms.

According to the US bureau of debt they look after the debt accounting. And according to MMT, MMT is based in accounting and operational realities. The government is constrained by choice and must have values in the accounts before it spends.

Transmogrifying that to say these values have no meaning to humans is distorting reality

All this talk of a government not having to be constrained in how it spends is irrelevant and meaningless in the context of the operational framework described by MMT which is based in laws everybody agrees are not broken

Reply

Mario Reply:
August 26th, 2011 at 1:51 pm

@Andrew,

I’m not sure I’m understanding you exactly…so bear with me on this and tell me if I’m off or not and why/how/where/etc.

okay so you’re basically saying that the operational realities MMT describes is negated b/c congress puts restraints on itself and its accounting practices that are not necessary?

MMT as I see it would agree with you! The whole point of MMT is to PROVE that these said congressional restraints ARE UNNECESSARY and we do that by discussing the actual operational realities. Once more people realize what is reality and what is unnecessary then HOPEFULLY we’ll get some policy changes to reflect operational reality.

Reply

Andrew Reply:
August 26th, 2011 at 2:37 pm

@Mario,

I assumed operational realities meant things like the way the system operates. where the law helps to describe some of those realities. But you are saying operational realities is a thing i need to have faith about, grasp, understand and come to believe. Warren said no faith was required.

More or less everybody knows the government can just print up the currency if it wants. So i just cannot grasp the big deal of that being endlessly repeated.

I thought MMT was just a description of modern money when i began this journey.

I am just bewildered. Bill Mitchell says the tax money goes nowhere while he is describing the accounts. The whole thing is just incomprehensible to me that he can say that.

What is this MMT thing about ‘just accounts’ and accounts are abstract to the point they have no human meaning at all.

Reply

Mario Reply:
August 26th, 2011 at 2:57 pm

@Andrew,

“But you are saying operational realities is a thing i need to have faith about, grasp, understand and come to believe. Warren said no faith was required.”

Well I guess you could say that is true from your perspective since you don’t work at the Fed or the Treasury and so you can’t literally go and see their computer spreadsheets and mark ups.

But the fallacy you are entering into is that you can’t do that now either so you already have faith in a system you have no evidence exists. The only evidence you have is arcane laws based on a system that no longer exists and is therefore no longer relevant. I mean by your definitions and statements, wouldn’t it be impossible to even have federal deficits?

I sympathize with your anxieties but until you can literally see those spreadsheets, I don’t think it’s ever going to go away. Maybe you can get an internship at the Fed or something and ask some of the operational guys there? I do recall there being an NPR recording from All Things Considered where they go to the NY Fed and talk to the operations guys and they explained ex nihlio operations first hand, etc.

And so to quote from the great (greatest?) play on earth…Hamlet, Act 1, Scene 5, lines 917-920:

HORATIO
O day and night, but this is wondrous strange!

HAMLET
And therefore as a stranger give it welcome.
There are more things in heaven and earth, Horatio,
Than are dreamt of in your philosophy.

Reply

Matt Franko Reply:
August 26th, 2011 at 2:27 pm

@Andrew,
“must have values in the accounts before it spends.”

In my Roman tale, if the tax collector who was doing the taxes in the morning and the payroll in the afternoon ran out of coins in his bowl (think TTL) before payroll was done, he would #1 be embarrassed and hope word did not reach his superiors, #2 he would quickly travel back to his home compound and reach down into his 52,000 coin “TGA” jar and grab a few handfuls of coins and then quickly return to the shire and put them in the bowl and then complete the payroll.

Today (with our IT) we could simply run a negative balance in the bowl (TTL) instead of traveling all over the shire to obtain coins from a jar (TGA) to then put in the bowl (TTL).

There were no real constraints on this process then and there are no real contraints now (other than morons in govt today vs depraved in govt back then).

Hope this helps…. Resp,

Reply

WARREN MOSLER Reply:
August 27th, 2011 at 10:37 pm

mmt explains accounting and operational realities

Reply

Frank
There is nothing particularly abstract about the book keeping just because it is on a computer. The bank of England has been using reserve balances since 1878.
Apparently MMT is based on bookkeeping and operational realities in a system constrained voluntarily by law.
And in the context of that i asked a simple question which should have a simple answer.
Is your answer created by your belief the accounts do not exist or something else? Your belief can of course be true.
But what am i supposed to believe before i am to be able to understand what MMT is?

Reply

Matt Franko Reply:
August 26th, 2011 at 8:46 am

@Andrew, Sometimes answers are not simple. It’s hard for me to explain, but “accounts” are not “real” if you can see that. Accounts are abstract. The balances in “accounts” dont “come from somewhere”; if you can see that…

The Romans used coins and jars which are NOT abstract instead of “accounts” as back then information technology was virtually non-existent; you may be “trapped” in this non-abstract paradigm that you have been conditioned to think within and are having a hard time getting out of it. Resp,

Reply

WARREN MOSLER Reply:
August 27th, 2011 at 10:31 pm

mmt explains things. it’s isn’t ‘based on’ anything

Reply

“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.”

Can this be understood with the governments accounts or does it require faith the system works differently to the accounts?

Is MMT something based in accounting or is it based in ‘in reality it works very differently’ to the way you think it works.

Why do MMTers talk about simple accounting and operational realities? The simple accounts so not support MMT because these simple accounts (the ones required by law) say there are no funds in an account at the fed to return funds to the bondholders. The simple accounts say when the government deficit spent it created true debt for the bank owning bondholders, whereas immediately prior to deficit spending the simple accounts say the banks had an iou and the government had an iou. After spending the government no longer has an iou.
Several MMT’ers have told me these simple accounts are a charade. Others say MMT just works differently to the simple accounts and the insiders know this.
So has MMT got anything to do with simple accounts or does it just require faith? I can believe it works differently to anything the government can tell me. I am though hopelessly frustrated by talk of simple accounting and operational realities.

Reply

WARREN MOSLER Reply:
August 25th, 2011 at 3:26 am

It’s not about faith.

And the accounting with all the laws does support mmt

Reply

Andrew Reply:
August 25th, 2011 at 4:24 am

@WARREN MOSLER,

So why are there are the funds in accounts at the fed associated with bond holders? So that the debt to bond holders is ended from funds in these accounts? How did the funds get into those accounts?

I was assuming you were saying these accounts had funds only because bond holder funds were not channeled to the government for deficit spending contrary to the legal accounting. Does the legal version of deficit spending begin with the TT and L entries or am i missing the vital piece of information i need?

Reply

WARREN MOSLER Reply:
August 25th, 2011 at 3:52 pm

First, accounting is after the fact record keeping. It’s not ‘the dollars’

And ‘legally’ is the will of the Congress, which makes its own rules and orders the spending and taxing.

And I agree and feature the constraints Congress imposes on itself vs actual operational restrictions.

So give that why does any of the above matter for the point under discussion?

The trade deficit is an unsustainable imbalance that takes away jobs and output.

Facts:

Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.

Reply

Huh?

Reply

Its all fraud

Reply

China and the US
“Domestic credit creation is funding foreign savings. Assume you live in the US and decide to buy a car made in the China. You go to a US bank, get accepted for a loan, and spend the dollars on the car. So where do things then stand? You exchanged the borrowed dollars for the car, the Chinese car company has a deposit at the bank, and the bank has a loan to you and a deposit belonging to the Chinese car company on their books.”

You need to update this as it is not accurate:

“Domestic credit creation is funding foreign savings. Assume you live in the US and decide to buy a car made in the China. You go to a US bank, get accepted for a loan, and spend the dollars on the car. So where do things then stand? You exchanged the borrowed dollars for the car, the Chinese car company sells the dollars to the Chinese government, the Chinese government buys US bonds (has a deposit at the Fed), the Chinese government provides the Chinese car company yuan (the Chinese government does not need to get yuan to spend them) to pay employees, and the Fed provides funding to the bank.”

Unfortunately we have not increased aggregate demand, the bank loan is offset by the purchase of US bonds. The demand that used to exist was met by foreign workers, therefore the GDP and employment in the US is not improved, in fact, since the expectation may be that future demand for cars will be met by foreign supply, a US car company may not invest in production facilities to make future cars, which decreases employment in design, engineering and construction in the US.

The goal of the Chinese government is to increase employment, primarily for social reasons. The last thing any government wants is a huge population of employed citizens, especially one where there is a great deal of political control, socially and economically, throughout the country. Therefore the Chinese have an incentive to undervalue the output when sold to foreign markets. Yes, this means that the Chinese citizens are not consuming all they produce and are poorer than they should be. Do you think the Chinese government cares if their citizens are poor? No, they care that they can control the country, preferably through economic means, but they will use military means if that fails.

Since there is a finite amount of employment (supply) needed to meet existing demand, excess employment in a US dollar pegged nation must result in excess unemployment someplace else in the US dollar universe.

If and when we decide not to sell more bonds to the Chinese, because we need the demand, the result will most likely be asset inflation or commodity price inflation rather than economic growth.

Reply

WARREN MOSLER Reply:
November 17th, 2010 at 7:02 pm

you missed the point of the chapter and the book.

yes, buying a foreign car does not add to US domestic demand, jobs, or output.

that’s a good thing. we get a car without having to work to produce it.

and that means for a given amount of govt. spending we can have taxes that much lower so we can buy both all we can produce domestically at full employment plus whatever the rest of the world wants to sell us.

Reply

Martin Reply:
November 18th, 2010 at 12:53 pm

That implies that “at full employment” everyone is producing something that some other person wants to buy.

I know cars are a bad example, but useful. There is a finite demand for cars at a certain price. If the demand is filled by China, then all those employees in the US need to find new jobs producing something else. If there is no expectation that any production of goods will take place in the US rather it will take place in China (subsitute Mich. for US and Tenn. for China for the auto industry) all the supporting building and services that support those employees have to either move (possible in the US, not with regards to China) to the new production location, or they have to be retrained and hired by someone else who can meet some new, undefined demand (see Google).

The cost of losing production facilities and the switching costs are expensive and depend on finding some new demand (assuming everything else is in equilibrium) or some people have to accept lower purchasing power.

Reply

WARREN MOSLER Reply:
December 3rd, 2010 at 7:34 am

Sorry, this somehow got lost in the pile of comments i get to comment on. Let me know if I’ve missed others.

“That implies that “at full employment” everyone is producing something that some other person wants to buy.”

Some are producing public goods and services and paid by govt. so they are not being sold in the market place. The rest are producing private goods and services that are being sold to willing buyers.

“I know cars are a bad example, but useful. There is a finite demand for cars at a certain price.

OK

If the demand is filled by China, then all those employees in the US need to find new jobs producing something else.

OK

If there is no expectation that any production of goods will take place in the US rather it will take place in China (subsitute Mich. for US and Tenn. for China for the auto industry) all the supporting building and services that support those employees have to either move (possible in the US, not with regards to China) to the new production location, or they have to be retrained and hired by someone else who can meet some new, undefined demand (see Google).”

OK and agreed.

“The cost of losing production facilities and the switching costs are expensive and depend on finding some new demand (assuming everything else is in equilibrium) or some people have to accept lower purchasing power.”

Agreed.

But the benefit exceeds the cost, as we get to consume the same number of cars that now come from China, plus whatever goods and services the Americans who used to be producing cars can now produce.

The problem is we don’t understand our monetary system that always allows us to keep everyone willing and able to work employed and producing real output.

Martin Reply:
December 7th, 2010 at 9:10 pm

No, I understand and in principal I believe we agree.

“But the benefit exceeds the cost, as we get to consume the same number of cars that now come from China, plus whatever goods and services the Americans who used to be producing cars can now produce.”

So the key driver are the goods and services the Americans who used to be producing cars now produce. What if they produce nothing? What if these people now collect unemployement or are hired by the government to dig holes and then fill them? What if the actual value generated to other citizens is zero, or in some cases negative because they displace an employee at a private firm that used to do the same job?

I am not a smart guy so I always push something to the extreme and see if it makes sense. No one works. The government pays us all to do nothing. We then buy goods from someone offshore to meet our demands, which they sell to us in exchange for the dollars we get from the government. The offshore folks buy government bonds and everyone is happy. Now this is great, we don’t work and we get goods, I understand that. But there is also no investment, no R&D, no development unless it is paid for by the government (and then you have decrease the payments to people not to work otherwise they have no incentive). It looks alot like the Soviet Union before the wall came down. You fall behind in all sorts of ways even if you live well. You also know that at some point in time the sellers of goods will decide to stop taking government IOUs in exchange for goods. Then we will have to produce our own goods and services but may not have the infrastructure, know how or ability to do so. Then life is no fun at all. No, our children don’t have to “pay off” the debt and they get to enjoy all they produce, but it may not be of the same quality that we enjoyed. In other words, the value is lower (a decrease in purchasing power). On top of that those government IOUs may turn into cash which wants to buy assets, so you get inflation. This is exactly what did happen to the Soviets over time.

For the benefits to exceed the cost those displaced have to find employment that produces value to our society larger than the payment being made to them, regardless if it is private or public otherwise the end result is a long term decrease in purchasing power for society as a whole. Most commenly manifested as inflation which harms those without assets moreso than those with assets.

I don’t think we disagree on the process, I think we disagree in the result that everyone “willing and able to work employed and producing real output”. I think there is a real risk that they produce no real output if we allow the production facilites (more importantly the knowhow and skills) needed to produce real output be moved to another nation who uses our monetary system to do so. If the exchange rate floated then the movement of those facilities would adjust the purchasing power impact to today rather than into the future.

Reply

Martin Reply:
December 7th, 2010 at 9:14 pm

And there are a couple more comments I posted in this chain as well that you have not responded to. I do understand that you are busy and do not expect a response to everything, so I appreciate any opportunity to interact as I believe the framework you have laid out is very effective in understanding monetary policy.

I would be happy to take this to a different forum if that makes it easier on you. As you wish.

Reply

Tom Hickey Reply:
December 7th, 2010 at 9:33 pm

Martin, imports are a benefit at full employment. Otherwise, the importing nation is exporting jobs, as your example notes, so that the real terms of trade may be even or negative considering the output gap. The point of MMT is that a monetarily sovereign government issuing a nonconvertible floating rate currency like the US can run full employment with price stability using the principles of functional finance. In fact, it is imbecilic not to do so, because falling short of full employment implies an output gap that represents foregone opportunity. Therefore, MMT concludes that the government should run full employment along with price stability and not be concerned with the level of imports. If there is a CAD and the private sector wishes to save, too, then the government just runs an offsetting deficit. If inflation should threaten, then taxes are raised to withdraw enough nongovernment net financial assets to cool the economy without leading to unemployment.

Warren may have a different answer for you, but that is how I understand it.

WARREN MOSLER Reply:
December 8th, 2010 at 12:41 am

close enough! except that raising taxes in response to ‘inflation’ should be modified to ‘inflation from excess demand’ thanks.

WARREN MOSLER Reply:
December 8th, 2010 at 12:39 am

sorry again. please repeat and I’ll now see them, as I’ve fairly recently gotten access to all comments as they come in, thanks

Martin Reply:
December 8th, 2010 at 2:02 pm

Tom, I can’t reply directly so I have replied to my own post.

I understand what you are saying, but it only makes sense if the “full employement” produces a product or service that increases either value or productivity (i.e. increases output). In other words, if you have an output gap and you pay people to do nothing you have not closed the output gap. Instead you have increased the dollars in the system and caused inflation unless you issue bonds or increase taxes.

I view the issue from the side of prices. For a business in China to get a new customer they must sell it to the consumer at a lower price than the US business (let’s assume rate sensitive consumers). The consumer is better off. They get the good and have more money left over. In a perfect world, the Chinese business would sell the dollar to buy Yuan so they could pay their employees and suppliers and use the rest to pay capital. This transaction, repeated many times, would shift the price of the Yuan and the dollar such that the Chinese business could no longer sell cheaper and they would lose the customer to the US business that now can. The consumer is back to where they were and all is good. That does not occur today as the Chinese government breaks the price relationship between thier nonconvertable floating rate currency (the Yuan) and ours. They end up with a store of future inflation (US government bonds) and full employement. We end up with goods, unemployment and a future decrease in purchasing power. Now if we can find new jobs for the unemployed that increase output, we win. If we cannot, we lose.

Neil Wilson Reply:
December 8th, 2010 at 2:37 pm

Instead you have increased the dollars in the system and caused inflation unless you issue bonds or increase taxes.

Your fatal assumption is in those words.

If people have no dollars to spend then they cannot give buying signals to the market. Therefore the market does not produce goods for them however much they may want them.

If people are given dollars to spend then those buying signals hit the market. At that point the market, in aggregate, can do two things: it can either price adjust to eliminate the extra demand, or it can quantity adjust to service the extra demand.

The reason that classical economics doesn’t talk about quantity adjustment is because in their models apparently just assume it away along with unemployment.

If the economy is not at full output, it can turn those extra dollars into extra goods and services. If the external sector wants more dollars, they can supply more imported goods.

So you get a whole bunch of transactions that otherwise wouldn’t have occurred, but you don’t get an inflation.

Tom Hickey Reply:
December 8th, 2010 at 2:58 pm

“Now if we can find new jobs for the unemployed that increase output, we win. If we cannot, we lose.”

Yes, but that doesn’t necessarily mean that it has to be one to one in job and product. For example, the state funds a job guarantee that puts everyone willing to work busy doing something productive, such as happened in the CCC, WPA, TVA, etc, during GD1. That deficit expenditure increases the flow of NFA “on the way” through to its being saved as tsys, as Congress requires in the $-4-$ debt offset. This increases nominal aggregate demand, and business responds to increasing demand with increased investment. GDP rises.

There is no problem with importing goods from Asia as long as the government realizes it has the ability to create simultaneous full employment in the US and that it can do so without either endangering its finances or generating inflation, the two bogeymen now preventing this.

Martin Reply:
December 9th, 2010 at 1:57 pm

Neil,

Sorry, I can trade other assets or my goods and services for other goods and services, the only thing I need dollars for is to pay my taxes. Also, I am talking about an increase in money, not a scarcity or money.

Second, the reason that quantity adjustment is not considered (imediately) is because if I am running at full capacity at my car factory I cannot produce additional goods without building additional facilities, this takes time. The imediate response is an increase in price, the resulting response is an increase in capacity. This is true also for services, in a full capacity world as I have to hire a new employee and to lure them from the current job I have to pay them more.

In GD1 the wage paid to people for the CCC, WPA, TVA, etc was $7,000 per year in 2008 dollars. They produced results that had value above that payment therefore national wealth increased. Remember, Katrina increased GDP becuase of all the goods and services that were needed to rebuild. The net worth of our nation decreased.

The full employment has to be productive (increase output) otherwise it just increases prices.

Peter D Reply:
December 20th, 2010 at 5:54 pm

Tom Hickey: “There is no problem with importing goods from Asia as long as the government realizes it has the ability to create simultaneous full employment in the US and that it can do so without either endangering its finances or generating inflation, the two bogeymen now preventing this.”

But isn’t there a concern as to what is the quality of this full employment? Like Martin, I’d like to take it to the logical extreme: all US workers employed in govt programs via Job Guarantee or in services, all the “productive” stuff overseas. This is a not a healthy society, I believe. Isn’t there more to cost-benefit analysis than just getting stuff for money?

WARREN MOSLER Reply:
December 20th, 2010 at 7:44 pm

for me the job guarantee has a ‘target level’ of maybe 3% of the work force. So if the pool is larger than that it means that for the size govt. in place taxes need to be cut, or govt expanded, depending on one’s politics

Tom Hickey Reply:
December 20th, 2010 at 8:14 pm

Peter D., the reason that the US is declining is that financialization is replacing productive investment, i.e, finance capital is crowding out industrial capital. So I would tax away economic rent in order to disincentivize rent-seeking and incentivize productive investment.

WARREN MOSLER Reply:
December 22nd, 2010 at 2:39 pm

in real terms people are working in the financial sector which has no value added to real output, rather than working in the real sector

it’s a massive brain drain and a total waste of human endeavor

Peter D Reply:
December 20th, 2010 at 11:02 pm

Warren: Why 3%? Isn’t the size of the program dependent on a lot of things that could go wrong with the economy and demand a large size? Weren’t Roosevelt public works larger, for example? Also, by saying the govt needs to expand, isn’t it already expanded de facto by employing the people under JG?

Tom: agree. Is your an example of what you refer to as “principles of functional finance”?

WARREN MOSLER Reply:
December 22nd, 2010 at 2:40 pm

for me the JG target should be maybe 3%, meaning that if it’s larger than that taxes should be cut and/or govt spending increased.

and yes, the unemployed and those in the JG are in the public sector.

Tom Hickey Reply:
December 20th, 2010 at 11:39 pm

Peter D, it’s not functional finance but the application of the tax aspect of functional finance. The principles of funcional finance only specify when to use taxation, not what kind of taxation to sue. IAW functional finance, taxation should be targeted for maximum effect in withdrawing nongovernment NFA.

It is well known that taxation is a disincentive and therefore when it is used this needs to be taken into account . In my view the way to target taxation is toward incentivizing growth, since taxation is only necessary when production is not able to meet demand, and growth based on production rather than financialization increases both supply and income from production.

Rent-seeking is non-productive and parasitical on the productive economy, and so it should be disincentivized in order to increase productive growth. By disincentivizing rent-seeking through targeted taxation, productive investment is incentivized indirectly. In general, I do not favor taxing income, consumption, or production when there are alternatives that do not affect growth directly. Economic rent is a logical alternative.

Peter D Reply:
December 24th, 2010 at 3:23 am

Warren: “in real terms people are working in the financial sector which has no value added to real output, rather than working in the real sector

it’s a massive brain drain and a total waste of human endeavor”

Agree (and myself guilty as charged – an engineer working in finance). Therefore while it does look like imports are always benefits and exports costs, it is not true if it means that all people who know how to make stuff are overseas while we here are only enjoying the fruits of their labor. It seems to me, a lot of stuff probably could be outsourced without skill- and brain-drain, but some we should prefer to keep here regardless of the facts that it seems a benefit to pay USD for real products.

WARREN MOSLER Reply:
December 24th, 2010 at 5:00 pm

from a purely economic point of view, economics is the reverse of religion. it’s better to receive than to give.
having people make stuff for us to consume is a sign of economic success.

the problem can come when they decide not to and we have to figure out how to make stuff for ourselves.

but in reality that’s not what I see happening. I see us importing labor content more than intellectual content, and supplying intellectual content here domestically. Or at least that’s what I want to see…

Tom Hickey Reply:
December 24th, 2010 at 11:29 am

Peter D: It seems to me, a lot of stuff probably could be outsourced without skill- and brain-drain, but some we should prefer to keep here regardless of the facts that it seems a benefit to pay USD for real products.

I think we should be looking at the global economy as a closed system and asking what the issues are and what will make this system work more efficiently and effectively in light of the vast asymmetries.

As I see it, the major problems we face economically are over-supply and under-demand, as well as unsustainability owing to externalities. There is also the problem of financial instability involved with credit extension, which Minsky and others have examined in depth.

Over-supply and under-demand should be pretty simple to fix through better distribution. The externality problem can be addressed through price reflecting true cost. Financial instability can be reduced, e.g., through incentivizing prudent lending practices and disincentivizing imprudent ones.

Market solutions are generally more efficient where there is actual competition. However, in the age of giant corporations that dominant markets, transcend national boundaries, subvert the political process, and suborn officials. These entities are monopolistic and anti-competitive, and need to be broken up. The growing transnational influence of multinationals is one of the chief issues that the world will have to deal with both economically and geopolitically. Otherwise, liberal democracy is at risk. Therefore, market solutions must be tempered with government controls. In addition, government must be proactive where the private sector is either unable or unwilling to do so, e.g., in providing public goods.

There also needs to be an operational approach to the global financial system that is not based on mercantilism but rather on everyone doing well. Because of asymmetries, this can only happen through cooperation and coordination instead of relying chiefly on competition.

Moreover, the world faces a problem with the allocation and use of real resources, especially energy. Economic growth, necessary to provide for the needs of growing population, is energy constrained. Those contraints are becoming tighter and threaten to constrict necessary growth.

The challenge of the 21st century is making the transition to an effectively and efficiently functioning global economy smoothly in the face of national interest and asymmetry, especially controlling externality and achieving sustainability. Otherwise the road to globalization will lead to conflict.

Underlying all this an operational approach to money, banking and finance that is capable of meeting the capital/income requirements of a global economy in order to balance supply and demand through a harmonious relationship of productive investment and income. Presently, global finance seems to be part of the problem instead of part of the solution.

US Trade Deficits
1.Trade deficits with nations who have exchangeable currencies should result in relative changes to the exchange rate between the two currencies.
a.Assuming locals who produce goods in one nation are paid in local currency and the firm who employes them is paid in a foreign currency there should be a demand for local currency and a supply of foreign currency, which implies a higer price for local currency relative to foreign currency.
b.Long term deificits self correct as price signals decrease demand for imports (decrease in purchasing power of the deficit nations).
2.Trade deficits with nations who have currencies pegged to a non local currency should result in a misallocation of aggregate demand.
a.Locals who produce goods in one nation are paid in local currency and the firm who employes them is paid in a foreign currency, but that firm is obligated to exchange to local currency at a fixed rate by the local government (which they must do to get local currency to pay employees, so even if they think they are not getting enough for their foreign currency, they have little choice).
i.The local surplus government will end up with foreign currency with which they can buy foreign government bonds (temporary decrease in foreign aggregate demand), they can buy foreign assets (aggregate demand resulting in local asset inflation), they can exchange for other currencies (decreases the foreign currency relative to a second currency, decreasing purchasing power) or they can buy foreign currency priced commodities (producer price inflation in foreign currency).
ii.The local government will manage local aggregate demand through local currency tax policy, local currency debt issuance and the fixed exchange rate between the foreign currency and the local pegged currency.
b.Long term deficits exist only if the local currency purchasing power remains cheap relative to foreign currency purchasing power.
i.A policy to buy goods for more than they are worth and sell them for less than they are worth (maintaining a fixed exchange rate at a lower level than one should) can be used to maintain GDP growth and lower levels of unemployement than would be possible without the currency intervention.
ii.The resulting local inflation pressures (due to an exaggerated aggregate local demand) can be offset with tax and debt policies.
iii.The impact on purchasing power in the foreign currency can be managed through purchases of foreign government bonds (deferring aggregate demand) and managed purchases of foreign currency priced commodities (buying into weak global demand, putting a floor on raw materials).
3.By pegging a currency to the US dollar, the impact is to include the net foreign supply (foreign production minus foreign consumption) in the US supply.
a.Since a local economy can consume everything they produce, assuming the government does not tax away aggregate demand, foreign production results in a substitute to local production, assuming both local and foreign production can grow to fulfil any local demand.
i.To maintain a currency peg, a single entity must control the foreign currency. Therefore one can look at the seller of the foreign goods as a single entity (just like every 7-11 sells slurpies, we don’t expect each store to buy their own raw materials). In this case the foreign government sells a good in the US and temporarily decreases US aggregate demand by buying government bonds.
ii.To increase aggregate demand (stimulating growth) the US government can increase spending (deficits increase savings). If that demand is met by foreign supply (because the price does not adjust) the increase in production capabilities is met in the foreign nation. If production capabilities are not local then the GDP growth does not occur (or is muted as sales services and transportation are the only beneficiaries). In addition, if the expectation is that demand will be met by foreign supply, then there is no investment in production facilities in the US economy.
b.To maintain local GDP growth and employement, the local nation must maintain an exchange rate that undervalues the local currency, which works like a negative tax.
i.If a US state paid manufacturers a negative sales tax (or waived property taxes) to produce goods that were sold outside the state, it would attract local production at the expense of production in other states (see auto manaufactuing in the US).

Reply

WARREN MOSLER Reply:
November 17th, 2010 at 6:59 pm

not the way i’d say most of that

Reply

Martin Reply:
November 18th, 2010 at 12:31 pm

Is it incorrect? If so, pleae give me some ideas where and how. Thank you.

Reply

Tom Hickey Reply:
December 8th, 2010 at 2:37 pm

The problem is that we don’t have across the board floating rates. China pegs to the dollar so there is not a corresponding adjustment, for example. Within the EZ, there are disproportionate flows among EZ countries that are no longer addressed by the exchange rate since all the EZ countries share the same currency.

This is creating severe imbalances in the global economy that would in principle be corrected by floating exchange rates. MMT has ad hoc solutions for these imbalances that are regularly discussed on this and other MMT blogs, but the more efficient way would be to have international trade actually based on floating rates instead of artificially imposed ones that inevitably result in imbalances due to inefficiencies.

Martin Reply:
December 9th, 2010 at 1:38 pm

Tom, you are starting to agree with me more than you think. What is failing is not the inability of the US government to spend, it is that price signals are being lost (primarily through foreign governments pegging to the dollar). MMT works, but the impact on local productive output due to a foreign government maximizing its local labor utilization by holding US dollars (utilized to buy commodities or US government bonds) is creating stress on US dollar prices. The end result has to be a decrease in purchasing power, either through politial means (taxation) or price (inflation).

WARREN MOSLER Reply:
December 18th, 2010 at 8:48 am

two things.

while the purchasing power of an individual dollar may be lower (prices higher) don’t forget about the purchasing power of all the dollars which is the GDP or some similar type of macro measurement.

So while ‘a’ dollar purchases a lot less than 100 years ago, all the dollars are purchasing a lot more real goods and services this year vs 100 years ago.

Page 61:
“Domestic credit creation is funding foreign savings. Assume you live in the US and decide to buy a car made in the China. You go to a US bank, get accepted for a loan, and spend the dollars on the car. So where do things then stand? You exchanged the borrowed dollars for the car, the Chinese car company has a deposit at the bank, and the bank has a loan to you and a deposit belonging to the Chinese car company on their books. sells the dollars to the Chinese government, the Chinese government buys US bonds (has a deposit at the Fed), the Chinese government provides the Chinese car company yuan (the Chinese government does not need to get yuan to spend them) to pay employees, and the Fed provides funding to the bank.”

Reply

I get the feeling that I have stumbled onto a cult. Alas, I had hoped to have a serious discussion. Tom Hickey was engaging for a while. Warren Mosler is so sure of himself that it scares me. I’d love to continue with a productive discussion.

Reply

Tom Hickey Reply:
October 11th, 2010 at 5:36 pm

Alexander, one could say that all ideologies are the basis for various cults. There is no universally accepted economic paradigm like there is in hard sciences. Different theories compete.

The way to engage in a productive discussion here is to find out first what going on. To do this, go through the mandatory readings, digest them, and then pose questions/objections based on that understanding.

Warren and many of the people here happen to be familiar with operations, and what’s happening here flows from that understanding and the implications of it. If you think that someone is wrong about monetary and fiscal operations, then make a case for it. If you disagree with the implications drawn from application of operational rules, them make a case for that. To get traction here, you have to demonstrate that you have a grasp of operations first.

Reply

Tom Hickey – I am aware of the theory from which come your comment on my statement: This can be funded by short-term public debt as long as the size of the public sector (government) budget is not excessive in relation to the total economy. The ideas you express are largely a summary of Warren Mosler’s writing on the subject of public debt. Please explain precisely and concisely what you and Warren Mosler propose.

Reply

Tom Hickey Reply:
October 10th, 2010 at 3:26 pm

What I propose is no-bonds and consolidating the Treasury and Fed, letting Congress manage the economy using fiscal policy by relying on Abba Lerner’s principles of functional finance updated, along with economic analysis based on operational reality as described by MMT through national accounting identities, the sectoral balance approach, and stock-flow consistent macro models, with the goal of achieving optimal capacity utilization/full employment together with price stability. Congress should also adopt a Minskian approach to horizontal money creation and the use of leverage to prevent financial instability arising due to the financial cycle. I would also qualify functional finance to target taxation and regulation toward disincentivizing economic rent and incentivizing sustainable productive investment. Congress should also eliminate subsidies, privilege, and favors, and commit all public expenditure and investment to public purpose, investing in vital resources where the private sector is either unable or unwilling to do so. The budgetary process must be viewed in terms of a comprehensive strategy for achieving national objectives coordinated by the national goal of national and global peace and prosperity in a sustainable fashion.

I think that Warren has pretty well set forth what he proposes under “Proposals” in the menu bar at the top of the page, and much more specifically than I do in this brief post.

I would also be interested in hearing what others propose.

Reply

Alexander Doty Reply:
October 11th, 2010 at 3:23 am

Let us take your proposals one at a time. No bonds, I take it, means no public debt. Is this correct?

Reply

WARREN MOSLER Reply:
October 11th, 2010 at 9:40 am

it means deficit spending remains as reserve balances.

read ‘0 is the natural rate of interest’ on this website before responding, thanks

beowulf Reply:
October 11th, 2010 at 12:05 pm

Congress should also eliminate subsidies, privilege, and favors, and commit all public expenditure and investment to public purpose, investing in vital resources where the private sector is either unable or unwilling to do so

Tom Hickey, agree with everything you say. The biggest step towards eliminating (or at least reducing) “subsidies, privileges, and favors” would be zeroing out the $1.2 trillion in tax expenditures and recycling the revenue to working and middle class families with a negative income tax. Direct spending for any program could then be judged on the basis, should the money go to, say, “cash for clunkers”… or be added to the negative income tax credit instead?

However, one tax expenditure worth adding is something that Michael Hudson and his colleagues have suggested Latvia use to reform its tax code, a 100% income tax credit for all site value taxes paid (the 100 percentage could be reduced as the economy approaches full employment as a sort of an inside out tax increase) . State legislatures would then be nuts not to switch as much of state and local tax burden to property taxes on land (but not improvements) taxes as possible, since their citizens would be reimbursed on the federal side anyway. Most recent data is for 2008 (which probably isn’t any higher this year because of the economy):
Revenue from taxes, the largest share of state and local government revenue, rose 3.7 percent to $1.3 trillion. Sales and gross receipts made up the largest share of tax revenue ($448.7 billion), followed by property taxes ($409.7 billion) and individual income tax revenue ($304.6 billion)
http://www.census.gov/newsroom/releases/archives/governments/cb10-108.html

Reply

WARREN MOSLER Reply:
October 11th, 2010 at 9:34 am

Under current institutional arrangements, the tsy can do what’s call ‘funding the debt’ with nothing longer than 3 month bills no matter how large the deficit spending which I propose as an interim step.

Reply

Another element of this theory which seems questionable to me is the following: reclaiming fiat currency via taxation is essential to maintaining its value in exchange. What is the evidence for this assertion? Clearly, an excess of fiat currency depresses its value: supply exceeds demand. Warren Mosler asserts that taxation is necessary for dampening aggregate demand. It seems to me that taxation may be sufficient for dampening aggregate demand but that it is not necessary for doing so. The alternative is to limit the extent of fiat currency issued. In this, I think that perhaps Warren Mosler and I agree. There is plenty of evidence supporting the theory that an excess of fiat currency depresses its value. I see no evidence supporting the theory that reclaiming fiat currency via taxation is essential to maintaining its value.

Reply

Tom Hickey Reply:
October 9th, 2010 at 11:17 am

Taxation reduces the amount just as does not issuing in the first place. What you are missing is flow effects that affect demand (sales).

Reply

Alexander Doty Reply:
October 9th, 2010 at 2:04 pm

The flow effect to which you refer, I take it, is the stimulation of demand represented by spending for the public sector (i.e., government spending). This can be funded by short-term public debt as long as the size of the public sector (government) budget is not excessive in relation to the total economy. As this public debt comes due, it can be replaced with renewed public sector debt, thus funding the public sector budget with effectively permanent public sector debt. As money is created to extinguish old public sector debt, it is reclaimed by the issue of new public debt. The only net increase of base money in this system is interest on the public debt and growth in the size of public debt in proportion to growth in the size of the total economy. Base money in this system thereby grows at the rate of the economy plus the interest rate on public borrowing. This growth of base money supports growth in aggregate demand. Does this address your point about flow effects that affect demand?

Reply

Tom Hickey Reply:
October 9th, 2010 at 2:47 pm

This can be funded by short-term public debt as long as the size of the public sector (government) budget is not excessive in relation to the total economy.

What is the criterion for excessive?

Government never “pays off” its debt. It just “rolls it over.” But even this is a misunderstanding because a monetarily sovereign that is the monopoly issuer of a nonconvertible floating rate currency cannot be indebted in its own currency. That is just a nonsense. There is no national “debt.” It is rather nongovernment savings of net financial assets in the form of tsy’s. Tsy’s only represent debt under a convertible fixed rate system like the gold standard and they are a holdover from those days. Presently, they are obsolete operationally and could just be eliminated if Congress wised up.

What happens operationally is that numbers get switched on the Fed’s spreadsheet from demand deposit accounts (bank reserves) to time deposit accounts (tsy’s) and back, with more interest paid on the time deposits. This not a fiscal operation and does not require new funding to be appropriated. The interest payments are funded by currency issuance, but this does not come from revenue or borrowing, since neither funding from revenue nor financing with debt make operational sense under the present monetary regime.

What happens is that when Congress approves a budgetary deficit, private bank accounts get credited, bank reserves increase for settlement in the interbank market, and tsy’s are issued to drain the excess reserves to allow the Fed to hit its overnight rate. Tsy issuance just sterilizes the excess reserves in time deposit accounts at the Fed, removing the excess reserves. Sales and redemption of tsy’s just return the reserves to the interbank market. The Fed uses OMO to smooth this out to hit its target rate.

Meanwhile, the private bank accounts that Treasury has credited begin to spend the new deposits down, creating a flow in the economy. What happens at the macro level is that these funds flow through the economy, while at the same time are saved as tsy’s by people wishing to save. The saving is funded by the increase in demand deposits, so it’s a wash.

If it is a wash, why do it? What is important is the flow of these newly created net financial assets throughout the economy, creating demand and providing space for the desire to save and delever.

WARREN MOSLER Reply:
October 10th, 2010 at 9:02 am

no, it just shows you haven’t gotten into the ‘mandatory readings’

the post is too convoluted for comment.

I am indeed interested in this debate. The referenced Wikipedia article on Chartalism states: “Warren Mosler, L. Randall Wray and Bill Mitchell are largely responsible for reviving the idea of Chartalism as an explanation of money creation; Wray refers to this revived formulation as Neo-Chartalism.” and “(Febrero 2009) argues that modern money draws its value from its ability to cancel (private) bank debt, particularly as legal tender, rather than to pay government taxes.” So there is at least one other person, a professor at the University of Castilla in this case authoring “Three difficulties with Neo-Chartalism”, who objects to the following assertion: “The demand to hold and acquire this government issued currency is driven by taxes levied by the state – which typically can only be paid in the state-issued fiat currency.” Febrero answers: “Apart from being unrealistic (Mehrling, 2000, p. 401) we find a counter-example for this logic in today’s Europe.” and “Note the following sentence in Wray (1998, p. 167): “Indeed, because taxes could be paid using bank money, the public would no longer need to obtain fiat money (except, perhaps, for illegal transactions and vending machines)”. In the European case, it is not that taxes “could be paid using bank money” but that taxes are paid using bank money because it is the money injected into the economic system to monetize public spending.” Warren Mosler’s response to my question about evidences is the following: “it’s a point of logic 100% supported by evidence” and “read ‘the 7 deadly innocent frauds of economic policy.’” There is no evidence I can find relating to my question in “The Seven Deadly Innocent Frauds.” I would be interested to know what is the evidence referenced by Warren Mosler.

Reply

Matt Franko Reply:
October 8th, 2010 at 7:32 am

Alexander,

“taxes are paid using bank money because it is the money injected into the economic system to monetize public spending”

The author here seems to be refering to the source of initial balances to settle govt securtites issuance as the “owner” of the “money”…ie becasue a dealer bank of course is involved in settlement of govt securities issues then the author views this as “bank money”…that is not how one would define a currency sovereign imo.

Im not sure who you are quoting (quotes are not closed in your post), but I think Wray may be refering to actual privately issued bank notes vs in the US Federal Reserve notes in his hypothetical. A situtation of competing or co-existing currencies within the same country.

The quote reads like the author thinks the banking entity involved in settlement of govt securities issues can be considered the sovereign? This is incorrect if so imo.

Resp,

Reply

Tom Hickey Reply:
October 8th, 2010 at 9:39 am

The quote reads like the author thinks the banking entity involved in settlement of govt securities issues can be considered the sovereign? This is incorrect if so imo.

Maybe we could call commercial banks that are government chartered public/private entities “franchises” from the sovereign. They get to use the sovereign’s unit of account to lend, thereby creating deposits that function as money, but they cannot affect net financial assets as the sovereign can because the deposits they create are offset by loans, so commercial banking in aggregate nets to zero. However, banking can be a profitable franchise if run prudently, and it can also provide a public service by acting as an agent for government, performing services that government would otherwise have to provide directly, e.g., through a national bank.

Reply

WARREN MOSLER Reply:
October 10th, 2010 at 8:35 am

It’s about ‘sectors’ with regards to net financial assets.

A bank’s balance sheet has assets and liabilities, which are mainly loans and deposits.

Banks assets are considered private sector, non govt. assets because there is a private sector equity investment.

And more to your point, the banks create loans which are non govt liabilities, and deposits which are non govt assets.

The same is true with ‘pure’ govt lending as well. The private sector winds up with assets, the proceeds of the loan, and liabilities, the promise to pay it back.

So lending from banks or govts does not create/destroy net financial assets the way govt spending and taxing does.

However, when state owned banks lend funds that they don’t expect to enforce collection and repayment is likely to be ignored, then the private sector has the funds, assets, and the liabilities are functionally not there. In that case state lending does, functionally, create net financial assets.

anon Reply:
October 8th, 2010 at 7:35 am

That particular paper has been examined and discredited multiple times on this blog and others.

The author shows he knows nothing about Chartalism by attempting to frame Europe in that context. Bill Mitchell has devoted numerous blogs to pointing out the fundamental error of doing so. Chartalism is a description of money under a single sovereign currency issuer. There is no such single sovereign for the Euro zone – there is no supranational fiscal authority that corresponds to the ECB. That is the fundamental problem with the EZ monetary and fiscal system. Mosler has also written about it and proposed the fix of the ECB assuming in part such a fiscal authority role by crediting national bank accounts at the ECB on a pro-rata basis. The actual fix so far has been a sort of supranational insurance fund whereby the EZ as a whole backs the fiscal survival of its weaker members through ECB direct market intervention plus a separate rescue fund. But these sorts of fixes are necessary because Europe has been set up under a single monetary authority along with national deficit constraints that effectively usurp the true Chartalist potential of national governments.

Erroneous:

http://www.ucm.es/info/ec/ecocri/eus/Febrero.pdf

Reply

WARREN MOSLER Reply:
October 8th, 2010 at 7:40 am

never heard of febrero and he’s wrong. so is mehrling, on many things. and wray makes my point.

you can put anything you want on wikipedia. it’s not an authority on anything. the fact that you use it as such shows your level of scholarship.

all currencies that had runaway inflation had extremely large amounts of bank debt that clearly didn’t give the currency value or stop ‘inflation.’

and they all issued govt bonds which also necessarily did nothing to reduce aggregate demand.

Treasury secs serve to ‘offset operating factors’ at the fed and don’t alter net financial assets (monetary aggregate). This is a matter of accounting, an identity.

read ‘soft currency economics’

Japan had the world’s largest ‘quantitative easing’ policy that resulted in maybe 30T yen in excess reserves which did nothing for lending or the economy or in any way alter the price level or weaken the currency.

All fed research shows QE does nothing apart from adjusting the term structure of rate including the latest paper by Seth Carpenter on this website.

There is no quantity channel.

tsy secs do alter the term structure of rates.

The question is whether the term structure of rates alters the level of the currency.

The bank of england’s research concluded the evidence is inconclusive not long ago.
Same with all central bank research on the subject.

You can try trading currencies based on interest rate policies.

good luck!

Reply

I have read all of your writings and find them quite interesting. This explains my plethora of comments. However, your responses are unclear to me. My question boils down to the following: why not raise funds required for public spending exclusively through short-term debt and do away once and for all with the distortion of the economy which comes with taxes?

Reply

WARREN MOSLER Reply:
October 5th, 2010 at 7:55 am

in the first instance, tax liabilities create a nominal demand for units of the currency which then allows govt to then spend it’s otherwise worthless currency.

govt borrowing is best thought of as following spending and functions as interest rate support but does not alter the economy’s net financial assets.

so from inception, without taxes there would be no spending and nothing for govt to borrow

see ‘soft currency economics’ on this website.

Reply

“the value of the dollar was only as good as the federal government’s ability to enforce tax collection”

Why should this be so? The value of the dollar derives only from demand from the currency to pay for dollar-denominated goods and services. It is not clear to me how it is more or less demanded in proportion to the federal government’s ability to enforce tax collection. If the underlying problem is the threat of inflation caused by an excess of demand over supply, then the problem is not tax collection nor is the solution to dampen demand. The problem is a paucity of supply and the solution is to increase supply.

Reply

WARREN MOSLER Reply:
September 30th, 2010 at 10:04 pm

sounds like you need to read the 7 deadly innocent frauds or some of the ‘mandatory readings’ on this website, thanks!

Reply

s/b When the Fed funds target rate is raised by the Fed, it use sopen market operations to reduce base money and not to increase it.

Reply

WARREN MOSLER Reply:
September 30th, 2010 at 9:07 am

actually, the fed used to keep the banks net borrowed for a small amount, and so all it had to do when it changed its target rate was change the rate it charged the banking system for the needed funds. quantity didn’t change at all.

today, with excess reserves in place, all it needs to do to hike rates is raise the rate it pays on reserves.

Reply

all evidence confirms taxes reduce aggregate demand.

Reply

What would be the effect of setting government spending at 19% of GDP (Niskanen’s number) and eliminating tax collection entirely?

Reply

warren mosler Reply:
September 28th, 2010 at 8:52 am

with no federal or state taxes it’s instant hyperinflation

Reply

Alexander Doty Reply:
October 1st, 2010 at 5:48 am

Inflation is only possible if an increase in the monetary base is permitted to accommodate excess aggregate demand by means of an increase in prices. Why should we assume that the central bank would accommodate an excess of aggregate demand through an expansion of the monetary base? A constant level of optimal public spending and a concomitant expansion of the monetary base for this purpose would limit the growth of the monetary base to the rate of public spending. Why should this be inflationary?

Reply

Alexander Doty Reply:
October 1st, 2010 at 2:10 pm

To the extent that the rate of public spending and concomitant expansion of the monetary base is excessive, the central bank may compensate by reducing the monetary base with the issue of debt.

WARREN MOSLER Reply:
October 3rd, 2010 at 8:24 am

issuing debt is just a ‘reserve drain’ to support interest rates. you have a lot of catching up to do- please start with ‘soft currency economics’ under ‘mandatory readings’ on this website

Alexander Doty Reply:
October 2nd, 2010 at 2:26 pm

Here’s how it works:

1. The Treasury sells one-year obligations to fund the public sector fiscal budget – this is accomplished in 52 equal tranches over the course of the fiscal year.

2. The Treasury begins to retire the one year obligations at the end of the fiscal year – this is accomplished in 52 equal tranches over the course of the following fiscal year.

3. The net result is that there is a permanent revolving debt equal to the public sector budget and the monetary base is increased steadily by the amount of interest paid on the debt.

4. The level of Treasury borrowing can be adjusted to exceed or fall short of the public sector budget according to whether economic stimulus or dampening is targeted. The size of the permanent revolving debt in relation to the size of the economy will increase during stimulus periods and decrease during dampening periods. The net result will be that one cycle cancels the other over time.

WARREN MOSLER Reply:
October 3rd, 2010 at 8:34 am

the level of tsy borrowing has nothing to do with aggregate demand. there is no channel

WARREN MOSLER Reply:
October 3rd, 2010 at 8:11 am

there is no channel from the ‘monetary base’ to aggregate demand. See the Fed’s Seth Carpenter’s paper on this site.

“In conformity with economic theory, the spending effect was larger when the tax change was legislated to have a permanent effect on tax liabilities.” The effect of tax changes on consumer spending, Steindel, Charles, Current Issues in Economics and Finance, December 1 2001 http://www.allbusiness.com/marketing/market-research/884096-1.html

Reply

William A. Niskanen, the chairman of the libertarian Cato Institute says: “judging by the last twenty-five years (plenty of time for a fair test), a tax cut of 1 percent of the GDP increases the rate of spending growth by about 0.15 percent of the GDP a year. A comparable tax hike reduces spending growth by the same amount” (http://www.theatlantic.com/magazine/archive/2006/06/stoking-the-beast/4862/2/)

Reply

Stipulating that your assertion of how taxes are used to control aggregate demand, is there any evidence that this technique does in fact have the intended controlling effect?

Question: If the government doesn’t tax because it needs the money to
spend, why tax at all?
Answer: The federal government taxes to regulate what economists call
“aggregate demand” which is a fancy word for “spending power.” In short, that means that if the economy is “too hot,” then raising taxes will cool it down, and if it’s “too cold,” likewise, cutting taxes will warm it up. Taxes aren’t about getting money to spend, they are about regulating our spending power to make sure we don’t have too much and cause inflation, or too little which causes unemployment and recessions.

Reply

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.

Reply

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.

Reply

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.

Reply

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.

Reply

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!

Reply

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

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.

Reply

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?

Reply

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.

Reply

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.

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.

Reply

Steve Reply:
August 8th, 2010 at 9:11 am

excuse me, 1a from post #63…..

Reply

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.

Reply

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.

Reply

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.

Reply

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).

Reply

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!

Reply

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?

Reply

WARREN MOSLER Reply:
August 2nd, 2010 at 10:52 pm

convertible in that the govt itself guarantees conversion at fixed rate

Reply

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.

Reply

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

Reply

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.

Reply

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!

Reply

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.

Reply

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?

Reply

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.

Reply

Where are parts 2 and 3 please?

Reply

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.

Reply

How to make things complicated, by Mark Thoma:

http://moneywatch.bnet.com/economic-news/blog/maximum-utility/the-feds-exit-strategy/455/

Reply

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.

Reply

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

Reply

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.’

Reply

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 …

Reply

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!

Reply

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

Reply

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

Reply

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!

The 7 deadly innocent frauds: Where are the missing chapters?

Reply

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?

Reply

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!

Reply

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

Reply

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!

Reply

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.

Reply

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.

Reply

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)?

“…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?

Reply

What happened to sections 2 & 3?

Reply

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/

Reply

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.

Reply

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.

Reply

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?

Reply

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 ; )

Reply

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,

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?

Reply

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.

Reply

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?

Reply

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.

Reply

Deficit Terrist Reply:
November 3rd, 2009 at 2:55 pm

Winter, Mcardle was invited to a session of bloggers at the treasury, why didn’t she show? Isn’t she a friend of yours?

Reply

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://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?

Reply

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.

Reply

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?

Reply

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.

Reply

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).

Reply

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.

Reply

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?

Reply

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?

Reply

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.

Reply

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.

Reply

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.

Reply

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.

Reply

What other seriously counterproductive issues do private currencies have Warren?

Reply

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.

Reply

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.

Reply

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?

Reply

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.

Reply

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?

Reply

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.

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.

Reply

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.”

Reply

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.
.
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.
.
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.
.
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.
.
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.
.
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.
.
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.
.
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.
.
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.
.
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.
.
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.
.
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.
.
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.
.
Meanwhile, each year the increased debt will help keep output high and unemployment low, benefiting our children with additional income, goods and services.
.
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.
.
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

Reply

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.

Reply

Really good stuff, Warren. Required reading this fall semester, for sure.

Reply

Yes, ideas for the right publisher welcome!

Reply

Potomac Oracle Reply:
January 3rd, 2012 at 7:30 pm

@Warren Mosler, You may want to check out Ellen Brown’s publisher. She had a hell of her time getting “The Web of Debt” published here because the Fed didn’t want it in circulation.

Reply

WARREN MOSLER Reply:
January 4th, 2012 at 6:26 am

i wouldn’t publish it either. too many material errors

Reply

Robert Bostick Reply:
January 14th, 2012 at 10:51 am

@WARREN MOSLER,
Really?

Well, I woundn’t know, not being an expert just a73 y/o someone looking for a better way to view the universe.

Thanks for the feedback.

Have you done the Diane Rhem’s Show or anything at MSNBC, King World News?

I wish you and your outstanding group of colleagues would go “real big time media” between now and June. Just getting the OWS folks to focus on facts like, “the U.S. can’t go broke”…”taxes don’t pay for anything”…”zero interest rates are good”, and being the “sole issuer of the currency” would stir the pot of political discourse enough to get the Tea Party to wonder about its harboring deficit terrorists.

Again, thanks for your brilliant insights.

WARREN MOSLER Reply:
January 16th, 2012 at 7:47 am

been trying, thanks! feel free to promote from your end!

Robert Bostick Reply:
January 15th, 2012 at 1:56 pm

@Potomac Oracle,

I know I should become thoroughly familiar with the principles of MMT but being an impetuous septuagenarian, here goes.

What constrains a sovereign currency nation from funding all of the government/public sector budgets of all of its subordinate political jurisdictions (55,000 plus here), bypassing bond markets, and issuing to these entities interest free credits/currency?

Reply

WARREN MOSLER Reply:
January 16th, 2012 at 8:00 am

nothing operational