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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Response to Dem debate

Posted by WARREN MOSLER on March 2nd, 2010

I arrived in Connecticut to begin a ‘listening tour’ before making the decision to run in the Democratic primary for United States Senate. Tonight I listened carefully to the Democratic candidates as they put forth their agendas for restoring the US economy and both fell far short of the mark. Neither had a credible economic agenda, and what they did propose- tax increases- would only make matters worse.

Making sure that people working for a living are paid enough to be able to buy the goods and services they produce has long been a core economic value of the Democratic party. And what drives the lion’s share of business, both large and small, is the competition to attract the consumer’s dollars by producing the goods and services working people want. Unfortunately, the current situation is clearly one where people working for a living are not taking home enough money to buy what business is desperately trying to sell. Consequently, business has been contracting and laying people off, which makes matters even worse.

The Republican response has traditionally been to give tax cuts and other monetary incentives to business rather than to the people doing the work. That does not result in new hires for the businesses, as business only hire when orders and sales pick up. Instead, it results in higher profits with the hope that those profiting will hire more domestic help and more gardeners, and produce a few jobs that way, which is known as trickle-down economics.

So while, in addition to tax hikes, both Democratic candidates for US Senate proposed tax relief, it was for small businesses- the traditional Republican approach, and indeed, the approach of the Obama administration. Note that last week’s jobs bill featured a $5,000 payroll tax reduction for businesses, and not for employees. In contrast, I have long been proposing a full ‘payroll tax holiday’ where a couple earning a combined $100,000 per year would see their take home pay rise by over $650 per month. That would be enough to fix the economy as people could then make their mortgage payments and car payments, and even do a little shopping. This is the Democratic approach which also gives businesses what they really need- people with enough money to spend to buy their products. It’s people with money to spend that creates the backlog of orders which then quickly results in the millions of new jobs we need to restore our economy to full employment levels and prosperity. The payroll tax holiday also reduces costs for business. In a competitive environment this translates into a combination of both lower prices and better cash flow for business that can be used for the new investment the recession has long delayed.

The reason the Democrats don’t propose this kind of tax cut is because they can’t answer the question of ‘how are you to replace the lost revenues.’ And, in fact the Obama administration has currently put Medicare and social security cuts on the table to ‘pay for’ what they’ve already spent. What both Democratic candidates are displaying is a failure to understand the difference between the function of Federal taxation and State and local government taxation. I grew up on the money desk at Banker’s Trust on Wall St. in the 1970′s, ran my own investment funds and securities dealer for 15 years, currently own a small Florida bank, and visit the Fed (Federal Reserve Bank) regularly to discuss monetary policy and monetary operations. I know how the payment system works, as does the Fed’s operations staff.

What we all know is that when Federal taxes are paid, all the Fed does is change the numbers down in our bank accounts. For example, if you have $5,000 in your bank account, and you pay a Federal tax of $1,000, all the Fed does is change the 5 on your bank statement to a 4, so you then have only $4,000 in your account. With online banking you can watch exactly that happen on your computer screen. The Fed doesn’t ‘get’ anything. It just changes the numbers in your account. And when the Federal government spends, it just changes numbers up in our bank accounts. It doesn’t ‘use up’ anything. In fact, the Federal government (unlike State and local governments and the rest of us who do need money in our accounts to be able to spend) never has nor doesn’t have dollars. Think if it as the score keeper for the dollar. When a touchdown is scored and 6 points go up on the scoreboard, does anyone ask where he stadium got those 6 points? Can the stadium run out of points to post on the score board? Of course not!

So why then does the Federal government tax, when it doesn’t get actual revenue (it just changes numbers down in our accounts) and it does not use up anything when it spends (it just changes numbers up in our accounts)? The fact is, taxes function to regulate the economy by controlling our take home pay. If taxes are too low, the result is excessive spending and the strong upward pressure on prices we call inflation. If we are over taxed, as we are today, and the Federal government is taking too much out of our paychecks, the result is a drop off in sales by businesses, and rising unemployment. Federal taxes are like the thermostat. If the economy is too hot (something I have never seen in my 37 years in the financial markets), they can be raised to cool it down. And when the economy goes ice cold, like it is now, my full payroll tax holiday is in order. The Federal government’s job is to keep the economy just right by keeping taxes low enough so people working for a living can afford to buy the goods and services they are capable of producing.

That’s what fiscal responsibility is all about. But until our politicians understand the difference between State finances and Federal finances, the will continue to fail to make sure our take home pay is high enough to sustain the high levels of output and employment that are the hallmarks of American prosperity.

Let me conclude with a word about China. It was stated in the Democratic debates and not disputed that the US was borrowing $4 billion from China to pay for the war in Afghanistan. However, close examination of monetary operations shows this is not at all as it seems. China has what amounts to a checking account at the Federal Reserve Bank. China gets its dollars by selling goods and services to the US, and those dollars are paid into that checking account at the Fed. And US Treasury securities are nothing more than fancy names for savings accounts at the Fed. So when China buys US Treasury securities, all the Fed does is shift China’s dollars from its checking account at the Fed to a savings account at the Fed. And when those Treasury securities become due and payable, all the Fed does is shift the dollars in the savings accounts (plus interest) back to China’s checking account at the Fed. That’s it. Debt paid. And it happens exactly this way every week as billions of Treasury securities are purchased and mature. And this process has no connection to Federal government spending for the war or anything else. Spending is always nothing more than the Fed changing numbers up in people’s bank accounts, no matter what China might be doing with their Fed accounts. That’s why the ‘national debt,’ which is nothing more than dollars in savings accounts at the Fed, has never created a financial problem, and never will, either for us or for our children. Yet the administration, the media, and the two Democratic candidates for US Senate from Connecticut have the story completely wrong as well, which results in proposals which are bad for Connecticut and bad for America.

America is grossly overtaxed and needs a full payroll tax holiday NOW to stop the bleeding and restore the American dream. The only thing standing in the way of economic prosperity is a lack of understanding of our monetary system.

Warren Mosler

95 Responses to “Response to Dem debate”

  1. Min Says:

    To take the viewpoint of a skeptical listener, one might think that you are trying to pull the wool over people’s eyes by telling half-truths. For instance,

    “What we all know is that when Federal taxes are paid, all the Fed does is change the numbers down in our bank accounts.”

    Is that really all that happens? Yeah, I know that physical dollars are not exchanged when I write a check. Maybe all this about changing numbers is a way of getting us to take our eyes off the ball. When I write a check to anybody, the bank changes the numbers in my bank account. But it also changes the numbers in the other person’s account. Doesn’t the Treasury have an account with the Fed? Doesn’t the numbers in that account change, too? Besides, isn’t it my bank that changes the numbers in my account, not the Fed? Is this guy leveling with us?

    “In fact, the Federal government (unlike State and local governments and the rest of us who do need money in our accounts to be able to spend) never has nor doesn’t have dollars. Think if it as the score keeper for the dollar.”

    Well, if all the government is is the scorekeeper, why does its score show up on the scoreboard? I can even go online and watch the national debt get bigger. I know the debt doesn’t actually change every second like the numbers on that scoreboard, but it still shows the right picture, doesn’t it? We are getting deeper and deeper in debt all the time. If I didn’t pay off my credit card, the numbers would still keep changing, too. But I would still be obligated to pay it off. To say it is just numbers is to deny reality.

    ” China has what amounts to a checking account at the Federal Reserve Bank. China gets its dollars by selling goods and services to the US, and those dollars are paid into that checking account at the Fed. And US Treasury securities are nothing more than fancy names for savings accounts at the Fed. So when China buys US Treasury securities, all the Fed does is shift China’s dollars from it’s checking account at the Fed to a savings account at the Fed. And when those Treasury securities become due and payable, all the Fed does is shift the dollars in the savings accounts (plus interest) back to China’s checking account at the Fed. That’s it. Debt paid.”

    Again, is that really all there is to it? The same thing happens when I pay off a debt, but the numbers in my account change, too. Are you saying that the national debt doesn’t increase when we run a deficit to pay interest to China? Get serious! Besides, it sounds like you are saying that we don’t have to worry about the dollars that China has. That makes them rich in our money. And just like rich people have influence and can call the shots, doesn’t that give them influence over us? Do we want China to call the shots for America?

    Look, I get it that the government can print all the money it wants. I get it that money is numbers in bank accounts. So what? We still balance the books, don’t we? Every year the national debt increases by the amount of the deficit, doesn’t it? All of this talk about changing numbers in accounts is irrelevant. We still need to be fiscally responsible. If we just printed money when we wanted to, without balancing the books, we would end up like Germany in 1923 or Zimbabwe, — or like America after the War of Independence, when the paper money issued by the Continental Congress was worthless.

    The Republicans have run this country down with their irresponsibility. If the Democrats tax and spend, the Republicans cut taxes and spend. Bush starts two wars without paying for them, cuts taxes, and tells us to go shopping! If we don’t restore responsibility, we will never gain control of the national debt. You say that we are overtaxed, and have been for 37 years. That sounds nice, but it just makes you a Republican in disguise. You are obviously sincere with your talk about changing numbers, but you are fooling yourself into being irresponsible, and you are trying to fool us.


    Please understand that I do not believe the words that I am putting in the mouth of the hypothetical skeptical listener. (Except that I do think that you oversimplify a bit too much.) I am trying to put voice to concerns that people have, even if they do not buy the scare tactics of people who say that America is bankrupt, and so on.


    Tom Hickey Reply:

    Min, it all comes down to the false household-government budgetary analogy and confusion of meaning resulting from the use the same term, e.g., “debt,” for different concepts at the vertical (government-nongovernment) vs. horizontal level (nongovernment). This ideological myth has to be replaced with operational reality in the public mind.


    Min Reply:

    Hi, Tom! :)

    If I thought that operational reality was all it took, I would not have written that note. I think we first have to allay unfounded fears, but on top of that, we have to say what responsible government looks like. I like the Bible story of the 7 Fat Years and the 7 Lean Years, since it promotes countercyclical policy. OTOH, I am by no means sure that that is good economics, nor how, given the last 30 years, how to implement it politically.


    Matt Franko Reply:

    I get that you’re playing devils advocate…

    Would this help your skeptical person, to visualize where the numbers go? Resp,


    Min Reply:

    Thanks, Matt! :)

    I think it would help, but I think it would make the skeptical listener even more suspicious that Warren is just playing a numbers game.

    I hope I captured that feeling with the question, if the government is just the scorekeeper, why is its score on the scoreboard?

    BTW, I am currently caught in a spam protection loop. By the time I get back to the previous page and enter the new sum, it has changed. :(


    Tom Hickey Reply:

    Min, over at Bill Mitchell’s place this is called “the last mile.” Given the level of public ignorance, disingenuousness of the self-interested, and media complicity, the last mile looks like sheer cliff. But until it is scaled, the nonsense will go on and the people’s business will not get done.

    Warren’s running is an important step in the last mile. He will get a lot more news coverage running for a senate seat then for president. Hopefully, some of that will give him a chance to explain this more fully. I and others have offered suggestions on other thread about what we think need to be done.

    I think that you playing the devil’s advocate is a useful exercise. These are kinds of questions that will be fielded and answers must ready that ordinary people can understand and remember. Warren has already laid the groundwork of this in “The 7 Deadly Innocent Frauds.”

    I think the scoreboard analogy is a good one. Most people think that government has money in the bank like they do and get it from revenue, like them. They know that the government’s revenue comes from taxation. So this this household-government budgetary analogy is at the basis of their thinking about government spending and borrowing.

    The core of MMT is the vertical-horizontal relationship of government and nongovernment. People need to see how the government is not financially constrained as currency issuer, while households, firms and states in the US are revenue constrained.

  2. Slawek Galimi Says:

    Why Warren Mosler will never be a Senator or President:

    1) You understand reserve accounting. However, once our politicians understand what you already know, and the restraints of leaving debt to our children are removed, it will be like kids in a candy story where everything is free.

    2) Tax policy takes far too much time to implement as a governor of economic activity and automatic stabilizers are based on nominal income, not real economic activity. Politicians aren’t capable of taking away the punch bowl. That’s a major contributing factor to the sub-prime mortgage bubble. What started out as a noble policy objective ran amok with Maxine Waters and Barney Frank, your new colleagues in the Democratic Party! Wow…that’s a scary thought!

    3) Your position that inflation up to 40% is not harmful is a complete non-starter. Forget it. You even mention that in a position piece and you’re done.

    4) Yes…you grew up in Ct. However, now you live in the USVI. You get a 90% tax break on your income for living there. The media and your competitors will tear you apart and your message will be lost. Elections are won and lost on sound bites, not explanations of reserve accounting.

    Just thinking aloud. Good luck.



    1) You understand reserve accounting. However, once our politicians understand what you already know, and the restraints of leaving debt to our children are removed, it will be like kids in a candy story where everything is free.

    Except they know the voters hate inflation even more than they hate unemployment.
    That’s why they are not being critical of the Fed’s discussion on raising rates even with unemployment excessively high.

    2) Tax policy takes far too much time to implement as a governor of economic activity and automatic stabilizers are based on nominal income, not real economic activity. Politicians aren’t capable of taking away the punch bowl. That’s a major contributing factor to the sub-prime mortgage bubble. What started out as a noble policy objective ran amok with Maxine Waters and Barney Frank, your new colleagues in the Democratic Party! Wow…that’s a scary thought!

    With our current pensions and retirement programs and countercyclical income tax policy it’s highly unlikely a tax hike would be in order.
    And most ‘inflation’ problems are in fact micro issues.

    3) Your position that inflation up to 40% is not harmful is a complete non-starter. Forget it. You even mention that in a position piece and you’re done.

    That’s from a main stream economic study, not my position on anything. I’m the one who wrote “Full Employment AND Price Stability” which shows how we can have full employment (as defined) and enhanced price stability.

    And note you are confirming the political constraint on spending- people hate inflation.

    4) Yes…you grew up in Ct. However, now you live in the USVI. You get a 90% tax break on your income for living there. The media and your competitors will tear you apart and your message will be lost. Elections are won and lost on sound bites, not explanations of reserve accounting.

    I’m in the USVI at the invitation of the US Govt. as part of their economic development agenda. They are still actively attempting to get more people like me down there, but so far without much success.

    Just thinking aloud. Good luck.



  3. Mike Norman Says:

    The current reality is that the Federal Government MUST borrow before it can spend. I know that’s a technicality, but that’s the reality. The Government then pays interest on its debt, which accrues mostly to banks, high net worth individuals and foreign governments. Very little of that interest benefits workers or the general population and even more disturbing is the fact that the payment of interest limits what the government can do to help workers because those interest payments are seen as adding to the deficit. The interest that banks earn factors into their profits and capital and they lend based on their capital. Loans are made to entities that the banks deem worthy even if those loans serve no public purpose (financiing speculation, for example). Again, the general public is a loser in this game because the government has essentially ceded its money creating power–power granted to it by the Constitution–to the private sector. It’s a totally ridiculous scheme that destroys economic democracy.


    Tom Hickey Reply:

    Since the divergence of the specialists from the producers after surpluses where first created, the function of government has been to protect the specialists from the producers. That way that this is usually stated is that the government exists to protect the rich from the poor.

    The current reality reflects that socio-economic structure. MMT shows how to replace it with an operational system that can support democratic reform. The reform itself is a political task. The last big step forward was taken with the emergence of representational government at the time of the American revolution. However, that perpetuated the conception of government protecting the top from the bottom. Time for the next step?


    Min Reply:

    “Since the divergence of the specialists from the producers after surpluses where first created, the function of government has been to protect the specialists from the producers.”

    Not to get too far afield, but where does that theory of history come from? It does not seem to explain the existence of aristocracy, nor the Roman republic. Mandarin China seems to fit, however.


    Tom Hickey Reply:

    It seems that the first specialists to emerge were the priests who developed enough astronomical knowledge to innovate in agriculture and mathematics to account for the surplus, divine land geometrically, etc. This knowledge seemed like divinely inpired magic at the time. These people eventually evolved into the technocrati.

    Another big advance came with innovations in warfare like the chariot, giving the professional warrior class a huge advantage over others It was said that an expert chariot warrior could defeat 10,000 on foot on open ground. These became the ruling and political class.

    See, for example, William H. McNeill, A World History.

    Min Reply:

    Thanks for the reference, Tom. :)

  4. Mike Norman Says:

    I’m starting to understand why most people have a hard time understanding what you (me, we) are saying, Warren. It’s because they are right and we are wrong. Under the current monetary system the government DOES borrow, mostly from banks, and the money that the banks lend to the government is created for the banks by the Fed, which is an independent entity. The very money that we use as a medium of exchange–as the “grease” that facilitates the production and consumption of goods and services, that defines our economy and economic well-being–is created by private bankers who have the final say on who gets it. And WE THE PEOPLE, patsies that we are, pay these bankers interest all because we’ve allowed the government to abrogate its responsibility of being the creator of money.


    warren mosler Reply:

    mike, this like me owing you $20 today and i tell you i can’t pay you until friday even though I have $100 in my pocket because I have a rule i made to myself to only pay on friday.

    self imposed constraints are not imperatives of monetary operations. and they are subject to immediate revision by the govt in question.

    and the govt can’t spend without approving its own expenditures,so technically that a constraint as well.

    anyway, i’m changing planes in dubai enroute to an adb presentation in manila.

    and when i say ‘govt’ isn’t constrained in dollars that includes the whole shootin match- congress/tsy/fed/ and anything else the govt of issue decides to divide itself up into.


  5. JKH Says:

    Banks own a miniscule amount of government debt. Commercial banks own $ 100 billion and dealers own another $ 100 billion, out of a total float of $ 7.5 trillion.

    For some reason there’s been an enormous amount of disinformation circulating around the blogosphere over the past year or so on this topic of bank holdings of government debt. That’s not where it is.

    The foreign sector is the huge holder at $ 3.6 trillion. The US has received the real benefit in the trade deficit. Although the zero natural rate proposal would certainly reduce the cost of servicing that debt.

    The rest of the debt interest is going mostly into pension funds where it benefits pension recipients.


    RSJ Reply:

    “The rest of the debt interest is going mostly into pension funds where it benefits pension recipients.”

    The amount of treasuries held by those financial companies that primarily provide maturity transformation, holding longer term assets and issuing liquid short term liabilities is approximately equal to the number of treasuries held in the sum of state and local + federal pension funds, as well as private pension funds, (non-money market) mutual funds, CEFs and ETFs.

    Both groups hold about 10% of treasuries outstanding.

    These ratios have been changing as the financial system has changed. In the 1950s, the banks held about 1/3 of the treasuries, households held 1/3 directly, and the pension/mutual/ETF funds held about 2%. So those who still view banks as one of the primary consumers of treasuries are behind the times, but those believing that pension funds are or ever were anything but a bit player in this market are also wrong.

    As the foreign sector’s holdings of treasuries grew, this came at the expense of a decline in treasury holdings by banks and households, not investment funds, whose share grew from 2% to 10%. But the overall bond holdings of the maturity transformation players did not decrease but increased — as the supply of treasuries was insufficient they bought agencies, and when that pool was exhausted, they created synthetic AAA assets to meet their needs for holding safe longer duration debt against their short term liabilities.

    To a lesser extent, the same holds for the investment funds. As the level of financial assets swelled, there was a shortage of safe long-duration debt, although pension and investment funds are not levered as banks and so they are able to bear more risk in the form of lower asset quality than banks.


    JKH Reply:

    You’re right. It’s more dispersed than what I implied. Pension/insurance, mutual funds, households, and state/local governments are all roughly the same order of magnitude right now. The foreign sector is the material standout. I’d associated state/local govs with pension/insurance for some reason.


  6. Mike Norman Says:

    Fine, I stand corrected on the amount of Treasuries owned by banks. I could have looked that up easily enough, but I didn’t. The point is, money creation has been ceded to the private sector and it goes where the financial sector wants it to go. The government MUST borrow under the current monetary structure and it pays interest on that borrowing, which it need not do. (And lots of interest to foreigners, which it need not do, either.) It’s money that could be spent elsewhere. Contrary to what Warren says, the government cannot just “mark up” bank accounts. It is precluded from doing this under the current structure. That is the reality. It also explains why NO ONE is buying this stuff! For Warren to be correct our monetary system would have to be changed to a non-debt money system and the governemnt would have to stop issuing Treasuries and be held to an accounting standard that is inapplicable to its sovereign to issue currency.


    beowulf Reply:

    A Treasury-issued currency (like Lincoln’s Greenbacks) would have the same economic effect as the Fed singly buying and holding Treasuries (since the interest paid on the latter would be refunded to Tsy’s Fed account anyway). In both cases, there’d soon be an increase in excess bank reserves, as the Fed has long operated, they’d soon have to start selling Treasuries (i.e. increase the federal debt) to mop up reserves to meet the target Fed Fun rate.

    The way to get your Greenback and and keep control of interest rates is by paying interest on excess bank reserves (this authority was granted by the TARP bill). From what I’ve read here, the Fed is having trouble using IOR to set the Fed Fund rate (leaving aside why the Fed doesn’t just collect the overnight market interest payments itself via the discount window)– apparently its because there are some Fed accounts anot being paid IOR. if I understand correctly, GSE and other governments controlled accounts.

    Once the Fed can figure out how to steer the overnight rate with IOR, then there’d be no need to sell any more Treasuries to regulate interest rates. I guess that’s the first step, making the IOR regime work. The next step is simple, allow Treasury to overdraft its Fed account to fund deficit spending (overdrafts would not be counted towards the federal debt).


    Min Reply:

    “A Treasury-issued currency (like Lincoln’s Greenbacks) would have the same economic effect as the Fed singly buying and holding Treasuries ”

    To continue as Devil’s Advocate:

    “I don’t give a damn about a greenback dollar.
    Spend it fast as I can.”
    – Jerry Jeff Walker

    Something like 1200% inflation in a few years!

    That inspires confidence — not!


    beowulf Reply:

    Good point. However as I also noted, issuing a Treasury currency leaves unaddressed the issue of excess bank reserves.

    The US handled its next total war (World War II, the First World War ended before the US had completely mobilized) smarter. Treasury borrowed money from the Fed at nearly zero percent interest but controlled inflation by wage and price controls and by jacking up taxes to soak up reserves from the system (I believe that’s when the marginal tax rate went to 91%).

    In 1944 (the year with 1.2% unemployment), the GDP grew by 28%, and the inflation rate was 3.5%. Even if the inflation rate was understated (and hence, the GDP growth overstated), THAT’S a full employment economy.

    Tom Hickey Reply:

    Min, wars are inflationary. Lincoln’s choice was to go all out to win and fight deflation later, or either lose for lack of funding, or else go into huge debt to the bankers? That was the choice. If MMT were understood at the time, they could have avoided inflation by withdrawing excess net financial assets created by war funding through taxes.

    Min Reply:

    Thanks, guys, for the replies. :)

    An important point for the debt scare mongers is that, despite the inflation, the U. S. did not go bankrupt.

    And they did better than the inflation of the Revolutionary War. :)

    warren mosler Reply:

    so do you think greece would be facing the same problems if it was their own no overdraft rule rather than the ecb’s rule?

    of course not. it makes all the difference when any and all constraints on making payment are self imposed rather than external constraints


  7. Mike Norman Says:


    With regard to your comment that the U.S. receives the real benefit from the trade deficit that’s true, however, it is offset by a financial sector that extracts a high cost from the real economy. As good as the trade deficit is, we’re still left paying interest to foreigners. Under a Treasury funded system it wouldn’t be that way.


    Min Reply:

    The skeptical listener likes the idea of not paying interest to foreigners.



  8. JKH Says:

    It’s a good point you make, and fundamental to understanding the truth of the issue.

    Ground zero (no pun intended) for the fiat architecture is the zero natural interest rate proposal, which includes using the banking system as the conduit for all government liabilities. Bank deposit liabilities replace debt. The government pays the banks what it wants on reserves (zero under the proposal I guess) and the banks pay the public whatever they calculate as appropriate (probably zero as well).

    Debt issuance is a chosen detour relative to that ground zero. That’s the reality we live in today.

    But the deeper point around debt is that there’s always a price at which debt can be auctioned. The government DOES create/supply the money at the margin that is required to buy the debt. Availability of funds is never the ultimate issue. The issue is price.

    Similarly with the banks, availability of reserves is never the issue. Loans create deposits, and the money to “fund” the loans is always available in the system as a result. Availability is never the ultimate issue. The issue is price.

    I think the paradigm is largely about getting past false perceptions of “availability” such as “running out of money” – both in the sense of government expenditures and in the sense of bank credit. The money multiplier is a hideous misrepresentation of reality in that regard. That’s why I emphasize capital.

    Even under existing constraints, it helps to be able to deconstruct the logic that got us to where we are.


    beowulf Reply:

    If the economy is too hot (something i’ve never seen in my 37 years in the financial markets), they can be raised to cool it down.

    I just read the other day that at the height of World War II (1944), the unemployment rate was 1.2%. The government has since adjusted the unemployment metrics in several ways (for one thing, the 1944 unemployment rated counted 14 year olds and older, today its 16 years and older), by current measures, I wouldn’t be surprised if 1944 had a negative unemployment rate!

    You know there’s a labor shortage when the federal government takes it upon itself to fund day care centers to keep mothers of young children in the workforce.


    beowulf Reply:

    Shucks, the child care link above isn’t working— to just copy what I was referring to…

    During WORLD WAR II, millions of women entered the workforce in war production areas. The need for an organized childcare program became acute. Congress responded by including provisions in the Community Facilities Act of 1941, then more commonly known as the LANHAM ACT, which created Lanham Act centers for child care… the centers were open to all children whose parents worked in war production areas. The federal government provided 50 percent of the funds needed to operate the Lanham Act centers; states, localities, and parents provided the remaining 50 percent in matching funds. In 1943, the cost to parents for child care in a Lanham Act center was uniformly set at 50 cents a day.


    Matt Franko Reply:

    “The government DOES create/supply the money at the margin that is required to buy the debt.”

    This was key for me (non-economist) to grasp about MMT (got it from you and Scott F)….so as long as the Fed will accept existing issued Treasury securities as collateral in that repo with Dealer Banks, IMO that auction cannot fail. Would you consider this the definition of a sovereign default: “The point where the Country’s own Central Bank will no longer accept the Country’s Government bonds in a collateralized operation”? (ie never gonna happen in the US)


  9. Mike Norman Says:

    The FED creates/supplies the money, not the government. The government can AND SHOULD do it; it is granted that power in the Constitution, but it’s currently the Fed that does it and the Fed is not only independent, but has recently displayed a shocking lack of knowledge as to its own function and does not operate in the public purpose.

    Which brings me to the “public purpose,” something you hear discussed a lot on this blog mostly out of exasperation: That Congress, policymakers, etc, don’t understand the public purpose of the banking system, etc. It’s not that they don’t understand, but rather, that the private banking system is not constituted to operate in the public purpose. It’s private and while it has some elements of public purpose (guaranteed deposits, lifelines to the Fed, etc) is has been handed the sole power of money creation and it’s going to do with that power what it sees fit as a private system. Bestowing that power on the private sector is WRONG and in abrogation of what the Constitution says.


    Tom Hickey Reply:

    According to the Fed:

    “The Federal Reserve is the central bank of the United States. Its unique structure includes: a federal government agency, the Board of Governors, in Washington, D.C., and 12 regional Reserve Banks.”

    BTW, there is no private equity (stock) in the FRS. The profits of the FRS are returned to the Treasury.

    The Treasury is required to offset disbursements $4$ by law. That can be changed politically. There is no real reason that the Treasury needs to issue debt. The national accounting could be handled differently, and excess reserves could be managed through the Fed’s paying a support rate.

    Mike, it sounds to me like you are buying into the conspiracy theory being advanced by Ellen Brown and others about the Fed being privately owned, with the government borrowing from it and paying interest to the bankers. Please, correct me if I am wrong.

    I would like to see the CB and Treasury folded together to avoid this confusion, but as I understand it this is what already happens operationally.


    Paul M Reply:

    Mike, I am layman (not an economist). I am educated professional working man trying to support myself and my family just like millions of other Americans, i.e the target audience for messages posted on this blog. I am the guy you need to convince in order to get the public to buy in. Help me understand, operationally, how the Fed/banking system creates money?

    If I understand Warren’s point correctly, the Treasury “borrows” first then spends.( I understand an unnecessary self constraint) Meaning they issue treasury’s which exchanges noninterest bearing reserves for an interest bearing account thus dropping the reserve balances in the banking system. Then in order to maintain the proper interest rate the treasury replaces those reserves by changing the number in their reserve account?(scoreboard operations) So at the end of the day the reserve accounts returned to their original level and treasuries have increased?

    Illustrated with numbers…

    Beginning Reserve Balances= $100
    Beginning Tsy’s Balances = $100
    Tsy “Borrows”= $20
    Resulting Reserve Balances= $80
    Resulting Treasuries Balances = $120
    Scoreboard Operations adds $20
    Result $220 in total reserves plus treasuries

    I appreciate you help in understanding this.


  10. Tom Hickey Says:

    Warren, before you launch into changing numbers up and down, I would recommend a paragraph or two on the vertical-horizontal relationship and why the household-government budgetary analogy is wrong post-1971. This is at the bottom of most people’s confusion.

    I’ve been following this on Google alerts, and it seems that the “changing numbers up and down” is coming across as “printing money.” Without showing how the household-government budgetary analogy is wrong, what you mean is not clear to a lot of people, including many who should know better but are brainwashed in the talking points.


  11. warren mosler Says:

    ‘they’/govt of issue does just change numbers up and down.

    tsy accounts and fed accounts are just record keeping on ‘their’ side of the ledger and are of no consequence to the non govt sectors.

    and while govt requires itself to sell tsy secs before spending because it doesn’t know any better, it’s still a self imposed constraint easily modified to suit.

    And the fact that it’s self imposed rather than an external constraint makes all the difference. Just ask Greece.

    the 7 deadly frauds covers the household vs govt issue.
    new update on this website now.


    Oliver Reply:

    Warren / Tom: could it be that the problem is not that people aren’t prepared to accept the operational realities but that they are more terrified of the perceived hazards they bear (such as inflation, misappropriation etc.) than of the straightjacket of voluntary constraints which we have somehow learnt to live with? I think (understandably) sullenness towards politics is just as common as towards the financial industry. So, say taking markets out of some equations or merging the Fed and the Treasury would only shift suspicion from one loathed entity to another and there seems to be a natural tendency to spread responsibility to as many independent entities as possible (for cheques and balances). One needs to prove that accountability and transparency would improve and volatility would diminish with a shift in paradigm. To underline the potential power of MMT might be counterproductive because it is precisely this (abuse of) power which people are sceptical of. Dispersing fear could prove to be the better tactic politically. But I guess that’s what you’re doing anyway – just thinking out loud…


    Tom Hickey Reply:

    Oliver, I think this is a major point. People mistrust both “big government” and “big business.” The questions is which they distrust more post-crisis. Of course, there is a left-right divide on this.

    The Fed is “independent” so it will be free of political influence, which is, of course, not so. Moreover, under the present arrangement of “independence,” the Fed is beyond accountability to the people, too. That is a big disadvantage for the people. They need to realize this.

    People are brainwashed into “fiscal responsibility” even though it is against their own interests by the household-government budgetary analogy. They are apparently unaware of and indifferent to the other side of the coin. “Fiscal responsibility” is presently managed at the cost of unemployment, which is actually in violation of the Fed’s congressional mandate.

    However, when it comes to money people are pretty well able to get it if things are explained to them in a way that they can understand. What they have to get over is the idea that government must tax them to fund its spending or borrow to finance it. I don’t think that this is an insurmountable obstacle. Currency issuance versus currency use is pretty simple. I’ve explained the basics to ordinary people and most get it pretty quickly, with great surprise and shock, I might add. They ask why no one seems to know this.

    People need to understand that under the present system of Fed “independence” there is no electoral accountability. They also need to understand that government has the power to maintain real output capacity and full employment, along with price stability chiefly through fiscal policy, and that voters have the power to hold Congress and the president to account in doing so, while they have no say over banks or the Fed. “Power to the people.” This is what the populist movement on the right and progressive movement on the left are about.

    This has to be presented in a simple way they can understand. Wonky won’t cut it. Here’s a good article summarizing the cognitive science of it.

    Easy = True by Daniel Drake (Boston Globe).


    Min Reply:

    “People are brainwashed into “fiscal responsibility” even though it is against their own interests by the household-government budgetary analogy.”

    I wouldn’t call it brainwashing. It’s deeper than that. Andrew Jackson was not brainwashed, he was wrong to pay off the national debt. But who knew that at the time? People blamed Van Buren, who presided over the depression that followed.

    Jackson distrusted the big banks, and that distrust is still strong and widespread. Perhaps Scotch-Irish culture has something to do with that. The stereotype of the Scots is that they are penny-pinchers, but I think that they value fiscal responsibility, as they see it. And in English culture, too, we have “Neither borrower nor lender be.”

    An argument I would like to make — I hope it is economically sound — is that, even under a gold standard, paying off the national debt would be a bad idea. It would leave us without enough base money, and, while the private banks could create money temporarily, they cannot bear the burden of bank runs. Then I would say that being off the gold standard is a boon, because the government cannot go bankrupt, it never has to default, and it can provide as much base money as we need.

    I think that we need to show that, not only are we off the gold standard, it is a good thing that we are not.

    Jason Reply:

    I also agree with Oliver. A current example is the coming fight over public/federal employees salaries, pensions and healthcare compared to the private sector. I sense a rapidly growing anger that state and federal governments are beholden to public service unions and grant them never-ending pay increases and continue with defined benefit pensions that are virtually extinct in the private sector. MMT will have to overcome the hurdle of non-government workers feeling that if the feds can spend without budgetary constraint (and perhaps hand out block grants to states), these public workers will see even more benefits while the private sector sees little benefit.


    Tom Hickey Reply:

    Jason, the problem is not with the public sector but the private sector. The private sector is not compensating workers for productivity increases but rather increasing corporate profits. Any profit beyond a reasonable return on capital/risk is called economic rent. It is similar to Marx’s surplus value that capital extracts.

    The cry should not be to reduce government worker compensation but to give private sector workers a fairer shake. This can be done through tax policy, for example, taxing rent at an accelerated rate.

    The government is now doing the right thing. The private sector needs to adjust, not government.

    beowulf Reply:

    Since Uncle Sam end up bailing out failed pensions anyway, as Dean Baker has suggested, defined-benefit pensions federalized.

    To keep Wall Street happy, defined-contribution 401(k)’s could be kept in the private sector, but large employers and local governments that still funding defined-benefit plans would come out ahead if they could sweep their pension accounts (and future liabilities) into a federal pension system.

    But Jason has a good point. If the government starts spending without budgetary constraint, as a political matter, the money would to have to go to universal programs (healthcare, pensions, infrastructure) and not to feathering the nest of public workers or small group of beneficiaries. As many government subsidy programs as possible (e.g. food stamps, Sect. 8 housing vouchers, corporate welfare) should be zeroed out and replaced with a negative income tax.

    zanon Reply:


    Your claim that private sector is failing is nonsense. If you look at corporate profits, you will see that they are remarkably flat on % basis. Unfortunately for you, everyone has had encounter with Govt employees and has idea of their “productivity” based on their own eyes.

    MMT says nothing about distribution, and this is what this fight is about. At local level, taxes do directly go from private sector to fund public sector, so you are taxing poorer people to pay richer people. Your mary antionette response is typical of Govt worshipper.

    Jason Reply:


    Just out of curiosity, what is the incentive for productivity increases if you tax the resultant “economic rent” as you call it. Should we discourage productivity increases because it tends to pressure wages or employment? The Luddites had the same idea….

    Tom Hickey Reply:

    Zanon, for the last several decades, worker compensation has been flat, productivity has risen, and so have corporate profits. Income and wealth distribution are approaching all time highs.

    zanon Reply:

    Tom Hickey:

    Please do not bore me with your “what’s the matter with kansas” platitudes and Democratic talking points. I am not interested and, as I read NYTimes, I assure you I have seen every one a thousand times before so now find them dull as well as stupid.

    Labor share of income has been flat at about 70% since 1940s, although more if it now comes from benefits and not wages than it did in the past. If corporate profits was going up, then this % must go down, and it has not. This empirically flasifies your boring talking-point claim.

    Of course distribution has changed a great deal, especially in finance industry so beloved by obama, but that was not your point nor am I interested in discussing it with you.

    Tom Hickey Reply:

    Jason, the issue a capitalistic society is incentives, positive and negative. We create incentives to encourage behavior that is beneficial to society and and disincentives to discourage behaviors that have negative consequences for society.

    Taxes used both to withdraw net financial assets from sectors that are overheated and also as disincentives for negative behavior. Conservative think that exploitation of labor is OK in order to incentivize innovation and growth, and progressives do not. Taxes are one way to create a disincentive, while strengthening the bargaining power of labor is another. Progressives recommend using both.

    The problem is that a purely or predominantly capitalistic society capital is treated as the only economic factor that counts. Progressives hold that operationally labor is on an equal footing with capital and should be treated as such instead of being suppressed in the interest of a few.

    This is a philosophical difference that conservatives and progressives disagree over. It comes down to values and so there isn’t much point in disputing it. Each side selects facts to support its position, but it comes down to different ways of seeing the world.

    zanon Reply:

    Tom Hickey:

    Conservatives do not think “exploitation of labor is OK”. And in our “primarily capitalistic society” (hah! how anyone can claim that after seeing banking crises in action is beyonds me) the fact that capital/labor share of income has remained stable at about 70% in LABOR’S FAVOR for over 70 years and claim “capital suppresses labor” is laughable.

    Your truly are religeous zealot on this matter, like Creationist. But just as Creationist will never rethink his belief no matter how many fossils you show him, you will not re-think you belief no matter what facts to the contrary you are shown.

    I live in California. This glorious state has prison doctors making $35K more than San Francisco doctors NOT INCLUDING BENEFITS and having LA COuncil members being the highest paid in the Nation (with LA being a ruin). Don’t get me started on department of water and power, or the murderous barbarians that are muni bus drivers. Or the prison guards.

    there is explitation here going on for sure, but it is not what you think. Not that I expect a true believer such as yourself to be bothered by facts.

    So we have distribution battle here, even with MMT, where policy question is should private sector worker keep more of their income, or should public sector worker (who is better paid) get even more than they do now. Your solution is for private sector to change ratio of 70% in labor’s favor for 70 years to go even further towards labor, through diktat or something, and for distribution from private sector to public sector, which has been increasing for decades, to continue increasing, so pie that private capital and labor are splitting gets smaller and smaller as public takes more of it.

    Given what you are rooting for, even your ridiculous description of what “convervatives want” sounds attractive (although please do not confuse me with conservative, as I want nothing to do with those fools)

    Min Reply:

    Zanon: “{Tom’s} claim that private sector is failing is nonsense. If you look at corporate profits, you will see that they are remarkably flat on % basis.”

    OK, so the fruits of increased worker productivity are going proportionally to profits, but not proportionally to workers, whose wages are stagnant. So where is the difference going? To landlords?

    Thanks. :)

    zanon Reply:


    Labor share of income has been one of the most stable ratios in all of economics in US for about 70 years. It’s right around 70%.

    Other countries do not have ratio nearly so stable. In Germany, I think it varies quite a bit. Why this is the case, I do not know.

    What I do know is that Tom Hickey is flat wrong on facts.

    And as I said before, if you bother to read my post, difference is going to benefits, which are part of compensation, but not of wages.

    Still, remember point of post — Hickey’s argument that $120K unionized bus drivers are part of solution, not lower taxes on regular working folks, who have been held down by evil corporations for at least 70 years and counting.

  12. Ralph Musgrave Says:

    Good article by Warren above, but I agree with Min’s original post above i.e. that Warren does too much “changing numbers on bank accounts” etc. Warren’s political opponents will seize on this. For example W. claims that when China’s Tsys mature and the Fed gives them cash, then “That’s it. Debt paid”.

    My answer: “No, it’s not”. China can use the cash to order stuff made in the US and ship it back to China. Given constant aggregate demand in the US, that would involve US citizens sacrificing current consumption in order to make the latter goods. That constitutes a real repayment of debt: i.e. a repayment with real physical goods.

    Likewise if China sold its dollars and invested them in a different currency that would involve a real standard of living hit for US citizens: similar effect.


    Xy Reply:

    Doesn’t that constitutes a reinjection of the aggregate demand that has been leaking out of the US economy to China?


    John O'Connell Reply:

    @Ralph Musgrave,

    Or else, if MMT is adopted and it works, and the US is at full employment when the Chinese decide to cash in their Treasuries and buy US products, then they will have to bid up prices in order to acquire the goods, i.e., inflation.

    Unless the government responds quickly by raising taxes (by the same amount that China is buying goods), in order to maintain aggregate demand and prevent the inflation.

    Imports are a benefit to the society, and exports a detriment. When the Chinese decide they want to reverse the situation, the party (for us) is over, no?

    In that sense, are not our current trade and budget deficits consuming our children’s production, in the sense that what we consume today from abroad will have to be produced by them and sent abroad? OK, only maybe, but at the option of those who export to us now? Not under our control?



    or, if, when the Chinese do come in and spend their hoard, it’s a one time relative value shift and not inflation that does reduce our domestic consumption until they run out of dollars and the trade surplus goes away.

    however, there are things we can do to reduce our real exports when the time comes, such as direct and indirect export taxes and other measures to reduce the foreign purchasing power of our output.


    Ralph Musgrave Reply:

    @John O’Connell,
    Agreed. Importing stuff from China in exchange for an ever expanding stock of dollars or Treasuries held by the Chinese benefits today’s US citizens. But as you say, there is a POTENTIAL cost to future US citizens if the Chinese decide to spend these dollars on stuff made in the US and shipped back to China.


  13. Tom Hickey Says:

    Ralph, the reason China can buy the Tsy’s is that we bought stuff from them first. If they want to turn around and buy stuff from us, what’s the problem? That’s how trade works. Here there’s just a step in between where the Chinese park their money for awhile before deciding what they want.

    Again, if China transferred its Tsy’s into reserves and used them to repatriate to China or buy forex to get stuff elsewhere, that’s just the way that international trade works. The Chinese wouldn’t have our # if we didn’t buy their stuff. If we didn’t buy their stuff, that would have various effects in the US economy, of course. But we did, in fact, freely decide to buy their stuff and they can take the money and do with it it as they please, just like anyone else who trades with us or us with them.

    Maybe I am missing your point. Are you suggesting that we erect tariff barriers to keep Chinese goods out to prevent them from earning dollars by selling their stuff to us? That’s an option, I guess.


  14. Ralph Musgrave Says:

    Tom: I’m not saying there is a “problem”. I was just disagreeing with Warren’s claim that US debt to China is repaid when Chinese owned Tsys mature.

    Tsys near maturity are little different to cash. Thus the book keeping entries made at the Fed when they mature are of virtually no economic significance.

    What is of real significance is China shipping stuff to the US. That makes the US indebted to China. Fiddling with Tsys, dollars, or other bits of paper etc does not extinguish this debt. The debt is repaid when for example the US exports stuff (physical stuff or intellectual property etc) to China or loads of Chinese tourists come for holidays in the US, etc etc.


    JCD Reply:

    Presumably the folks who sell stuff to the Chinese will be happy to do it. I’m guessing they’ll earn a profit for doing so, which they will either save as US currency or Treasury debt, or they will spend it until someone is willing to hold it.

    The only risk is inflation, which if it is a problem, the government can cure by taxing more or spending less.


  15. Tom Hickey Says:

    Agreed. I didn’t quite get what you were saying, since it is obvious. :)

    I don’t think that Warren’s point overlooks this though. He is just saying that the a time deposit (Tsy) is shifted to a demand deposit (China’s reserve account at the Fed). Nothing else is involved, like having to tax, which most people seem to think is the case. You know, the “mortgaging our kids and grandkids’ future and sticking them with the bill” scare/guilt tactic of the fiscal scolds.

    Of course, China is only going to shift the time deposit to a demand deposit because it has a use for the funds that exceeds the opportunity cost of the interest on the Tsy.


    BSW Reply:

    Another factor that is not discussed very often in all this deficit deception is the simple fact that we are not the only country that would like to have more money to spend. The problems we face are the same ones facing all the other countries around the world including China. The current “system” has worked very well to constrain economic activity resulting in where we have currently wound up.

    The changes Warren and others in this group are advocating can be like letting the Genie out of the bottle – be careful what you wish for. I am sure that is also what contributes to scaring people and will allow people in power who have a vested interest in the status quo to maintain those scare tactics.

    So while it seems obvious to anyone reading Warren’s papers that indeed this could really be true, the devil is always in the details of how we get from where we are now to where we want to be in future.


    warren mosler Reply:

    what the deficit terrorists are worried about is where we are going to get the dollars to pay off all those tsy secs, since, as they further state, they must come from taxing or borrowing, unless we print them (whatever that means) in which case that will be inflationary.

    My point is that’s all total non sense and counter to actual monetary operations.

    Can China spend their dollars? Like the various US admins have been pushing them to do? Yes, they can buy whatever they want from willing sellers at market prices. And if the prices are a lot higher and if there are export taxes or anything else that reduces their purchasing power they can try calling the manager. And, of course, if they did start buying our goods and services our fearless leaders would declare unconditional victory even as our real terms of trade deteriorated to oblivion.

    It’s the blind leading the blind.


  16. Eric Eberhard Says:

    I have seen this kind of silliness before. As to the same tired argument on the score boards — it as usual ducks the devaluation question. If we change the rules in basketball so that a basket becomes 2,000 points (or 3,000) … certainly the score board won’t run out. But, if a super star plays a game before the change and earns 70 points, he is considered a fine player. If after the change, a player earns 2,000 points in a game, they will bench him and fire him shortly. This is the point all these “score board” pseudo-economist gloss over. Of course you can pass them (dollars or points) out willy-nilly — but they won’t have any value if you do that.

    Of course the Fed can print all the dollars they like — the question is, what are they worth? Here? Abroad? How does inflation and value of currency factor in? How about interest rates?

    The other thing ignored is — what is it a score of? The answer is that it is “stored consumption” — In other words, if I earn 1,000 then I am allowed to consume 1,000 worth of goods. If I earn 1,000 and consume 600 and save 400, I expect to consume that 400 at a later date. Meanwhile, the person that borrowed my 400 to spend today, will need to consume less later in order to give me back my 400 with interest.

    So it is not the borrowing and saving by China that matters, what matters is the day they want to consume more. Right now, they consume less than they produce (they are saving) and we are consuming more than we produce (going in to debt). One day, the Chinese are going to want to consume more. say China writes a check to Saudia Arabia for oil … so many checks we can’t get oil … then that argument falls apart. Now the Saudi’s have the “score” in their account, the Chinese have oil in their cars, and we have … nothing.

    At the end of the day, you have to ask yourself a simple question — in life do you really ever get something for nothing??? This notion that we can forever consume more than we produce and that the rest of the world will keep tolerating that … is absurd in the extreme. Often studying things at the extreme make things clear. According to this misinformed post:

    We can spend all we like and borrow it from the Chinese, or print dollars, and it is OK.

    So — everyone in America should stop working! Then the government should stop taxing and instead print money for every citizen — 1 billion dollars for each person each day! Think how rich everyone will be — retired in Beverly Hills with a billion per day in income. Then each citizen can purchase everything they need from China using dollars either borrowed from China or printed. We never have to produce anything!!!! To pay the Chinese interest, we just print more money!!! And the Chinese will just keep shipping us goods in return for these dollars and the whole word will let Americans continue to over consume and under produce for ever and ever, and none of these countries ever expect any goods and services at some future date in return for their lending …

    Yeah, go with that, or join a Tea Party!


    Tom Hickey Reply:

    Warren’s Dallas Tea Party Address


    Tom Hickey Reply:

    Oops. Broken link above. Here it is again.

    Warren’s Dallas Tea Party Address


    Matt Franko Reply:

    You completely ignore the US citizen’s manifest desire to save.


    jcmccutcheon Reply:

    Eric, I give you credit for at least admitting that the government cannot be insolvent in its own currency. That’s a start. Also, you are correct in saying we should focus on real goods and services and not fiat balances in accounts.
    That is an essential part of MMT.

    You arguments about inflation are the canonical argument against MMT. My response inline….

    So it is not the borrowing and saving by China that matters, what matters is the day they want to consume more. Right now, they consume less than they produce (they are saving) and we are consuming more than we produce (going in to debt).

    Right and who is better off? Are you Chinese?
    Answer: we are better off. China is holding the worthless currency. Duh!

    One day, the Chinese are going to want to consume more. say China writes a check to Saudia Arabia for oil … so many checks we can’t get oil … then that argument falls apart. Now the Saudi’s have the “score” in their account, the Chinese have oil in their cars, and we have … nothing.

    I know what you mean but your argument is nonsensical. China will be paying the same price for oil at the margin than we pay. If the price goes up for them it goes up for us too.

    Nobody is saying that we should stop working and give everyone a billion dollars. What is being said here is: We should increase demand by issuing more currency ( via tax cuts) until the slack in the economy tightens up. That is all.

    And the Chinese will just keep shipping us goods in return for these dollars and the whole word will let Americans continue to over consume and under produce for ever and ever, and none of these countries ever expect any goods and services at some future date in return for their lending …
    Exactly. As long as they are willing to continue to accept worthless fiat money in exchange for stuff. We should continue to exploit this. Also, What is over-consume? What is under-produce?


    Greg Reply:


    You seem more interested in maintaining the “value” of the dollar than the value of people.

    The reality IS we are not near broke nor can we go broke. Money is NOT an investment. It is how OTHER investments are priced and a policy tool. Thats all it is. Thinking about it in any other way is fallacious.

    Your China scenario ignores the fact that regardless of how much “dollars” the Chinese save they can still buy all the oil they want. They dont need dollars to do that. The reality of the oil scenario you present is EXACTLY why we need to invest in alternative energy solutions that are out there for the developing.

    You’ve taken Warrens argument to an absurd conclusion that he has never advocated. Lets do the same thing with the opposite argument “Maybe if we just cut govt spending to zero we can pay off the debt in 2 years”, of course we’ll stop paying EVERY govt employee Including the military a salary in the process” Lets see how that works out for us.


  17. jorge rl Says:

    Waren, STAY INDEPENDENT! democratic candidates have a bad chance of getting elected and the goal is to get you in!

    If you must choose a Party go republican and count on the independents to vote you in and then do as you wish because now you have a seat on the table…

    Both Dems and Reps don’t get it so play the card that has the best chance!!


    warren mosler Reply:

    I’ve got Tea Party support as I’m running against the Obama Admin’s record and I’m proposing the largest tax cut of all time.

    And it’s pure traditional Democratic populist working class values as well.


  18. Slawek Galimi Says:

    Warren, 61 posts but not mine. Are you afraid to admit that you get a 90% tax break? Did you get a 90% tax break on your deferred performance fees that were discussed in the FT? If you think keeping this info off your blog will protect you, it won’t. The media is remarkable at sifting through BS.

    By the way, Eric Eberhard is dead right. You clearly understand reserve accounting and the concept that you we won’t default. Beyond that, the policies you derive from that understanding are hugely flawed.


  19. Greg Says:


    I cant dispute the numbers you quote regarding the ratio of capitol/labor in this country but I think there is a lot of “meaninglessness” in them. Essentially what you are saying is that every job still requires labor in the same proportion it has for the last fifty years. Its obvious that labor would be the largest proportion of any cost considering NOTHING gets done without some sort of human effort.

    The numbers that are indisputable over the last 20+ yrs is that the average worker is not reaping the benefits of whatever growth we have had. The upper 1-5% have seen way more growth in income in proportion to their efforts than the average worker. Thats indisputable. Is it fair or right or sustainable? Thats another question entirely.

    You quote public employees in California and point out some pretty astounding numbers that need to be looked at. 120k for driving a bus seems a little excessive but the same question should be asked of bankers and insurance CEOs. They dont get to hide behind the “We’re private sector and its none of your business what we pay our selves”, thats BS!! All their salaries are a cost “passed on” to us consumers, just like they argue taxation is. The conversation regarding what various jobs are “worth” is one worth having but mostly people will all agree that the “other guy” is overpaid and THEY are underpaid.


    jcmccutcheon Reply:

    Zanon, There is not question that things need to be cleaned up in the financial sector and it has been said here by our host that banking should be a public monopoly. However you argument is flawed because we can -for the most part- choose what financial services we buy. That’s not the case for local government. I can’t say: I object to that city attorney making 300K therefore I won’t pay my taxes. If I don’t pay my real-estate taxes they will come and take my house. What you have at the local government level in many places is a highly organized , well funded, politically active block that votes itself into office and votes itself ever increasing and currently unsustainable remuneration. A great example is miami-dade county with unfathomable salaries and pensions handed out.


    Greg Reply:

    Actually Jcmccutcheon I think you have it backwards. We can object to our govt and vote them out if we are organized enough, just like we can boycott a company if we are organized enough. Unfortunately in the private sector we often dont even know what someone makes because it does not need to be disclosed. We boycott companies for reasons other than how they pay their employees and unless we sit on a board of directors we have ZERO chance of removing a CEO whom we think is rewarding himself too well for poor performance.

    We can find numerous examples of public officials who are over paid for what they do and we can find numerous examples of private workers or owners who are overcompensated. Its not a phenomena unique to any particular sector.


  20. zanon Says:

    Greg: I am in no way saying “every job still requires labor in the same proportion it has for the last fifty year”. That is not the correct interpretation of that fact. The fact shows that, in US, labor and capital split profit in aggregate 70/30 and have done so for almost a century.

    Distribution within that is different business, and I have no idea why you think I am supporter of financial system which is what has driven this split. Besides, I do not think of financial industry as being “private” in any way — it is obviously another branch of Government.

    jcmccutcheon: I have no idea what you are talking about as it seems you agree with me.


    Greg Reply:


    Please define “split profits 70/30″ and define labor and capital.

    If you are saying that everyones salary/benefits is labor (including management) and that capital is simply what is left after all costs have been paid, which is profit, thats one thing but if you are saying that labor gets 70% of profits, I’d have to question that. In fact its pretty clear that the average worker is worse off relatively speaking over the last twenty years. Maybe the 70% is being divided by more people and the 30% is being divided by fewer people but then that needs to be factored in as well.


    zanon Reply:


    I am using exactly the same definition as everyone else uses on this topic. Tom Hickey’s broken link points to a rubbish paper, but data is data and you can see this same thing there.

    I am being very precise in what I say, and I explicitly said that these are sector level numbers that do not mention anything about distribution within sector.

    But at tax rates of 40%-50%, you also need to look at distribution between sectors and factor that in. The Tom Hickeys say “don’t look at bloated public sector, have private capital give more to private labor”. I point out this is nonsense.


  21. Sergei Says:

    Zanon, labor share of income is wages. It has been consistently trending down from mid 50s in the 70s to mid 40s now.

    I do not know where you got your 70% number from. It is not true


    zanon Reply:


    Please read my previous comments. Then please look up word “benefits”. Then please learn to add. Compensation is flat. More of it now comes in form of benefits than wages. I have been very clear about difference between “compensation”, “wage”, and “benefit”.

    And you can see my 70% from the very link that Tom Hickey put up LOL! If you can get the link to work, which is exactly what I expect from government union lover. And, the irony is delicious, labor in US gets MORE % of income than it does in the blue-eyed Nordic paradises the Tom Hickeys of this world keep promising us are just one Government Program away. This is very well documented phenomenon just on search away if you use the wonderful Google. Although it is interesting it never gets any play in New York Times.

    I consider my case closed on this topic.


    Sergei Reply:

    Zanon, it is definitely not closed. You should go and check the data before you start teaching how to add. You can start here

    then go to GDP numbers and compare to compensation of employees. If you look at wages and salary then you will arrive at 43%. If you look at total compensation you will get 54%.


  22. zanon Says:

    I salute you for taking effort to 1) actually try to add real numbers, and 2) post link correctly (something with evades Tom Hickey).

    Unfortunately, you would be better off in this instance dropping your crude calculations and simple doing search on this topic which is very old and very well researched.

    Tom Hickey paper is garbage but has the data. Go look at that.
    Or look at either of these. (US only)

    Measuring Labor’s Share of Income by Paul Gomme and Peter Rupert (methodology)


    Sergei Reply:

    the fact that you try to substitute terms does not change anything.

    Each year 100% GDP belongs to the people of the country. So I really appreciate your approach and would even claim that 100% of GDP is income of its people. Good luck!


  23. Phillip Says:

    It would probably help the public’s perception of the Federal Reserve Banks as being privately owned if they didn’t pay dividends to member banks.

    From an email to me:

    Also, here’s the statement from our annual report on the capital stock requirement:

    Capital Paid-in

    The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in
    an amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting with a
    par value of $100 and may not be transferred or hypothecated. As a member bank’s capital and surplus changes,
    its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid-in and
    the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value
    of stock subscribed by it.

    By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paid-in
    capital stock. This cumulative dividend is paid semiannually. To reflect the Federal Reserve Act requirement
    that annual dividends be deducted from net earnings, dividends are presented as a distribution of comprehensive
    income in the Statements of Income and Comprehensive Income.

    I hope this is useful to you.


    Tim DeWolf
    Manager, Research Library
    Federal Reserve Bank of San Francisco



    So what happened with the Conn. election?




    Got about 1% as the Independent Party Candidate


    strawberry picker Reply:

    Failure is good for you Warren, it is a learning experience. How many bad loans do you have at your palm beach bank?

    Mother Jones just released an article how it is beneficial for the banksters and corporations to buy State Judges to corrupt our judicial process – and to add to that here is an article talking about how FDIC lawsuits can be influenced by state law.

    many industry professionals say this only represents the tip of the iceberg of possible damage claims from Federal Deposit Insurance Corp. against directors and officers of failed banks.

    “Many directors still don’t understand the extent of their liability or that the FDIC can and will pursue them in the event of a bank failure,” says Jonathan Hullick, a former senior policy specialist for the FDIC.

    But as the receiver for failed banks and thrifts, the FDIC has three years to file tort claims and six years for breach-of-contract claims unless the failed institution’s home state has a longer statute of limitations.

    So if you bankster dude’s can just deflect attention for 3 years you are off da hook? But Roman Polanski has hillary clinton chasing him 30 years later because he got some sex? Are you FREAKING KIDDING ME?!?!?



    I think we still have the highest capital ratio around at about 14%.

    The problem is the bad loans ate up the last couple of year’s earnings

    I’ve been a personal contributor to the recent deficits with no earnings which means paying a lot less in taxes.

    ESM Reply:

    “So if you bankster dude’s can just deflect attention for 3 years you are off da hook? But Roman Polanski has hillary clinton chasing him 30 years later because he got some sex? Are you FREAKING KIDDING ME?!?!?”


    You appear to misunderstand the logic behind statutes of limitation. They have not been promulgated according to some weird system of justice where the severity of a crime fades with time, or in which a criminal is rewarded for his skill or luck in evading prosecution or capture. The primary reason for such statutes is that the evidence degrades with time, in particular the evidence that a defendant might be able to muster in his defense. Documents get lost, memories fade, eyewitnesses die, etc. A secondary reason is that even the threat or risk of prosecution can be damaging, especially to somebody engaged in business. A potential defendant essentially has a right to demand that the authorities either move ahead with a case or clear the record. The same kind of logic drives the requirement that charges be brought in a timely manner against somebody who has been arrested.

    In the case of Roman Polanski, the trial was over. He simply became a fugitive when he got wind of the fact that the judge would sentence him to jail time. There is obviously no statute of limitation which would or should apply.


    With the FDIC playing wolf looking for weakest sheep in the flock… What chance do you think Citigroup has?

    The SPIC hasn’t even blinked.

    In my opinion, the systemic risks associated with Citigroup now trading under $5 / share and Trevis analysts valuing C at $4.17 / share are grave if earnings don’t materialize.

    The breakup value of this company is higher than its current market-cap anyway right?


    I read the New Haven newspapers and I saw your name listed as Independent for the Governor of Connecticut. Nice try!



    Independent Party candidate for US Senate.

    Got about 1%


    Ankur Patel Reply:

    @WARREN MOSLER, I am a high school student trying to wrap my head around this. This is what i understand:
    When the government sells bonds, it takes money out of the private sector.
    When the government buys bonds from the private sector, it is injecting money into the private sector.
    I understand what a reserve requirement is by a central bank, and the discount and support rates.
    I understand the basics behind Keynesianism- that demand determines supply, and that that govt spending and tax cuts can bring up demand in economic downturns.
    I have tried to read New Economic Perspectives, and i understand what a floating and sovereign currency is, but i don’t know what they mean by non-convertible.
    We are no longer on the gold standard.
    Here are my questions/concerns:
    Why are we not operationally constrained by revenue? If China or people in our country buy bonds so the government can get money, then wouldn’t there be a point where we would have to repay the principals on the bonds (with interest)? Why is it better to have short term bonds instead of long-term ones? Doesn’t growing the national debt devalue the dollar (and i understand that having a very strong or very weak currency can be bad, but is there reason to be worried because a weaker dollar will cause more expensive imports?) I have often heard people like Ron Paul say that when the Fed prints money, we raise the price of imported oil- is it true? I read that MMT challenges the traditional view on imports and exports by favoring imports and claiming that exports are bad-why? I have been leaning towards Keynesian and Post-Keynesian ideas because i have grown frustrated with the current austerity rhetoric, and MMT seems appealing, but i can’t grasp the concepts. Could you or someone else knowledgeable in MMT help me?


    Ankur Patel Reply:

    @Ankur Patel, Also, im being critical, im just confused about what you, L.Randall Wray, and others have been proposing

    Ankur Patel Reply:

    @Ankur Patel, *not being critical

    John O'Connell Reply:

    @Ankur Patel,

    Ankur, read Warren’s “mandatory readings”. Most of the answers to your questions are there.

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