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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.

MMT and Fed/Treasury operations

Posted by WARREN MOSLER on August 30th, 2010

Excellent- an instant classic!

Modern Monetary Theory—A Primer on the Operational Realities of the Monetary System

By Scott Fulwiller

27 Responses to “MMT and Fed/Treasury operations”

  1. Rodger Malcolm Mitchell Says:

    Scott’s paper is accurate, but it won’t win the battle for the hearts and minds of the public, the media and the politicians.

    The debt-hawks are winning, because they use simple, everyday terms to put forth their pseudo-logic. Your book is the best I’ve read at informing the people, who make the decisions that affect our lives.

    The MMT authors who knew how to write for the people, rather than writing for other economists, don’t receive the respect they deserve. The “other side” seems to have a lock on plain speaking and plain writing, even though what they say and write is nonsense.

    Rodger Malcolm Mitchell

    Reply

    Scott Fullwiler Reply:

    I agree, Roger, but this wasn’t necessarily intended for the layperson in the first place. A description of how MMT’ers mean by the term “operational” by necessity is going to have to get into some details that many won’t want to wade through. Fine with me–for those that want to, and there’s quite a few regular commenters on the blogs that apparently do want to, this was for them.

    Reply

    Tom Hickey Reply:

    Thanks for a great post, Scott.

    Reply

    Tom Hickey Reply:

    Rodger, sometimes truth is complex. :)

    The problem is that when you simplify MMT principles, they you are accused of either being simplistic or some “obvious” argument is mounted against a misperception. If you state the case professionally, you lose the bozos who are too lazy to read and think things through. Damned if you do, and damned if you don’t

    Reply

    Scott Fullwiler Reply:

    Exactly. I guess the only way to deal with it is to recognize there is a time/place for both, and try to do that as well as possible.

    Thanks to both of you, Tom and Roger, for helpful comments at NC.

    Reply

    Scott Fullwiler Reply:

    Oops, misspelled Rodger. Sorry.

    Unforgiven Reply:

    >The debt-hawks are winning, because they use simple, everyday terms to >put forth their pseudo-logic.

    Point well made. This is where some work is sorely needed; thanks to Warren for leading the charge!

    Andrew Reply:

    Rodger is totally correct. If you use the term “balance sheet” in describing why government can spend without taxing or borrowing, you stand no chance whatsoever in convincing the public that your view of the world is reasonable.

    The constitution gives the government the right to create money. The fact that the government creates treasury bonds instead of money is incredibly problematic to the understanding you seek to provide. (I know that you would say the government creates money as well, but it APPEARS that the government collects or borrows money, rather than creating it). Also problematic is the fact that private banks are given the privilege to create money accorded the government.

    It isn’t about whether or not the current system works or doesn’t work, it’s that the current system is too complicated for reasonable people who don’t want to make a study of MMT (pretty-much everyone) to be convinced that it makes sense.

    If the real goal is something other than academic, and I think it is, another tact is needed.

    P.S. – I tried to get my usually thoughtful father to read Warren’s “Seven Deadly…” and I failed – he hit the reference to Laffer and decided that Warren couldn’t know what the heck he was talking about.

    Reply

    WARREN MOSLER Reply:

    like trying to convince people the earth was round, or that the earth went around the sun. that stuff took hundreds of years

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    We don’t have that long.

    I think a lot more could be done with the numbers. And graphs. Show how the surpluses of the late ’90′s led to the recession of 2001-2. How the deficits of the ’80′s led to growth in the ’90′s.

    I think the concept of vertical and horizontal can be made understandable to anyone. That’s a start. Compare it to how it worked under the gold standard, but keep it simple. Just that will be enough to show people that things are different now.

    Emphasize the fact that much of what is considered “normal” economics is based on a hard money system, which we don’t have anymore. It’s not that those ideas are wrong, they just fit with a different world. Like applying the rules of football to soccer.

    The points on a scoreboard is a good analogy. And people will understand the idea of moving the bits around in a computer, rather than transferring gold bars out of Fort Knox. Computers are a familiar thing nowadays. People are aware that they don’t physically handle their money very much anymore.

    You have to watch your words. “Unconstrained” is death. It conveys irresponsibility. Whenever you discuss that idea, make sure to mention that excessive money creation is BAD. (Say it loudly, in capital letters.) And only then say that insufficient money creation is just as bad.

    ELR vs. unemployment and welfare will get lots of people on your side that won’t need to understand the mechanics of central bank operations. Actually, nobody outside central bankers and their watchdogs needs to understand that. MMT emphasizes it way too much.

    The policy implications are the important thing. You need a good way to say with precision (different from accuracy) what this year’s deficit should be, given this year’s size of the private sector economy (in historical context). How much money needs to be created by government to make up for the shortfall of private spending, and put everyone back to work? You say, look, in 2007 there were 138 million people working, and now there’s just 130 million. Those 8 million people made $400B in salary, so if we want the same GDP we had in 2007, we need government to pick up the slack to the tune of $400B, either in tax reductions or increased buying of goods and services. But the 2007 GDP isn’t enough for 2012. It’s not just those 8 million who lost jobs in the past few years. The population has increased, productivity has increased, and prices have increased, and today about 17% of the labor force, that’s about 24 million people, are not working to their full capacity. So the shortfall to full employment now is more like $1.2 – $1.6B (be prepared to “show your work”, as they say on the physics exam). That’s the deficit we need, just to get back to even.

    Then you can talk about spending it wisely. No more un-shovel-ready. No more bankrupt Solar companies and bridges to nowhere. The Federal Government is getting all the stuff it needs already (use words like “stuff”, it’s better than “goods and services”), and wasting a lot of money on the side, and in the process. We don’t need more “federal spending”. Payroll tax cuts and grants to States put the money quickly into the places where it is needed, and will be used to buy stuff and hire people that we need now.

    Say something about what we would do if we “overshoot”, so that this won’t cause excess demand and inflation. Automatic stabilizers are easily understood. People working pay more taxes than people on welfare, and collect fewer unemployemt checks. Those things will reduce the deficit. If the private economy picks up to the tune of $1.6B, we won’t need a deficit and we won’t have one, except to account for what people decide they need to save, and the deficit will consist only of the cost of the ELR program, plus the trade deficit. Figure it out, if the savings rate is 5%, 7 million workers at $8 an hour is $115B a year. Chump change. We won’t get there overnight, and Congress will have time (or can delegate the power) to reduce State grants or reinstate the FICA tax in increments, so as to maintain equilibrium.

    Hire a PR firm. Or get volunteers to do it.

    I hope this helps.

  2. oliver Says:

    Excellent paper! Sums up everything that’s been discussed on this and other MMT blogs over the last couple of months (and probably on many other occasions that I’m not aware of). Should go straight to the ‘mandatory readings’ section.

    Reply

  3. Mr. E Says:

    One thing to learn from the right: Saying the same thing over and over is interesting, not boring.

    Lots of left leaning people learn that being interesting is more important than being considered serious.

    Reply

  4. condolence letter Says:

    It is very good post. keep posting such good information.

    Reply

  5. Dollar Monopoly Says:

    Excellent paper! The trick to simplifying for the laymen is a two part process. First pose everything in binary terms. People naturally think in binary terms – good/evil, male/female, good/bad, on/off.

    so first thing let’s pose Scott’s logic in binary terms
    Issuer vs. User
    Spending vs. Savings
    Savings vs. Debt
    Asset vs. Liability

    Now comes the second part – reframing
    All issuer liabilities, or debt, is user savings.
    Debt for a user is a burden. Debt for an issuer is not a burden…it’s a convenience.

    I’ve tried to reword things on my site – DollarMonopoly.com.

    http://dollarmonopoly.blogspot.com/p/issuer-user-paradigm.html

    still a work in progress. let me know what you think. all feedback is welcome.

    Reply

  6. Stephen Says:

    I think we Americans have a “democratic prejudice” that blinds us to the purely mythological nature of the term.

    The mass of humanity is neither intelligent nor moronic–they are, by definition neither particularly intelligent nor particularly stupid. The fact is that a collectivity is always passive by nature and is led, either for good or evil. The mass media people understand this very well. If you are with any size group, automatically the leaders are sought out, whether for good or ill, and the rest normally follow their lead, minus a few rebel or intelligently independent types, as the case may be.

    So, the point is not to try to convince “most Americans,” which is a total waste of time and would be like chasing a mirage, but rather to try to convince the people who will, eventually, be responsible for determining public opinion. It is not about quantity (another American bugbear) but about quality.

    Reply

  7. Cezary Wojcik Says:

    In “Soft Currency Economics”, the chapter “The Myth of the Money Multiplier” 2nd paragraph reads:

    “….In the real world banks make loans independent of reserve positions, then during the next accounting period borrow any needed reserves. The imperatives of the accounting system, as previously discussed, require the Fed to lend the banks whatever they need.”

    If this practice remains the same nowadays banking sector rather borrows then spends “out of thin air” until aggreagate savings
    in banking system are higher than aggreagate loans no new money creation takes place.

    Does this statement make sense to you ?

    Reply

    WARREN MOSLER Reply:

    I don’t think so.
    the banking system creates deposits for the borrower by ‘data entry’ which can be said to be ‘out of thin air.’
    the lending process is constrained by regulation including capital requirements, but not by ‘loanable funds’

    Reply

    Cezary Wojcik Reply:

    @WARREN MOSLER,

    I gave a thought to it and understood my mistake in thinking. Thank you for corrrection. Natural consequence there is that savings accounts at a bank are rather burden. Interest on customers savings is a cost. Banks make their living on loans and buying financial assets.

    Reply

    Cezary Wojcik Reply:

    @Warren Mosler,

    Again i’m probably not correct enough as a non-banker. However now, after dwelling a bit, i’m aware of BIS (Bank of International Settlements) and Basel Aaccords (I,II, 2,5 and III) and CAR (Capital Adequacy Ratio) and RWA (Risk Weighted Assets).

    Would you agree that (simple example) a bank having $100mln equity lending only to AAA to AA- rated corporate clients (which allows for RWA 20%) is “constrained” to lend up to $5bln ? Actually 50 times more than equity ?

    WARREN MOSLER Reply:

    Yes, for that asset class, but there is also a constraining overall capital ratio
    So if that’s 10%, with 100 million in equity a bank can’t have assets for more than 1 billion even if they are all 0 risk weight US treasury securities.

    Cezary Wojcik Reply:

    @Warren Mosler,

    Thank you, Sir, for your kind answer. Not sure but sort of recall from somewhere that overall capital ratio in US banking system is 6% which makes our $100mln-equity-bank to lend up to almost 1,7 bln. Nowaydays Bassel III convention recommends very sophisticated methodology to calculate asset risk including correlations. Do you think that financial crisis 2008 would have been avoided if bankers had had better formulas to calcualate assets risks ?

    WARREN MOSLER Reply:

    It’s closer to 10% today for all practical purposes, though 6% is the legal limit.
    but in any case no, I don’t think capital ratios would have mattered regarding the crisis.

  8. Cezary Wojcik Says:

    Mr. Warren Mosler,

    Thank you for you kind remarks, Sir. Banking system seems now to fit in my model. I have to admit that there’s one thing i’m still striving with, namely that US trade deficit is “good” for US. In case of Japan you even jokingly compare it to “war reparations”. :-).

    If you agree that Foreign sector US dollars positive balance (cash reserves, Tsy, etc) is IOU on US domestic assets and future US GDP then what is “good” about leaving future US generations to share GDP with more people than US population ?

    Kind regards
    Cezary

    Reply

    WARREN MOSLER Reply:

    the dollars foreigners hold are nothing more than US tax credits.
    there is no further promise of being able to buy anything.
    in fact, the opposite is true- it’s clear that purchases are at ‘market’ from ‘willing sellers’ and that the fx rate is not fixed by the govt.

    so all we and our posterity ‘owe’ the holders of dollars on deposit at the fed is a bank statement.
    and we have numerous perfectly legal options to reduce the actual purchasing power of those ‘savings’
    if we ever decide to do so. Practically, however, seems to me they will never spend any of them, and instead keep growing their hoard.

    Reply

    Cezary Wojcik Reply:

    @Mr. WARREN MOSLER,

    Dear Sir,

    I took me a few days to digest your view on net imports but finally i went through. :-)
    Do you know any methods to differentiate value of dollars held by domestic sector from dollars held by foreign sector ? Is it possible in the first place ?

    Would you agree that huge (500-800% of GDP) non-government sector savings may increase the probability (or frequency) of “bubbles” effect ocurring on various assets ?

    Merry Christmas
    Cezary

    Reply

    WARREN MOSLER Reply:

    there is some info in the Valance charts under ‘valance’ on this website.

    yes, the private sector is necessarily pro cyclical

  9. Cezary Wojcik Says:

    Thank you for your kind answers. I’ll be back once i understand properly what actually “purchasing power” means and go through Valance charts.

    Reply

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