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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.

The certainty of debt and taxes- comments on the Fiscal Cliff

Posted by WARREN MOSLER on July 8th, 2012

It takes a fiat currency to sustain full employment.

And a fiat currency, like the $US and the euro, includes the certainty of debt and taxes.

Taxation is required to allow the government to spend its otherwise worthless currency.

And ‘debt’- some entity spending more than its income- is required to ‘offset’ an entity’s desire to spend less than its income.

These desires to not spend are known as demand leakages.

That means, at full employment, either a private sector entity or the government will be spending more than its income to offset the demand leakages.

Private sector spending is, operationally, revenue constrained. It is limited by income and credit worthiness.

Public sector spending in a currency it issues is not revenue constrained.

The private sector, the user of the currency, must first obtain funds before it can spend.

The public sector, the issuer of its currency, must, from inception, spend or lend first, before it can ‘collect’ taxes and/or borrow.

The private sector is necessarily pro cyclical. In a down turn, the private sector loses credit worthiness and therefore is limited in its ability to spend more than its income.

That leaves only the public sector to spend more than its income to fill any residual output gap and sustain full employment.

Those claiming ‘the problem is too much debt- private sector and public sector’ are entirely missing the point.

That includes everyone in Congress, President Obama, and Candidate Romney.

Those now pushing for Federal deficit reduction are entirely missing the point.

There is not Federal solvency problem, short term or long term, with any size deficit.

There could be a long term inflation problem.

However, I have seen no credible, professional long term forecasts of substantial inflation. That includes the Fed, the CBO, and the forecasts of the largest financial institutions, as well as the inflation rates implied by the long term inflation indexed US Treasury securities.

Last year the pre debt ceiling war cry from all sides was that immediate deficit reduction was imperative to keep us from becoming the next Greece.

That fell by the wayside after the downgrade, that was supposed to cause interest rates to spike and find the US, Greek like, on its knees before the IMF,
instead cause rates paid by the US Treasury to dramatically fall. The difference is the US govt is the issuer of the $US, while Greece is but a user of the euro.

So seems to me in this economy federal deficit reduction should be off the table, and the burden of proof of a sufficiently high long term inflation risk
be on those who want to put it back on the table. Anything less seems subversive, either by accident or by design.

(feel free to distribute)

217 Responses to “The certainty of debt and taxes- comments on the Fiscal Cliff”

  1. Dan Lynch Says:

    “The private sector is necessarily pro cyclical. In a down turn, the private sector loses credit worthiness and therefore is limited in its ability to spend more than its income.

    That leaves only the public sector to spend more than its income to fill any residual output gap and sustain full employment.”

    Exactly. There’s only 2 ways to inject more money into the economy — private lending, or deficit spending.

    Reply

    chewitup Reply:

    @Dan Lynch,
    Or a tax cut. (eliminate FICA!)

    Reply

    WARREN MOSLER Reply:

    and it’s about the actual spending, not the ‘injecting’ per se

    Reply

    Unforgiven Reply:

    @WARREN MOSLER,

    Suggesting a couple of corrections:

    “…instead cause rates paid…”

    causing

    “…sufficiently high long term inflation risk be on those who want to put it back on the table.”

    …should be on those who…

    Reply

  2. Ed Rombach Says:

    Warren – You are boiling down your message to a very effective style of pedagogy. The bullet points format is very compelling. I really like this section…..

    “Last year the pre debt ceiling war cry from all sides was that immediate deficit reduction was imperative to keep us from becoming the next Greece.”

    “That fell by the wayside after the downgrade, that was supposed to cause interest rates to spike and find the US, Greek like, on its knees before the IMF, instead cause rates paid by the US Treasury to dramatically fall.”

    Reminds me of a segment I did at Reuters a year ago which could have been written by you.

    http://reut.rs/oauYJS

    Reply

    MRW Reply:

    @Ed Rombach + Warren Mosler,

    I second Ed Rombach’s comment. Extraordinarily valuable to a non-economist like me, and greatly appreciated.

    You’re explaining operationally how things work operationally. The method matches the message.

    Reply

    WARREN MOSLER Reply:

    ;)

    Reply

  3. Ryan Says:

    Congress and politicians have never been adept or smart enough to
    vary government spending systematically to offset the gap. We need a better more direct program to credit the accounts of voters to attempt to precisely fill the output gaps when necessary rather than waiting for an act of congress. Removing funds might be more difficult.

    Reply

    Jacob Goense Reply:

    @Ryan,
    I’m not adept or smart enough either, assuming the current output gap figures are anywhere near reliable, how much needs to be credited/debited today under such a program?

    Reply

    Tom Hickey Reply:

    @Jacob Goense,

    Jacob, the simple answer is enough to provide a job to everyone willing and able to work on the level of resolving involuntary unemployment, and at the pay scale of everyone’s expertise and experience in order to eliminate underemployment and increase the participation rate. Then the nation would be optimizing its human resources and the economy would be performing up to potential.

    Reply

    Save America Reply:

    @Tom Hickey, Hickey you and erickson have convinced me the ELITE rule, they control the FIAT, they are going to blow themselves up, and warren is being silly when he says the 500 crony corrupt congresspeople are beholden to 350 million joe six packs instead of the elite lobbyists,ceos, etc.

    http://www.zerohedge.com/news/roubini-2013s-global-perfect-storm-and-greedy-bankers-hanging-streets

    Dr. Doom says the bankers are even more powerful and evil than 4 years ago and soon to blow up BIG! Greenspan, summers, rubin took out brooksely borne, so now they must be able to take out some really big regulators and good people with this extra power! Citigroup chairman reed said his jaw is agape that the corruption in wall street has not been punished and still listened too, so exactly Mr. Hickey when is your timeframe for when the elite finally lose control? :)

    Tom Hickey Reply:

    @Tom Hickey,

    SA: “so exactly Mr. Hickey when is your timeframe for when the elite finally lose control? :)”

    Hard to predict since events can stay irrational long than one would imagine, But as I have said, my reading is that there not going to a “next” crisis. Rather, we are already in the second leg down of the present one. But putting a clock on it is dicey because governments are very powerful and can act quickly and decisively by changing the rules when they see themselves threatened.

    My feeling is that the world is going to wake up some morning in the not to distant future to the realization that both climate change is a catastrophic threat to civilization as we know it and that the global economy is teetering. I suspect that some unforeseeable shock will bring on this realization suddenly after a gradual ripening of the omens.

    Can neoliberalism survive this hit? I don’t think so in its current state, but what the outcome will is yet unclear. Could be a lurch to either the right or the left. The current state of neoliberalism is long in the tooth in age and it seems to be me to be cresting, but the next wave is not yet visible behind it and probably won’t be before the neoliberal wave begins to break and fall.

    MRW Reply:

    @Save America,

    “warren is being silly when he says the 500 crony corrupt congresspeople are beholden to 350 million joe six packs instead of the elite lobbyists,ceos, etc.”

    You mean that ‘ole ‘government of the people, by the people, for the people’ crap?

    What do you think would happen if 350 million joe six packs discover how the deal really works?

    Save America Reply:

    @Jacob Goense, http://www.zerohedge.com/news/china-shuns-us-and-invests-direct-iran-oil-fields

    Jacob, since China paid 20 billion in US dollars for these oil resources, and the USA needs lotsa oil too and is the US Dollar currency issuer, why couldn’t we afford to outbid those guys? My Mosler MT 900 takes a lot of fuel to do 200mph down I-10 in texas, why we letting china guy get that oil? Now people telling me to trade in MT 900 for tesla electric car or GASP a bicycle, that 500 ft/lb torque gas engine that do 200mph is not a quality of life I DESERVE anymore, can you believe that?!? Not to mention my double hull catamaran super yacht with twin engines now my peers telling me to get a small dingy sailboat? HUH!? I am part of TEAM USA, don’t I deserve such luxuries and excess?

    All my IT friends that make blog software ( like this MMT site works on) and web serving software say thier energy bills going way up and they have to stop working unless we can get lotsa more cheap/free NRG! Maybe have to go back to calculators and abacus! WHA?!?

    Why USA letting china get this energy for its people/workers/slaves instead of USA citizen in USA borders? I may not be currency master like you guys and only think in real resource terms, but I can’t for the life of me figure out why the most powerful nation on the planet with the biggest economy and gotterdamerung god almighty military can’t have all the iran oil for team USA? What all this talk about SCORE and bowling alleys and FIAT got to do with making sure me and my TEAM USA kids have the oil, the double hull catamarans, the mt900′s, the massive estates on virgin islands? The way it looks to me, soon I will be living like asia man or india man, 15 to a 400 sq ft room with a dirt floor and 1 small bowl of rice will be all I can afford to eat! :(

    Reply

    roger erickson Reply:

    @Save America, All that oil isn’t as useful as you think if you can’t KEEP lots of people motivated to get it & use it.

    Something like the Pareto Rule will always occur, where a random subset will always try to divert a majority of static assets to whatever use their limited intellects aim at.

    Even then, the dominant resource is always human labor, and how to recruit & motivate it. Henry Ford was a smart dude. He LIKED to make cars. So, talked investors into paying people enough to buy all the cars he could make! Badda boom! In reality, it worked because all involved didn’t realize they we’re enjoying a net return-on-coordination. All each saw was their bit of the net margin. Nevertheless, it worked, largely because the main innovator liked making things, not just hoarding cash. The cycle doesn’t work when the dominant innovators are those who like to hoard cash, not make things.

    When manipulating human capital, the INITIAL, local view of the motivated hoarders is to maintain a buffer stock of very motivated human capital.

    Yet in the long run, Outcomes Based Training always rules. Without adequate group practice, group members don’t retain enough awareness or low enough response times to sustain group agility. Military people will tell you that every war ends with a highly adept military, and the next one starts with a newly incompetent one.

    Social coordination is like experience. By the time you develop it, you’re usually too old to use it, and have to resort to being a coach.

    Some subtle changes in our reward patterns would make all the difference.

    It’s adaptive to motivate people who like to make insanely great things. So give ‘em incentives, starting in Kindergarten. Reserve the biggest incentives for people who coordinate teams making more/better/faster/cheaper stuff.

    It’s NOT adaptive to motivate too many people to hoard stuff vs make new stuff. (No kidding? We knew that 20,000 years ago. So HOW did we end up with lawyers & bankers in charge of policy? It’s embarrassingly drawn out & complicated, but certainly not really very interesting.)

    ps: we need to quit giving incentives to Luddites, starting in Kindergarten

    roger erickson Reply:

    @Jacob Goense,

    “We need a better more direct program to credit the accounts of voters”

    Exactly. Went off the gold std to a fiat-std, to achieve agile policy.

    Now, we need fiat policy itself. If there’s too much bureaucracy in the way, the solution is to OpenSource Fiat Policy.

    There’s an app for that, of course, but it’ll only be effective after enough group practice.

    Fiat currency is just a tool used in fiat policy. It takes constant practice to leverage all the potential of a tool.

    Reply

    WARREN MOSLER Reply:

    I’d start with suspending FICA,
    giving the state govs a one time $500 per capita
    and offering a federally funded $8/hr transition job to anyone willing and able to work

    Reply

    SteveK9 Reply:

    @WARREN MOSLER, The first two are easy. Don’t you think a JG would require a lot of thought/planning? Assuming it is politically possible, which seem unlikely. If people were ready to go that far, Republican candidates would be getting 2% of the vote.

    WARREN MOSLER Reply:

    I’d first allow all federal agencies to add all the staff they could find that would work for the $8 (capped) wage.
    Soon after, assuming no major issues, I’d allow all state govs. to do same, then local. After that, non profits, including hospitals and nursing homes, etc.

    At the same time the private sector would be hiring like crazy because of the FICA suspension and funds for the state govs.

    At that point I’d be ready to offer the $8 job to any remaining takers.

    RJ Reply:

    @WARREN MOSLER,

    Can I suggest dropping things like $8/hr transition job. Or any guaranteed job schemes as your recommendation.

    It detracts from the key message and will just put many off. That is the need for more Govt debt. How this is achieved should be only ever a series of possible options for Govts to decide.

    WARREN MOSLER Reply:

    I’m an inflation hawk, and would be very uncomfortable expanding aggregate demand without providing a transition job to help avert labor shortages while official unemployment was still high/labor force participation still low.

    The private sector won’t hire unemployed nearly as quickly as they will hire someone in a transition job.

    But if you are willing to fly without this virtually no cost price anchor, you’re entitled to your opinion.

    Monica Smith Reply:

    @Ryan, The problem with Congress isn’t a lack of know how, but a lack of will. Despite the predicate in the Constitution that the people govern, in actual practice, because the principle of sovereign immunity was retained until the middle of the 20th Century, Congress not only enjoyed immunity from being accountable for actions on the floor of House and Senate, but in everything they did — every back-room deal, every manipulation of the bureaucracy, every bribe to industrial moguls. That is, we had a cadre of petty potentates whose prime objective was to exercise power. And power, to be felt, has to hurt.
    Now, despite the advent of the Federal Tort Claims Act, FOIA and the public’s ability to inspect all records and monitor proceedings, the impulse to exercise power is still a primary motivator for many office seekers and incumbents — especially the incumbents, whose power within the organizations is tied to longevity. And longevity, it turns out, is best assured by failure, which justifies trying and trying again, and threats of dire consequences, if newcomers take their slot. Of course, threats aren’t effective, if they’re not carried out from time to time, so punishment (of somebody) has to be meted out from time to time. At present, somebody has to be punished for sending 85 freshmen to the House in 2010. (You’ll notice that longevity in office is not a primary theme in 2012. Nobody wants to bring that up; nor that getting rid of earmarks was a really bad idea).
    Austerity is another word for punishment.
    Congress is trying to show the electorate who’s the boss. The electorate needs to hire more competent agents — stewards instead of rulers.

    Reply

    roger erickson Reply:

    @Ryan, Well said!

    First, I’ve found that most people don’t even know the dictionary definition of “fiat.” Nor do most have the faintest idea why we really went off the gold standard.

    So, Warren, please generalize your opening line even further.

    “It takes a audacious public initiative and agile policy to reach for the stars, and be all we can be.”

    Then follow up with “It takes a fiat currency to adequately provision an electorate fully employed at executing public purpose.”

    That key concepts – fully engaging our national agility – is the obvious, taboo gorilla in the room that most avoid. Other fields just call it “mobilization.”

    Why can’t we mobilize? Because a complacent population is easily distracted.

    Reply

    WARREN MOSLER Reply:

    that’s because of the deficit myths. We had one ‘stimulus’ in q2 08 of 170 billion that worked to restore growth to maybe 2.5% from near 0, but in q3 08 they failed to do another one due to deficit myths.

    Reply

  4. Monica Smith Says:

    “Debt” is a nice four letter word and that probably accounts for the prevalence of its use. Also, its allusion to depth and the deep, which most humans seek to avoid, provides a negative aura to an entity that, in an organism based on give and take, should be neutral, at least, if not a positive.
    Debt is good. The alternative is theft. But, since debt has that negative aura, it might be better to speak in terms of obligations.
    Instinct-driven people, people who can’t think ahead, are averse to obligations, too. But most people consider being obliged a positive condition, a recognition that they got and are in a position of being able to give back. Something the incompetent, whose only talent is the gift of gab, can’t do. Most people don’t like what they can’t do. That’s why the incompetent don’t like feeling obliged or being in debt.
    Electing such people as agents is a big mistake. It used to be said that “people who can, do; people who can’t, teach.” That’s unfair. More accurate would be “people who can’t, preach or pontificate.”

    Reply

    Save America Reply:

    @Monica Smith, Careful Monica, warren is a PREACHER of MMT memes and pontificates about them daily, and failed in his congressional bid. Do you really think sending another 100 new congressmen to DC would fix the big mess? That 500 representatives can’t be corrupted by the awesome power that is so centralized into so few hands worldwide?

    Remember Warren has said one world currency (with proper counter cyclical policies) is nothing to be afraid of, optimal currency unions be damned! ;)

    And even if you fixed DC, that it wouldn’t be recorrupted by the 7 billion other humans and thier ELITES (mega corps, governments, global banks, multinationals, etc etc) all over the rest of the globe? Companies and other forms of centralized power have been playing whack-a-mole with governments for centuries at least and much longer. If the USA fell into a blackhole tomorrow, the void would quickly be filled by the cancer inhabiting the rest of the planet.

    Monica I once watched the sean astin/howie mandell movie – Harrison Bergeron (youtube it), where howie mandell plays the character “chat with charlie” about a mindless game show host to mellow out the sheeple. My jaw was hanging agape when in REAL LIFE howie mandell went on to lead americas number 1 game show about money in breifcases – LOL! NO DEAL! Are you kidding me? didn’t he learn anything from the MOVIE? LOL! So I once ran into howie in vegas and said you should be ashamed of yourself dude, and he said he got tired of the people asking him to do stupid “bobby” jokes and just succumb to give them what they want. I also ran into sean astin a few years ago at a scifi convention and said howie made his movie role into reality, what are you gonna do, he said go watch his terry pratchett movie! LOL! Why open people’s eyes Monica, why do you care? 7 billion humans and most just want to come home and let thier cable and internet wash over them. Are you really counting on the electorate to fix what is broken? Deal or NO DEAL! ;)

    Let me ask you this Monica, how much crookedness and oppression would you have to personally witness or experience before you are willing to do violence? IE locking up crooks in jail, tar and feathers, etc, You personally, not some other people.

    Until you can answer that question, you are part of the problem, I meet very few people willing to lift a finger to enact real change, they just like to complain. Me too. Founding fathers gave up on peaceful solutions to deal with thier issues with the motherland, it had to go beyond that for real change. I was in bury st edmunds last year, where some barons met in a precursor to the magna carta, the king was told to sign or his life would be terminated, peaceful solutions had ended. I think short of people coming in and sticking a loaded weapon in your mouth, you will take all kinds of slavery and oppression Monica, but by the time it gets to that, it will be far too late for you.

    When is Monica willing to risk the lives of herself and her family to make real change like founding fathers did? Monica you are already a slave, accept your fate.

    Reply

    chris Reply:

    @Monica Smith, What about those incopentent folks who have now become your lender?

    Reply

  5. chris Says:

    The next leap in logic here is that some amount of inflation is both natural and useful for the economy. Inflation puts pressure on those who hoard dollars to play their part and contribute to demand.

    Reply

    Robert Rice Reply:

    @chris,

    Very interesting framing. Novel and creative; good stuff. However, I’m not sure we want to make a value judgment on savings and argue it is somehow immoral. We might be able to make the moral argument perhaps by making a distinction between saving and hoarding, i.e. excess savings (such as when corporations don’t disseminate enough of their income to their employees). The argument can be made without the value judgment attached by pointing out that while some savings is perfectly fine, it has a unintended negative economic side effect, a side effect the government can and should counteract with simple money creation.

    Reply

    roger erickson Reply:

    @Robert Rice, If an aggregate grows – by any measure – then some PATTERN of inflation is an absolute consequence, and some PATTERN of asset value changes is a corollary consequence.

    Hence, situational awareness and agility is always key. Warren calls it “exploring options.” Darwin called it Adaptive Rate.

    It’s not a question of savings per se, but the PATTERN of savings. Best to save what will be most useful in the next situation. That can’t be predicted, so agile transitions in savings patterns are key, and that requires practice.

    It’s all driven by a simple statistical rule. In any organized system, the cost of coordination is always the highest cost, and the ONLY return that outstrips that cost is the return on coordination.

    If there’s energy or asses available to grow on, you have to grow or die, because something else will if we don’t. Been that way for apparently ~4.5 billion years on planet earth. We really have only 2 options.

    Reply

    Robert Rice Reply:

    @roger erickson,

    Are you suggesting money creation is inherently inflationary? I don’t follow what you were trying to convey (it sounds like you were intending to respond to my other post–I’m not sure what your comments above have to do with my apprehension to placing a value judgment on savings).

    roger erickson Reply:

    @Robert Rice,

    It’s not really the point, but yes, net money creation is inherently inflationary in some pattern, but not necessarily in net. Price stability is simply not a reality, even if you want to hibernate – and hope nothings changed when you wake up.

    More to the point, whenever we have a net increase in the product of our population/capabilities/activity, then the value of some static assets will float higher or lower. A complex system re-equilibrates to change by letting floating variables float.

    Lowering taxes to offset reduced spending is only half of the solution. In an adaptive race, step one is distributing enough assets to allow distributed options to be explored.

    Step two is seeing that those options actually get explored. Without improvements in our education and incentives, too many people will just look for ways “save” extra fiat currency, instead of putting it to work.

    We’ve basically trained our population to be demand leakers! Gotta both give ‘em their currency back AND get ‘em more practice at using it, rather than sitting on it.

    ps: Not spending is a POTENTIALLY good thing – it means for a given size govt we can enjoy lower taxes, but that’s good ONLY if we actively explore options and make adaptive selections, fast enough. Necessary but not sufficient.

    Robert Rice Reply:

    @roger erickson,

    Sure, I agree, floating variables float. I’m not sure what the significance of this is as it relates to whether it is wise for us to argue savings is immoral.

    In any event, to get back to that particular issue:

    I agree excessive savings is not healthy for an economy, but it doesn’t strike me as realistic that we are going to encourage everyone not to save at all. That was my initial concern. Again, think balance. Some savings is fine, no savings is foolish, too much is wasteful. I like my porridge just right, particularly given the Federal government can largely negate the unintended negative side effects of savings.

    On the inflation issue–I do not believe money creation is inherently inflationary for the following reason: empirically we can see money creation isn’t the direct mechanism. The direct mechanism is businesses. Inflation is an aggregate choice. Demand-pull inflation is the result of an evaluation of market conditions by businesses as it relates to the ability to extract more money for the same services/products rendered. Confidence in achieving greater profits is what leads to higher prices.

    Now, money creation insofar as it causes increased demand can create sufficient confidence for businesses to feel safe in raising prices–this is why there is some relation between money creation and inflation, although importantly it is indirect and certainly not the intrinsic effect. However, it does not follow money creation always causes inflation. That is key to persuading the masses creating money in wise quantities will not hurt us. I think it reasonable to believe businesses within circumstances such as our own, will just be happy to have greater demand at existing prices. Eventually the confidence will grow and run amuck, but that can be dealt with.

    I do however agree with what I believe you were ultimately alluding to, namely that there is a disequilibrium within the Fed’s dual mandate. Given capitalism is largely about seeking more profits, stability in prices isn’t the norm, unless it is incentivized, which it has been historically through sufficient unemployment (although perhaps not purposefully). When the government acts to raise demand, unemployment decreases, and eventually business confidence increases such that raising prices is regarded as the sensible thing to do. So you have competing desires, or what I’ve coined as the disequilibrium in the Fed’s mandate. Price stability and full employment are like magnets or like-charged particles which, if they get too close to each other, will repel.

    There are better methods to achieve price stability without unemployment and subsequent suffering having to function as the counterbalance.

    WARREN MOSLER Reply:

    Not spending is a good thing- it means for a given size govt we can enjoy lower taxes

    Reply

    Chris Reply:

    @WARREN MOSLER, Got it! The purpose of fed. taxes are to create a need for money and subdue demand when needed. When the non government sector saves money, it accomplishes the same thing so taxes can be lowered.

    WARREN MOSLER Reply:

    :)

  6. Robert Rice Says:

    Warren,

    This article is it. This is beautiful–it gets to the real issues in the economy in a relatively easy to understand manner. Like a laser beam, we should focus on these two points until election day (and beyond if necessary):

    1. The U.S. cannot go bankrupt. We can create money out of thin air to fund any spending we want.
    2. We should print, and no, inflation is not going to be a problem unless we print too much and raise demand beyond full production.

    We can use the wholesome food analogy I referred to the other day to combat opposition to money creation, or there are similar alternate analogies, such as drinking water (which done to excess can kill you, but some of which is necessary to sustain life) or consuming vitamins (many would argue these are necessary although excess can poison you).

    Those two points all day long.

    And you nailed it with the virtual agreement between Republicans and Democrats on there being a “debt problem”. Their agreement on the “debt crisis” has me the better part of mortified. I listen to the news networks frequently, and everytime I hear them agreeing on this, the first thought out of my mouth is, “We’re f’ed. This is not good.”

    The problem we face is–there’s an unspoken allegiance amongst the Democrats and Republicans to the idea that any quantity of money creation is regarded as inherently inflationary. It’s as if the austrians have won that argument without much of a fight. In fact, it’s as if this belief is regarded as axiomatic by nearly everyone. It is dead wrong. We can hammer our rebuttals on the wall of the establishment in good Lutheran tradition. The contrary opinion doesn’t have a leg to stand on. Time for the economic revival for the good of us all.

    Encouraging stuff here.

    Reply

    WARREN MOSLER Reply:

    thanks!

    Reply

    ESM Reply:

    @Robert Rice,

    Sorry, but you aren’t going to make any progress framing the issues in that way because pretty much anybody who worries about deficits and debt already knows that the government can print money.

    The fundamental misconception is that the issuance of Treasury debt somehow defers consumption/constrains demand/postpones inflation. Thus, the absence of any inflation now is simply a reflection of the fact that the government has been able to sucker frightened people into buying Treasury debt now instead of spending. However, the debt hangs like a sword of Damocles over the economy because it represents spending power that will be unleashed when the bonds are redeemed rather than rolled over.

    If you can get people to understand that there is functionally no difference between a Treasury bill and a dollar bill, you’ll start to make progress. Then people will start to realize that causality runs from savings demand to issuance of Treasury debt rather than the other way around. That is, the government runs deficits and issues Treasury bonds in response to demand for savings vehicles by the private sector. The government does not decide it needs to raise funds and then go hat in hand to the private sector and ask what interest rate it demands for lending.

    Reply

    Robert Rice Reply:

    @ESM,

    ESM,

    I don’t think what you’ve described has entered anyone’s mind as a concern except your own. What I was describing is what people say in objection to money creation as a prescription to excess debt. Our rebuttals need to be directed at their rebuttals.

    I realize other people realize the government can create money, however the problem with suggesting that as a policy choice always boils down to inflation. I’ve been listening to people like Peter Schiff, Shadowstats, et al make this argument for years. People with a relatively uneducated understanding of economics find this argument of theirs compelling.

    Again, there are two false beliefs that need to be rebutted. False belief 1: Excess debt. We can simply print to pay it off. Yes, everyone realizes this, but they object to it based on false belief 2: “We can’t print because we’ll devalue the dollar. Hyperinflation is coming, hyperinflation is coming!” A mistaken understanding of inflation is the belief impeding money creation.

    If inflation wasn’t a concern, we’d be printing right now.

    Reply

    ESM Reply:

    @Robert Rice,

    We’re printing right now AND inflation isn’t happening. If you could get people to understand that point, the sounds of scales falling to the floor would be deafening.

    Even if you don’t agree with me about how important it is to make that point, your suggested framing has been used repeatedly by Warren and Mike Norman on TV and radio, and so far they have received either blank stares or the kind of look usually reserved for people with two heads.

    Robert Rice Reply:

    @Robert Rice,

    Let me see if I have your argument right: You’re arguing because people are obtuse and/or obstinate, we shouldn’t therefore directly address their unsound arguments anymore because it’s already been done without success? Doesn’t that sort of undermine your previous point that we should make a different argument than the one we’ve allegedly been making? If they’re thick headed, holding their beliefs as unfalsifiable, how’s a second, alternate argument going to change their minds? We don’t need to convert everyone to the truth, just enough open-minded people. I’m hopeful enough of them are out there. If not, discussions aren’t the means to the end, war or genetic reengineering is.

    I do however appreciate your cynicism. Obstinance is problematic.

    I would add: inflation is like a superstition for many. It’s tomorrow the ghosts are going to jump out of the closet and getcha. It’s a belief arising from theory, not so much from empirical data (although they’ll make historical appeals at times). They believe inflation is on the horizon, certainly that it will be if we actively print.

    Now, I realize you’re saying, “We’re already printing, we don’t have inflation, but people still believe we will.” Well, we need to rebut the underlying theory. It’s the mechanics that they hold onto. The conceptual theory itself is unsound. The inflation mechanism is misunderstood. I mean, it isn’t money creation that causes inflation, it’s businesses in the pursuit of higher profits. Inflation is a psychological phenomenon related to business confidence.

    For all of Warren’s and the rest of the gang’s appearances on TV, I haven’t heard many if any MMTers frame a rebuttal in the manner I would frame it. Rather, it seems like those discussion end up stuck on how to view taxes as money destruction or spending as money creation, which I think (as I’ve been arguing in another thread here) has largely detracted from their overall message being heard.

    The fact is, few even entertain money printing as a policy choice because of inflation. It’s heresy, anathema, worthy of excommunication or worse. We can rebut that belief more effectively.

    Robert Rice Reply:

    @ESM,

    The above was directed to you although I failed to readdress it.

    ESM Reply:

    @Robert Rice,

    @Robert:

    “I mean, it isn’t money creation that causes inflation, it’s businesses in the pursuit of higher profits. Inflation is a psychological phenomenon related to business confidence.”

    Hmmm. I think the disconnect here is that I disagree with you on inflation. Inflation happens when aggregate demand exceeds capacity. It is not just (or even primarily) a psychological phenomenon. It is also wrong to say that it is “businesses in the pursuit of higher profits.” In fact, the pursuit of profits by businesses is what restrains inflation.

    To the extent money creation increases aggregate demand, and I believe there is a positive causal relationship, then it is perfectly reasonable to worry about the idea that “printing money” will cause inflation. The best argument IMHO is that the government has been running trillion dollar deficits for many years, and we still have overcapacity and high unemployment. Most mainstream economists (including Paul Krugman, by the way) believe that if you funded those deficits with dollars rather than bonds, then that would be inflationary. This is incorrect, The logical implication of this incorrect belief is that the accumulated national debt is an inflation threat because, ultimately, bonds have to be redeemed for dollars.

    Robert Rice Reply:

    @ESM,

    ESM,

    I wasn’t arguing inflation is a decision that’s made in a vacuum irrespective of a given set of economic conditions (as if demand levels are inconsequential). To the contrary; there is a market context, and that context is related to inflation.

    Business operators are risk managers with the goal of maximizing profits; they evaluate market conditions in an effort to ascertain whether it is likely they will increase profits upon raising prices. So, for us to understand inflation, we need to understand why business operators make this choice. In other words, under what environmental conditions do business operators arrive at the level of confidence required for inflating?

    This choice occurs in the aggregate when there is strong, sustained demand. The choice can be exacerbated by excess demand. We agree there is a relation between money creation, demand, and inflation. A predictable pattern arises. However, money creation is not intrinsically inflationary. Inflation is a choice, and it isn’t chosen unless certain economic conditions have presented themselves.

    to illustrate this point: Imagine we were at 50% capacity. Would printing enough money to raise capacity to 60% cause a rise in prices? Nothing significant if anything at all. Business operators would be happy just to be selling more at existing prices. We see then that inflation is not the direct effect of money creation. Money creation has to create sufficient demand for business operators net net to choose to raise prices. Til then, we can print til our heart’s content.

    Some of what you wrote really doesn’t address my position. For example, I didn’t write we should never worry about inflation if we print too much money. We shouldn’t worry about inflation if we don’t print too much though, and that’s the point. You can worry about drinking too much water every time you take a drink, but the fact is, drinking water is good for you unless you drink it in excess (which can kill you). Money creation in moderation not to be feared because it is not intrinsically inflationary. That is a false belief held by most we need to rebut.

    ESM Reply:

    @Robert Rice,

    “Money creation in moderation not to be feared because it is not intrinsically inflationary.”

    Do you understand that this is a tautology? Just like “drinking wine in moderation isn’t bad for you” or “drinking too much water is bad for you.”

    How can you prove to an MMT skeptic that “printing” an extra $1T or $2T or $10T wouldn’t cause lots of inflation? Even I think that printing $100T would cause inflation. So there’s some level between $0 and $100T which even I think is too much. Where in your argument are you addressing the issue of how much printing is inflationary.

    If you ask Paul Krugman whether it would cause inflation to replace the $10T of publicly traded Treasury debt with reserves, he would say yes. He thinks that “monetizing” the debt would be inflationary. I think the key point is that replacing Treasury bonds with reserves (which the Fed has actually been doing for the past couple of years) has almost no effect on inflation. Therefore, there is no danger from the “overhang” of Treasury debt, anymore than there is danger from the “overhang” of outstanding levels of reserves and currency.

    I’ve been arguing that that’s the key point to make. Perhaps you don’t even agree with my point, let alone that it’s the key one.

    Robert Rice Reply:

    @ESM,

    ESM,

    In logic, a tautology is a compound proposition of the form, “A or not A.” None of my statements consist of this form.

    And it isn’t up to me to prove a negative, it’s up to those who do not share my views to prove their assertion, “X quantity of money will cause inflation.” Let them substantiate their claim. All I have to do is show their argument is unsound (in the case of a deductive argument) or not cogent (in the case of an inductive/abductive), should I believe that to be the case.

    Let’s recap: My objective was to rebut the positive claim the disagreeing parties assert. They believe money creation is intrinsically inflationary. In rebuttal, I argued the actual mechanism of inflation is people making a choice, and they generally won’t make that choice unless the conditions allow for it. Hence, money creation is not by its very nature inflationary. We are clearly well below capacity, so given my argument, we should be able to agree there is a quantity of money we can create which will help and which will not lead to inflation.

    Now, whether Krugman believes monetizing the debt would raise demand sufficiently to cause inflation is irrelevant and frankly a red herring. If he wants to make that argument, I’m all ears, but what does that have to do with my argument? I haven’t suggested we should monetize all of the debt. If you’re point is at some point we can create enough money which will lead to the conditions which result in the mechanism choosing to cause inflation, we agree. But so what? Between now and that point, as I wrote previously, we can print til our heart’s content.

    And out of curiosity, what is the difference between monetizing the debt and the Fed replacing treasuries with reserves in an asset swap? You seem to be drawing a distinction between the two. The only difference is in the one case, the debt is extinguished, and in the other case, the debt just ends up on the Fed’s balance sheet, which is to say the Treasury owes the Fed, which is to say the government owes the government, which is to say, save for the debt ceiling, for all practical purposes, the debt’s been extinguished. On paper it hasn’t but practically it has.

    Anyhow, you’re own theory needs to account for the empirical data, specifically why it is very few argue money creation is our savior. Why is that? The observational data suggests it is a fear of inflation based on a belief money creation is inherently inflationary. So why wouldn’t we answer this fear with a direct rebuttal, such as the one I’ve presented, hence demonstrating this fear is based on an unjustified belief? In my opinion, that’s the best strategy.

    ESM Reply:

    @Robert Rice,

    “In logic, a tautology is a compound proposition of the form, “A or not A.” ”

    Look, if you’re going to be a pedant, at least try to be a competent one. I was using the word in its rhetorical and pejorative sense, since this is not actually a blog devoted to logical formalism. That being said, there are other forms of href=”http://en.wikipedia.org/wiki/Tautology_(logic)”>tautologies in logic besides “A or not A.”

    “And it isn’t up to me to prove a negative,…”

    Are you serious? Do you really think that the burden of proof is on the people whose minds you’re trying to change?

    “If he wants to make that argument, I’m all ears, but what does that have to do with my argument?”

    Let’s put this in logical form since you seem to fancy yourself a rigorous logician: MMT => A and B and C.

    Krugman, who is a representative of mainstream economics, and in fact has considerable influence with politicians, at least on the left side of the political spectrum, does not accept MMT because he believes A and B and !C.

    If you want to get Krugman and people like him to accept MMT, do you want to spend your time explaining why A and B are true, or do you think it’s perhaps a better idea to explain why C is true?

    “You seem to be drawing a distinction between the two.”

    I am not, since there is no difference. The Fed’s QE experiment has provided empirical evidence that monetizing the debt doesn’t matter, which is helpful for the argument, although probably unnecessary.

    “So why wouldn’t we answer this fear with a direct rebuttal, such as the one I’ve presented, …”

    Because I think your rebuttal is conclusory and therefore unpersuasive.

    Robert Rice Reply:

    @ESM,

    Ah yes, the cries of a wounded animal. I know it’s hard when your ego is bruised to keep it above the belt, but try. I mean really, do you need a hug? Do you need some comfort? Would you like me to send you some flowers? Maybe a massage at the local parlor?

    I know what you were saying in regard to tautologies. None of my statements were tautological in any sense. The essence of a tautology is what I indicated, and I’m sorry if this hurts your wee feelings, but none of my statements were tautological at all, in any way, and you couldn’t prove it on your best day, in your finest hour, with a host of cheerleaders behind ya.

    I already acknowledged that the burden is on me to refute the argument for inflation. But those who believe we can’t print any money at all because *gasp* inflation will follow, need to make their argument instead of holding it as axiomatic.

    Next time you come to school, try listening…

    Now, spend your time not wasting mine and instead scraping your ego up off the floor. I thought we could have a respectful, dignified conversation because there are important issues at stake here. This, however, is ridiculous.

    ESM Reply:

    @Robert Rice,

    “I know it’s hard … to keep it above the belt, but do try.”

    My apologies. I hadn’t realized your belt was above your neck, but it makes sense to me now.

    WARREN MOSLER Reply:

    good points.

    Reply

  7. John Woods Says:

    Excellent article Warren! You are very good at framing the problem, as well as th solution in understandable terms. One of my big concerns, and what seems to me to be the biggest headwind against the economy right now is real estate. Any thoughts regarding the most effective way Government can spend, cut taxes and/or in some way incentivize in order to speed the real estate recovery? Low rates and the refinance programs are a great start, but still seems to require more juice.

    Reply

    Ralph Musgrave Reply:

    @John Woods,
    Building houses (i.e. real estate) is not the central purpose of economic activity. The central purpose is to produce what people want – which of course includes houses. The solution, as Warren rightly suggests, is simply to up spending. If people choose to spend a majority of extra spending power on housing, so be it. If they choose to spend it on other products, that will create jobs, raise GDP, etc etc, and those who gambled on house price increases continuing for ever will be left out in the cold. Tough.

    In a free market you are free to take a risk. If it pays off, that’s nice. But if it doesn’t, no one is under the slightest obligation to come to your rescue.

    Reply

    Tom Hickey Reply:

    @Ralph Musgrave,

    RM: The central purpose is to produce what people want – which of course includes houses.”

    I think that there is more nuance here than the simple statement of utility say. Should be rather, The central purpose is to produce what people need – which of course includes adequate shelter, and then to the degree that a surplus is possible to produce what people want. We are producing too much of what some people want and not enough of what other people need. This is especially evident in US housing. Plenty of McMansions and not enough affordable housing ‚ not because of lack of demand but because of the difference in profitability. As a result many people buy much more house than they can really afford by traditional standards because many lenders have reduced the standards to maintain demand at those prices. This also increases land rent.

    Reply

    SteveK9 Reply:

    @Tom Hickey, Working in a suburb north of Toronto and I have never seen so many McMansions. They are built literally one foot from each other. I keep staring at these and thinking ‘is this really what people want?’ … maybe not.

    WARREN MOSLER Reply:

    of course any house built in the last 30 years would probably be a mansion by standards of a few hundred years ago?
    I’ll bet those houses aren’t more than 20,000 sq ft?
    ;)

    Tom Hickey Reply:

    @Tom Hickey,

    Here’s a Feb 2012 post on sq footage in the US going back several decades. Pretty steady rise since the fifties.

    What’s going on with new home sizes – is the madness finally over?

    Sleeper Reply:

    I know you’re all mainly talking about the US but in the UK at the first whiff of a recovery you can expect the great housing price bubble to rapidly reinflate. So in answering the accusation that MMT policies would lead to (hyper)inflation, at least in the housing market in the southeast of England, I think you’d have to say ‘yes’. Then again any recovery would do that.

    Reply

    WARREN MOSLER Reply:

    why hyper inflation?

    seems there’s an actual housing shortage over there due to zoning, etc?
    if so, it’s the market allocating by price, a relative value shift, vs ‘inflation’?

    Reply

    Sleeper Reply:

    @WARREN MOSLER, Sorry, I wasn’t clear. I was musing about a conversation with ‘the man in the street’. I was imagining the accusations of hyperinflation would be coming from people who were just using it as a synonym for high inflation rather than being technically accurate.

    I thought inflation was caused by too much money chasing too few goods. And yes there is an actual shortage of housing. What am I missing?

    Anyway if house prices start to creep up (at the height of the bubble they were going up £50 a day) I think I’d have a hard time selling the ‘relative value shift’ line. After all to the man in the street, inflation is prices going up.

  8. joe bongiovanni Says:

    “Public sector spending in a currency it issues is not revenue constrained.”

    A basic here.
    I always thought that since the nation was founded and a government established, the Department of Treasury(the government agency responsible for spending) was limited to spending that which it had collected in taxes, or borrowed from savers, and the revenue was accounted for and available in its General Account for spending.

    See definitions of Treasurer, Auditor, Comptroller and Register in the Statute establishing the Department of Treasury.

    To my knowledge, the requirements for FIRST obtaining funds before spending is still in place.

    However, if what Warren says here is true, then that constraint no longer exists. When was it given up?
    Legally?

    Since it is the role of the Treasurer to spend all government monies, how can we say that the government (Treasury) is not revenue constrained?
    By law.

    Thanks.

    Reply

    WARREN MOSLER Reply:

    you are correct, the more nearly correct statement would have been that the govt is not operationally constrained by revenue.
    there are all sorts of self imposed constraints on the treasury (an agent of congress) including no overdraft rules, debt ceilings, budget approval, etc.

    And with today’s institutional structure, including the primary dealer system, for all practical purposes issuing t bills isn’t a constraint.

    And in any case, even with all the institutional baggage, govt (from inception) must spend or lend first, before being able to ‘collect taxes’ or sell securities. There can’t (from inception) be a reserve drain (payment to govt) prior to a reserve add (payment from govt)

    so today, for example, the Fed bot 3t or so of securities which added reserves that can now be used to pay for tsy secs when available. in the past, when the fed kept the bank net borrowed, the fed would have to do repo (a reserve add) on settlement day so the balances would be there for the banking system to pay for the tsys.

    Reply

    joe bongiovanni Reply:

    @WARREN MOSLER,

    Thanks a lot.
    So, if I understand, the government CANNOT simply create the monies needed to fix our current predicament without first going back to the Congress and removing a series of so-called “operational constraints” on our fiat money system, all of which have the power of national law, perhaps also involving international law.

    In essence, there must FIRST be a legal restructuring of the present monetary system, thus establishing a new legal framework needed to achieve the real benefits of “public money” and MMT.

    I am most interested Warren, in what is included in the “etc.” part of your response. Who is working on that?

    At the Fiscal Sustainability Teach-In a couple of years ago, I asked for a list of the so-called “self-imposed constraints” that represent the obstacle to achieving the worthy goals of MMT.
    Why pretend that the government CAN just print the money and solve our national economic problems, when that would be illegal and is therefore impossible?

    We NEED to reform the money system.
    Or MMT will forever remain a theory.

    May I respond to your other points separately?
    Thanks.

    Reply

    WARREN MOSLER Reply:

    The current institutional structure is plenty ok to allow all the deficit spending needed to sustain full employment.
    And as per my proposals I’d make the current 0 rate policy permanent and also not let the tsy sell anything longer than 3 mo bills.

    yes, there are self imposed legal constraints, like the no overdraft rule and the debt ceiling, but a congress with half a brain that even half gets it just keeps passing the debt ceiling as they’ve done forever, so it’s not an obstacle to full employment. And the no over draft rule has been obviated by the primary dealer system that requires participating dealers to buy gov secs at auction. the at auction part ensures they are buying them voluntarily as they go to the highest bidder, and all are allowed to borrow to fund their purchases at or below the fed’s target rate. So even Japan with deficits 3x ours hasn’t been obstructed by their no over draft rule.
    So neither of the self imposed constraints are in the way of ‘solving our national economic problems.’

    where have you been reading this stuff???
    ;)

    joe bongiovanni Reply:

    @joe bongiovanni,

    It seems like I’m talking to myself again… and probably am, but …among the things I can’t figure out are …… why I can’t reply to Warren.

    OK, so he ignores my legal foundation for reforming the money system.

    Instead he discusses how the present “institutional arrangements” can create full-employment with resort to MORE public-indebting, open market operations, and about how great it is that we pump up the financialista primary dealers with “free” money so we can borrow it back from them …… all the while proclaiming this a monopoly-ISSUING, fiat monetary government.

    First, why not recognize the legal requirement that the government cannot deficit spend without taxation or bonding? Right Now.

    So, what does GUV do about lost tax revenues?
    Either shut ‘er down, or change the law.
    As in, re-empower the GUV to create the money.

    Of course, the debt-ceiling should be eliminated. It IS just another unnecessary blow to our monetary autonomy.
    Better to eliminate the need for any public borrowing – but that’s the opposite of more public debt owed to the PRIVATES, who we the public have empowered to create the money.

    We NEED to change our whole system of government finance, SO THAT the government CAN create new money.

    On policy – MORE ZIRP is going to get us out of this? ZIRP should be pretty much permanent but it does nothing to expand this moribund, deflationary real economy.
    It’s the interest-rate string thing.

    And shortening the term of Treasury issues does WHAT?
    There are no new financial assets -a.k.a. money, as in increasing exchange media, to support increased aggregate demand, created by re-issuing Treasuries.
    Only the primarys and brokers are making any benefit from churning repos.

    And we are left with the question of how do we increase the money supply(M1) so that it exchanges more goods and services.

    Thanks.

    WARREN MOSLER Reply:

    i fully support operational reforms, as per my proposals,
    but we don’t have to wait for them to get to full employment

    and i don’t think you understand that the gov will have to pay interest on its deficit spending with or without what you call borrowing if it wants the interbank rate to be higher than 0.

    And with a 0 rate policy, which I support, and nothing longer than 3 mo bills, the govt pays no interest with or without said ‘borrowing.’

    you haven’t dug deep enough into monetary operations to get past the rhetoric.

    ‘pubic debt’ is nothing more than dollar balances in Fed accounts in any case.
    the only difference between current arrangements and your proposal, rhetoric aside,
    is that your proposal has all the dollars deficit spent in fed reserve accounts,
    vs current arrangements where they can be in either reserve accounts or securities accounts (all at the fed)

    with 0 rates, it doesn’t matter.

    you have read ‘the 7 dif’?

    SteveK9 Reply:

    @WARREN MOSLER, It’s the style of that last paragraph that loses me … you can conclude I am an idiot, but I thought I would mention it.

    Reply

    WARREN MOSLER Reply:

    me too…
    ;)

    joe bongiovanni Reply:

    @WARREN MOSLER,

    Further considerations –
    The words ‘operational’ and ‘operationally’ never really entered our understanding of modern monetary economics until they became of common usage here in MMT as descriptive of an unwarrented limitation on MMT’s theory of fiat money mechanics.

    I think we agree that all of the “constraints” we have thus far identified are legal in nature. The foundation of modern money itself is legal in nature.
    It would help promote the understanding of the ACTUAL situation we encounter in attempting to implement MMT to say that we are “legally” constrained from doing things we might be able to do, were we to begin a brand new fiat monetary system from scratch.
    Somehow I feel that a legally unconstrained issuance of public monies would also be a hard sell.

    Every MMT proponent is issued the currency of the term ‘operationally-constrained’ without accounting for its importance to achieving the goals of the theory. Each of them owe the uninformed reader the follow-up explanation : thus, we need to legally reform the money system to remove these operational constraints.
    Otherwise it sounds like somebody forgot to wind the clock.

    Thanks.

    Reply

    WARREN MOSLER Reply:

    yes, I’ve proposed eliminating the no over draft rule many times,
    even though in practice it’s never been an issue and probably never will be.

    LetsGetItDone Reply:

    @joe bongiovanni, Joe, you said:

    “First, why not recognize the legal requirement that the government cannot deficit spend without taxation or bonding? Right Now.”

    Because that’s not true. See, for example: here,

    and here.

    So, without changing a single existing law, the Executive can force the Fed to fill the public purse.

    joe bongiovanni Reply:

    @WARREN MOSLER,

    Finally (I promise)

    Among the first laws to be remedied in order to achieve public-service money would be the Federal Reserve Act so as to conform our private central bank into the public sector of functional finance.

    The resulting public central bank could actually perform the duty alluded to in your reply – ‘government lending’. Right now, the private central bank only buys and sells money-things and lends to other private banks. It is the bankers’ bank, not the government’s bank.

    I mention this because of your penchant to resort to reserve management and federal open-market operations as kind of lynch-pins to promote the ideas of “government” money creation.

    I do not believe any of that.
    IMO the private central bank never creates any money that contributes to fuller employment of Americans, and thus its operations function at the level of promoting financialization (a negative public policy) versus “real-economy” monetization(money-creation).

    Ninety percent of your readers glaze over at the thought of a reserve drain.
    For some reason, MMTers who decry the continuance of “gold-standard” memes have no problem with exalting the importance of a ‘reserve-based’ true fiat money system.

    Reserves mean nothing.
    We can get along without them.

    Thanks.

    Reply

    Tom Hickey Reply:

    @joe bongiovanni,

    Among the first laws to be remedied in order to achieve public-service money would be the Federal Reserve Act so as to conform our private central bank into the public sector

    Joe, you should study up a bit more on the Federal Reserve Act and relevant statues if you think that the US has private central bank. That’s an urban myth.

    Tom Hickey Reply:

    @joe bongiovanni,

    BTW, here is an interesting article by Prof. Bill Woolsey, a Libertarian. Who Owns the Fed? (October 1, 2004) gets into the nitty gritty of the FRA. One would expect a Libertarian to conclude that the Fed is private bank owned by bankers. Woolsey shows how this is not the case in spite of conspiracy theories to the contrary.

    Woolsey concludes his well-documented article with this statement:

    Who owns the Fed? The owners of a business typically have ultimate authority over operations and serve as residual claimant. Stockholders elect directors, who appoint top management. Stockholders receive the profits — excess revenues after all other claims on funds are paid.

    For the Fed, final authority is in the hands of the politicians. They appoint the Board of Governors, who dominate the Federal Reserve banks. Further, any earnings of the Federal Reserve banks beyond expenses, including the 6% dividend to the member banks, goes to the U.S. Treasury. Since the U.S. government has final authority and serves as residual claimant, the most reasonable view is that the Federal Reserve system is government-owned.

    WARREN MOSLER Reply:

    The Fed has never been an actual obstacle to an deficit spending congress has ever voted into practice.
    and for all practical purposes it’s a public institution- an agent of Congress.

    joe bongiovanni Reply:

    @joe bongiovanni,
    NOT talking to myself again – trying to keep the discussion together.
    I guess there’s a good amount of left-margin protection in place.

    To Tom,
    If the central bank’s stock IS owned by the private bankers that sit on its Boards of Directors and is legally constituted as a private corporation that is OBVIOUSLY serving the interest of the private bankers – it being the ‘bankers’ bank’ – that, in a practical sense, pretty much makes it a private central bank.

    Of course, its structure is determined by law adopted BY Congress, and the Congress CAN change its structure. That’s what I propose – to make it a public, and publicly-controlled central bank, acting in the public interest.

    Given there has never been a Court finding other than the Fed Banks are private corporations, I guess that makes it a very legal and logical urban myth.
    I hope you can point me to a statutory contradiction. Thanks.

    Second, I’ve read Prof Woolsey.
    Like all Libertarians, they MUST blame government for EVERYTHING.

    How can they blame the government for destroying our money system if they can’t identify the Fed as a government entity?
    They see the Fed and its private bankers as a monopolistic cabal that does nothing except encroach upon private property rights.
    Thus – abolish the Fed and abolish the government.
    No surprise there, really, Tom.

    Besides, would we be correct to accept here the Libertarians view of a solution to our monetary-economic problems?

    And to Warren, fine, the Fed was created by the Congress, but in the image of the private bankers who wrote the law.
    For all those who say that – as a practical matter – the Fed is an agent of government, I say, then why not MAKE it an agent of the government?
    In a REAL, legal sense?

    “practical sense” is so in the eye of the beholder.
    Thanks.

    WARREN MOSLER Reply:

    I have no problem eliminating what are called the vestigial ‘shareholders’ of the Fed.
    But either way it’s still a public institution that answers to Congress, and there to functioning for public purpose.

    And like all govt agencies, public purpose is a work in progress, as all are continually subject to takeover by special interests.

    Tom Hickey Reply:

    @joe bongiovanni,

    I guess the URL http://www.federalreserve.gov is to further the conspiracy theory?

    joe bongiovanni Reply:

    @joe bongiovanni,

    To Tom

    What conspiracy theory are you talking about?

    Abraham Lincoln said:
    “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers.”

    And he described the power to issue the nation’s money as “the supreme prerogative of government”.
    There’s no conspiracy theory here.
    Just the facts.

    Why should any patriotic American settle for a bunch of private bankers controlling the issue of our national circulating media, and why pretend that it is not THEIR policies that are responsible for the situation we have today?

    It’s really beginning to seem that “shoot the messenger” comes earlier and earlier to these MMT debates.
    respectfully

    WARREN MOSLER Reply:

    give me an example of private bankers controlling the ‘issue of our national circulating media’, whatever that means, thanks.

    Save America Reply:

    @joe bongiovanni, Joe, why should any patriotic north dakotan settle for any non north dakotan controlling the issue of thier circulating media? Especially with a fed paper showing the USA is not an optimal currency area.

    http://www.chicagofed.org/webpages/publications/working_papers/2001/wp_22.cfm

    I think more USA people need to be critical of what is going on in europe and say hey, why should so many people be subjected to one currency in team usa when research shows perhaps this is not to thier best benefit and weakens efficiency of various policy responses.

    There was a LORD of the rings, but I think the hobbits didn’t want to be ruled like the goblins and they had different policy response that was better executed with seperate currency unions.

    joe bongiovanni Reply:

    @joe bongiovanni,

    to Saveamerica

    Thanks. That is SUCH a good question.
    While it could be said that those North Dakotans voluntarily AGREED in 1889 in joining the Union that the federal government’s powers under the Constitution would prevail, there is also the present situation where that federal government’s powers have been handed over to private bankers who are incapable of handling the money responsibly.

    Fortunately, the Bank of North Dakota fills some of that capacity by ‘leveraging’ public and private finance to the benefits of ND’s citizenry.

    While the Minneapolis Fed and Mr. Kocherlakota are supposed to take care of the state – one of the best economies in the country -, the proposal of Congressman Kucinich (HR 2990) for replacing the private Fed system includes the sharing of the federal money-creation powers with the states, with state defined projects funded by new money creation.

    I’m not a multiple-currency advocate though I do support non-debt based local-currency-initiatives where they can strengthen and diversify local economies.
    Thanks.

    WARREN MOSLER Reply:

    HR 2990 or whatever it is is an operational optical illusion, as previously discussed on this website.

    re read ‘soft currency economics’ on this website and then re read that HR and i think you’ll see what i’m getting at

    Save America Reply:

    @joe bongiovanni, Warren says the fed boyz need to give the states money on a per capita basis, the fed boyz need to hire joe 6 pack too, if your government fails you and doesn’t do these smart things that warren mosler says to do, why continue to be part of that barbarous RELIC that is failing you and your family day after day after day?

    I am in total astonishment that people continue to be part of a system that fails them day after day, that was not the SPIRIT of the founding fathers of this nation, if the SYSTEM failed you, it was time to get under another new system.

    If the FEDS are too evil or stupid to do 2 simple things that warren mosler says do, hire people and give money out, then its time for states and cities to start talking about succession and lift themselves up by thier own bootstraps and quit depending on DC. People are slaves though.

  9. Gary Says:

    Great explanation in this post!

    Reply

    WARREN MOSLER Reply:

    thank you!

    Reply

  10. walter Says:

    Warren,

    Very strong post! (Next one for Huffington Post?)

    I think that one of the core points in the discussions circles around your sentence “The public sector, the issuer of its currency, must, from inception, spend or lend first, before it can ‘collect’ taxes and/or borrow.”

    The possibility of ‘lending’, which prevents deficits, I do not see in the subsequent part of the text.

    Could you elaborate on that possibility given the fact that the real economy, where the collateral has to come from, always already exists prior to inception of the currency?

    Reply

    WARREN MOSLER Reply:

    yes, thanks, and pending.

    govt housing agencies make loans with houses as collateral. the federal home loan bank funds banks with financial assets, including mtgs, as collateral. even the fed demands collateral from its members when it lends.

    Reply

    walter Reply:

    @WARREN MOSLER,
    But why do you claim we are left with the public sector that has to spend more than its income (run deficits) if it also could lend (not run deficits)?

    Reply

    WARREN MOSLER Reply:

    true. but the banks can lend, too. the problem is the private sector doesn’t want to borrow to spend, from banks or the govt.
    i suppose the fed govt could lend to state and local govs if they would spend, but seems they are in deficit reduction mode as well

  11. Jose Guilherme Says:

    Great post by Warren: clear, concise, powerful.

    Two observations:

    First, Warren left the foreign sector out of the picture – was it to make the explanation as simple as possible?

    Secong (more complex), the operational constraints that remain in the USA are in my opinion more complex than MMTers often care to admit.

    If and until the Treasury has no overdraft at the Fed, than in practice the executive branch is limited in its power to issue money and deficit-spend. It will still be bound by anachronic rules originated under the Gold standard according to which no government spending is allowed except if “financed” by taxes or borrowing from the private sector.

    I just happen to think that Marc Lavoie, who btw sympathises a lot with MMT, got it right. As long as the Fed has autonomy (or, even worse, “independence”) it is not possible to simply consolidate Treasury and central bank accounts under a single item, like MMT does.

    That would be a bit like “consolidating” the executive, legislative and judicial branches under the heading “American State” on the pretext that, after all, the 3 represent a single unit: the American people.

    Perhaps there could be a way of getting the present fiat currency system closer to the MMT ideal by, e. g., making the Treasury issue platinum coins. That would be allowed under present legislation, as web followers of MMT have brilliantly demonstrated in the near past, but it is not clear that it would be politically acceptable under present circumstances.

    As a matter of fact, in a post of some months ago Bill Mitchell himself indirectly recognized the obstacles remaining to full institutional implementation of MMT in the USA.

    He imagined a scenario where Obama (“The Boss”) instructed Chairman Bernanke to mark up all those accounts of the Treasury in order to fight the recession. I agree this would be an ideal scenario but it is unfortunately not possible under the present institutional constraints (except perhaps if the executive were bold enough to risk a confrontation with congress by issuing a large platinum coin…).

    So at present – again, as Marc Lavoie states – Canada is perhaps the country closer to the MMT ideal, because the central bank can “finance” the Treasury directly in the primary market.

    Brazil, where the central bank under President Dilma lost its autonomy and now for all practical purposes simply obeys orders from the executive would be another strong candidate.

    As for the US, it got closer to the ideal in 1971 but it still has a few steps to go before attaining the full possibilities of functional finance.

    Reply

    Viorel Teodorescu Reply:

    @Jose Guilherme

    Not sure how the platinum coins would fit into the MMT framework.

    The way I figure it, money are contracts for labour, that under the fiat system are printed on paper. In the past, money was ´printed´ on gold, silver etc – and this got governments into trouble, as they could not get enough gold to ´print´ money/labour contracts on, so they were constrained in their spending. Paper is easier to get hold of, so now we can spend at will, up to the point that there are enough money/contracts to employ everyone. After everyone is employed, printing more money/contracts will be inflationary, because there will be no-one left to employ.

    Printing money on platinum will mean constraints again, and that is counter-productive.

    @Jose Guilherme,

    Reply

    Jose Guilherme Reply:

    @Viorel Teodorescu,

    You’re right, I didn’t express myself clearly enough especially for those who haven’t followed closely the platinum coin controversy.

    What I meant with the platinum coin was the idea popularized at pro-MMT web blogs about a year ago of the Treasury minting say 100 grams of platinum, worth less than 5 thousand dollars at today’s prices, into a nice coin denominated as worth 1 trillion dollars (a power the Treasury apparently does hold only in the case of platinum coins, under current rules). The Treasury then deposits the coin at the Fed and automically earns the right to spend 1 trillion.

    Later, when and if needed, another coin and another 1 trillion and so on (the deposit could also be used to repay outstanding debt).

    By minting platinum coins with arbitrary denominations the government would thus gain the power to deficit spend in the amount that it needs to fight the recession, liberating itself from today’s artificial – yet legal – restrictions such as the debt ceiling.

    Reply

    WARREN MOSLER Reply:

    the coin was proposed as a way for the president to spend without it being labeled deficit spending when congress wouldn’t pass the increase in the debt ceiling.

    Reply

    WARREN MOSLER Reply:

    first, as previously explained, the no over draft rule is not and never has been an obstruction to deficit spending.
    ‘in practice’, as you say, no nation with its own currency and a no over draft rule has ever not been able to deficit spend as directed by the legislature? Japan, UK, Turkey, Italy, Greece, etc? There’s enough supporting institutional structure to make the no over draft rule moot to the point where 10 year JGB’s are trading under .80%, for example.

    Second, I used a two sector model because that’s all that was needed to make the point. Private sector can be further divided into residents and non residents. Or business and household and non resident business and non resident household. You can break out state and local govt and non resident govt. etc. the idea is to use as few sectors as possible to make the point initially, and respond as needed to those who can’t extrapolate on their own.

    Also, it is always ‘possible’ to consolidate most anything for purposes of analysis to understand the macro forces at work.
    For purposes of analysis you can indeed consolidate into the ‘american state’ when appropriate. For example, you can say the US sent a man to the moon if the discussion is at that level. You can have a constructive discussion and get macro points across without going into any more detail than that.

    Nor does any cb have any actual independence that I know of. From what I know they are all agents of the legislature, particularly the fed. congress confirms all the appointees and makes all the banking rules and fed rules.

    Anyway, even if Congress voted 10 trillion in deficit spending, and extended the debt ceiling for the spending they just voted on, and obama signed it, I have no doubt there would be no issue ‘funding’ it under current institutional arrangements.

    the obstacle to deficit spending is currently nothing more than the deficit myths.

    Where are you guys suddenly getting this stuff?
    Also, I know Marc well, and he always agrees with me in private conversation, best I can recall.
    Same with Bill. And I know he knows for all practical purposes Congress can spend whatever it wants.

    Note, too, I’ve been pointing out the self imposed constraints for as long as i can remember, maybe even before Marc did.
    They are a real part of the institutional structure.

    And what does ‘under the MMT ideal’ mean? makes no sense to me.

    Yes, operationally the platinum coin thing ‘works’ but it’s not necessary.
    Plain old ordinary deficit spending currently works just fine.
    The reason for the coin was to allow the president to bypass the legislature.
    That’s an entirely different matter.

    Reply

    Ed Rombach Reply:

    @Jose Guilherme,

    “He, (Bill Mitchell), imagined a scenario where Obama (“The Boss”) instructed Chairman Bernanke to mark up all those accounts of the Treasury in order to fight the recession. I agree this would be an ideal scenario but it is unfortunately not possible under the present institutional constraints (except perhaps if the executive were bold enough to risk a confrontation with congress by issuing a large platinum coin…).”

    Are you suggesting that the President, any President, possesses enough knowledge about markets and the economy as a whole to make competent unilateral fiscal decisions of such scope that bypass the constitutional spending authority granted to Congress?

    Reply

    WARREN MOSLER Reply:

    right, the executive carries out the instructions of Congress when it comes to spending

    Reply

    LetsGetItDone Reply:

    @Jose Guilherme, See my reply to Joe Bongiovanni. Using Platinum coins would functionally be the same as instructing Bernanke to mark up those accounts. And as far as political acceptability is concerned. That’s an arguable issue, but if the coin is large enough; there would be nothing anyone could do to reverse the effects of such an act. Say the coin minted had a $60T value and this outraged the Congress. What could they do? Change the Law?

    If they passed a new one, then the President could simply veto it. They’d never override that veto in either House. Filling the public purse with $60 T would be a fait accompli. Whatever the initial reaction to the move, it would be a very popular one too; once the President used it to pay off all the debt subject to the limit; or most of it anyway; and then ceased issuing anymore to cover “deficit spending.”

    Reply

  12. Andrew Says:

    @Robert Rice,

    Do most lay people think of the National debt only as Government borrowing associated with term bonds? Or do they also consider offering interest on reserves as Government borrowing?

    To a lay persons thinking.. Doesn’t trilions of QE prove we can monetize (retire) the national debt (term bonds) and the country doesn’t vaporized in a hyperinflationary puff of smoke. Can the good guys get more out of this point?

    Underneath it all, the key motivation behind the deficit hawks, hyperinflationists and currency debasement doom mongers is to shackle the Governments ability to spend on social programs and/or place more power in the hands of minority private interests. They will bang away like crazed drumming rabbits with whatever gets most traction with the public. If they are losing the public debate on the deficit they will switch to inflation, if they start losing that they will switch to destruction of the currency, then back to the deficit. Let’s face it, MMT needs a complete circular argument and an army of monkeys with cymbals.

    Reply

    WARREN MOSLER Reply:

    they say ‘monetary policy’ operates with a lag, which is probably now stretched to 4 years or more for the US, 20+ years for japan…

    Reply

    Andrew Reply:

    @WARREN MOSLER,

    That shouldn’t make sense to a lay person. There is no real world evidence to substantiate the lag effect. The lay person doesn’t understand it. They are listening to the so called experts and giving credence to the most popular or loudest voices.

    Twisting peoples moral sensibilities, getting them to buy into the evillness of deficits and believe the Government is constrained like a household. That is the centre of the demonic alter universe. Around this hub all the other deceits and lies are spun.

    Depending on force disposition it seems like the rebels need to plan a concerted attack in strength on the hub or choose to overwhelm the weaker spokes one by one…. We must bring the dark star down….

    Reply

    John O'Connell Reply:

    @Andrew,

    Friedman produced data demonstrating correlation between money supply and prices, when a lag of 18-24 months was incorporated. Lags are very much understandable to lay people. When you fertilize your lawn, does it turn green immediately, or only after a week or so?

    WARREN MOSLER Reply:

    yes, and the lag always crossed the fiscal cycle.

    also, the better argument is that prices including interest rates cause ‘money supply’

    Andrew Reply:

    @Andrew,
    Is there empirical evidence or is it just a Friedman theory?
    If it is a rubbish theory discredit it. If there is empirical evidence and an MMT solution to a real problem then we still have a cymbal to clang.

    WARREN MOSLER Reply:

    central bank research hasn’t found convincing evidence, to the point where the Fed stopped looking at the various M’s they came up with.

    WARREN MOSLER Reply:

    go for it!

    John O'Connell Reply:

    @WARREN MOSLER,

    I think a monetarist would not today characterize the lag as a definite amount of time, as was frequently done in the past. Today I think they would define the time of the effect of monetary stimulus on prices as the time that the economy returned to a healthier level with healthier growth. In past recessions, particularly ones in the ’60′s and -70′s, that averaged about 18 months, but was quite variable. This time, it’s 4 years and counting. Even a monetarist would not claim that inflationary effects would be felt while the stagnation (not to say “recession”) is still in progress.

    When MMTers talk about the threat of inflation, they seem to acknowledge the MV=PT (are those the right letters?) rule. Money times velocity equals price times quantity sold (= GDP). What is the MMT version of what should happen if we were to enact all Warren’s ideas, and the economy suddenly (say in 1 year) recovered, and found itself with three times as much high-powered money as before the recession, and velocity having risen back to its pre-recession value, and only 10% more goods? Would the government need to change tax and spending laws and policies so as to soak up the excess? (As if it were that nimble.) Or is there some magic that says the exceptionally large deficits during the recession can have an effect only contemporaneously, if any, and not at any time in the future?

    Reply

    Tom Hickey Reply:

    @John O’Connell,

    Here’s a summary of the MMT’s version of QTM by Joseph Laliberté, which got a thumbs up from Scott Fullwiler in the comments.

    Fiscal policy vs monetary policy to control inflation: MMT perspective, by Joseph LalibertéFiscal policy vs monetary policy to control inflation: MMT perspective, by Joseph Laliberté

    John O'Connell Reply:

    @Tom Hickey,

    Not quite the answer to my question, but from that article I gather that MMT does believe in persistent effects of changes in money (although defined differently than monetarists did), and that government would have to compensate tomorrow for the deficits of today.

    Which would seem to validate the fears of those who say today’s deficits will cause tomorrow’s inflation.

    WARREN MOSLER Reply:

    fiscal ‘compensates’ for savings desires. if they keep growing deficit spending (combo of govt and non govt) needs to be higher

    Andrew Reply:

    @John O’Connell,

    So unraveling a popular misconception is not easy. I’m an engineer not an economist I dont have the background to anticipate every issue but I believe it can be done. (Engineers perservere to solve problems). Peel one layer of the onion and find another. Overcoming multiple layers with some valid (yet can be overcome) objections is a serious challenge that requires a well thought out strategy.

    The defences are deep. Yet we can find a way in.

    Hugo Heden Reply:

    @John O’Connell,

    I think I understand your question. Today’s deficit spending increases the “money supply” (net financial assets). That’s ok, because it enables the economy to recover. But what happens then? Does not this “higher money supply” constitute a latent inflation risk (as per the Quantity Theory of Money)?

    Does that sound like what you’re asking?

    WARREN MOSLER Reply:

    the lag is until the deficit spending kicks in
    ;)

    no need to even publish ‘money supply’
    just count bodies in the transition job.
    ;)

    John O'Connell Reply:

    @Hugo Heyden,

    Yes, that’s the question.

    @Andrew,

    What misconception are you talking about?

    [As a programmer, I can guarantee you that it is impossible to anticipate everything. End users are far more numerous and have infinitely more points of view. You can't predict what they will think or do, and so you can't program for what you don't know about. That's one reason there is software service, to "correct" the code that didn't know what to anticipate.]

    John O'Connell Reply:

    @Warren Mosler,

    So, it has to be done by automatic stabilizers, and the shrinkage of the transition workforce will reduce the deficit precisely enough to prevent inflation.

    Without a JG, though, is it likely that the automatic stabilizers will be insufficient and the spending today will cause “overheating” tomorrow? If so, then this is a strong argument for a JG, to remove discretion from policy because our discretionary mechanism is hopelessly inadequate to cope with short-term change.

    WARREN MOSLER Reply:

    like the story, ‘i don’t have to outrun the bear, i just have to outrun you’, jg just has to be better than the current practice of using unemployment as a price anchor.

    likewise, yes, i agree congress will have to make fiscal adjustments. and they might get it wrong. but not nearly as wrong as they have it today

    Tom Hickey Reply:

    @John O’Connell,

    “Not quite the answer to my question, but from that article I gather that MMT does believe in persistent effects of changes in money (although defined differently than monetarists did), and that government would have to compensate tomorrow for the deficits of today.
    Which would seem to validate the fears of those who say today’s deficits will cause tomorrow’s inflation.”

    Scott Fullwiler has written on this. I gather than his answer would be that if the interest payment exceed the primary deficit and the their ratio to GDP is rising, then production will lag the increase in the money supply due to govt, eventually resulting in excessive effective demand wrt goods produced and therefore inflation.

    In other words, the issue has to related to demand relative to production since the financial constraint is price instability and the non-financial constraint, availability of real resources.

    WARREN MOSLER Reply:

    gov needs to ‘compensate’ to changes in savings desires.

    current deficits reflect current savings desires. the deficits/debt doesn’t have to change if savings desires grow lock step.

    again, just count bodies in the unemployment line

    Tom Hickey Reply:

    @John O’Connell,

    “Does not this “higher money supply” constitute a latent inflation risk (as per the Quantity Theory of Money)? Yes that is the question?

    Increasing and decreasing money supply is only “inflationary” or “deflationary” at the margin. The margin is determined by changes in non-govt savings due to shifting saving desire. So if the domestic private sector generally desires to net save (S>I) and this is not offset by external dissaving (net exports), then govt needs to dissave in offset in order to maintain a full employment budget with price stability.

    Tom Hickey Reply:

    @John O’Connell,

    “So, it has to be done by automatic stabilizers, and the shrinkage of the transition workforce will reduce the deficit precisely enough to prevent inflation.
    Without a JG, though, is it likely that the automatic stabilizers will be insufficient and the spending today will cause “overheating” tomorrow? If so, then this is a strong argument for a JG, to remove discretion from policy because our discretionary mechanism is hopelessly inadequate to cope with short-term change.”

    More or less correct. The idea is to achieve “good deficits” through policy design enlightened by the sectoral balance rather than allow bad deficit resulting from falling tax revenues and increasing stabilization in response to austerity. That design would mean adopting the sectoral balance approach and functions finance in economic policy formulation. Since shifts in saving desire are impossible to know, reform would need to incorporate revisions to the tax structure, and upgrading the design of automatic stabilization. Ideally a MMT JG would be included to mop up residual UE and provide a price anchor. The idea is develop economic policy based a macro solution that is is effective balancing production (“growth”), employment, and price stability.

    roger erickson Reply:

    @WARREN MOSLER, Monetary & religious policy both operate with the same lag, one based on faith in a “after life,” though both are vague on when before, during & after are demarcated.

    If you have to ask, you’re not supposed to. It’s an article of the faithful, no matter how cruel.

    Reply

    Robert Rice Reply:

    @Andrew,

    Andrew, you and ESM seem to share the same concern, that because we have all the evidence to rebut the other party, because we have all the good arguments to rebut the other party, because we’ve tried to point them in the direction of the evidence and the sound arguments and they nevertheless retain their beliefs holding them as unfalsifiable, presenting the arguments is no longer worthwhile. Our side has been anything but effective in defeating the other side’s arguments. Watch the national news–CNN, MSNBC, Fox News, etc. and no one in the media is on our bandwagon. No one is saying, “All we have to do is print, and no, inflation won’t be a concern.”

    If ya’ll think we should take our football and go home and no longer play ball, that’s your decision. I disagree with your call. I’m quite certain we can get through to enough of the right people. We need to reach the media, the open-minded, not the dogmatic and intellectually dishonest. The media will listen if we have the right voice speaking. We just need to be clear, concise, and on the right message.

    Reply

    ESM Reply:

    @Robert Rice,

    “Andrew, you and ESM seem to share the same concern…”

    That’s not my concern at all. I’ve written repeatedly here, probably for years, that Warren has chosen the wrong way to frame the MMT argument. Unfortunately, you advocate framing the argument in essentially the same way.

    Although mainstream analysts/economists/politicians use household finance as a model for government finance, they don’t actually believe the finances work the same way. They just believe the household finance model is a good one for understanding how to keep the economy running smoothly.

    For example, no serious person really believes that the US government can be forced to default on its debt by the market. Serious people know that the government has the ability to print money to cover its nominal liabilities. Likewise, no serious person really believes that Social Security or Medicare will go bankrupt. They speak about bankruptcy as a metaphor for not being able to meet the expectations of future beneficiaries.

    I don’t believe it’s helpful to argue that the metaphor is not literally correct. For example, if I say that giving money to Solyndra was a waste of money, I don’t literally mean that the money was wasted, and it wouldn’t be particularly helpful if you responded by saying that the money just circulates around.

    The key point of MMT isn’t that the government can print money. Everybody knows that. It’s that the government is not really borrowing when it deficit spends. Rather it is accomodating the private sector’s desire to do work in order to acquire government liabilities. Whether those government liabilities are in the form of bills, notes, bonds, reserves, or cash currency is of little consequence.

    Reply

    WARREN MOSLER Reply:

    good points

    Robert Rice Reply:

    @ESM,

    1. The reason for asserting very directly we need to print money isn’t because we’re going to reveal to people the Federal government has the operational ability, but to help them realize it has the opportunity, as negative side effects will not be a problem (unless done to excess). The idea is to get these people to level their argument against the opportunity to print money, aka to appeal to inflation, so that we can rebut the real issue. The objective is to reveal to them money printing in some contexts is healthy for the economy, something they do not understand.

    2. We aren’t bankrupt in any sense, whether it be meeting current or future obligations. We can make that point after refuting their inflation concerns. We might need to do some revising of those obligations so we do not input too much money into the economy, but that’s it.

    3. Again, the distinction between operational ability and opportunity is what’s tripping people up. People are failing to realize we don’t just have the ability, but we have the opportunity, nay the responsibility given certain economic contexts.

    4. Admittedly I find this final point fairly ironic: If the government isn’t borrowing when it deficit spends, what’s it really doing? Printing money maybe (it’s one or the other)? This is my point. We need for people to realize printing in certain contexts is healthy for the economy. It feeds demand. That’s the issue–people do not believe it is healthy. We can help them realize it in fact is. That’s the way to frame this discussion.

  13. John O'Connell Says:

    Excellent piece, very well presented. I’m taking you up on your offer to distribute. I hope it will motivate some people to investigate further.

    Reply

    WARREN MOSLER Reply:

    thanks !

    Reply

  14. A Communication from Your Central Bank | The Wall Street Examiner Says:

    [...] and indebted economy, the ability of households and firms to generate demand for products leaks out of the economy as these households and firms save substantial portions of their income.  If there is weak [...]

  15. joe bongiovanni Says:

    “Public sector spending in a currency it issues is not revenue constrained. The private sector, the user of the currency, must first obtain funds before it can spend.”

    In theory.
    Or, in a meaningless term, ‘operationally’ speaking.

    The public sector spending is done through the Treasury.
    Since its inception, it is legally prevented from “spending” money that it does not have.
    The public sector is revenue constrained.
    The public sector (Treasury) must borrow (or tax) the money that it spends.
    The public sector is a “user” of the currency, which is privately created.

    The private sector includes the banking system.
    The private sector bankers create “purchasing power”, a.k.a. currency or money, and rent that currency to all of us – including the public sector – without first acquiring the funds that it is renting.
    The private sector bankers are not revenue constrained.
    The private bankers are currency issuers.

    Just saying.

    Reply

    Robert Rice Reply:

    @joe bongiovanni,

    What you’re just saying is just wrong. See the following:

    http://www.moneyfactory.gov/

    or:

    http://www.usmint.gov/

    These departments of the Treasury are responsible for the creation of money.

    The authority to create money is granted to the U.S. Congress in the Constitution. See article 1, section 8 (item 5, specifically):

    http://avalon.law.yale.edu/18th_century/art1.asp

    Reply

    joe bongiovanni Reply:

    @Robert Rice,

    I’m sorry if you thought my comment on money creation was about coins (a TRUE Treasury-issuance function) or Federal Reserve Notes – which form the currency part of M1.

    Federal Reserve Notes are printed FOR the private bankers at cost and become part of M1(money) when they enter circulation as non-reserve cash.

    Of course the authority to create money was granted to the Congress, and we want it back. But in 191 this money-creation authority was delegated by Congress to the private Federal Reserve banking system.

    Except for a few Kennedy notes and coins, it’s been pretty much a private banking function to create money.

    I am talking about what the Fed describes as “money” – the M1 portion of the supply of money.
    Sorry for your misunderstanding.
    Thanks.

    Reply

    Robert Rice Reply:

    @joe bongiovanni,

    Joe, here’s what you wrote:

    “The public sector is revenue constrained.”

    and,

    “The public sector is a ‘user’ of the currency, which is privately created.”

    There isn’t much ambiguity here. I understood what you wrote, although you may not have chosen the best words. The fact is, the Federal government can create money whenever it wants, insofar as it follows the rules. Certain departments within the FG do not have the authority to create money, but that isn’t what you wrote. If you’d like to reword what you wrote, that’s up to you, but there was no misunderstanding on my end. It seems like you may have meant to write the public sector is synonymous with the Treasury only, which is certainly an idiosycratic usage of “public sector” and would certainly cause a misunderstanding.

    Are you talking about the entire Federal government being revenue constrained–a user of money–or simply the Treasury?

    WARREN MOSLER Reply:

    so you want Congress to make loans directly, rather than via its banks?

    or do treasury securities bother you, recognizing they are just savings accounts at the Fed?

    joe bongiovanni Reply:

    @joe bongiovanni,

    to Robert Rice
    Yes, the public sector is the government and it is the user of the currency that private bankers create.
    Please explain what part of the federal government can create money whenever it wants as long as it follows the rules?
    It is the rules that prevent the government from creating money as we know it.
    It is within the definition of the sovereign powers of any government to create that nation’s money.
    However, the laws and rules have been written granting that power of issuance over to the private bankers, including the central bank at the FRBNY.
    When discussing the money power of the sovereign government, the monetary right resides with our Congress, but Congress has legally and by various Rules delegated that power to bankers.
    That the ultimate sovereign authority to create the nation’s money resides with the Congress and the government is indisputable. But I tried to be clear that for all practical purposes the entire federal government is precluded by the laws and regulations from creating money today.
    Given that it is the Treasury that disburses all of the government’s money, it is the entire federal government that is revenue constrained; that is, the entire federal government must first acquire from the private sector the money that it spends.
    Thanks.

    WARREN MOSLER Reply:

    in any case close examination shows there can’t be a reserve drain without a reserve add.

    that means the fed has to do a reserve add to provide the credits in the reserve accounts before the private sector can pay for treasury securities.

    the question is whether the congress can deficit spend at will,
    which it can and does under today’s institutional structure,
    the no over draft rule not withstanding.

    joe bongiovanni Reply:

    @joe bongiovanni,

    This in reply to Warren.

    I don’t understand your question.
    Congress should make no loans. That is not the role of Congress.
    More importantly, Congress should never need to borrow any money from anyone as it has the issuance power over national money.
    Whatever public agency – the FED were it one – should make any loans needed BY the bankers.
    Treasury securities at present are an unnecessary burden on the taxpayers of the country.
    I have no problem with government-issued bonds for the purpose of providing a safe haven for no-risk savers.
    But the return would be near or at zero.
    I have a problem with the present system where the government MUST borrow, for any reason.
    I thought MMTers should feel the same.

    Thanks.

    WARREN MOSLER Reply:

    with a 0 interest rate policy govt ‘borrowing’ is completely a moot point

    my question is about your policy initiatives should ‘your’ monetary arrangements be in place.

    Tom Hickey Reply:

    @joe bongiovanni,

    We do, but for different reasons. How about formally consolidating Tsy and cb functions under Tsy and ending the Fed, going to no tsys longer than 30 days, setting the overnight rate to zero, and instituting the financial reforms proposed. It’s all in the mandatory readings and policy recommendations.

    Tom Hickey Reply:

    @joe bongiovanni,

    “Please explain what part of the federal government can create money whenever it wants as long as it follows the rules?”

    It’s called Congress, and the process is the appropriations process through which govt disburses funds into the economy through spending and transfers, using its agencies. Congress also regulates private banks through its laws and agencies since banks have a government franchise to use the govt’s unit of account, which expands and contracts the money supply based on credit extension. Banks also have unique access to the cb, the govt agency that is the sole issuer of US currency, both for the reserves necessary for RR and interbank settlement after netting, as well as to obtain vault cash in exchange for reserves.

    Robert Rice Reply:

    @joe bongiovanni,

    Joe,

    Scroll up to your initial post and remind yourself of what you were first arguing (it’s marked above as thread 8; the numbers are on the left next to the first post of each thread). You initiated your correspondence by indicating it was your belief the Federal government was revenue constrained from its inception. In my response above, I pointed out that you are mistaken. The Constitution gives Congress the authority to create money from its inception.

    Now you’ve changed your tune. Allegedly Congress enacted laws which delegated their Constitutional authority to private bankers and the Fed while also enacting other laws that prohibit itself from money creation. Conspicuously absent from your transforming perspective is any legal reference whatsoever which would suggest you are correct. You’ll need to make at least some kind of effort to justify your beliefs.

    Let’s suppose you can actually come up with some kind of legal reference which indicates the authority to create money has been delegated. I would point out delegation of authority does not withdraw the authority from the delegating party. When a king sends a messenger in his stead to act with his authority, that doesn’t render the king without authority over that which was delegated. Alternatively and as a second analogy–if an individual grants another the power of attorney over their estate, that doesn’t mean they no longer have authority over such, it means someone else has the authority in addition. They only retain said authority insofar as the grantor continues to allow them to have it. Ultimately primacy remains with the delegator.

    In response you might argue–granted, delegation isn’t a sufficient condition to remove Congressional authority to create money, but it isn’t delegation only that we’re talking about. It’s delegation in addition to prohibition which together constitute the loss of Federal government authority to create money. To which I would respond and say–even if there are such laws prohibiting Congress’ authority to order the Treasury to create money, such would be in contradiction to the Constitution, and you know full well those laws have a snowball’s chance in Gehenna of being held up in court. Any laws prohibiting Congress’ authority to create money are quite clearly unconstitutional, as Article 1, Section 8, item 5 clearly demonstrates. The Federal government by all rights could ignore such laws. And it’s unrealistic to envision the SCOTUS ruling the Federal government gave away its authority to create money based on some subordinate law, should such a case ever end up before the court.

    I don’t think you have any argument, here, legal or otherwise.

    Tom Hickey Reply:

    @joe bongiovanni,

    If it were true that the cb is a private bank creating the nations currency, then the govt would be borrowing from the private sector to fund itself.

    But the cb is not a private bank. Government funds itself through its cb agency as sole issuer of reserves and the Tsy, also an agency, as sole issuer of tsys. The Tys also has sole disbusrement power. The cb cannot disburse funds into non-govt, since that is the power of Congress and it is carried out through the interaction of the cb and Tsy as agencies created by Congress. Congress created the Fed as an agency that is independent of political influence in setting monetary policy, but the Fed is not chartered as a private bank. In the disbursement process both the tsys issued and the reserves used to clear funds Tsy credits to private bank accounts end up in private hands, increasing non-govt NFA, the Tsys as nongovt saving of net financial assets and the deposit credits as spendable funds, also NFA.

    Maybe you need to study “Soft currency econonics” and 7DIF and read the FRA more closely?

    Reply

    joe bongiovanni Reply:

    @Tom Hickey,

    Gee Tom, I’m disappointed.
    Where to begin. Maybe say please avoid the confusing shorthand here. Too often MMT is a semaphore-like language, and the code prevents, rather than enhances, understanding..

    OK, YES, the government borrows from the private sector to fund the non-taxed (deficit) portion of its expenses. How can there by any question about that?
    The government (Treasury as disbursing agent) cannot borrow from itself, and so who else is there besides the Foreign sovereigns?

    Did you really write that the government funds itself through the Fed’s “issuance of reserves”? Reserves have no bearing whatever on the financing of government.
    And to say that the Government funds itself through Treasuries is to say that the government doesn’t fund itself, and therefore must BORROW the funds it needs from the private issuers of “money”.

    And then, the CB cannot ‘disburse’ funds to private entities???
    When the CB makes loans, is that not a disbursement of funds?
    Because when the CBs balance sheet went up about a Trillion, didn’t all those loans go to the private bankers?

    “…the Fed is not chartered as a private bank”.
    I never said anything about the Fed(FRB) charter, but of the FRBNY as the nation’s CB.

    I have never been able to find the Charter of FRBNY and it is widely reported among legal scholars that no Articles of Association exist for the FRBNY, which IS registered as a private corporation.
    Its Board of Directors are private bankers, who alone establish compensation, and NONE of its employees are part of the government system of employment.

    PLEASE let me know where I can get the Charter of the FRBNY. Thanks.

    Tom Hickey : “In the disbursement process both the tsys issued and the reserves used to clear funds Tsy credits to private bank accounts end up in private hands,…”
    Huh?
    The Treasury, as disbursor of funds, receives the proceeds from Treasury securities it issues as “money” from the private purchasers of the securities, and the Treasury disburses the money to private hands.
    You need to distinguish between Treasury’s disbursing of payments for goods-and-services from its debt-management activities.
    Is there a point here somewhere?

    I have read all that stuff, several times over, just in case I missed something.
    Was there something I missed?
    Thanks.

    Reply

    Tom Hickey Reply:

    @joe bongiovanni,

    Clueless.

    WARREN MOSLER Reply:

    posted this response to same comment on the Huffington post:

    Warren Mosler
    108 Fans
    1 second ago ( 7:41 PM)
    This comment is pending approval and won’t be displayed until it is approved.

    Congress is the boss of the tsy and the fed.
    If Congress decides to spend and it’s own laws get in its way it can immediately change them at will. But the no over draft rule you are referring to has never been an obstacle to deficit spending. The treasury has set up a group of what it calls of primary dealers who agree to buy all new tsy securities at auctions, where the dealers bid for them at prices the dealers believe will be profitable. Furthermore, the dealers are allowed to sell short in advance, and they have access to funding for their purchases.

    In any case, ‘congress’ is the public sector for purposes of this discussion, and the fact that it constrains its agents, the fed and the tsy, does not mean the public sector is revenue constrained.
    Favorite (0) Flag as Abusive Share it

    Warren Mosler
    108 Fans
    2 seconds ago ( 7:42 PM)
    This comment is pending approval and won’t be displayed until it is approved.

    (cont. from previous comment)

    banks are designated agents of govt/congress. They require govt charters, are subject to govt regulation and supervision, which includes regulators who can replace bank management for non compliance with regulations. Banks are also public/private partnerships as their liabilities can be their private capital plus fdic insured deposits which are generally 90% or more of most bank’s liabilities. Govt sets capital requirements, asset/loan requirements and limits, liquidity requirements, and matched funding requirements. there isn’t much left for the ‘private’ aspect of banks to do except price risk and market and promote their ability to promote what govt allows them to do. It is also Congress that has decided that bank liabilities- what we call bank deposits and, in general, ‘money’- are acceptable for payment of taxes.

    Yes, banks make loans, and the corresponding bank liabilities, called deposits, which are also most often called ‘money’. But those deposits, in the first instance, belong to the borrower, not the bank. In other words, if you borrow 100,000 from a bank, you get the 100,000 to spend, so in that sense it is borrowers that always create the assets and liabilities.

    Let me add that if the politicians recognized that banks are largely public sector agents, it would be the republicans trying to shut them down and the democrats trying to expand them…
    ;)

    Reply

    joe bongiovanni Reply:

    @WARREN MOSLER,

    In two parts

    Interesting.
    Here’s a good joke by Warren:
    Congress is the boss of the FR bankers. (And the Treasury, as if the Treasury was not part of the Executive Branch).

    Funny how the consensus among the Congresspeople (as shown so obviously by the Dimons of the World) is that the bankers run this town(DC).

    He goes on to say that Congress doesn’t KNOW it is the boss of the nation’s money system, and of the private bankers of the world who have outright bought and own our government.

    Why pretend that NOW Congress is the boss of the bankers? That’s a painful proposition today. We NEED to reform the banking and currency system such that Congress IS the boss of the bankers, and we ARE the boss of the Congress, and we can again own our money system.

    Congress CANNOT immediately change the problem laws at will BECAUSE the bankers own the Congress. That doesn’t mean we shouldn’t identify those laws and the changes needed.

    The fact that the laws constrain the government from spending at will DOES in fact mean that the government sector is revenue constrained. By definition.

    deux

    Which of these statements is true?
    Banks are agents of the Congress.
    Bankers own this town. (Congress is the agent for the bankers).
    Who’s zooming who here?

    Sorry, but government deposit insurance FOR THE DEPOSITORS does not make a public-private partnership. It’s more like promoting moral hazard by putting the bankers’ hand in the taxpayers pocket.

    The implication is that banks are like cuddly public entities because there are requirements that they maintain capital levels in relation to the holdings of their loan portolio.

    GIVEN that it is the inability of the private bankers to provide “circulating media” for the growth of the national economy that causes massive unemployment, that only makes sense. It doesn’t make them public servants.
    If banks do not make loans, we have no means for exchange.

    And as to who owns what, the bankers created the loan (and THUS OWN a securitized Promissory Note of repayment with interest) out of thin air – they did not lend either their own, or other depositors’, money.
    They lent something they didn’t have.
    That’s why it’s called The Legalized Crime of Banking in Adams’ book by that name.

    It is the bankers who OWN the money system.
    And we NEED to take it back.

    Reply

    WARREN MOSLER Reply:

    assuming we took back the money system, etc. whatever that actually means,
    do you have any specific fiscal/monetary/spending/taxing/interest rate/whatever proposals to restore output and employment?

    Tom Hickey Reply:

    @joe bongiovanni,

    Joe, are you representing AMI?

  16. joe bongiovanni Says:

    Warren said:

    give me an example of private bankers controlling the ‘issue of our national circulating media’, whatever that means, thanks.

    In a way his comment s illustrative of MMTs failure to comprehend a national monetary system and I suggest a read of Del Mar’s History of Monetary Systems to put the concept of the “national circulating media” into perspective.
    It was the term most used by Fisher in his analysis of central banking operations.
    So, national circulating media means the same as money or currency system – only depicting it as a national resource.
    The money system common.

    Warren, the so-called “endogenous money system” can only really be described as the private bankers creating all of the M1 money, which works its way up the monetary aggregates.
    How is that any surprise?
    Sure, the parts of M3 are created by non-bank bankers and also “serve” as money, but if you read the Fed’s publication on Modern Money Mechanics, you have their definition of money as M1, which is consistent with mine. Who do YOU think creates the nation’s “money”?
    Glad to oblige.

    Reply

    WARREN MOSLER Reply:

    yes, loans create deposits which are called M something or another.

    And banks make loans under strict regulation and supervision of Congress,
    with Congress setting all the rules for all aspects of banking.

    i see banks as agents of congress, just like soldiers are agents of congress.
    yes, they have rules of engagement, but that doesn’t mean they aren’t govt. agents

    and check out my proposals for banks, fdic, fed on this website.
    i propose only banking activities that serve public purpose and require maybe 10% or less
    regulation and supervision currently required.

    Reply

  17. joe Says:

    Awesome paper! The entire core of economics understood in one easy page. Why is it so hard to get people to see that to earn a dollar someone else must spend a dollar? Economics boils down to +1 -1 = 0.

    Reply

    joe Reply:

    @joe Is there ever a good reason for the Federal govt to run a surplus? Just the other day, Obama implied the Clinton surplus was a good thing.

    Reply

    Robert Rice Reply:

    @joe,

    A surplus can mitigate excess inflation.

    Reply

    WARREN MOSLER Reply:

    at the time it did offset what could have otherwise been inflationary private sector credit expansion that was something like 7% of gdp. when that credit expansion ended/collapsed the gov should have been standing by to aggressively reverse things.

    Reply

    roger erickson Reply:

    @WARREN MOSLER,

    Exactly. Policy agility is the constant goal. Given sectores balances can & do fluctuate. Those fluctuations never hinder an electorate with their wits about them … or in command of their faculties.

    WARREN MOSLER Reply:

    thanks and agreed!

    Reply

  18. Jose Guilherme Says:

    @WARREN MOSLER,

    “And the no over draft rule has been obviated by the primary dealer system that requires participating dealers to buy gov secs at auction. the at auction part ensures they are buying them voluntarily as they go to the highest bidder, and all are allowed to borrow to fund their purchases at or below the fed’s target rate…”.

    Ok, I got your point on how the no overdraft rule won’t be an obstacle to deficit spending. If the Treasury account at the Fed is below the level required to pay for targeted spending then the government just proceeds to sell its securities at the next auction in the amount needed to fill the gap.

    “Nor does any cb have any actual independence that I know of”.

    Well, the ECB certainly seems to be independent and not under the control of any legislative body, be it at the European or national level. Its board only has to worry about answering to a legal mandate it received at inception to exclusively fight inflation.

    The ECB is the issuer of the eurozone currency; yet to all practical purposes it is unaccountable to any elective body as a result of the stipulations of the ill-advised Maastricth Treaty.

    Neil Wilson has recently pointed out that, according to a paper by Marc Lavoie

    http://www.boeckler.de/pdf/v_2011_10_27_lavoie.pdf (page 24)

    a euro government under pressure from bond markets could under present rules regain a measure of monetary sovereignty by “directing its domestic publicly-owned commercial banks to acquire new bond issues at the price of its choice”.

    Unfortunately, no periphery government seems to have the political courage to take advantage of this possibility to break austerity policies that will cause hard to repare, long term economic damage.

    Reply

    WARREN MOSLER Reply:

    Yes, it would take a change in the treaty to change the nature of the ECB.
    It’s under that much political control, which, granted, is relatively remote.

    Reply

  19. Alexia Says:

    Mr. Mosler where do you get your facts?

    The USA was in full employment for the entire period after WWII and prior to fiat currency. Unemployment has been very high, boom and bust, AFTER the introduction of fiat currency.

    http://www.washingtonpost.com/wp-srv/special/business/us-unemployment-rate-history/

    Reply

    WARREN MOSLER Reply:

    see ‘exchange rate policy and full employment’ at this website?
    (under ‘mandatory readings ;)

    Reply

  20. LetsGetItDone Says:

    Great piece, Warren. I’ll be using it as soon as I get the chance.

    To everyone, a great deal of exchange with Joe Bongiovanni occurred with people accepting his assumption that Treasury must, within the framework of current law either tax or borrow to spend. That is not true, because of the possibility of Proof Platinum Coin Seigniorage. Many of you who commented here, know that very well by now, but only one person mentioned it, until I commented. Why is it that so many of you won’t call attention to PPCS to refute arguments like the ones Joe B has been advancing? Or to put this briefly, why don’t you folks like PPCS?

    Warren concludes by saying:

    “So seems to me in this economy federal deficit reduction should be off the table, and the burden of proof of a sufficiently high long term inflation risk
    be on those who want to put it back on the table. Anything less seems subversive, either by accident or by design.”

    If PPCS were used in the volume I’ve been proposing, then it would immediately take federal deficit reduction off the table. And when inflation ceased to materialize after 3 months or so, it would take inflation off the table too. Then the main features of the MMT recovery program could be implemented because both the insolvency and inflation rationalizations for not doing vigorous deficit spending would be gone.

    Reply

    Tom Hickey Reply:

    @LetsGetItDone,

    “Treasury must, within the framework of current law either tax or borrow to spend. That is not true, because of the possibility of Proof Platinum Coin Seigniorage.”

    The current doesn’t “have” to tax or borrow to spend because that is impossible operationally for a government that issues its own currency. The government can force tys issuance before the Fed can credit the tsy account, but its a shell game. The Fed auctions off the tsys to the PD’s who borrow from the Fed to purchase the tsys and then just sell them back to the Fed and the Fed credits the Tsy acct.

    Where the platinum coin is needed is when the debt limit is hit and tsys issuance is not permitted to meet current needs. That is likely unconstitutional since the funds were already appropriated and the appropriation not rescinded. The president should just order the Fed and Tsy to do it anyway under emergency powers, as Clinton recommended, and let Congress either take him to court or try to impeach him.

    Not that I don’t like the platinum coin. But Congress would like shut that gate quickly unless it happened in the middle of the night with no one knowing about it until afterward.

    Reply

    ESM Reply:

    @Tom Hickey,

    “Where the platinum coin is needed is when the debt limit is hit and tsys issuance is not permitted to meet current needs.”

    Correct. Although even if the platinum coin idea works, the President would suffer a huge political backlash and possibly impeachment proceedings (which of course is the only remedy for a President acting against the wishes of Congress or against the law).

    “That is likely unconstitutional since the funds were already appropriated and the appropriation not rescinded.”

    It is not unconstitutional at all. Some have argued that it is unconstitutional for Congress to force a default on the debt, directly or indirectly, based on the 14th Amendment. The 14th Amendment says no such thing, however. There is a big difference between defaulting on a debt and questioning its validity.

    I don’t think the platinum coin is realistic. The President is just going to have to accept the fact that Congress has the power to retract authorized spending by tinkering (or not tinkering) with the debt ceiling. It still gives the President more flexibility than if the Congress were to retract the previously authorized spending explicitly. At least the President can decide where to cut back, which assets to sell, or whether to default.

    Reply

    Djp Reply:

    @ESM,

    Since SOMA is pretty big now…
    Could the NY Fed ever choose to just forgive Treasury Debt?
    That would certainly have some scary headline consequences, and I wonder what Krugman would say about it. But in reality, it shouldn’t matter at all, other than providing a way around the debt ceiling.

    I’ve been somewhat curious for a little while whether this could happen.

    Also been curious about how the NY Fed actually calculates its annual pnl in a few basic cases.
    (1) A short term repo transaction — Fed buys X for $10M and then sells it back a few days later for $10M+$500. Is the $500 profit on their books?
    (2) Same thing, but for a longer term transaction in the SOMA portfolio where the Fed buys a 5y Treasury. First they buy a 5y for Y and then in that first year collect some coupon payments. What’s the pnl the first year? What about the year it matures?

    Any pointers would be most appreciated.

    LetsGetItDone Reply:

    @ESM,

    “Correct. Although even if the platinum coin idea works, the President would suffer a huge political backlash and possibly impeachment proceedings (which of course is the only remedy for a President acting against the wishes of Congress or against the law).”

    I think the backlash point is arguable unless you mean a partisan backlash, which of course he must expect. Impeachment however, is for high crimes and misdemeanors, not for doing something perfectly legal for something Congress doesn’t like, so if the Rs try to impeach him, then things will backfire on them, even more than there attempt to get Clinton.

    Meanwhile, while all this noise and angst is going on, who’s going to be the hero repaying the debt? the longer they BS about it, the bigger a hero he will be. If he then goes after them for a progressive program, what will they say? We can’t afford it? With $44 T of unearmarked funds sitting in the TGA? Forgive me, but I don’t think so? There’ll be a lot of teeth gnashing; but they’ll be impotent!

    WARREN MOSLER Reply:

    it’s all about the president spending $ initially authorized by congress but the blocked by congress by not extending the debt ceiling.

    so currently, with the debt ceiling not an immediate obstacle, federal spending would’t change.

    LetsGetItDone Reply:

    @Tom Hickey, I agree that the debt stuff is kabuki and I understand the big sham very well. So, what? Politically, the sham makes people think there’s this huge debt burden.

    Tom, on using $60 T PPCS it makes no difference whether Congress closes the gate or not, once the President’s done the deed on minting a $60 T coin. Even if Congress could pass a bill right after he had minted it, it would do no good, because the President still has 10 days to sign the bill or not. In that time the $60T would be long in the TGA, and the cow would be out of the barn. Also, again, Congress could not pass a new law over his veto because the Ds will block that.

    Minting that coin is so much better politically than going through a constitutional crisis on all counts. So, again, why don’t you think that is the best course for the President to pursue to break the “we can’t afford it because we have this big debt logjam”?

    Reply

    joe bongiovanni Reply:

    @LetsGetItDone,

    Gee, so even though both Warren and Randy have expressly conceded that right now, today, legally, the government must have the money in its account before it can spend, perhaps “non-operationally”, and THEREFORE, the government is revenue-constrained , non-operationally of course, Joe F says here that this is NOT TRUE.
    And he provides as proof for his conclusion something that maybe could happen (like if you get it designed and minted and transported to the TGA at the NYFED without anyone knowing about it).
    It’s not like there IS a Platinum Trillion in existence, but, in theory, maybe it could happen.
    That’s pretty thin stuff, Joe, as proof that the government now, legally, must tax or borrow in order to spend.
    As soon as the ignorati in the Congress see this coming, the bankers sheep there Assembled will void that option with a simple amendment, AS IF this Prez would go there.

    As I said elsewhere, we agree that the government MUST have the right to issue the currency directly rather than issue debt to cover deficits. The Kucinich Bill allows that. It removes the limit on enabling government to do whatever it passes in its budget to taxation and debt.
    For real.

    Reply

    joe bongiovanni Reply:

    @joe bongiovanni,

    my error.
    should have said …
    “that the government now legally doesn’t need to tax or borrow in order to spend.”

    Reply

    Tom Hickey Reply:

    @joe bongiovanni,

    STill not true that the the govt must tax or borrow to spend. The govt under any system has to have funds to clear when it credits deposit accounts. That can be from direct issuance of notes (as has previously been authorized) or by Tsy issuance of tsys and cb issuance of reserves, as now.

    In direct issuance, no interest is paid and less non-govt NFA is created than with interest paid on tys. The process would be much less convoluted with direct issuance, and it would be less convoluted if the govt did not prevent its Tsy from running overdrafts at the Fed. It is due to the no overdraft rule that deficits need to be offset with tsys and the Fed must auction the tsys to the primary dealers before buying them for its book. The simplest way forward with the present system is to remove the no Tsy overdraft rule (after all banks are permitted overdrafts) and the debt ceiling, which is nonsensical since it potentially prevents expenses incurred under currently running appropriation. This could be done fairly easily by Congress.

    In contrast abolishing the Fed, going to direct issuance of non-interest bearing notes, and switching to full reserve banking would involve a huge political battle with powerful interests and presently control the levers of power. The likelihood of that happening anytime soon is remote without a sea-change in US politics. If there is a second leg down or another financial crisis soon after this one, that could happen. But at this time the K amendment and the AMI plan are dead in the water.

    More practical to go for something that is more politically pragmatic, and even repealing th no-overdraft rule and the debt ceiling would be extremely difficult when he has not been possible to get meaningful financial reform and it is still business as usual. Without the public 1) getting fired up due to crisis, and 2) seeing the light about how the monetary system works, no change of any magnitude is likely.

    Reply

    WARREN MOSLER Reply:

    The reason the govt isn’t net spending at higher levels is not because of the no overdraft provisions or the debt ceiling limits.
    In other words, getting rid of those two self imposed constraints won’t bank any difference because they are not, and rightly so, a practical constraint on spending. You just don’t ever hear a Congressman saying he’s against spending more or against cutting taxes because the debt ceiling extension might not pass. Especially when it’s the same people who vote for the spending who vote to increase the debt ceiling. Nor has any Congressman ever pointed to the no overdraft provision when promoting deficit reduction.

    In any case, still waiting for what you would actually propose if in your mind Congress deconstrained itself however you think the K bill would do that.

    Reply

    Tom Hickey Reply:

    @WARREN MOSLER,
    “You just don’t ever hear a Congressman saying he’s against spending more or against cutting taxes because the debt ceiling extension might not pass. Especially when it’s the same people who vote for the spending who vote to increase the debt ceiling.”

    That true. What we here is that Government can’t afford to spend more and has to cutting back its already allocated commitments because the US “cannot afford” it, and all the deficit and debt nonsense.

    It seems to me that it arises from the self-imposed rules that the Tsy cannot run at overdraft at the Fed and so has to auction tsys into the private sector. This gives the false impression that either the govt has to tax to spend or else borrow in the private sector, where there is a limited stock of “loanable funds” and govt borrowing “crowds out” private borrowing, raising rates and curtailing investment. The idea is that through the tsy, the private sector determines the interest rate.

    This is wrong on several counts, the first being that if the govt had to tax or borrow, non-govt net financial assets would not change through govt spending, while it can be shown through accounting that non-govt NFA increases through deficit expenditure. Secondly, the Fed sets the overnight rate, not the market and the yield curve is determined by extrapolation of expected Fed changes in the interest rate in the future.

    Aslong as this misperception continues the deficit hawks and deficit doves will be arguing with each other, confusing the electorate. While it is possible to convince the public of the true situation by educating them, the argument is rather complicated for most people to be able to understand when they think in terms of the govt as big household analogy. Direct issuance of notes would put an end to that, but it is politically impractical. Seems that the most politically practical way to make it obvious that the current narrative is bonkers is to end the no-overdraft rule and let the Fed and Tsy exchange liabilities directly. But that is almost as bad as direct issuance in the eyes of most since it involves “monetizing the debt.”

    So this is a tough sell, not only for those reasons, but also when so many people think that the Fed is private bank and that the country is borrowing from bankers in creating its currency.

    WARREN MOSLER Reply:

    I would say even with the no overdraft rule abolished, overdrafts would be seen as ‘printing money’ and ‘hyper inflationary’ much like negative capital at the ECB is viewed.

    The problem is the idea of ‘spending more than income’. At this point in time it’s considered immoral and a bad thing.
    And any attempt to ‘free’ the Congress to spend more than its income, including platinum coins, greenbacks, debt free money, public banking, or whatever, will be seen as a left wing gimmick to trick us all into believing it’s ok for govt to spend more than its income.

    These approaches are a violation of ‘Lerner’s Law,’ much like the ‘deficit dove’ positions that many headliners support. I don’t actively support any of those approaches, for the specific reasons already stated, while I often do support their proposals for the economy, such as larger deficits.

    Instead, my approach remains that of working to show how the issuer of anything necessarily ‘spends more then his income’ etc. etc. which I certainly can’t say has carried the day, but does seem to be gaining traction.

    Tom Hickey Reply:

    @WARREN MOSLER,

    Warren, if you are saying that it really comes down to the deficit owl argument against deficit hawks and doves, I agree. It seems to me that the issue cannot be resolved until the electorate and politicians understand that taxes and borrowing don’t fund government under the present monetary regime, the current political impositions that make it seems no notwithstanding.

    I think that most people more or less get this about a fiat currency away, and they think that the rules prevent politicians from using the purse willy-nilly for political gain by forcing funding through tax or borrow. That is to say, they want it this way and believe it is working but not well enough and so are calling for a balanced budget amendment and more control by the states over their economic policy locally. Of course, states do actually have a financial contraint operationally and many sates either have balanced budget amendments, or they are being pushed for. This would really pretty much do things in for the US.

    Therefore, the task at hand is to convince people that, as long as the deficits are “good” deficits in the MMT sense, federal deficits actually don’t matter and neither does the national debt. IMHO, this is the sine qua non for bringing about meaningful change politically. The electorate is not going to go for political change of economic policy without this understanding, which neither party presently has, nor does any third party or other significant political faction.

    Even if the K bill/AMI plan for direct issuance of notes were to pass tomorrow, this issue would remain. Being able to issue currency directly without debt and going to full reserve banking would not themselves solve anything as long as the public is afraid of “wasting money” and still sees inflation as a primary threat to their interests. What it would do allow greater expansion of the military to “meet existential threats” and cutting back on social services to “save money” in reality for crony capitalism.

    So I don’t see any any forward without fist dispelling the government as big household analogy and showing how policy space works economically so that “good” deficits are necessary for good government and are in everyone’s best interests. This is what everyone who understands this needs to be pushing for, in spite of other differences. The other differences are merely academic otherwise.

    WARREN MOSLER Reply:

    and we can’t be the next greece, and hyper inflation isn’t just around the corner

  21. joe bongiovanni Says:

    I guess this comment format works for some, but ……

    To LetsGetItDone

    You offer two references as proof that the government does not NEED to borrow and tax in order to funds its operations. They’re both the $6Trillion Coin.

    If you read Corrente, his emphasis is on using that money to pay off existing debt, so that there is headroom for MORE DEBT – more borrowing – to be issued.
    We should just abolish the debt-ceiling, I thought we all agreed.

    There IS the potential for money-issuance without debt using coin seigniorage, BUT, and this is a big BUT, the $6Trillion Coin violates Warren and Randy’s (through Innis) basic premise about money – that it is always, and must be, DEBT.

    It is because they fail to take the monetary SYSTEM route – the legal money route – that they ignore the means-of-exchange primary function of sovereign money that leads to their misunderstandings.
    People should ead Soddy’s The Role of Money for a fuller understanding.

    Here is AMI’s critique of Innis, for reference:
    http://www.monetary.org/critique-of-innes/2012/06

    COINS are issued into circulation DEBT-FREE.
    As were the Greenbacks.
    Why not issue electronic Greenbacks to fund the deficit as part of the budgeting process?

    There is no problem with the concept of debt-free (at issuance) money.
    That’s why Lincoln called the money-issuing power “the supreme prerogative” of a sovereign government.

    Thanks.

    Reply

    LetsGetItDone Reply:

    @joe bongiovanni, Joe B, I really appreciate your efforts, but I think you’re a bit confused. First, I am the letsgetitdone at Correntewire. I’m also Joe Firestone one of the organizers of the 2010 FS conference. I was the guy who handed you the mike quite a few times. Second, I’m not advocating a $6 T coin, I’m proposing a $60 T coin to pay off all the debt subject to the limit and also to pay for all new “deficit spending,” and also demonstrate to people that no more debt instruments need to be issued ever again, as long as the 1996 law isn’t repealed, and even if it is the $60 T coin should pay for 15 years of deficit spending at least.

    And third, the platinum coin doesn’t conflict with the notion that all money is debt at all. Since both Warren and Randy point out that high-powered money IS a debt of the Federal Government in the precise sense that the Government is obligated to accept its own money in payment of taxes. No doubt reserves and other high-powered money is different than TSY securities in certain ways since the Government owes no interest on it ad there is also no term on it. But it still represents a Government financial obligation and in that sense is “debt.”

    Reply

    joe bongiovanni Reply:

    @LetsGetItDone,

    Joe,

    Thanks for appreciating my efforts, however confused.
    On the first part, thanks for the mike at the FSTI.
    Most of my questions remain unanswered.

    Second – the denomination of the coin is meaningless – only its intent and impacts both on society and on the monetary economic discussion.
    In that regard, I can only hope you understand my agreement that Congress should be able to do the things you claim possible with “coinage”; i.e. pay off the debt and supply real money, i.e. WITHOUT DEBT, where “deficit spending” is necessary today.
    What I cannot understand is why MMT does not accept that this is EXACTLY what the maligned Kucinich Bill proposes to do.
    Nor do I understand why “coinage” advocates would not expect an IMMEDIATE amendment by Republicans, to the 1996 Act, prior to TGA deposit, placing a limit at $1,000. Or whatever.

    And third, here I disagree completely.
    Forget about the debt-repayment, it confounds the discussion of ‘money as debt’.
    And limit the creation of “coinage” money to the deficit-balance that is needed for the economy every year to achieve GDP potential (Again, exactly what the Kucinich Bill does).

    Knowing the Treasury’s methods for introducing coinage into “circulation”, we need a nominal $500B coin every year.
    It is minted without debt.
    It takes the train to FRBNY and is “deposited” in the TGA of the government.
    It exists immediately for payment for goods and services.
    It is debt-free-at-issuance money.
    It is money without debt.
    It is, just as importantly, permanent debt-free money.
    There will never be any debt associated with the existence of that money until it is used in exchange – in commerce.

    Then of course, we get captured by double-entry bookkeeping, and depending upon who’s “book” it is, it is either a credit or a debit, but it, in and of itself, never represents any debt to anyone.

    It CAN be saved and loaned to someone.
    But, due to its debt-free-issuance, it is not extinguished as money when the loan is repaid.
    The loan money came from somewhere in the first place.
    From the coinage, or from the Kucinich debt-free issuance, which is exactly the same.

    Both Randy and Warren, all based on Innis, are wrong.
    That’s why I linked Zarlenga’s criticism of Innis.
    The significance of state money TODAY as the means for payment and collection of taxes is a secondary matter to that of whether legal money IS debt.
    State money is about the legal concepts of the sovereign state.
    We are a state.
    We have a national money system.
    It works for all of us.
    We are legally protected in commerce by using it.
    AND we pay our taxes with it.
    So what?
    Thanks.

    Reply

    Gary Reply:

    @joe bongiovanni,

    “we need a nominal $500B coin every year.
    It is minted without debt.

    It is money without debt.
    It is, just as importantly, permanent debt-free money.
    There will never be any debt associated with the existence of that money until it is used in exchange – in commerce.”

    The moment government says that this coin is money and uses it as money – it becomes government debt. This is because government can buy anything with it only because it promises to accept that money back as taxes or fines, etc.

    The issue is not government debt as such – the issue is who pays the taxes that gives the value to the money and how much taxes.

    Anther issue is – what government spends its money on.

    And finally – the interest on government debt does not matter – as government can always pay it back (in case of money issuing government, which in your coin example it certainly is). It does matter who gets the interest – and that is part of the above question of where government spends its money. So, from that point of view spending money on paying interest for the savers is rather useless (in my opinion).

    WARREN MOSLER Reply:

    well stated, thanks

    LetsGetItDone Reply:

    @joe bongiovanni, You said:

    “Second – the denomination of the coin is meaningless – only its intent and impacts both on society and on the monetary economic discussion.”

    No, Joe! The denomination of the coin is politically significant. If an unappropriated and unobligated sum of $44 T is sitting in the TGA, then that totally changes the political situation, without any other changes in the system. I, like you, would like to see more far-reaching changes to the banking system. And I see no problem with pushing for those. But the best short-term gain that we can get, because it takes persuading only one person is a high value platinum coin filling the public purse. So, I think that is step 1. After it is done, I will then be all for pushing a more complete and comprehensive solution to the present fiscal/political situation. But right now, the size of the coin is very, very important if we want to save the safety net.

    In that regard, I can only hope you understand my agreement that Congress should be able to do the things you claim possible with “coinage”; i.e. pay off the debt and supply real money, i.e. WITHOUT DEBT, where “deficit spending” is necessary today.

    I do understand it and I have always basically agreed with it. But it is an argument calling for something that neither this nor the next Congress will legislate. So, that’s why, for the time being I focus on the coin. If the President issues it, then the truth of your argument will be more compelling to people, because government powers will have been demonstrated for all to see.

    What I cannot understand is why MMT does not accept that this is EXACTLY what the maligned Kucinich Bill proposes to do.
    Nor do I understand why “coinage” advocates would not expect an IMMEDIATE amendment by Republicans, to the 1996 Act, prior to TGA deposit, placing a limit at $1,000. Or whatever.

    I understand that the Kucinich bill is about producing what you call debt-free money, and I think I favor the bill. I say “think” because I haven’t read it thoroughly and thought about it, due to my judgment that it could never get even 50 votes in either this or the next House of Representatives and not even 10 votes in the Senate. The bill should be advocated, but getting it done is very long-term work.

    As far as an “immediate amendment” is concerned. Doing that isn’t politically practical once the President has done the $60 T thing. The reasons why are 1) the amendment can’t be immediate enough to stop the move, since the President has 10 days to sign any new legislation, and the TGA, would be filled with the $60 T within two days without the president even having to inform Congress until the deposit was credited; and 2) The Rs would be very unlikely to get such an amendment through Congress since it would be filibustered in the Senate, and the President has enough votes there to make sure that a cloture vote would fail. He may even have enough votes to stop passage outright, if the nation is faced with that debt ceiling default situation again before he does it.

    And third, here I disagree completely.
    Forget about the debt-repayment, it confounds the discussion of ‘money as debt’. And limit the creation of “coinage” money to the deficit-balance that is needed for the economy every year to achieve GDP potential (Again, exactly what the Kucinich Bill does).”

    I disagree with this first because debts already incurred must be paid, and second, because paying these debts with PPCS profits is paying for them with “debt free” money, making it a demonstration that 1) government can create “debt-free” money and 2) that it can use it to eliminate the public debt.

    Also, third, I disagree with it because I don’t want to limit the creation of money to the “deficit” in each year. That will end up leaving to Congress the annual decision to cover the “deficit” year-by-year, and gives the conservatives an opportunity to play games every year which may force the Treasury to start issuing debt again to cover deficits. (That especially may happen because as soon as the Government stops issuing debt instruments, the banks will immediately start screaming like the proverbial stuck pigs for new debt so that they have a risk-free investment vehicle. This happened in Australia at the beginning of the 80s when they started running surpluses and didn’t issue debt, and had the banks scream bloody murder getting the government to cave and issue debt while it ran surpluses.)

    In contrast, if that $60 T coin gets minted, the whole issue of “funding” deficit spending will be off the table for at least 15 years, giving us plenty of time to build support for changing the banking system, and also plenty of time to re-build the nation before the assholes can bring up the “we’re running out of money” thing again to block progressive legislation.

    WARREN MOSLER Reply:

    I’ve seen nothing constructive in the K bill

  22. joe bongiovanni Says:

    Warren
    I can’t thank you enough for providing the link to the two articles on HR 2990 (The National Emergency Employment Defense Act of 2011), and on Congressman Kucinich’s work thereon, that were posted here at the Center.

    I admit the error of avoiding the Center in the past, and had never seen those two postings.

    Upon review, here’s my take.
    Yourself, Neil Wilson, Tom Hickey and Rodger Mitchell propound all sorts of evils contained in the Kucinich full-employment proposal – I believe all of them in error.

    One Ralph Musgrave, obviously interested and better informed than your readers about both monetary systems and political economics, in seemingly effortless corrections to the flaws presented, draws it all down to the quintessential truth about what MUST be public policy Number One.

    We really need to be clear and understand what the issues are we are discussing before we declare victory in the knowledge of money.

    Political Monetary Economics 101, according to (this) Joe
    Somebody is going to control the powers of issuance, valuation and use of the state money system. It is either going to be the state – the national government to whom the powers were granted in the Constitution – as we advocate on the public money side, or it is going to continue to be the private bankcorporations of the world, who create ALL of the world’s monies as a debt, repayable with interest that is never created, using not their ownership of the money lent, but the unique, corrupting privilege of issuing the nation’s purchasing power.

    I’m sorry to say that the more I study MMT, the more I become convinced of its own mythology, as opposed to its science. Even the most respected Bill Mitchell fosters MMT myths. Especially for one, the myth of the money multiplier myth.

    To which I commented on Bill’s Blog recently.
    http://bilbo.economicoutlook.net/blog/?p=1623&cpage=1#comment-24955

    The money-multiplier myth might have been an errant explanation by some uninformed neo-classical economists of how money is created, and the role of deposits and reserves in that creation, but the truth of those relations has been publicly known and clearly explicated by the Fed at least since BEFORE the abandonment in 1971 of the fairly-benign Bretton Woods “Gold-Bullion Exchange Standard” .

    I have enjoyed the dance between ’34 and ’71.
    I hope things are clear to your readers.
    Thanks.

    Reply

    WARREN MOSLER Reply:

    still waiting for your current proposals once ‘control’, whatever that means, has been changed to your liking.

    or is that all that has to be done, a change of control of some type, and the economy will return to full employment?

    Reply

    joe bongiovanni Reply:

    @WARREN MOSLER,

    Let’s begin by agreement on meeting the full-employment goal.
    Until everybody’s working, it’s all in.

    In order to pursue full-employment we need to change some of the present statutes regarding both the banking and currency system and government finance.
    At the FSTI I asked for the list that MMT would advance for legislative reform.
    I am still waiting for it. We can develop one here on the blog.

    The Kucinich Bill offers a legislative remedy by restoring economic democracy to the country. The Bill is based upon implementing Lincoln’s observations after going to the bankers in order to save the Union – that the government should create all the money that is needed by the government and for national commerce.

    Warren repeatedly disparages the Bill with cavalier disdain, but he offers no analysis.
    I am amazed that any MMT proponent has not fully read, and does not fully comprehend, the K-Bill.
    It definitely includes many of the premises that MMT is founded upon; those of monetary sovereignty coupled with state money(only, FOR REAL), and social progress achieved through the utilization of the monetary system as a public policy tool.

    I have asked many times and will again – what are the goals of MMT that cannot be achieved through the Kucininch Bill?

    Warren asks for institutional/policy alternatives to compare with his own.
    I gladly respond.
    What is not included in the Bill is my opinion.

    On Warren’s institutional proposals(Banks, FDIC, FED and Treasury)

    BANKS – Warren proposals have to do with lending and investment policies, many related to investment and shadow banking not traditionally covered by federal regulation.
    Under the Kucinich Bill, regulated banking would be pretty much limited to that of the commercial banking sector.
    While investment and shadow banks could continue to exist, they would no longer be able to create, or leverage with, $US-denominated monetary assets as that would become purvey of the government. The great reformation required on the balance sheets of the unregulated banking sector would soon be upon us.

    The major difference is that all commercial banks would be operating on a ‘real-money(monetized bank-credit) basis, similar to Fisher’s 100 Percent Money proposal.
    Risks associated with bank runs and moral hazard would disappear from the banking system. Banks would lend real money that they obtain from their depositors.

    Once we decide that banks would do banking, in extending the capital formation and investment trust function to any commercial bank, Warren’s list of rules regarding bank investments and other activities by US banks is exemplary.
    No change. All in there.

    FDIC – Sorry, given the avoidance of moral hazard through money reform, the role of the FDIC is almost non-existent — deposit-loss restoration that result from institutional fraud. Banks will suffer their losses; all lending risks are borne by the bank’s shareholders.

    The FED
    Warren’s proposals assume the continuance of private money-creation, and interest-rate based monetary policy actions. No problem that the government can lend unsecured – and zero need for a federal risk guarantee on Treasury defaults.
    We take back the money system.
    Not sure if loan security is covered in the Bill.

    Interest rates would be determined by the market. The government has changed to managing the quantity of money; the price of which is whatever the market will bear.
    The government can always add liquidity in the event of hoarding, etc.

    Transform the Fed into a publicly-owned central bank, under Treasury Department, keeping its supervisory and clearing functions, etc..
    The independent monetary authority ensures monetary quantities are adequate to achieve potential GDP(demand) and available for capital accumulation by investment trusts.
    The Fed would be a lender of last resort to ensure liquidity. No interest rate leverage would be available to Fed borrowers (no advantage to borrow from the Fed over other banks).

    There would be no ‘reserve’ function associated with Treasury-Fed-banking operations and there would be minimal bank-capital and regulation required, as the bulk of systemic risk has been eliminated. The economy would not be subject to bank lending levels.

    TREASURY:
    Cease all issuances of securities – Agreed.
    Cease purchase of Financial Assets – Agreed

    Other Considerations
    Warren supplements the institutional changes with two demand-management proposals.
    1. A single $150 Billion grant to the states, per-capita issued, as a form of “revenue” sharing. (or, non-revenue sharing?)

    Kucinich proposes an ANNUAL grant of 25 percent sharing of the federal government’s “New-money” creation. A Non-stagnated, non-debt-destructed $14Trillion economy and 3 percent growth potential is accommodated with $420 Billion of debt-free “circulating media” authorized in the federal budget for that purpose.
    Thus, est. some $105 Billion ANNUALLY to the states, again on a per-capita basis.

    The K-Bill enables funding of other special state projects for needed infrastructure improvements, all by debt-free issuances or zero percent loans, approved by Congress.

    2. A full payroll-tax holiday for FICA withholding, and the balances funded by the government for employers and employees. At 30 percent of government revenues, regardless of source, on a $4Trillion budget, that adds about $1.2 Trillion to the economy and would require an additional $1.2 Trillion of funding. With no more government borrowing, what is the source of the government’s funds to maintain the social insurance balances? Money being debt, and all.

    On Social Security Funding, leaving FICA as is, the Kucinich Bill proposes to simply fund any deficits of the account:

    SOCIAL SECURITY TRUST FUNDS. The Secretary …. shall submit to the Monetary Authority any requests to cover impending deficits in Social Security Trust Fund accounts.

    In addition, provision is made for funding educational growth:
    “to sufficiently provide for universal pre-kindergarten, fully funded State programs for elementary and secondary education and universal college at every 2-
    and 4-year public institution of higher learning and create a learning environment so that every child has an opportunity to reach their full educational potential.

    In addition, the Kucinich Bill’s calls for a one-time citizens dividend, with the amount to be determined by the Secretary. I hope it would not be less than Bush’s free $600 per capita, roughly $186 Billion

    Finally, the Bill caps all interest rates at 8 percent, and limits all fees and interest to the principal amount of the loan, to prevent specific compounding interest; mortgages excepted.

    On those points, this is how the Kucinich and Mosler(MMT?) policy initiatives compare.
    Thanks.

    Reply

    WARREN MOSLER Reply:

    I agree in general with your actual fiscal proposals.

    You do, however, misrepresent my banking and monetary reform proposals, which is indicative of your general lack of understanding of actual monetary operations logic. This is further confirmed by your banking, Fed, and FCIC proposals. The problem is the ignorance displayed with those proposals will cause them to be (rightfully) discredited by Fed and Tsy senior staffers with credible rebuttal that you all will not be able to credibly defend, because ‘they’ will be right and you will be ‘wrong’ operationally.

    And, unfortunately, when discredited operationally your fiscal proposals that I support will not get further consideration, because the implication is that your discredited proposals ‘open the door’ the fiscal proposals.

    My position is that ‘the door is already wide open’ for the fiscal proposals, and that they are not operationally dependent on anything else. That is, we could immediately, with no negative monetary/operational consequences, have a:

    Full FICA suspension and increase social security by raising the minimum benefit to, say, $1,500 per month.
    Distribute $150 billion to the state govs on a per capita basis
    Fund an $8/hr transition job for anyone willing and able to work.

    Further, I have proposed the Fed be ordered by Congress to permanently maintain a 0 interest rate policy simply by reducing interest on reserves to 0%, and Congress order the tsy to issue nothing longer than 3 month bills. Economically and for all practical purposes monetarily, this accomplishes most of what you are trying to accomplish.

    In fact, Congress is currently operationally free to deficit spend in any size it wants.
    And it is free to set any interest rate it wants.

    Furthermore, I also restrict banking much as you suggest, and maybe a bit more in my proposals.
    And I support full deposit insurance for reasons outlined as well.
    In fact, there is no other way to do it. Many have tried, all have failed, and for good reason.
    The liability side of banking is not the place for market discipline. Never has been, isn’t now.

    joe bongiovanni Reply:

    @joe bongiovanni,

    Gee Warren, I was just trying to be responsive to your call for monetary system and policy alternatives to what it is that you advocate, and I tried to use your 4-pager on this site for the template.

    You have made a number of claims about my comment. Please understand that I hope we can pursue those claims in order to prove, or perhaps disprove, your point – maybe in a new thread especially for that purpose. Based on your cavalier attitude, let’s have a go, shall we?

    1. I misrepresented your banking and monetary reform proposals, …..
    2. Probably because I lack an understanding of actual monetary operations logic.
    3. Which is confirmed by my banking, Fed, and FCIC proposals (which are contained in the Kucinich Bill).

    On those three:
    Here is the policy sheet I used.
    http://moslereconomics.com/wp-content/pdfs/Proposals.pdf

    Please say how I mis-represented them.

    On my ignorance, just to be clear, I love the way the modern monetary intelligencia are constantly evolving the terms, definitions and meanings they use.

    For instance here, “monetary operations logic”.
    I could just be glib, and correct, and say there is no logic to monetary operations – I thought that was what MMT was all about.

    With a library of books on money and banking, and regular searches of the BIS, IMF, Fed, FDIC, Central Bank and academic research sites, I have to admit that I never saw the term “monetary operations logic”.

    I just did a search at the Central Bank Research Hub and found no response.

    I am surprised that I never came across that term before in my effort to catch up on MMT.

    What research paper, textbook. economic or financial dictionary covers the subject of which I am accused of being ignorant?
    Because, I am a student of money, and I always want to know more.

    As I said, all the proposals I advanced were from the Kucinich Bill.

    You say they display almost unparalleled ignorance that would be rightly rebutted by senior Treasury or Fed officials. I’m not sure as to what you think they might rebut, but I promise you its true that every clause and phrase of the Kucinich Bill spent months in discussions among the affected agencies, including Treasury and Fed, and they have concurred on the legal and technical feasibility of each and every one of them.

    Nobody raised “monetary policy logic” by the way.

    What I really do like, Warren, is that we seem to agree on the socio-economic results we are pursuing. We disagree on how to get there.

    You say that the K-Bill is seriously flawed, never saying how.
    You claim that your options are viable right now.
    Not operationally viable, but legally, technically and functionally – that is “actually” viable, actually do-able.
    I say they are not. Not even close.

    On the K-Bill, it was written by Congress’ primary legislative draft-person on the subject of money, banking and government finance. So as to the legality and technical feasibility of the reform proposals, read my lips – we’re all in.

    On the matter of vetting before Treasury and Fed officials, shall we?
    How about a counterpoint proposal venue?
    Here’s MMT. Here’s Kucinich.
    There’s a fork in the road ahead, as Neil Young says.
    Let’s look as far down each as we possibly can and see which one looks better.

    I feel a NEED to make a point here.
    The Kucinich Bill is modeled on two historic reform proposals by academic economists.
    One was the 1933 Chicago Plan for Monetary Reform which was presented to FDR and which was debated in both Houses of Congress as The Monetary Reform Act of 1934.
    The other was the 1939 Program for Monetary Reform, jointly authored by six prominent economists including Fisher, Graham and Douglas(Yale, Princeton, Chicago) . The 1939 Program reform proposal was publicly supported by over 400 economists when it was presented. (Check it out at SSRN under Dr. Ronnie J. Phillips.)
    From your rather arrogant dismissal, I must presume that you know more about the needed reforms to the money system than any of them, or all of them combined.

    This is where we’re at.
    Each of us has presented reform proposals aimed at achieving greater economic democracy and social justice.
    Mine – HR 2990 – is a new version of old efforts by progressive economists that goes directly to the structure of the monetary system.
    Warren claims “operational” superiority, using accounting identities and technological utility – immediately available.
    I’m generally available if you know who to call.

    Thanks.

    WARREN MOSLER Reply:

    for one thing you don’t understand a permanent 0 rate policy is functionally equiv to ‘debt free money’ ‘greenbacks’ etc.
    call that monetary operations logic, if you will.

    I don’t have time or inclination to go on the defensive regarding what you said i said about anything.

    The writings of the group you modeled after was all about fixed exchange rates, from what I’ve read of them over the years.

    noticed this in the bill

    (5) GOVERNING PRINCIPLE OF MONETARY POLICY- The Monetary Authority shall pursue a monetary policy based on the governing principle that the supply of money in circulation should not become inflationary nor deflationary in and of itself, but will be sufficient to allow goods and services to move freely in trade in a balanced manner. The Monetary Authority shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

    Sounds a lot like quantity theory that misses the difference between gross and net financial assets, among other things I’ve already gone into in my writings. Also sounds like its trying to draw on the fixed fx writings of you group of past experts and put it in a floating fx context, which is an unworkable mix of metaphors.

    your bill exchanges fed reserve notes for the new ‘us money’ which misses the point.

    it says banks can only lend the new ‘US money’ which sounds like a no leverage system. that can be replicated by a 100% capital requirement with today’s banks, for example, under current institutional structure.
    again, ‘monetary operations logic’ concludes its functionally identical

    no time to go into the rest of the bill.

    but its entirely unnecessary in addition to large parts that are unworkable.
    you stated goals can be readily accomplished with current institutional arrangements.
    and more so.

  23. joe bongiovanni Says:

    To Robert Rice,

    Thanks for what looks like an attempt to clear up our differences here.

    You imply a contradiction in my statements where I say that
    1. Right Now, Legally, Today nobody in government has any power to create any money as we know it (coins excepted) = results being two
    – that ALL our money is being created by private bankers.
    – spending by government is revenue constrained

    And

    2. The Congress of the United States is granted the power to create the nation’s money under the Constitution, (and we want that above power back from the private bankers.)

    You opine about the legal effects of the delegation of power. I would observe it has been legally established(delegation) and practiced with regard to money for over a hundred years.

    The Congress HAS, legally or illegally, completely and effectively delegated the power of the sovereign to issue the nation’s “money” over to a private banking cartel.
    They HAVE the power.
    It is not a FINAL delegation.
    It is a temporal delegation.
    Thus the effort to reverse the actions of Congress in that delegation – all as outlined in HR 2990.

    THAT is the tune.
    There has been no change in that tune.
    It is the tune I have sung since 35 years before the Kucinich Bill was thought of.

    On the matter of whether the federal government was revenue constrained since inception, yes, it has been.
    The laws establishing the Federal Treasury have further established that whatever monies are paid out by Treasury EXIST as a matter of control, accountancy, reporting and audit.
    HAD the Congress utilized its powers on day one to issuance, debt-free, of the monies to enable national commerce, this would not obviate the NEED for Treasury to accommodate each and all of those conditions.
    Unless some other law was passed to make that possible (see Kucinich)

    It’s part of the mythology of not understanding the national money system to accord with the notion that providing money for commerce(the national circulating medium of exchange) means that the government does not need to count its own inflows and outgoes in the use of that money.

    What Congress has is the POWER to create laws that order the Treasury to do anything, legal or otherwise. What Congress doesn’t have, having abdicated our public trust by both design and error, is any government agency that can TODAY create money to use in national commerce.

    It is the POWER that is supreme within sovereignty. But the right and privilege that that power entails, again effectively and in practice, belongs to the bankers of the world.

    We can pretend that is not the case, and say things like ‘when Congress spends, it creates money’, and repeat it over and over again, and feel good about it. But that doesn’t make it true.

    Thanks.

    Reply

    ESM Reply:

    @joe bongiovanni,

    “We can pretend that is not the case, and say things like ‘when Congress spends, it creates money’, and repeat it over and over again, and feel good about it. But that doesn’t make it true.”

    When Congress authorizes borrowing to cover net deficit spending, it is essentially authorizing the Treasury to create net new T-bills. For pedogogical reasons, Warren won’t call T-bills money, but they are. And through the magic of the Federal Reserve and Fed lending via repo, T-bills are essentially fungible with reserves or cash. Neglecting the middlemen (Fed and bond dealers), the Treasury deficit spends by paying in T-bills, which it creates ex nihilo.

    Reply

    WARREN MOSLER Reply:

    it’s just that in general I don’t call anything ‘money’
    particularly around academics

    Reply

    Tom Hickey Reply:

    @WARREN MOSLER,

    “fungible tax credits” instead of money?

    WARREN MOSLER Reply:

    right, same thing

    Neil Wilson Reply:

    @ESM,

    I wish more people would realise that rather than just believing the ‘Wizard of Oz’ light show.

    Reply

    Tom Hickey Reply:

    @Neil Wilson,

    Exactly. When the cb swaps its liabilities for its own liabilities (reserve currency cash currency or its own liabilities (reserves) for Tsy liabilities (tys) it’s just “making change” or shifting the way govt liabilities are held between demand and savings accounts.

    While it possible to say that banks “buy” cash currency from the cb for reserve currency, it is equally correct to say the cb is “buying” cash currency for reserve currency. But there is no spending when “spending” denotes a fiscal operation that increases non-govt financial assets.

    Same holds for “printing money” (which is a logical nonsense in the way it is usually used).

    joe bongiovanni Reply:

    @ESM,

    In discussing money we often refer to either its monetary system functions or the various forms of its use in commerce and finance.

    Rothbard, Fisher and many others, including the Fed, refer to the M-1 money supply when discussing ‘money’.

    When Congress authorizes and Treasury issues securities, it is true that the “proceeds” go through a series of transactions and end up in the M1(after the Treasury spends). It is the “proceeds” from the securities that Congress spends in paying its bills.

    It could be abstractly inferred that Treasury thereby “deficit spends by paying in T-Bills”(creates money). But that abstraction does not confer the status of ‘money’ on the bonds. Neither does it confer upon the Congress or Treasury the act of issuance of money. The government’s issuance is one of term-debt, repayable upon maturity with interest.

    Whenever a Treasury security is issued, its essential monetary character is one of the public “use” of the existing money supply, and not one of creating the money supply – just as is taxation as a source of government revenues.

    Were the security a money-issuance, that is, a creation of new money by the Congress, there would be more M1 by the amount of the issuance. In reality, the issuance of public debt does nothing to increase the money supply.

    On the contrary, as the private banks DO create the money supply, the issuance of debt by private bankers DOES create additional M-1 money by the amount of the private debt issued.

    As such, the fungible qualities of Treasuries in commerce make them money-like. Not much different than any financial instrument that trades as a financial asset. But they are definitely not money.

    Thanks.

    Reply

    Tom Hickey Reply:

    @joe bongiovanni,

    The MMT economists prefer to define terms operationally and see “money” as a confusing term. Changes (flows) in the stock of non-govt net financial assets are what is significant. The government adds financial assets that are a govt liability through Tsy disbursement by directing the Fed to credit non-govt deposit accounts, the settlement of which takes place in reserves that come through auction of tsys. So when the tsys are auctioned and the reserves credited to the Tsy are disbursed to non-govt accounts through spending and transfer, the total increase (flow) in non-govt NFA is the amount of the tsys and the reserves that entered non-govt by crediting deposit accounts. The stock of NFA held by non-govt increases by the amount of the flow. Tsys and reserves are fungible operationally and actually function in this way massively on a daily basis, e.g., through repo.

    WARREN MOSLER Reply:

    note that you can correlate/model/etc net financial assets with things,
    but even the fed has abandoned trying to correlate its various M’s with anything useful for its purposes.

    WARREN MOSLER Reply:

    Just more of the usual empty rhetoric and semantics. A rose by any other name, etc.

    again, do you have any specific proposals to restore output and employment?

    Robert Rice Reply:

    @joe bongiovanni,

    Joe,

    Today’s history lesson begins with a primer from the Minneapolis Fed:

    http://www.minneapolisfed.org/community_education/student/centralbankhistory/bank.cfm

    To be followed by this Wikipedia article:

    http://en.wikipedia.org/wiki/Early_American_currency

    And to consummate, an article from the Philadelphia Fed:

    http://www.philadelphiafed.org/education/teachers/resources/money-in-colonial-times/

    The above should be sufficient to demonstrate you are mistaken.

    But in case it isn’t self-evident, the fact is, the government was not a currency user from its inception. They issued paper money as well as coins.

    I suspect the reason why the Constitution doesn’t specifically say Congress has the authority to print “paper money,” is for the simple reason the Continental Congress and the 13 Colonies had exercised such authority previously with unfavorable results. In those days, paper money was convertible. When the Continental Congress reneged on this promised convertibility, it destroyed confidence in the government’s issued paper money (which they’d been issuing to help fund the Revolution). Consequently this gave rise to hyperinflation as well as the phrase, “Not worth a Continental,” (the name of the paper money prior to the ratification of the Constitution). Having this concern fresh in their minds, it seems to me the writers of the Constitution wanted Congress to be able to issue what would be regarded as “real” money by the populace, and so they specified non-convertible coins. But let’s not get hung up on the form the money could be issued in, as that wasn’t so much the point as it was that the authors wanted the government to be able to create what was regarded as “real” money. Today electrons flowing through semiconductors, paper, and coins all constitute real money.

    And it isn’t as though they gave up on issuing paper money anyway, as the history lesson above elucidates.

    In reference to your other comments, you’ve largely just repeated yourself without addressing my arguments. Delegation does not equate to giving away authority, etc., etc., etc. I don’t feel the need to repeat myself. I don’t mean to be rude, but it’s your responsibility to read other people’s comments correctly, not mine to repeat endlessly in hopes that you’ll actually evaluate my concerns accurately and fairly. I don’t mean to suggest you are purposely being unfair, but negligence isn’t any better of an excuse.

    I do however hope the above helps. We need to get our act together as a country, evaluate claims and arguments fairly, be honest, not let egos get in the way like three year olds, and simply let the facts lead us to greener pastures.

    Reply

    WARREN MOSLER Reply:

    so far just he’s just been a lot of AMI propaganda/empty rhetoric.
    impressive that they got it all as far as they have.
    but that goes for a lot of things

    Reply

    joe bongiovanni Reply:

    @Robert Rice,
    To Robert
    Thanks. I totally agree that we NEED to get our act together as a monetary country.
    From the first MinnFed link.

    “The Bank of the United States was conceived in 1790 to deal with the war debt and to put the government on sound financial footing. It was intended to help fund the government’s debt and issue currency notes.”
    And…..
    “Though the intent of the Bank was to facilitate government finances, Hamilton had another goal in mind—to function as a commercial bank.”
    So, to be clear, Robert, the First Bank of the United States was a PRIVATE bank, and I PROMISE you that they gave NO MONEY to the government – for any reason.

    The second WIKI article AND the third fed article are both about Colonial Currency, ending with the rebellious Continental – that is, even before that first article.

    Again , none of this has anything to do with anything I said.

    It would be incorrect, Robert, to think that just because ANY government might create Bills and Coins for the national economy, or electrons flowing about with $-signs, that this somehow means that government is, ipso-facto, self-financing; i.e., that the government is not “revenue constrained”. It depends on the legal structure that guides government finance.
    Again, it is not correct.
    I suggest a read of a textbook on government finance.

    Given my study of the history of money and monetary systems, I do wish you could add to my understanding. I’ve read over several times Hammonds epic on “Banks and Politics in America from the Revolution to the Civil War”. And more recently monetary historian Stephen Zarlenga’s , “The Lost Science of Money”, which has several informative Chapters on that period, some of which correct the errors you learn from the Fed.

    Robert, I never purposely avoid a question. I wish you would have simply said – HERE is what Joe failed to address.

    Was it the matter of the Delegation of Congressional Authority with regard to the issuing power contained in Article 1, Section 5 Clause 8 ?

    Because, here I must be circumspect. I actually believe – not making the claim, but I believe – that the delegation of money-creation power from the Congress to the Federal Reserve System was not legal – because the Fed is a private institution, and the legal delegation doctrine established through Court decisions AND the Administrative Procedures Act say that the Congress can only LEGALLY delegate to either the Executive Branch or an administrative agency that is part of and under the control of the government.
    But THAT is a separate matter.
    I cannot sue the Fed and the Congress.

    Having said that, I don’t understand what “delegation of power” issue we are discussing that I did not address.
    I tried to point out that the Federal Reserve Act effectively transfers the power to create ALL of the nation’s money, as we describe it in these conversations, notably M-1, to the Fed member banks.
    It has been done.
    The “delegation” is complete and in force.

    Of course, as I have said many times, the POWER and the RIGHT to issue a sovereign nation’s currency rests with its government. And that government can, at any time, choose to reverse that delegation of money-creation powers by Amendment to the Fed Act, all as contained in the Kucinich Bill.

    Sorry if anything appears either irresponsible or, as you say, negligent, on my part.
    It is not intended.

    Greener pastures ahead, let’s hope.
    As in Greenbacks.

    For the Money System Common

    Reply

    WARREN MOSLER Reply:

    “I tried to point out that the Federal Reserve Act effectively transfers the power to create ALL of the nation’s money, as we describe it in these conversations, notably M-1, to the Fed member banks.”

    That’s because you/others define ‘money’ as bank liabilities.

    What makes banks different is primarily that their liabilities/deposits are FDIC insured,
    and, to a lesser extent, that their liabilities/deposits can be used to pay taxes.
    and along with that comes the necessity of government regulation, which is necessarily a work in progress.

    GE makes loans in the tens of billions, and they create liabilities called GE commercial paper,
    which trade in the wholesale markets much like bank liabilities. Sometimes even at lower yields than bank liabilities.
    But GE commercial paper is not FDIC insured, and they do not issue them in small enough denominations for most to count them as ‘money’ yet the Fed has included them in some of its ‘M’s’ over the years, which has caused a number of academics to include commercial paper as ‘money’. But they are not FDIC insured, and GE is subject to the odd liquidity crisis, so GE credit is not a bank. (they did recently get a banking license, but that’s a separate corp. and different matter)

    But my point, to your point, is why does the ‘power’ to create a liability academics define as ‘money’ critical to anything outside of academia?

    What exactly are you trying to ‘take away from banks’?
    The govt. doesn’t ‘give’ anything to banks that they ‘loan out’- they don’t ‘get reserves from the govt that they loan out’
    Anyone can make loans without any ‘power’ from government.
    And those loans will likewise result in liabilities an academic could define as ‘money’
    And those liabilities might have further use in exchange.
    So what?
    Do you not want any private sector entity to be able to make loans of any kind?
    Do you want only govt. to make loans and not banks or anyone else?

    The K proposal features a 100% reserve requirement which does nothing but alter the bank’s return on equity for a given capital requirement. It doesn’t restrict bank lending.
    At best k has confused reserves with capital, but more likely he’s been snowed by proponents who’ve stumbled across rhetoric that’s effective in raising funds and mobilizing support from people who don’t know any better.

    Robert Rice Reply:

    @joe bongiovanni,

    Fair enough Joe, let’s see if we can work toward the unity of mind it is in our individual interest to share.

    So, to be clear, Robert, the First Bank of the United States was a PRIVATE bank, and I PROMISE you that they gave NO MONEY to the government – for any reason.

    Whether the country’s first bank was private or not wasn’t the issue. The reason I appealed to these sources was to give you evidence the government was issuing currency, both before and after the ratification of the Constitution (i.e., within the context of the country’s inception). Can we agree on this as a historical fact? If so, is it not reasonable to infer the government was a currency issuer in those times?

    Again , none of this has anything to do with anything I said.

    You indicated you believed the government was a currency user at the time of its inception. The references above demonstrate otherwise. How is this not germane?

    It would be incorrect, Robert, to think that just because ANY government might create Bills and Coins for the national economy, or electrons flowing about with $-signs, that this somehow means that government is, ipso-facto, self-financing; i.e., that the government is not “revenue constrained”. It depends on the legal structure that guides government finance.

    So you believe the founders had a different reason than financing government spending when they granted themselves the authority to create money? What, pray tell, was their real motive?

    some of which correct the errors you learn from the Fed.

    And what exactly did the Fed write incorrectly?

    I actually believe – not making the claim, but I believe – that the delegation of money-creation power from the Congress to the Federal Reserve System was not legal – because the Fed is a private institution, and the legal delegation doctrine established through Court decisions AND the Administrative Procedures Act say that the Congress can only LEGALLY delegate to either the Executive Branch or an administrative agency that is part of and under the control of the government.

    If I recall correctly, Tom answered this point above. The Fed is a government agency. It has private member banks which purchase a quantity of stock as a membership fee, but it is itself a government agency. The Fed has a .gov website, for example (which it obviously would not have if it were not a government agency). That really should be sufficient, but the Fed specifically professes to be a government agency:

    “The Federal Reserve System is considered to be an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive branch of government. The System is, however, subject to oversight by the U.S. Congress. The Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government; therefore, the description of the System as “independent within the government” is more accurate.”

    http://www.federalreserve.gov/pf/pdf/pf_1.pdf#page=4 (see end of page 2 and beginning of page 3)

    It’s all government baby.

    I tried to point out that the Federal Reserve Act effectively transfers the power to create ALL of the nation’s money, as we describe it in these conversations, notably M-1, to the Fed member banks.
    It has been done.
    The “delegation” is complete and in force.

    Do you have a link for the specific Act you are referring to?

    Now, there are two points I would repeat here–and it is repetition, and why I made some of the comments about being fair, listening, repetition, etc. (which I only mention now for explanatory purposes):

    1. Delegation does not necessarily equal giving authority away. I gave you two examples. The law would have to explicitly indicate the authority was being handed over to another party. I highly doubt any law indicates this. But supposing there is one, this brings us to my second point:

    2. So what if there is? Such a law would be unconstitutional under Article 1, Section 8, Clause 5. The Federal government could ignore any subordinate law with just basis. Should someone sue, the SCOTUS would never rule the government had permanently given away its money creative, self-funding powers. There’s no way. The Federal government would just argue it was following the law with primacy, and they’d win.

    Anyhow, where’s this law you keep alluding to which is allegedly inconsistent with the Constitution? Can you please provide me with a link? Thanks.

    Tom Hickey Reply:

    @Robert Rice,

    RR: “So you believe the founders had a different reason than financing government spending when they granted themselves the authority to create money? What, pray tell, was their real motive?”

    This has a clear historical answer. The Constitution gave the currency issuance power to the federal government through the legislative powers enumerated in Article 1, section 8. It was Hamilton that wanted to created a central bank when the institutions of government were being developed using the Constitution as the rule over all other rules.

    One faction objected saying that this exceeded the powers enumerated in the Constitution. Hamilton countered that the Constitution implied all powers needed in exercise of enumerating powers. SCOTUS sided with Hamilton and the doctrine of implied powers became precedent rather than enumerated powers. We are still arguing over this even though it has been established virtually from the beginning.

    Exactly what motivated Hamilton to do this is a matter of debate among historians. But those on the other side of the argument that Alexander Hamilton are convinced that Hamilton, who was from New York, was in the pocket of the bankers, notably Robert Morris. Sound familiar?

    joe bongiovanni Reply:

    @robertrice,

    I must apologize as this discussion has really gotten a bit silly.

    I never said the government was revenue- constrained BEFORE inception of the Treasury department – HOW could it be – by definition?
    No Treasury Department = no revenue. Without a Treasury Department to establish accounts and pay the government Bills, there can be no claim of being revenue-constrained.
    That’s why I said all the Scrip and Continental talk was not relevant.

    The issue is one of since the establishment of the Treasury Department, so post-September 1789. After the Department was established by law in the First Congress, all payments were to made on the basis I provided earlier – only after the monies were received.

    At that time the government earned money on ownership of its shares in the First Bank. Neither emitting Bills of Credit nor coinage is creating money for paying Bills.

    Five years after the Treasury was established, the U.S, government was $6 Million in debt to the PRIVATE Bank of the United States. The government was well on its way to funding its operations via the issuance of debt. The government was revenue-constrained – THAT is why it issued the debts.

    We never coined a nickel and owed $6Million

    I believe the Founders granted the Congress the POWER to create money, or I wouldn’t be here. Both the ambiguous language and British money custom (commodity money) prevented the implementation of that power when Hamilton prevailed.
    Motive? I go by history, the facts and the law.

    If the Fed were a government agency, its employees would by in the union. The Board members are compensated, but the banking SYSTEM is private, including the Regional Fed Offices. All private employees.

    I’ve been reading FED publications for 40 years. Its opinion of itself has changed over time. Get hold of a Fed Purposes and Functions publication from the 60s or 70s.
    I hope you’re joking about the dot.gov .

    What I have a really hard time with, Robert, is any assertion that the power to create the nation’s money has NOT been effectively delegated to the private banks, and perhaps that the private banks do NOT create the nation’s money.
    The creation of money originates within the banking system. That is what endogenous money is all about.
    The Fed says so. Read Modern Money Mechanics.

    The sum is this. The Constitution gives the power to create the nation’s money to the sovereign people, acting through their Congress.

    The private bankers now HAVE that power. The Fed says so.
    It’s not my job to show the language of the delegation. It would be a waste of time and is also irrelevant. The proof is in the pudding.

    On your Point No 1 – Delegation DOES equal the transfer of the authority when the results are the proof.
    On your point No 2 – I NEVER said the delegation was permanent. You made that up. The delegation is whatever is in the law. I’m here because I want to reverse that delegation. You’ll never make any of these changes without it.
    Thanks.

    joe bongiovanni Reply:

    @warren mosler,

    “That’s because you/others define ‘money’ as bank liabilities.

    Others? I don’t know anyone who defines money as bank liabilities. At least I don’t hang out with any.

    “But my point, to your point, is why does the ‘power’ to create a liability academics define as ‘money’ critical to anything outside of academia?”

    My point? Where is my point?
    I know how banks operate. My library is full of books on money and banking.
    OK, let’s pretend, Warren. Let’s pretend that the creation of “money” is not the actual creation of the total purchasing power of the national economy, and the renting of that purchasing power to the American people, including their government. And, let’s pretend that it matters not who controls the creation of the nation’s purchasing power, and that it was NOT what we fought the War for Independence over – the right to issue and create and regulate the use of our own money?

    OK, we want the government’s power of money creation taken back from the banks.

    “Do you not want any private sector entity to be able to make loans of any kind?”

    The government grants to the banks the special governmental privilege to create the national purchasing power out of nothing. Anyone ELSE can only make loans of things they own, except bankers.

    “The K proposal features a 100% reserve requirement which does nothing but alter the bank’s return on equity for a given capital requirement. It doesn’t restrict bank lending.”

    The K proposal eliminates ANY reserve requirement, does NOT limit the bank’s return on equity and will undoubtedly REDUCE the bank’s capital requirements. It is not intended to limit bank lending. It is intended to promote bank lending – with real money.

    Nobody’s confused about reserves and capital.
    This is about the national money system of a modern monetary economy.
    We can follow the dots.

    Thanks.

    WARREN MOSLER Reply:

    the bank liabilities in question are also called bank deposits, which others define as ‘money’

    ok, my error, I thought K had 100% reserve requirements last time I read it.
    Must have been changed?
    I agree with 0 reserves, like Canada.

    Govt grants banks two key things- secure deposits/liabilites not dependent on markets, and, of lesser importance, bank deposits can be used for payment of taxes.

    Whether academics define bank deposits (aka bank liabilities) as ‘money’ is of no consequence.

    So how can bank lending not result in an increase in bank deposits (aka, ‘money’ by most)?

    Don’t all loans ‘create’ equal liabilites/deposits as a point of logic?

    Heck, when you eat at a restaurant an don’t pay until after you eat, your ‘tab’ is the liability that goes with your unpaid meal, which is the ‘loan’. There’s no getting around the fact that credit is necessarily two sided. Someone owes and someone is owed?
    Credit is evidenced by an asset and a liability.

    joe bongiovanni Reply:

    @warren mosler,

    Money is money.
    Debt is debt.

    It is true that in accounting for money, the money supply includes checking account bank deposits, which are a liability to the bank.
    But they never answer the question of the definition of money,

    The Kucinich Bill does have a section that ends fractional-reserve banking. It does not engage full-reserve banking.
    This is sometimes difficult to understand for those who are immersed in reserve-based banking. They do not understand the REAL money system – as it would exist under the Kucinich Bill.
    Reserves against WHAT?
    No reserves. Real money.
    Banks lend at will.
    No moral hazard.

    I’m really sorry that you’re incapable of differentiating the means-of-exchange money for the national economy from that which involves a transaction.

    There is no effort to limit transactions.
    There is merely an effort to assure adequate “means-of-exchange” money to achieve our GDP potential.
    Once the money exists it is up to commerce to shape the future.

    WARREN MOSLER Reply:

    it’s not about what ‘money’ is, it’s about what the dollar is, defining the thing the govt demands for payment of taxes.
    which is what the tax liabilities do.

    for all practical purposes there is no actual fractional reserve banking currently. so it’s ending something that functionally isn’t there. fractional reserve banking applies to fixed fx, not floating.

    i realize it’s not meant to limit transactions.

    we can currently assure adequate ‘means of exchange money to achieve our gdp potential’
    simply by adjusting our fiscal balance.

    have you read ‘soft currency economics’ on this website?

  24. LetsGetItDone Says:

    @ESM, This is a reply to Warren who said above:

    “it’s all about the president spending $ initially authorized by congress but the blocked by congress by not extending the debt ceiling.

    so currently, with the debt ceiling not an immediate obstacle, federal spending would’t change.”

    It’s true that repayment of public debt using PPCS profits doesn’t itself change spending. But it’s quite likely that in due course $60 T PPCS would increase Federal deficit spending due to the political impact of paying off the public debt, issuing no more debt, and also having $44 T left over to cover future deficit spending. Again that’s because a move like this one would totally change the background for public debate. We’d no longer be debating the debt. Instead, we’d be debating the likely impact of Federal deficit sending proposals. It seems to me that’s exactly the kind of debate MMT would like us to have.

    It is not true that removing the debt ceiling would have the same political effect, even if we could get that done. If we did, the deficit hawks would still object to more deficit spending on grounds that “we” will run out of money, because we can only tax and borrow and we would then have to debate whether it will ever be the case that other nations would not buy Treasury debt. Who wants to argue about such nonsense? We’ve been arguing about that for years now. It’s so much better just to take the debt issue off the table by getting rid of the public debt and never having any more of it. That will end all arguments about solvency once and for all. So why not just do that? Why, keep emphasizing that there are no barriers to out just continuing to borrow? It’s true. But it’s bad messaging and it’s bad politics.

    All of us should just get behind $60 T or $100 T PPCS. The debt ceiling is coming up again in just a few months and a good part of the safety net is at risk. Your point here is that it should be off the table. You’re right! It should! But it is not! And it won’t be off the table unless the President does what I’m proposing, which is to use very high value PPCS like $30 T, $60 T, $100 T, maybe a Quadrillion, etc.

    So, if my fellow MMTers really want the safety net off the table after this election, then I think MMTer who believes in doing that ought to join me in getting behind high value PPCS now, and keep up that drum beat until the President either does that or, alternatively is exposed as not telling the about our running out of money. Why are you not joining me in this?

    Reply

    WARREN MOSLER Reply:

    it violates ‘Lerner’s law’ as the effort to ‘get rid of the debt’ carrying the implication that ‘the debt’ is a problem that needs to be gotten rid of.

    And that will likely be (as it already has been) used against it by those saying it just renames ‘the debt’/govt. liabilities and doesn’t eliminate those govt liabilities, which you’ve ‘conceded’ are a bad thing by the act of trying to get rid of same.

    In other words, it’s seen as a ‘gimmick’ that doesn’t actually change anything.

    Reply

  25. LetsGetItDone Says:

    http://moslereconomics.com/2012/07/08/the-certainty-of-debt-and-taxes-comments-on-the-fiscal-cliff/comment-page-1/#comment-200791

    Btw, I agree with the rest of the above comment and think it’s a very clear statement.

    Reply

  26. John O'Connell Says:

    My grandmother’s recipe for spaghetti sauce goes, in part, something like this:

    “Combine ingredients in a saucepan on high heat and bring to a boil. Reduce heat and simmer … “

    Managing the economy is sort of like making spaghetti sauce. The sauce is the economy, and its temperature represents its output, as compared to its potential. (Think of the temperature in celsius, where 0 is freezing, and 100 is boiling. That scale maps well to many economic variables.) The stove is the government, the gas is the government deficit, and the kitchen is the rest of the world.
    Simmering represents the economy operating at full potential, but without overheating.

    If the sauce ingredients start out at room temperature, you can turn the gas up all the way, and keep it there for quite a while, with no danger of the saucepan boiling over.

    Likewise, when the economy is operating with lots of unemployment and excess capacity, like it is today, we can have very large deficits with no danger of inflation. In fact, we have so far had deficits of record-breaking size for 4 years running without any increase in inflation, and the economy is still nowhere near our goal of simmering”.

    As the sauce temperature approaches 100 degrees, you have to reduce the heat, or the sauce will boil violently, boil over, and make a mess. Likewise, when the economy gets near full employment, you will have to reduce the deficit, or the economy would “overheat”, and cause inflation.

    But, you can’t turn the gas off completely, and expect the sauce to continue simmering. The sauce is constantly losing heat to the kitchen, and will cool off if the gas is turned off completely.

    Likewise, you can’t balance the budget (no deficit) and expect the economy to continue operating at capacity. It will lose money to the rest of the world, because of the trade deficit, and the result will be a recession. Economists call this loss of money from the economy a “leakage”, and it is just like heat transfer from something hot to its cooler surroundings.

    In order to keep the sauce just simmering, without cooling off or boiling over, the gas must be on at just the right level to offset the heat loss to the kitchen.

    Likewise, to keep the economy operating at peak level, there needs to be a deficit just large enough to offset the leakages to the rest of the world, and also domestic savings, which is another leakage. (I have no analog in spaghetti sauce for domestic savings, which just proves that no analogy is perfect.)

    Reducing the gas before the sauce has come to a boil means it will take longer to boil, or may never boil, if the gas is not high enough to offset the heat loss to the kitchen.

    Likewise, reducing the deficit today, when the economy is so far from optimal, and not even moving noticeably in the right direction, is a recipe for recession, with no hope of ever getting back to full employment.

    The Treasury is the supplier of money to the economy, just as the stove is the supplier of heat to the sauce. Nobody else can create the dollars needed to raise GDP, and if government refuses to have a high enough deficit, refuses to create dollars in sufficient quantity, we will continue to suffer as we have for the past 4 years.

    Reply

  27. y Says:

    “It takes a fiat currency to sustain full employment.”

    Why’s that?

    Is sustained full employment impossible with “non-fiat” currency?

    Reply

    Tom Hickey Reply:

    @y,

    Policy space expands with non-convertible floating rate monetary regime and contracts with a convertible fixed-rate regime. The former has an inflationary bias and the later a deflationary bias. With the former govt can be focused on domestic policy, and with the latter the external is the focus (fx rate, gold outflow).

    Reply

  28. Robert Rice Says:

    Joe,

    You’ll have to forgive my tardy response, but as you can see, it’s taken some time to write it.

    I never said the government was revenue- constrained BEFORE inception of the Treasury department – HOW could it be – by definition? No Treasury Department = no revenue. Without a Treasury Department to establish accounts and pay the government Bills, there can be no claim of being revenue-constrained.

    What you wrote was that you believed the government was a currency user at the time of the country’s inception. Given this would refer to the Continental Congress, as I’ve demonstrated, that was not the case.

    Now the allegation has morphed to; post-creation of the Treasury, post-modification of itself, and post-ratification of the Constitution, Congress became a currency user. We’ll evaluate this proposition’s truth value shortly.

    That’s why I said all the Scrip and Continental talk was not relevant.

    Look Joe, the fact that the Continental Congress issued convertible currency after declaring themselves an independent nation from Britain in 1776, is direct evidence the government was a currency issuer at the time of its inception. That’s entirely relevant to what you wrote. Now you want to “clarify” and suggest what you really meant was that post-creation of the Treasury, Congress became a currency user. Yet, as I’ve pointed out, the Constitution specifically grants Congress the authority to coin money, which you accept and which quite obviously means it was a currency issuer at the time. I’ll show you shortly the historical record also clearly demonstrates Congress issued currency after the creation of the Treasury. As a matter of fact, the Treasury itself issued currency, both as coin and eventually as paper.

    The issue is one of since the establishment of the Treasury Department, so post-September 1789. After the Department was established by law in the First Congress, all payments were to made on the basis I provided earlier – only after the monies were received.

    No, the authority was specifically granted to Congress to coin. It wasn’t successful in coining in the quantities it wanted because, from what I gather, they lacked the physical resources. Without oring operations on behalf of Congress, while they possessed the authority to coin, they had little opportunity to exercise that authority in the production of sufficient quantities to negate a need for debt issuance.

    Five years after the Treasury was established, the U.S, government was $6 Million in debt to the PRIVATE Bank of the United States. The government was well on its way to funding its operations via the issuance of debt. The government was revenue-constrained – THAT is why it issued the debts.

    You’re drawing an inference based on circumstantial evidence. The issuance of debt to fund operations does not necessarily imply the government is a currency user. It is also possible it lacked the physical resources to coin in the quantities needed, and hence, although it possessed the authority, practically speaking, it functioned as a currency user.

    We never coined a nickel and owed $6Million

    The historical record is clear on this; the Mint did in fact coin money within a few years of the creation of the Treasury:

    “President George Washington appointed Philadelphian David Rittenhouse, a leading American scientist, as the first Director of the Mint. Under Rittenhouse, the Mint produced its first circulating coins — 11,178 copper cents, which were delivered in March 1793. Soon after, the Mint began issuing gold and silver coins as well. President Washington, who lived only a few blocks from the new Mint, is believed to have donated some of his own silver for minting.”

    http://www.usmint.gov/historianscorner/?action=history

    And as an aside, I’m not sure why President Washington would need to donate to the Mint if resources for coining were readily available.

    I believe the Founders granted the Congress the POWER to create money, or I wouldn’t be here. Both the ambiguous language and British money custom (commodity money) prevented the implementation of that power when Hamilton prevailed.

    If Congress had the authority to issue currency in the form of specie, then Congress was a currency issuer. Again, the fact it didn’t issue in quantities sufficient to fund public expenditures is more a function of insufficient resources at the time of a young nation.

    If the Fed were a government agency, its employees would by in the union. The Board members are compensated, but the banking SYSTEM is private, including the Regional Fed Offices. All private employees. I’ve been reading FED publications for 40 years. Its opinion of itself has changed over time. Get hold of a Fed Purposes and Functions publication from the 60s or 70s.

    It’s not up to me to do your research. Support your own claims. Besides, what the Fed allegedly said 40 or 50 years ago is not to supercede what they indicate today.

    If the Fed wasn’t a government entity:

    1. It wouldn’t forfeit all of its profits every year over to the Treasury as it has been since its inception in 1913 (with the exception of a small percentage retained to cover expenses).
    2. It wouldn’t call itself a government entity (Whether the institution evolved or its views of itself evolved wasn’t the question; the truth today was the question).
    3. The Federal government wouldn’t have issued it a .gov website.

    The fact the Federal Reserve employees aren’t unionized hardly proves the institution is non-government. You’ll have to ask Congress why they haven’t offered FR employees the opportunity to join one of the Federal government’s unions, but it hardly seems rational to infer the FR is non-government in contradiction to the above evidence simply because their employees are not Federal government unionized.

    I hope you’re joking about the dot.gov .

    And I hope you are joking about the FR being non-government. You seem to be suffering from ostrich syndrome otherwise known as sticking your head in the sand. The Fed publication specifically indicates it is government. And since you think it is silly to provide the .gov site as evidence, what’s your theory as to why the Federal government allows an allegedly private entity to use a .gov website? Like a good scientist, I’d like to hear your accounting for this data instead of being dismissive.

    What I have a really hard time with, Robert, is any assertion that the power to create the nation’s money has NOT been effectively delegated to the private banks, and perhaps that the private banks do NOT create the nation’s money.
    The creation of money originates within the banking system. That is what endogenous money is all about.
    The Fed says so. Read Modern Money Mechanics.

    I have read it. And no one has rejected endogenous money, only that it is not the only means by which money is created. The Federal government, the Treasury specifically, has a long history of printing money. They did so on behalf of Congress for well over 100 years, and they did so initially to fund the Civil war:

    http://en.wikipedia.org/wiki/United_States_Note

    The reason the Treasury stopped printing appears to be twofold:

    1. Redundancy.

    “United States notes serve no function that is not already adequately served by Federal Reserve notes. As a result, the Treasury Department stopped issuing United States notes, and none have been placed into circulation since January 21, 1971.”

    http://www.treasury.gov/resource-center/faqs/Currency/Pages/legal-tender.aspx (see the last FAQ)

    2. Limitations on the amount. Federal Reserve Notes are not subject to the limited quantity U.S. notes are subject to, which was apparently set my Congress in the 19th century at $300,000,000.

    The sum is this. The Constitution gives the power to create the nation’s money to the sovereign people, acting through their Congress. The private bankers now HAVE that power. The Fed says so

    You and your incessant failure to provide references… Because Joe said the Fed said so isn’t even worth responding to. Prove your case instead of expecting those you are conversing with to accept “Joe’s infallible word.”

    I would suggest the Federal Reserve has never made any claim the Federal government forfeited its authority to create money to private banks, leaving itself without such. And if it hypothetically had, such comments would be in contradiction to the SCOTUS, which has specifically ruled the Federal government has the authority to create money:

    “The Legal Tender Act of 1862, enacted February 25, 1862, was enacted to issue paper money, United States Notes, to finance the Civil War without raising taxes.”

    http://en.wikipedia.org/wiki/Legal_Tender_Cases

    This was challenged and SCOTUS ruled initially against the Act, but quickly reversed itself the next year, reaffirming and broadening the ruling again a decade or so later.

    It’s not my job to show the language of the delegation. It would be a waste of time and is also irrelevant. The proof is in the pudding.

    Well if nothing else, we can see who provides evidence and who makes unsubstantiated claims. And you aren’t even accurate about the pudding proof…

    On your Point No 1 – Delegation DOES equal the transfer of the authority when the results are the proof.
    On your point No 2 – I NEVER said the delegation was permanent. You made that up. The delegation is whatever is in the law. I’m here because I want to reverse that delegation. You’ll never make any of these changes without it.

    Joe, you sound like a clanging cymbal. Lots of noise, little music. I never said your position implies it’d be impossible for Congress to regain the authority. You’re arguing they don’t currently possess the authority because of delegation, and I explained delegation does not equate to giving authority away.

    By the way, as my intuition suspected, printing money wasn’t expressly authorized in the Constitution because of concerns over how it would appear given the Continental currency fiasco. However, it was purposely not prohibited by Congress either.

    Just a couple of the opinions expressed during the actual discussions on this matter. From the Madison Debates, Tuesday August 16th 1787:

    “Mr. Mercer was a friend to paper money, though in the present state & temper of America, he should neither propose nor approve of such a measure. He was consequently opposed to a prohibition of it altogether. It will stamp suspicion on the Government to deny it a discretion on this point. It was impolitic also to excite the opposition of all those who were friends to paper money. The people of property would be sure to be on the side of the plan, and it was impolitic to purchase their further attachment with the loss of the opposite class of Citizens.”

    and,

    “Mr. Elseworth thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By witholding the power from the new Government. more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.”

    http://avalon.law.yale.edu/18th_century/debates_816.asp

    Like I suspected, the reason the Constitution authorizes coining specifically is because the populace had greater confidence in specie as “real” money. Nowadays, paper, coins, flowing electrons through transistors, all serve as real money and are regarded as such by the populace, and the courts have long since authorized Congress to create all forms (certainly coins and paper).

    Robert

    Reply

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