The Center of the Universe

St Croix, United States Virgin Islands

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

Contact

If you are interested in having Warren B speak or any other inquiries, please contact the managing editor.

People who work on the site:

SADA MOSLER
Managing Editor
5013 CHANDLERS WHARF #2
CHRISTIANSTED, USVI 00820

Email: smosler@valance.us

 
MICHAEL PEDE
Editor
5013 CHANDLERS WHARF #2
CHRISTIANSTED, USVI 00820

Email: mpede@valance.us

727 Responses to “Contact”

  1. Peter Karpen Says:

    Sada:

    How’s Warren doing?

    We’re thinking of him and wishing him a speedy recovery.

    Peter and Kiki Karpen

    Reply

  2. hooverprintingpresses Says:

    Sada what has it been like living in hurrican alley? I never realized you lived in such isolation. I used to live in palm beach but insurance rates were too prohibitive and the carrying costs were unbelievable. How much does an 8 oz steak and gallon of milk cost? Thanks.

    Reply

  3. warren mosler Says:

    Hi,

    Yes, prices are higher here, maybe 25% on most things apart from gasoline which is relatively cheap as we have an oil refinery on island.

    Power goes off quite a bit, so we have generators. Travel is complicated by limited flights, and merchandise and food in the shops are limited as well.

    These all are weighted against the weather, scenery, clear blue seas, and a marginal US income tax rate under 4%.

    Reply

  4. hooverprintingpresses Says:

    4% taxes?!? I could live off my vanguard mutual funds and gubbment pensions with such low taxes. With the gubbment primed to raise our taxes soon I am selling all my continental US real estate and moving to your paradise. Thanks! I lived in Hawaii for 3 years and I love island life, but it was just becoming too crowded on Oahu and the other islands were so expensive.

    Reply

  5. warren mosler Says:

    YOU HAVE TO HAVE AN ELIGIBLE BUSINESS, MOVE IT HERE, KEEP A MIN OF 10 EMPLOYEES, LIVE HERE 183 DAYS A YEAR

    AND PORTFOLIO INCOME DOESN’T COUNT

    Reply

  6. hooverprintingpresses Says:

    Warren do you have 10 employees working for you? I thought it was just you and Sada? How do you qualify then?

    Reply

  7. warren mosler Says:

    I have a total of 10 or more Valance employees. Busy office! Sada does the blog.

    Reply

  8. Joe Baiera Says:

    Hey warrent just thought I’d put up a post. A few things. First Seda I do actually enjoy feeding the fish on the main page, it’s more fun than it sounds. Secondly, Warren I don’t understand alot of the lingo in this blog.. would you be able to suggest a book that i could give a good reading so that i may be able to understand the economic language. finally warren send me an email so i can save your email address and get in touch with you about this property.

    Reply

  9. warren mosler Says:

    Hi Joe!

    Start with ‘Understanding Modern Money’ by Prof. Randall Wray. If you can’t find it on line email me at warren.mosler@gmail.com and I’ll find one for you.

    Still in normal rhythm although it did seem to fall out Friday am, but by the time I got to the cardiologist’s office it was normal again. Pulse up in the 80′s but the doc’s say that’s ok. Other than that, walking a mile with ease, going out on the boat, etc.

    Reply

  10. hooverprintingpresses Says:

    Warren: I talked to my travel agent today – they say I can take a cruise with Carnival from cocoa beach to st. maarten for about 500 dollars for a 7 day cruise exterior cabin. Is that the best island to see or should I look at another?

    Do you know of a cheaper way for me to come visit your island or does that sound reasonable? As to the 10 employees – humm, I know I listened to a jimmy buffet record once about employing the local island people to comply with certain tax laws, I am retired and live off my vangaurd mutual fund returns, but perhaps there is some business I could start and employ some locals. I would need a maid, a cook, a driver, a landscaper, a pool boy, a tennis coach, a massuese etc etc I am sure I can find 10 employees.

    Right now I come under the capital gains tax laws and that takes the biggest chunk of my dollars of all my expenses, but I fear very soon that Obama is talking maybe 30% of my cut with new taxes and then my quality of life will go way down and all those people I spend big money on at the restaurants and trips and travel agencies and businesses will not get as much money from me, so I want to do the right thing and keep as much as I can to spend on the locals, I hope to visit your island in the next month or so. Is that a good time?

    Joe: I also like feeding the virtual fish – I have spent hours and hours just making the fish move around, I think they are beta fish, in real life my pet store owner friend say beta fish attack each other if you put them too close, but maybe they are not beta fish.

    Reply

  11. warren mosler Says:

    st martin is about 100 miles away. st thomas is about 40 miles. there are supposed to be some cruise ships stopping here next year but don’t know which ones.

    drop in any time!

    book a room at the tamarind reef hotel, 340 773 4455

    Reply

  12. Rob K. Says:

    Sada,

    My new computer runs Windows “Vista” premium.

    When I log onto your site with it, the screen goes black and says the pages aren’t compatible with it and it switches to Windows “basic”. Works just fine once it comes back on. You might want to check on that…never saw that before.

    Thanks,

    Rob K.

    Reply

  13. Joe Baiera Says:

    So how do we relay the info to congress that 700 billion to save the banks is actually counter productive? this whole issue is making me kind of nervous… good thing i have job security.

    Reply

  14. warren mosler Says:

    Hi Joe, I’m trying, but no one’s listening. The program won’t do any harm that I can think of, but not much, if any, good either.

    the biggest risk is the let down after it’s in place and nothing much is happening

    and now oil is going up again. just what we need!

    Reply

  15. Vipul Says:

    From our friend Dr. Galbraith in todays Washington Post:

    http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092403033.html?hpid%3Dopinionsbox1&sub=new

    I emailed the Mosler Plan to my Senators and Congressman (with appropriate edits in the case of the 2 republicans :p, I figured they wouldn’t be too enthusiastic about the full employment program)

    Only the Democrat (Sherrod Brown) replied:

    Thank you for expressing your concerns with the problems in the financial sector and proposals to address them.

    A lot of Ohioans, including me, are angry at the thought of bailing out people who made a lot of money making bad business decisions that created problems in neighborhoods across Ohio.

    I agree that we need to avoid rewarding excessive risk taking. These institutions made unwise decisions, and taxpayers should not be expected to simply cover their losses.

    Treasury Secretary Paulson this weekend sent a proposal to Congress that would give him almost unfettered authority to spend $700 billion purchasing troubled assets from financial institutions. On Tuesday, my colleagues on the Banking Committee and I held a hearing at which Secretary Paulson,Federal Reserve Chairman Bernanke, and others testified.

    They made a strong case for the need to act quickly to prevent further damage to our economy. The turmoil in the credit markets has the potential to do great damage to a lot of innocent bystanders. I am afraid that if we do not act, the economic instability could affect thousands of American jobs and the savings of countless middle class families.

    But Secretary Paulson’s proposal is not the right answer. No Secretary should be given a $700 billion blank check. Taxpayers must be given an opportunity to recover their money, and assurances their tax dollars will not fund lavish pay and golden parachutes. We need strong rules to guard against abuse, and to ensure all types of institutions and regions are helped.

    In the days ahead, we need to focus on containing the damage to middle class families and local businesses as much as possible. In the months ahead, we need to take a hard look at how financial markets are regulated so we never find ourselves in this situation again.

    Thank you again for contacting me. I will certainly keep your views in mind as the Senate debates ways to help restore strength to our economy.

    Sincerely,

    Sherrod Brown

    Reply

  16. warren mosler Says:

    Thanks!

    It reads like he didn’t even read it.

    Reply

  17. Jim Baird Says:

    That tears it. As much as I’m leary about Obama’s background, and particularly the prospect of a piling on of affirmative action at every level of society (look at SA to see how that’s working out), I have to vote for him just on the off chance he’ll actually listen when Jamie Galbraith’s in the room.

    Reply

  18. JIMB Says:

    Warren,

    Care to elaborate how the payment of interest on reserves changes your work on money? The Fed can presumably buy up any quantity of financial assets and maintain the Fed Funds rate … of course that might completely shut down all lending.

    Reply

  19. Rob K. Says:

    Warren,

    Overall question:

    Have we hit bottom?

    Thanks!

    Rob K.

    Reply

  20. Rob K. Says:

    yes, though no one answered, I think this morning was the bottom!
    can anyone confirm margin calls sent out in the last week caused funds and hedgie’s to reduce leverage caused the decline?

    thanks!

    Reply

  21. warren mosler Says:

    functionally, a tsy sec is an interest bearing deposit at the fed, so functionally paying interest on reserves means the fed doesn’t need collateral to do ‘matched sales’ / reserve drains.

    so yes, they can now buy collateral without having the ‘extra work’ of doing some kind of reserve drain to keep the ff rate on target.

    Not sure about this being a bottom. might want to wait for the eurozone to shut down. unless it’s going to survive as is and be pulled up by exports. hard to see how that can happen, but agreed it theoretically possible.

    Reply

  22. JKH Says:

    Warren,

    You left a comment on Brad Setser’s blog post this morning referring to a “totally confused” discussion following my comment there on the “money multiplier”. I wouldn’t disagree.

    I’ve scanned your “Required readings – Soft Currency Economics” on the subject, which looks very impressive. If you have time to respond, I’d be interested in knowing if you took exception to anything in particular in my comment on the Setser post (reference below). My first impression is that it is fairly in synch with your paper.

    (I did include an overly general point on capital at the conclusion of my comment, which may well have led to some of the ensuring confusion, and would have been better left out.)

    Thanks.

    My comment at Setser’s:

    October 14, 2008 9:59 p.m. JKH

    http://blogs.cfr.org/setser/2008/10/13/an-unlimited-guarantee-requires-unlimited-access-to-financing/

    Reply

  23. Rob K. Says:

    Sada,

    The new format is interesting but a little annoying. Is there a way to display on the home page the date/time of the recent post? It’s a little cumbersome to find the ‘new’ posts, or am I just missing something?

    Rob K.

    Reply

  24. sada mosler Says:

    Hi Rob,

    I noticed that you have just registered for the site. Make sure that you are on the website and not looking at the dashboard. There is a ‘View Site’ button on the top.

    The only change on the website is the ‘Recent Comments’ format; the rest is the same as before. The newer posts are listed on the left sidebar under the category ‘Recent Posts’.

    Email me if you have any more questions!

    -s

    Reply

  25. hooverprintingpresses Says:

    Rob I agree with you, is annoying. The way the comments show now, you don’t just get the new comments, but new comments mixed in with old comments too. IE comments no longer sorted by time posted. I liked the old way better, quicker access to new posts. As Obama says though, time for change eh? Sada – what is up with this registration stuff? My granpappy said rich elitists that started requiring registration were like those bankers who made prices really high so us common folk couldn’t encroach – encroachment by common folk who don’t do as you like really bother some of you folks don’t it? Don’t be like that, Obama gonna be our first black prez – encroachment is a good thing – expands your horizons – censorship and control through registration is for losers that killed socrates – don’t be like that!! Before you know it you will want to be charging for access to this stuff, I can see the $$$ signs rolling in your eyes now! How much money and low USVI taxes is enough?!?!?

    Reply

  26. sada mosler Says:

    Registration is optional.

    The new comments are still on top.

    Latest 50 are on the left, grouped first by recency, then by post.

    Email me if you have any subsequent problems.

    Thanks.

    Reply

  27. Rob K. Says:

    Sada,

    A BIG THANKS for dating each post.
    Problem SOLVED!

    Thanks!

    Rob K.

    Reply

  28. Mike Sankowski Says:

    Hi Warren,

    I am leaving comments across the web about the payroll tax holiday.

    As long as people are talking about it, why not try to influence the direction of the debate?

    http://www.motherjones.com/kevin-drum/2008/10/stimulate_me.html#comments

    http://www.econbrowser.com/archives/2008/10/pocketfull_of_m.html#comments

    Reply

  29. warren mosler Says:

    thanks! hope to get on it tonight. been way too busy!

    Reply

  30. Kent Kelley Says:

    Pleased to come upon your site and sounds like there are a few heads screwed on right. I’m USA in Ukraine and have an idea, now that the US national elections are over. Keep and eye on third party Bob Barr. If he picks up on Richard Gage AIA movement and hammers Bush for creating the problem and stalemates Obama & Pelosi in calling for new independent commission with subpoena powers in September 11, 2001 WTC then there will be some fur flying for the next four years. GOTO Gage url Structural Engineers point out that there was a controlled implosion and that building fires don’t melt steel. The 911 movement has spread across Europe – they are apolitical and I’m just a member of the Ukrainian Academy of Science watching the federal reserve note dance its way into oblivion. Добрый вечер!

    Reply

    Dave Begotka Reply:

    Simple, Physics do not change even on 911!

    Just think we killed so many on a LIE! And the American Public watches Survivor and eats Cheezy Poofs!

    What happens when they wake up? What happens when they get rid of the fed?

    What happens to the security markets?

    http://www.youtube.com/watch?v=x7kGZ3XPEm4

    Reply

  31. Kent Kelley Says:

    Sorry but wisdom of website didn’t print Richard Gage AIA’s website but if you’d care to have Google search I’d recommend that you enter his name plus “911″. There’s over 500 structural engineers, and registered architects calling for a new look at the controlled demolition of twin towers and their questions about the same in the 47 storied WTC-Bldg 7 which didn’t get any debris fall on it or an airplane crash into it.

    Reply

  32. Mike Sankowski Says:

    Hi Warren,

    My copy of “Understanding Modern Money” arrived yesterday. It is excellent so far.

    “…it is not the issue, but the acceptation, which is decisive.”

    I’ve reached page 25, as you can see.

    regards,

    Mike

    Reply

    RichW Reply:

    Got mine this weekend. I’m finding I have to reread parts and then let it sink in for a while before continuing.

    Reply

  33. David Pettey Says:

    More mainstream mentions of payroll tax holidays. As well as money to the states.

    http://online.wsj.com/article/SB123111515309852563.html
    Barry Eichengreen (from wsj):
    “I would like to see mainly payroll-tax cuts and block grants for states”
    “Infrastructure means bridges to nowhere.”

    Cheers, learned a good deal from following your site and associated references.

    David

    Reply

  34. warren mosler Says:

    Glad Barry is coming around. Maybe he reads this blog or talks to people who do.

    Reply

  35. Jim Baird Says:

    Meanwhile, Krugman is once again worried that household balance sheets might be improved too much:

    http://krugman.blogs.nytimes.com/2009/01/05/is-obama-relying-too-much-on-tax-cuts/

    Reply

  36. zanon Says:

    JIM: You got it! Krugman is so pro Government he really does not care what happens to households. God forbid the deficit grows through tax cuts that people might save! It must all happen through higher Government spending, and if people lose their jobs, the lose their jobs.

    Reply

  37. Russ Says:

    Hi Guys,

    Where did you find the song/band Ledge/Cave? do they have a web page?

    Wish I was there!

    Thanks!

    Russ

    Reply

  38. warren mosler Says:

    I own the tune- know someone famous who wants to do a cover?

    Reply

    Russ Reply:

    Unfortunately I don’t. Thought it was catchy.

    Reply

  39. Mike Sankowski Says:

    Warren,

    If you have not seen it, there is a huge explosion of talk about the money creation process – by some of the heavy hitters in the blogs.

    http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html

    http://www.interfluidity.com/posts/1233118501.shtml#comments

    Your ideas are taking root.

    Reply

  40. warren mosler Says:

    Good to see it, thanks!

    Reply

  41. Scott Fullwiler Says:

    Whoever Winterspeak is, he/she has the flex fx paradigm down pretty good. Well done!

    Reply

    Roger Reply:

    Thanks for the links. I’ve read Steve Keen’s website, and he seems to be partially in paradigm, but he also seems to outline that the private debt profile will inevitably lead to either a moderate (best case) or severe (base case) depression. Granted, he makes that case in a flowchart about why the original Paulson plan would be ineffective, but I think it is representative of his paradigm.

    His analysis emphasizes the reduction in aggregate demand caused by the private sector repeating its path from high debt obligations to all-time low debt obligations, mirroring the 1930′s-1950′s path.

    It appears that the difference between his moderate and severe depression cases is based on whether the govt diverts enough of the income generated from its giant “asset swap” back into aggregate demand.

    I’m not enough in paradigm to recognize the strength and weaknesses in his approach. He definitely emphasizes the debt-deflation concerns, but gives little attention to the effect of large fiscal stimulus.

    I’d be interested in hearing your thoughts, if you are familiar with his work.

    Thanks,
    Roger

    Reply

  42. warren mosler Says:

    the govt buying financial assets doesn’t add demand unless it somehow increases non govt borrowing to spend.

    worse, it takes interest income out of the economy. the fed’s 2 trillion portfolio nets them maybe 60 billion a year which is income lost by the private sectors.

    they need a fiscal adjustment to directly alter demand

    Reply

  43. winterspeak Says:

    Hi all:

    I dig Mosler! Try to give you lots of credit too, Warren, and am working on spreading your ideas.

    Must admit, they are *hard* to understand at first. Keen’s PK piece, which made it to Naked Capitalism, helped though.

    Reply

    RichW Reply:

    Winterspeak, nice to see you here.

    Reply

    warren mosler Reply:

    good to hear it thanks! read ‘understanding modern money’ if you haven’t yet

    Reply

  44. Jim baird Says:

    Winterspeak -

    I’ve been following your latest movements “into paradigm”. It’s always refreshing to see someone who might not be idealogically predisposed to “big government”allow themselves to see how finance really works. Of course, now the problem becomes that reading the financial pages becomes even more infuriating than before…

    Reply

  45. winterspeak Says:

    “understanding modern money” is on my list. Not the easiest tome to get ahold of, though!

    And yes, while I am not ideologically “big government” I do believe that government has several jobs to do, and that it should do those jobs well. Managing money is one of its most important jobs.

    Reply

  46. warren mosler Says:

    Right, I don’t promote ‘big government’ per se either, though many read that into some of what i write. And yes, getting the monetary system right would go a long way to promote stability, useful output, and employment in general.

    Reply

  47. Jim baird Says:

    I didn’t mean to imply that Warren is for “big govrnment” – only that many of a more libertarian persuasion rebel viscerally against the “state money” approach, no matter what evidence they are presented with…

    Reply

  48. warren mosler Says:

    Agreed. They are a ‘love money / hate taxes’ group and can’t deal with the fact there is no money as they know it without taxes.

    Reply

  49. Mike Sankowski Says:

    Hi Winterspeak,

    Glad to see you here. Trying to get the word out on these ideas is not easy, as most people look at you like you’ve sprouted horns once you start saying things like “taxes drive demand for money”, or “government surpluses are bad”. My dad literally could not repeat what I said, it was so far from his usual thoughts.

    I found Steve K’s treatment to be very good. I was looking at it all last night. I like the matrix he creates, it does very much simplify the understanding. Also, his take on ODE is spot on. Money is best looked at as a flow, and should be modeled as such.

    He is a horizontalist, in Basil Moore’s reading, and I think he is really missing out on the vertical component. I will try to expand his matrix model with the vertical component.

    I am much more of a big government person, simply because I think markets can be bad allocators of assets for long time horizons, but our society and civilization need long term allocation in some cases. For example, market forces have driven us to a point where we are in an energy trap, where most of our potential GDP will be spent on maintaining our energy. We would have been much better off wasting a trillion dollars on energy research over the last 3 decades. But we did not do that, so we are stuck in a position where we may not be able to grow due to energy constraints.

    Plus, I have a soft spot for waste as I look around and see people doing stuff that is wasteful all the time. When I hear libertarians talk about government waste, for some reason I always think of Robert Fripp (an incredible guitar player) who said: “What you call feeling, I call mistakes.” I walked around the Chicago Bean all day Sunday, which was a huge waste on my and Chicago’s part, and loved every second of it, surrounded by hundreds of smiling people who were also enjoying this wasteful public expense that will never recoup the costs of installation. And I think Steve Keen is right when he said that pure profit maximizing behavior would be called sociopathic by a psychologist.

    Reply

    Scott Fullwiler Reply:

    Mike . . . agreed regarding SK and vertical component. He got a very chilly reception a few years ago from us chartalists when he presented a previous version of the simulations in KC largely for that reason. There were also several problems with definitions of terms such as deposits, reserves, and profits . . . the positive response I’m hearing from several in the blogging world suggests these appear to be fixed.

    Reply

    warren mosler Reply:

    Very good!

    Last time I saw Basil (Moore) I said something and he asked whether I was a horizontalist or verticalist and he gave me a very perplexed look when I said ‘both, of course.’

    Reply

    Mike Sankowski Reply:

    You know these guys personally! Of course you two do…

    I did not see that Steve K has addressed the vertical component, but I do have limited understanding which I am working diligently to correct, so I might have missed something.

    Something interesting that is different than the model presented here is that he has net money creation from horizontal component. To be clear, his horizontal component does not net to zero at the end of the cycle.

    I think this growth in money supply in his model is due to the combination of relending and the turnover of capital. I follow the logic of the model up to that point, but he loses me on that step. I do not see how the accounting identities can be reconciled with the flow equations.

    Reply

    Scott Fullwiler Reply:

    From what I recall of his earlier presentation, that sounds like its along the lines of the criticisms we were making regarding both H and V. So maybe not that much has changed?

    Scott Fullwiler Reply:

    Also . . . yes … know them both and they’re both very intelligent, very good people.

  50. Teresa Says:

    Warren, as “Deficit Spending for Dummies’ will be your first material presented by me, do you think we could elaborate a little bit on this introductory phrase to make it sound neutral,let’s say “Understanding Deficit Spending”, or something like that? What do you think?

    Reply

  51. warren mosler Says:

    Hi, feel free to call it anything you want, thanks!

    Reply

  52. Zaid Alasad Says:

    Hi Warren,

    I was wondering if you had a chance to read the newly released BIS Quarterly Review entitled: “The US dollar shortage in global banking.”

    http://www.bis.org/publ/qtrpdf/r_qt0903f.pdf?noframes=1

    The thesis that the global dollar shortage was the result of maturity mismatches, as long-term dollar assets were funded by short-term dollar liabilities. The role of the Central Bank swap lines is also explained on pages 58-59.

    Also, in taking a glance at our counter-parties (national banking systems) in these swap lines, I noticed these counter-parties have a net long foreign position in US$, with the exception of Spanish, Belgian and French banks. So it looks like the Fed stepped in to fill the gap in short-term US$ funding with these swap lines.

    Would you be willing to comment on the data and conclusion presented in this report?

    Reply

  53. warren mosler Says:

    JUST GOT IT THE OTHER DAY AND HAVEN’T GONE THROUGH IT IN DETAIL YET.

    WHAT YOU SAY MAKES PERFECT SENSE AND IS SUPPORTED BY THE EVIDENCE IN THE MARKET PLACE.

    THANKS FOR THE LINK FOR THE READERS!

    Reply

  54. Mike S Says:

    Warren,

    Check out this discussion about private coinage.

    http://econlog.econlib.org/archives/2009/05/george_selgin_o_1.html

    Reply

  55. bforneyiii Says:

    Warren, there is no direct link on your home page to view a list of categories in which you file each of your posts. I do realize that I can find the hyperlinks to the category folder(s) in which an individual post may be located, but I cannot view the list of all categories. They used to be located on the left-hand pane. Can you help me locate any category list you may have for easy reference? Thanks,
    bforneyiii

    Reply

  56. warren mosler Says:

    try the search function for now and over to Michael to figure out how to improve navigation thanks

    maybe we need a page that lists all the posts by title and by date

    Reply

  57. Russ Says:

    Warren,

    I’m still looking to move to STX but can’t find any work. I came down in March to interview with Stanford had my trip scheduled and ended up being a few days after they were shut down…..bummer! At least I didn’t jump the gun, move down and have no job. So I chartered a sailboat instead with the Rose Sail Inn. Any chance you know someone who is hiring? I have the series 7, 24, 55, 63, 3 and 4. I will take any job except cold-calling/stock broker. Also when are you adding more music from the Cave? Do they have a website?

    Thanks again, I enjoy your site.

    Russ

    Reply

    Russ Reply:

    So what’s up?

    Reply

  58. Andrew ODell Says:

    Sada,

    I have enjoyed the Mosler Economic website very much. After reading over most of the site I feel well educated in Federal Reserve banking in an academic sense. In a real world sense I have worked in automotive parts sales, branch banking and at a mortgage bank in the bond department where I priced and pooled mortgages for sale in the secondary market.

    I have been thinking a lot about the financial crisis / economic downturn and have come to the conclusion that most of it has to do with falling home prices. The primary banks, federal reserve even GMAC have all seen bad loans rise as a result of falling home prices. I also feel that prices of homes are set to rise again if the federal government enacts a program similar in nature to the GI bill that was passed after WWII.

    My understanding of this bill was that it allowed returning veterans to purchase homes at a significant discount after they spent time in the armed forces. Let me explain the idea further. Right now a new enlisted soldier might make $10K per year for a 4 yr stint in the military plus they can get education credits toward college. What I propose would be an additional ‘government-owned home buyer credit’ of say $10K per year to buy government-owned homes that the federal government buys out of foreclosure.

    The federal government buying foreclosures would provide the banks a way to get bad loans off their books; reducing the need for bailout money. It would help the housing prices bottom. Right now it is assumed that one foreclosure on your street reduces prices on the entire street by an average of 5%. Falling home prices would be eliminated when the federal government buys the foreclosure and sells it to a veteran. It gives returning veterans a chance to buy a house or put down a significant down payment and start a family. This would decrease federal costs of unemployment and veteran related expenses.

    The result: bank stocks rally, veterans get the treatment they deserve after serving their country and deflationary pressure in the housing market ends. Ultimately higher housing prices would create jobs in construction, provide consumers with more money to draw on through HELOCs and end the banking crisis.

    The US dollar should hold steady on the passage of this bill as these houses have intrinsic value – they just lack a buyer who can afford them. The amazing natural resources this country has was converted into houses unlike any place else in the world. These homes are not worthless so the money the federal government spends to buy the houses is not wasted. The US dollar should be fine with a program like this. It would simply require coordination between veterans affairs and HUD and the federal government in passing a bill that enacts this into law. It would gain significant political clout behind whatever law makers back the plan as the military and banks would be forever grateful as would every homeowner.

    Please let me know what you think of this concept and also how I can post to the economic forum instead of the guest book in the future. I am going to send this idea to a few prominent law makers as well.

    I hope all is well with you.

    Andrew O’Dell
    B.A. International Business – Rollins College ’04
    M.B.A. – Wayne State ’11

    Reply

  59. warren mosler Says:

    Hi,

    My proposals are for the payroll tax holiday and 1000 per capita revenue sharing to the states which should instantly give working people sufficient increases in take home pay to afford to make their mortgage payments (and car payments, etc.) and thereby end the crisis.

    We’ve got the same goal with slightly different approaches.
    Mine might be considered ‘more equitable’ as it simply means stop taking funds away from all working people, rather than giving out funds only to home buyers.

    Reply

  60. Hd.Anjou Says:

    Might be good fo the students to know this: http://mixedink.com/OpenGov
    also twitter.com/OpenGov

    Reply

  61. Richard Bond from St.C living in Boston Says:

    If anyone is thinking of moving to St. Croix and does not know what business they could own and run from there do this. Go to the website bizbuysell.com and go to advanced search. M move the selection mark from All US to Alaska then to the right down the page mark include relocatable businesses. Every relocatable business on the website through out the U.S. will come up. Maybe there is a match between the businesses for sale, your skills and your budget you can find.

    Reply

  62. Richard Bond from St.C living in Boston Says:

    The deal with the Earl of L, Tom P owns one of the largest botanical gardens in Ireland and writes and consults on the subject. He would have contributed to the design not merely traveled as a guest.

    Reply

  63. Richard Bond from St.C living in Boston Says:

    Thought

    I wonder if perpetual hurricane insurance would be a viable idea.

    Reply

  64. Jim Says:

    http://www.moslereconomics.com/?page_id=32&cpage=1#comment-11601

    This link leads to a 404 page.

    Reply

  65. Sandy Says:

    Actually, several of your “mandatory reading” links lead to 404 pages.

    BTW, is there an online and downloadable edition of “Understanding Modern Money”–free or otherwise?

    Reply

    warren mosler Reply:

    Thanks, Michael will get on it!

    Reply

  66. Victor Says:

    Does anyone at the website ever actually read and answer people’s questions here?

    Reply

  67. Andrew ODell Says:

    Natural Gas Bottom?

    Could the Natural Gas price in Chicago be bottoming? I think Congress should look at supporting this industry as it is critical to infrastructure and energy security. The BTU price is at an all time low and industries, home building, and energy companies only have upside potential from these levels IMO.

    Andrew ODell

    Reply

  68. Jeff Hodgson Says:

    Mr Mosler,

    Tom Greene of William Blair suggested that I contact you. He sends his best wishes to you.

    I founded Chicago Weather Brokerage and have worked with the CME to develop snowfall binary options that will begin trading on Monday, December 7th. I have quite an extensive customer base with snowfall exposure. Tom thought you of all people might have an interest in trading this product. I have a couple of existing market makers/speculators to help get the market going but I could use a few more participants. Please let me know if you have any interest as I would greatly enjoy the opportunity to talk with you in more detail.

    Best,

    Jeff Hodgson

    Reply

  69. Warren Molser Says:

    Hi to Tom!!!

    I haven’t been trading directly for many years, so can’t help you there, but call any time.

    Reply

  70. Matthew Sparks Says:

    I have

    Reply

  71. Matthew Sparks Says:

    Mr. Mosler,
    I have got a problem and need help. I think the USA government could partner with free and clear home owners, (no mortgages) to float a bond for enough money to be able to refinance all homes with better terms, and lower interest rates. Revenue from the loans could pay these home owners a dividend and cover all costs. The trick as I see it would be to balance the desire for lower rates, with the desire for larger dividends. This would rid us of the secondary mortgage market if enough people participated in this type of program would it not? I have been told this is impossible but not have gotten a good explanation why.

    Reply

  72. WILLIAM MCBRIDE Says:

    MR Mossler
    Do you have any recommendations when setting up an EDC company that will be trading stocks and options as a market maker. Any help would be greatly appreciated Happy New Year.

    Thanks
    Will

    Reply

  73. warren mosler Says:

    Sounds good! We have good bandwidth from what I’ve heard. And good weather.

    email me at warren.mosler@gmail.com anytime.

    Reply

  74. Charles St. Pierre Says:

    Warren.
    I’ve been trying to get it. I think what you’re saying is that the government should stop issuing bonds, and simply print the money to keep operating, and to pay off the outstanding bonds. This will eliminate the threat of interest on the national debt snowballing, which is really the root cause of hyperinflation.
    Thus the government (may) run a continuous deficit, yet never accumulate a debt. If there is too much money in the system,with too much inflation, it should raise taxes, to control demand, by sucking up excess cash. It can also cut back on expenditures. If there is not enough money in the system, it should lower taxes, or spend more, or some combination of these.

    Reply

  75. warren mosler Says:

    That’s pretty much it, very good!

    A few details-

    I wouldn’t use the term ‘printing money’ which comes from the gold standard. Govt can simply spend as it always does- by changing numbers up in our bank accounts- and simply not sell tsy secs. A ‘different’ kind of spending is not applicable.

    Then, when govt spends more than it taxes, that ‘extra’ spending will show up as extra balances in checking accounts the banks keep at the Fed. No problem there. And if the Fed decides to not pay interest on those balances, which is my preference, so be it.

    Some people will continue to call those balances ‘debt’
    I don’t much care what they call them.

    Reply

  76. Charles St. Pierre Says:

    Thanks, Warren.

    OK So the money ends up deposited with the FED.

    So the government has no need to borrow. In fact, spending borrowed money is useless in expanding the money supply. Any borrowed money is first taken out of the economy, before it is put back in. So there is no change in the money supply. So attempts by the government to stimulate the economy by spending borrowed money will have no net effect, except maybe where the money is not being lent in the first place. Of course, the government borrowing it takes away the motive for the banks to lend it to the privat sector.

    In an expanding real economy, for the government to limit itself to borrowing leads to a relative contraction in the money supply. So in general the government must run a deficit, and without borowing. To balance its budget, or even borrow, or worse run a surplus, restricts or contracts the money supply.

    Do I still have it, or did I lose it?

    Reply

  77. Jim Baird Says:

    “So attempts by the government to stimulate the economy by spending borrowed money will have no net effect”

    Not quite. The issue is not whether or not the government “borrows”. The effect of additional spending is on how much additional demand it injects into the economy. Spending adds demand, taxation withdraws it. “Borrowing” merely alters the term structure of interest rates – it has no effect on agg. demand at all (except inasmuch as it leads to additional spending on interest payments)

    Reply

  78. Neal Says:

    Warren…

    I love your site and philosophy. Thought you might find this of interest.

    http://www.theonion.com/content/news/u_s_economy_grinds_to_halt_as

    Neal

    Reply

  79. Ward Davol Says:

    Hi Warren-
    I don’t think my first message went through to you. It’s Ward as in Ward & Diane from St. Croix, but now in Connecticut (unfortunately). I just got off the phone with Chris Hanley, and he suggested that I get in touch with you. If you need any help with your campaign in the Greenwich area, let me know. Perhaps I could organize an opportunity to speak at the Yacht Club here if you’d be interested. It seemed to have worked pretty well for Jim Himes.
    Anyhow, best of luck and let me know if you’re in the Greenwich area.
    All the best,
    Ward Davol
    (203) 979-4650

    Reply

  80. Scott Tam Says:

    I’ve read and heard Warren Mosler claim the IRS shreds cash it receives in payment of taxes. I cannot find any reference to this anywhere other than those quoting Mr. Mosler. (While it is a well known and documented fact the Treasury shreds old, torn, or defective bills to take them out of circulation, this is not what Mr. Mosler is talking about.) Can you give me any proof, documentation or third party reporting on this shredding of cash tax payments?

    Reply

  81. laurie green Says:

    hi warren. recognize the name from the past?? 11b ambassador dr manchester…in the 70s?? i was excited to see you are running for office here in ct.. please tell me why i should vote for you. i have chatted with your mom a couple of time over the last few months. she sounds great. so happy she is recovering so well from her stroke. looking forward to hearing from you.

    Reply

    WARREN MOSLER Reply:

    yes, hi!!!

    Check out my website and proposals at http://www.moslerforsenate.com, thanks, and feel free to get a group of people together for me to address. Hope to see you soon!

    Reply

  82. Charles Yaker Says:

    Two suggestions for publishing your book one is http://www.scribd.com/ and the other is self publish on Amazon Kindle although you won’t get the book publisher’s paying for TV and Radio appearances. I am not sure how Kindle works but Scribed is easy.

    Reply

  83. Sam Carpenter Says:

    Hi Warren,

    Just read your proposals at Mosler for Senate. Was particularly struck by the state vx. federal taxes.

    Since this is so, why have federal taxes. Why not let the states drain excess, if any? After all, we are presumably a republic, not strictly a democracy.

    Thanks,

    Sam

    Reply

    WARREN MOSLER Reply:

    it’s a political choice for sure!

    problem is states get in races to the bottom, etc.

    Reply

  84. S Thomson Says:

    Warren, about your $1 million challenge – is it open to all, all congresspersons, all Senators, or just your senatorial opponents? Does the latter include Peter Schiff?

    Can you state the challenge more precisely than offered in the blurb on your site? Or is that the extent of the challenge? “Mosler knows as a fact of actual monetary operations that, operationally, there is no such thing as the US government running out of dollars, being dependent on foreign borrowing, or potentially facing a solvency crisis like Greece. Nor is there any financial reason to cut Social Security or Medicare benefits. To make the point, he’s offered to pay $1 million of his own money to any of his Senatorial opponents on the ballot who can prove him wrong.” Is that the extent of your challenge?

    To ensure I wouldn’t be wasting my time in proving you wrong, are you suggesting that the US Treasury is not operationally constrained in the current Fed Reserve/FRN banking system, or are you suggesting that the US Treasury could instead create its own currency without debt – like the “Greenback” or a US Treasury Dollar? To confirm, are you relating your challenge to the current monetary system, or a proposed (but hypothetical) monetary system?

    As an FYI, I believe I can prove you wrong under the current monetary regime, but not under a hypothetical US Treasury Dollar issuance regime…

    Since the election is fast approaching, and I would want some time to put my proof together, the favor of your reply is requested…

    Reply

    WARREN MOSLER Reply:

    under current monetary arrangements ‘the government’ which includes the Fed, Tsy, and all other govt. agencies etc.

    Yes, I include the Fed as part of govt. See other posts on that at this website. I did not say specifically/exclusively the Treasury is unconstrained, though they do physically print the money last I checked.

    Open to all of Congress. Peter Schiff is included.

    Reply

    S Thomson Reply:

    IF you include the Fed as a part of ‘government’, then it is a truism that the country can never run out of money or go bankrupt. The Fed, and its member banks, can create as many FRN’s as they want (the banks being restricted somewhat for practical reasons), and can use these FRN’s to purchase US Treasury’s (which they are doing). And of course, QE is the purchase of UST’s with newly created FRN’s.

    However, I believe it is a fundamentally flawed assumption to include the Fed within government for the purposes of arguing that debt doesn’t matter, and that the country couldn’t run out of money.

    The Federal Reserve Act clearly delegates the creation of Federal Reserve Notes to the Federal Reserve. FRN’s are the present currency of the US (yes, the physical FRN’s are printed under contract with the Treasury and coins are ISSUED without debt from the Treasury).

    Available evidence makes it clear that the Federal Reserve system is owned by the member banks. Yes, certain governance positions are appointed by the President, but OWNERSHIP rests with private member banks (who earn a 6% annual dividend on their capital investments).

    In Modern Monetary Mechanics, printed by the Federal Reserve, the Fed admits that the majority of money is created by the lending of member banks in the fractional-whatever (capital or reserve) banking system.

    Ergo, when a Primary Dealer purchases a UST for its own account, it is the PD that is creating the FRN’s in order to purchase a UST. The actual money creation occurred by a private corporation in order to purchase an interest-bearing obligation of the US taxpayers (whether or not you believe taxes pay for the debt). Therefore a transfer of ‘wealth’ occurred FROM the ‘public’ TO the private corporation. You may argue that interest payments are stimulative, but I argue that since this is not an intra-governmental transfer (the debt obligation is now owned by a private corporation) there is an expectation of repayment.

    Can you point me to a specific place on your website that discusses your arguments for including the Fed as a part of the government? I looked around for a bit…

    Long story short, why would an MMT’er NOT argue for the direct issuance of money from the US Treasury a la the Greenback or the Kennedy dollar? Then money could be issued without debt, and interest would not be paid by the public to private companies where the Constitution clearly requires Congress to issue the currency of the land (why did they delegate it to a private cartel?).

    IMHO, having the US government issue more UST’s in order to purchase more FRN’s in order to spend them to stimulate the economy unnecessarily enriches the banks (the real money creators).

    Thanks for the response…

    Reply

    WARREN MOSLER Reply:

    start with the ’7 deadly innocent frauds’ to get a lot of your questions answered, and then the rest of the ‘mandatory readings’

    The Fed is controlled by congress. member bank ownership carries no management authority or voting on any issues of consequence, just a fixed return which makes it functionally debt.
    All profits are turned over to the tsy. it’s run on a public purpose basis, not a for profit basis. And the member banks themselves are functionally public/private partnerships subject to full regulation by the govt.

    Tom Hickey Reply:

    As you probably know, Libertarians are leading the charge about the Fed being private. Here is Libertarian economist Bill Woolsey putting that to rest, on a Libertarian site no less.

      Demystification: Who Owns the Fed?

    The “private” Fed being in charge of the US money authority is just a canard.

  85. S Thomson Says:

    There is no question that the Fed has both public and private aspects. Tom, from your article:
    “However, if one begins with an understanding that the Fed is fundamentally a political operation, then it is unusual in that bankers have an extra avenue of influence. Like everyone else, they can vote, lobby, and make campaign contributions and so influence the politicians. Unlike everyone else, they can own shares of stock in member banks that “own” the Federal Reserve banks and so influence directors, Federal Reserve bank presidents, and the Open Market Committee.” [With the widespread regulatory capture of federal regulators by the MIC, the mega-corporations, and the bankers, it's hard to argue the 'independence' of government anymore, but that is a whole 'nother discussion.]

    Of course, the Fed is not responsible for the majority of money creation – which happens when private banks create money through lending (whether you call it fractional reserve or fractional capital). The centrality of my point was the example of the Primary Dealer purchasing a UST with newly created FRN’s. The money creation occurs at the PD, not at the UST. And the PD has created an electronic FRN (which cost them nothing) and in return received an interest-bearing obligation of the United States. IMHO, that is trading something (a UST) for nothing (an FRN).

    Again, why would an MMT’er NOT want money creation to occur with the ISSUANCE of a US Treasury currency/money like a Lincoln Greenback or a Kennedy Treasury Dollar. If one is an MMT’er, and therefore debts don’t matter, why issue debt at all? [In today's system, it's because the UST cannot directly issue FRN's - per the Federal Reserve Act - but must borrow them before they can be spent.]

    In looking at the fundamental flaws of today’s debt-money system, IMHO, it is that private corporations (banks) create money/credit (really debt-money), instead of it being issued directly from the US Treasury. Again, in my opinion, one cannot have a true MMT system until debt-free money is issued by the government…

    Reply

    beowulf Reply:

    Well Tsy could stop borrowing tomorrow and simply create money (the Secretary of Treasury has been granted unlimited authority to mint coins of any variety, quantity and denomination), that and ten dollars will get you a pizza. The problem isn’t borrowing, oddly enough its actually cheaper to borrow since the 3-month, 6 month and 1 year T-bills rates are all lower than the interest on reserve rate (which the Fed would have to pay in the excess reserves created by new govt spending). The only constraint that matters is that Congress holds the checkbook, Tsy can’t spend money or cut taxes without congressional approval. That’s why the Fed keeps pushing the string on monetary policy, because Congress is asleep (and the President doesn’t want to interrupt their slumber) at the switch with fiscal policy.

    See Wynne Godley and Marc Lavoie paper on fiscal policy–
    http://www.levyinstitute.org/publications/?docid=911

    Reply

    WARREN MOSLER Reply:

    first you have to identify what your fundamental issue is:

    You don’t want banks to be able to make loans?

    You don’t want the tsy to spend more than it taxes?

    You don’t want the fed funds rate to be above 0?

    You don’t want the fed to set interest rates?

    When the govt spends more than it taxes, someone has those dollars.

    If the gov doesn’t offer some type of interest bearing account for those dollars the
    rate those funds can earn is 0, which becomes the minimum risk adjusted return anyone will be able to get for short term funds.

    Reply

    S Thomson Reply:

    I’m ok with deficit spending, a 0% interest rate, etc. As a quick aside, one quibble I have with MMT is that the first person to receive a newly issued dollar receives a greater benefit from it then other citizens (since their currency is diluted, but they did not receive the direct benefit of the government spending) – which leaves open the issue of cronyism and corruption. But as you say, MMT is operational, it does not specifically address policy implementation (I think that is what you say).

    In our current private-bank, fractional-whatever system, private banks create the preponderance of the nation’s currency. In my oft-stated example, Primary Dealers create zero-interest currency at the click of a mouse, and then purchase interest-bearing obligations of the US. This is a clear (and unnecessary) transfer of wealth from public to private hands. [There's a reason the banks tend to have the nicest buildings and best compensation...]

    In a second example, when banks loan a mortgage, they don’t actually lend the money (as you know). It is merely an accounting transaction. But in return for a couple of mouse clicks, they receive a pledge of collateral of productive assets and a claim on the future labor of a citizen. That does not seem to be a transaction with consideration on both sides. See the (in)famous Credit River case.

    I realize I’m treading off-thread, but again it seems to me that in order to truly propose deficits don’t matter, money shouldn’t be created as debt – especially by private corporations and then lent to the Treasury. The money should be issued by the Treasury without debt. While in the current system, future deficits can be repaid operationally with a few clicks of a mouse, it requires an expansion of the money supply (and the national debt) in order to pay for the compounding interest. The expansion of the money supply, all other things being equal, debases savings. [And again referencing the transfer of wealth from citizens to private banks.]

    With a Treasury-issued currency, no compounded interest would be required to be repaid, therefore, this would not require an increase of money supply for this particular factor, and avoids the loss of seigniorage for a privately-created currency.

    Not totally on point, but from the wikipedia (yes, I know, wikipedia): “When a private bank creates currency, the government cannot collect any seigniorage from it. Since the Federal Reserve has a target for the size of the currency stock, any currency created by private banks is currency that is not created by the Fed and thus constitutes lost seigniorage.[19] Some consider this an illegitimate “privatization” of what should be a public good, with these profits being retained by the government to finance essential social services and capital works.”

    Anyway, thanks for the conversation…

    Reply

    Tom Hickey Reply:

    In light of MMT, people on MMT blogs, here and elsewhere have made similar observations and proposals for reform, such as consolidating the cb and treasury functions, eliminating the deficit offset with tsy’s requirement since it is operationally unnecessary and provides a subsidy to bondholders, setting the overnight rate to zero and letting markets determine interest rates and spreads, and reforming the banking system to eliminate economic rent-seeking and cheating. This can all be done under the present monetary system simply by Congress changing some of the restraints that it has placed on the system. The issues you bring up are not operational; they were imposed politically and can be changed politically.

    Some consider this an illegitimate “privatization” of what should be a public good, with these profits being retained by the government to finance essential social services and capital works.”

    This is incorrect operationally because a monetary sovereign that is the sole provider of nonconvertible floating rate currency has no need to finance itself in that it is the currency issuer and there is no restriction on its currency issuance. Seignorage is operationally meaningless under a fiat system such as the present one; it pertains to commodity money. The US government doesn’t need to get funds from anywhere since it owns and operates the spreadsheet.

    There has also been some controversy about eliminating or restricting private banking, too. Some people have been for variations of this, but others have objected that 1) exclusive government banking puts too much control in the hands of the state, 2) government is not expert at assessing risk or deciding which investments will pay off and which won’t, and 3) banking reforms can fix problems that arise. There is a lot of discussion of such issues on Warren’s blog as well as at Bill Mitchell’s.

    Matt Franko Reply:

    ST,
    “In my oft-stated example, Primary Dealers create zero-interest currency at the click of a mouse, and then purchase interest-bearing obligations of the US. This is a clear (and unnecessary) transfer of wealth from public to private hands. [There's a reason the banks tend to have the nicest buildings and best compensation...]”

    Perhaps a small point, somewhat related, but a while back I looked into a Primary Dealer and found that they are “Primary” so to speak in terms of their having to readily engage with the FRBNY in setting monetary policy, I didnt take away that they somehow obtained head of the line priviledges at the Treasury auctions (darn!). I took that they are “primarily” required to engage in open market operations with the desk at the FRBNY when policy interest rates need to be adjusted/maintained. This is somehow in itself good for them, (front-running? I dont know). In this interest rate environment it seems to me it would be a tough business right now.

    In fact there was a lot of griping by some of the PDs that the Treasury Direct issue program was taking away some significant volume from them at the auctions. With current info technology, I see this trend doing nothing but increasing and the current ZIRP probably is accelerating this trend towards direct Treasury issuance to the non-financial sector as rates are so low that nobody wants to pay a broker as well.

    Resp,

    ps Of course this all goes away with no bonds, etc…

    WARREN MOSLER Reply:

    all govt spending is via incurring a liability, whether actual cash, reserve balances, or tsy secs.

  86. S Thomson Says:

    @ Tom – thanks for the thoughtful response. I appreciate it.

    I was a bit concerned about using the “Seignorage” quote, since many of the web definitions I found referred to commodity money, but a couple referenced the generic ‘profit’ from making money (the cost of creation v. the cost of sale), and one even specifically referred to the profit from printing paper currency (and of course electronic creation is free). It was the latter sense that I hoped the word would come across (the profit of creating any money). That might not be the right interpretation on my part…

    “since it is operationally unnecessary and provides a subsidy to bondholders” – that’s my rub (and a significant one in my opinion). The current structure of money/credit/UST creation provides a significant (and unnecessary) subsidy to bondholders. And in that context, makes the comment/concept that “deficits don’t matter” misleading at best, since larger government spending means larger subsidies to bondholders. [And the compounding of interest payments creates an upward influence on the money supply.]

    In fact, I would argue the entire bond auction construct was designed to subsidize (illicitly profit) the bondholders (see the many presidential quotes on the issue of money creation and bankers). It also obfuscates the reality of monetary sovereignty. It would be far more clear to all if we didn’t have debt, bond auctions, etc. And I still, whether people agree or not, argue that the Fed has significant private constituencies/ownership/independence. Call me a conspiracy theorist if you will… :)

    And as you reference, it’s all political. Of course, once granted subsidies create an entrenched class, and also significant political influence in order to maintain the subsidies. I can’t imagine the bondholders willingly giving up the subsidies, and substantial historical references exist to the battles for and against this model of central banking.

    While I don’t consider government banking a panacea, our system of private banking/debt-money creation has arguably created a generation of debt slaves, where people own little but owe a lot. And I’d probably try to forge a definitional difference between banking (holding deposits and making loans) and money creation. Designing a better system and having it implemented is of course a massive issue, but there are some very good ideas out there…

    Thanks again…

    @ Matt – thanks for your comment as well. As you reference, I was really discussing the PD in the context of the simplicity of explanation of how they purchase UST’s direct. Of course, other people (as you mentioned) can too…

    Reply

    Tom Hickey Reply:

    I have suggested making retail banking a government monopoly, using agents. I would see government holding demand deposits in checking accounts, issuing interest bearing time deposits and such matters of retail banking, as well as underwriting owner-occupied residential mortgages at long-term low interest. Government already guarantees this type of banking in the US and it may as well be made explicit, with government paying its agents a reasonable fee for services rendered. Retail banking should be riskless and boring since it is a public utility.

    I would then make all other forms of finance including investment banking private and require that they use the partnership model, with close regulation and oversight to preempt systemic risk. There would explicitly be no rescue of private firms, and insolvent firms would automatically be put into resolution, with a plan worked out for doing so that is continually reviewed and updated.

    Obviously, this would required revising the present system, and I don’t think that is going to happen without a major crisis that changes the politics drastically.

    MMT’ers are presently concerned taking advantage of existing operational possibilities, as well as offering suggestions for improving the present system through reform. This is set forth in the mandatory readings here, for example. Just because they offer recommendation for working within the status quo in some cases shouldn’t be taken as indicating that they endorse it. It is practically expedient to everything possible immediately to reduce unemployment, for example, especially when it possible operationally even under existing political restraints in the US.

    Reply

    S Thomson Reply:

    Tom, great thoughts/suggestions. Returning to the partnership model of investment banking would indeed provide an exceptional check on systematic risk-taking.

    I hear ya’ in regards to MMT current v. ‘preferred’. At times it’s more important to have a seat at the current table then to twist in the wind waiting for some big and presently unforeseeable shift. I do wish there was a bit of an asterisk behind the comment “deficits don’t matter” – because they do a little in the current construct. They really wouldn’t matter with a Treasury-issued currency.

    I do think the marriage of private banking and private money creation is fundamentally flawed, and any improvement would only be a band-aid on a broken model. When any private party can control both lending and the money supply, it means there is both the incentive AND the control to create boom/bust cycles that centralize the ownership of productive assets with the banking elite. => create money for free => loan and take productive asset as collateral => create bust => repossess property => reflate property…

    I’m sure you’ve read it before:
    “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
    Thomas Jefferson, (Attributed)

    Cheers!

    Reply

    beowulf Reply:

    I agree Tom Hickey’s the partnership idea is an excellent. I think it was David Cay Johnston who pointed out that accounting and law firms used to be general partnerships– every partner personally liable for each other’s actions– but since CPA and law firms are now usually set up as LLPs or LLCs, partners don’t have that personal motivation to keep each other honest and both profesions have been cutting ethical corners ever since (“learned professionals” like CPAs, lawyers and doctors are always personally responsible for their own actions, the LLC is used to shield them from partner liability).

    I do like the Jefferson quote, but it sounds too good to be true. There are a LOT of fake quotes about monetary reform floating on the internet (Abe Lincoln quotes in particular). Unless you read something which cites primary sources, I would assume its fake. And I just checked Snopes, the Jefferson quote is fake, first turned up in a congressional hearing in 1937 (the first recorded use of term “deflation” was 1920).
    http://www.snopes.com/quotes/jefferson/banks.asp

    One quote (actually the whole speech is good) that is legit is Thomas Edison’s “there’s no difference between a dollar bill and a dollar bond” speech. A 1921 NY Times eyewitness account is available at the Times website.
    http://prosperityuk.com/2000/09/thomas-edison-on-government-created-debt-free-money/

    WARREN MOSLER Reply:

    limited liability is a gift from gov- a form of govt protection- that in my book entitles govt to regulate those utilizing it for public purpose, rather than being allowed to abuse it contra to public purpose

    Tom Hickey Reply:

    When any private party can control both lending and the money supply, it means there is both the incentive AND the control to create boom/bust cycles that centralize the ownership of productive assets with the banking elite. => create money for free => loan and take productive asset as collateral => create bust => repossess property => reflate property…

    This was a factor leading to the establishment of the Federal Reserve System as the lender of last resort that could provide liquidity to the financial system in a panic, prevening massive liquidation, as had happened in the past, with the suspicion that the bankers had arranged it for their benefit.

    So even if we went to a public retail banking and private finance, there would still be a need to provide liquidity in crisis, but under the system I propose there would be a steep price to pay and immediate resolution for insolvency. In addition, under a partnership model, financiers would be lot more careful with their capital risk.

    The moral hazard in the present system incentivizes imprudent risk-taking and even cheating, since there are either low or no penalties imposed, just some finger-wagging and maybe a wrist slap. While real reform could fix this, history shows that eventually the financial sector just gets the reforms rolled back and inserts loopholes in the initial legislation and regulation, and subverts oversight, to tide them over in the meanwhile. So I don’t think that reform is viable. The structure and incentives have to change, and all involved, including politicians, need to have skin in the game and pay a price if things go wrong. A system without strict accountability is broken.

    WARREN MOSLER Reply:

    private lending requires funding in the financial markets which rely on mark to market for solvency.

    the public purpose behind lenders having gov guaranteed liabilities is the ability to lend on (govt prescribed) credit analysis rather than market value.
    so seems you are not in favor of that, which is ok. it’s a political choice

    Reply

  87. Tom Hickey Says:

    ST-If you want to pursue money & banking and finance issues from an MMT perspective, there are two posts at Bill Mitchell’s you may be interested in looking at. There are extensive comments, many from banking industry experts like JKH.

    Nationalising the banks

    Some myths about modern monetary theory and its developers

    Reply

  88. John Says:

    Just wanted to let you know I’m trying to do my part to advance MMT. I posted a short article on Morningstar debunking the “crowding out” argument earlier this month.

    http://news.morningstar.com/articlenet/SubmissionsArticle.aspx?submissionid=103085.xml

    Thanks for being a leader.

    John

    Reply

    WARREN MOSLER Reply:

    yes, excellent!!!

    Reply

  89. Jim Sherman Says:

    Warren, In your Nov 5th piece you speak of QE effect on Japans Equity markets shortly thereafter w/o mentioning the 9/11/01 effect of terrorists attacks and their ramifications on all the markets?
    Best, Jim

    Reply

    WARREN MOSLER Reply:

    right, forgot about that.

    Brian Murphy, Greg Richards, Kevin Connors…

    Reply

  90. Charles St. Pierre Says:

    Warren: here’s a video I think you might be interested in:


    http://video.google.com/videoplay?docid=-2550156453790090544#

    “Money as Debt.” He says when a bank makes a loan, it ‘creates’ the money to loan, numbers on the computer. Later, he goes on to show that because of interest, the total money needed to pay off loans is always greater than the money loaned, ie greater than the money supply in ratio (P+I)/P. He goes on to show this implys I/(P+I) share of borrowers will always be unable to pay off their loans. He also shows that this leads to an exponential growth of both the money supply and debt, that only with an exponential growth in real consumption can it be maintained, and that this spiral has no (nice) ending.

    But the video explains that, and more, better than I can. I think it’s a little different point of view from yours.
    The guy favors a nationalized banking system.
    It’s 47 minutes, but if you watch the first 10, I think you’ll want to see the rest.

    Reply

    WARREN MOSLER Reply:

    been hearing that ever since i can remember. they forget that the bank’s earnings get spent and those funds pay the interest.

    Reply

    Charles St. Pierre Reply:

    The interest pays the banks earnings… But, there is no reason for the banks’ spending to equal their earnings. By retaining some of their earnings, the banks can force there to be more borrowing, and for debt to increase.

    Reply

    Jim Baird Reply:

    Yeah, I usually illustrate by creating a model with just a farmer and a banker. The banker lends money to the farmer at 10% interest, but then uses the interest income to turn around and buy food from the farmer. At the end of ten years, the banker has collected more in interest than existed at the beginning, but the Farmer still doesn’t have any problem making the payments…

    Reply

  91. bns Says:

    Hi
    I’ve been reading up on mmt and was wondering if you could explain how treasury auctions create new money within the mmt framework? I understand that new money is created by the fed by marking up treasury’s account and then being spent into the economy. I’ve also read that treasury cannot run a negative balance and therefor must fund their account with auction proceeds before they can spend. However if anyone besides the fed buys the bonds wouldn’t they bought with “old” money already spent into existence leaving net financial assets unchanged? Or does treasury first sell new bonds for new money to the fed and then fed then swaps them for old money with the public? Thanks

    Reply

    WARREN MOSLER Reply:

    deficit spending adds net financial assets to the economy
    if you include tsy secs in your definition of ‘money’ deficit spending adds money to the economy

    yes, fed buying tsy secs leaves net financial assets unchanged.

    Reply

    Tom Hickey Reply:

    Bns, when the Treasury spends by crediting accounts, those accounts have to clear when the funds are used. Reserves are used for interbank settlement, so the Treasury has to make sure that reserves are available for clearance of it checks and electronic deposits. The Treasury then has to get the reserves from the Fed, and since by law the Treasury cannot run an overdraft at the Fed it has to issue tsy’s, which the Fed auctions, to obtain the reserves it needs to cover its accounts. The Treasury gives the Fed the tsy’s, the Fed credits the Treasury’s reserve account at the Fed, and Fed sells the tsy’s at auction, since by law it cannot simply exchange the reserves for tsy’s directly. The amount of funds that are used to buy the tsy’s at auction equal the amount that the Treasury has spent, since it is a $-4-$ offset. Therefore, at the macro level (in aggregate) it’s a wash.

    The funds Treasury expends are used to buy the tsy’s issued. The Treasury’s deficit spending, which creates additional nongovernment net financial assets (NFA), is converted directly to nongovernment saving of net financial assets. Since the national debt is the accumulated deficits, the national “debt” is actually nongovernment (forced) savings. This is just a monetary operation that drains the reserves created by deficit spending from the FRS so that the Fed can hit its target overnight rate, which would otherwise go to zero with excess reserves unless the Fed paid interest on reserves equal to the desired overnight rate.

    Reply

    WARREN MOSLER Reply:

    right, and interesting that the commercial banks can run overdrafts in fed accounts but the tsy can’t.

    Reply

    bns Reply:

    Hi thanks for the great explanations. They clear up the confusion I was having as I wasn’t sure if the public bought the bonds directly from the treasury or if they were passed to the fed and then sold to the public.

    Is it accurate to say then that there are two pathways for vertical transactions, either thru the treasury or thru the fed, but only treasury transactions create/destroy money while vertical fed transactions are asset swaps?

    Also does borrowing at the fed window factor into money creation?

    Thanks again

    Reply

    Tom Hickey Reply:

    Basically correct, but it is more accurate to say that Treasury deficits create additional nongovernment net financial assets, since expenditures increase nongovernment NFA while taxes withdraw NFA. This is important because only deficits increase the amount of nongovernment NFA, since the funds created by bank loans (loans create deposits) net to zero in aggregate.

    The Fed buying and selling tsy’s either through OMO or QE involves asset swaps that change the composition of assets and the term structure of government liabilities.

    Borrowing at the Fed window does not create nongovernment net financial assets. The borrowing bank gets an asset (reserves) by putting up collateral and taking on a loan obligation. The transaction nets to zero. Actually, nongovernment net financial assets are decreased by the amount of interest the bank pays the Fed for the loan, those funds being transferred from nongovernment to government (consolidated Fed and Treasury), with the Fed transferring its profit on operations to the Treasury.

    BTW, the Fed does not deal directly with the public. It operates chiefly through with Treasury, foreign governments, primary dealers, and member banks. The Fed also operates directly in the fx market and buys and sells gold. The difference is that the Fed deals in chiefly in reserves and the public does not have access to reserves, which requires a reserve account at the Fed. The public is not eligible for reserves accounts, only those qualified as participants in the FRS.

    WARREN MOSLER Reply:

    well stated! (as usual!)

    any data on Fed gold buying and selling?

    WARREN MOSLER Reply:

    discount window borrowing is nothing of economic consequence.

    govt purchases of non financial assets, including ‘goods and services’, add financial assets to the economy.

    govt purchases of financial assets don’t

    Tom Hickey Reply:

    I have no idea about the Fed gold transactions. The cb’s are still keeping their gold dealings pretty secret.

    Here’s the latest info I dug up from FT. China has apparently been a large net buyer. Hard to tell from figures through. Saudi Arabia’ s gold valuation doubled, but they are reporting this as due to an accounting change rather than acquisition.

  92. Jeff Hodgson Says:

    Hi Warren,

    Tom Greene put me in touch with you about this time last year. I dropped you a note in regards to the snowfall market we are developing here in the states. We are now expanding into rainfall as well. Here’s a quick interview I did recently on CNBC –

    http://www.cnbc.com/id/15840232?play=1&video=1641730293

    Would love to chat next week if you have a moment.

    Best,

    Jeff Hodgson

    Reply

    WARREN MOSLER Reply:

    Hi Jeff, well done. Happy to chat but not my area of particular interest

    Reply

    Jeff Hodgson Reply:

    Thanks Warren. If you get a chance, please email me directly at jeff.hodgson@cwbrokerage.com and let me know a # I can reach you at next week.

    Thanks.

    Jeff

    Reply

  93. Nemesis Says:

    The historical self-similar secular bear Coppock Curve pattern implies a bear market beginning no later than spring-summer ’11.

    S&P 500 Coppock Curve comparison to the S&P 500 1890s and 1930s, and for the Nikkei 1990s to date.

    Coppock Curves around the world, implying that Shanghai, Bovespa, and the Nikkei might already be on the verge of bear markets.

    Happy New Year (for the bears).

    Reply

  94. tmajor Says:

    Thank you Mr Mosler. My quest for the answers spans over 30 years discovering bits and pieces of the facts along the way. Your publishings finally put the true functions of the US monetary system together, complete with solutions for all to read from start to finish!

    I began another quest in 1980 as a junior in high school. I asked myself what long running event has the overwhelming majority participated in that would allow their soveriegnty to be stolen from them without a fight whatsoever, despite vast differences in social, financial,and religious backgrounds. I concluded that the U.S. government mandated school system had to be the culprit!

    After years of researching and uncovering bits and pieces of the facts Mr. John Taylor Gatto published a book, The Underground History Of American Education, piecing the entire scam together for all to finally view! The system is modeled after old Prussian, Germany’s socialist program. Designed, among other things, to mold and control human beings while destroying family values, creating credit consumers, and taking with it our once great sovereignty!

    The scarey part, because the populous is so brain washed, all of this tremendous information, when it is noticed, can barely be digested properly in the brain! These two significant publishings rank right behind the invetion of the wheel concerning modern economics, education, and why we are the people we are here in America as far as I’m concerned!

    Mr. Mosler I understand this monetary system 100%! I am a man of conviction and passion towards everything I believe in fighting for! I would consider it an honor to work with you in this fight to free American’s from this slavery! Please let me know if you are interested in my help.

    Reply

  95. Michael Colen Says:

    HI Warren,
    My blog is up and running.
    Note the first link listed; also note the first blog listed.
    I plan to increase the MMT content of the campaign shortly.
    The link to the blog is
    http://mikecampaigns.blogspot.com/
    If you know of any MMT supporters in the NY metro area that might be interested in my campaign, please let me know.
    I am planning to go to the Levy conference here in NYC Wed – Fri to learn some more MMT economics and to meet some MMT economists.
    Regards,
    Mike Colen

    Reply

  96. Ryan Says:

    This website is my island of sanity in a really messed up world. Anytime it just get “too much” with the WSJ and CNBC and the Fox News, I just remember to come here and I have hope…

    Reply

  97. giulio Says:

    Hi Warren, have you ever heard of the Giacinto Auriti’s theory about money?
    He was an italian professor.

    and another question:
    where can I read a regulation or a document about how banks really works? because I think money-multiplier is completely false.

    thanks

    Reply

    WARREN MOSLER Reply:

    no

    start with soft currency economics on this website?

    Reply

  98. giulio Says:

    thanks i’ve read. but many professors unfortunately don’t care about the opinion of warren mosler.
    I want to do my graduation thesis about the false myth of money-multiplier and I think that
    soft currency economics is a good starting point, but they wanted a regulation. they believe in the money multiplier model and they says:

    “you see? in every balance the amount of loans is always lower than deposits, so this means that they don’t create money. only the BC create money.”

    I think they are stupid, but they have the whip hand, you know.

    thanks a lot.

    Reply

    Tom Hickey Reply:

    Giulio, remember that doing a dissertation, getting past committee, and defending it are political acts. Don’t make any enemies.

    If things get sticky at the end, you can always ask the objector to write down his objection in detail so you can study it and take it into account. Of course, that will be the end of the objection. But it risks making an enemy, and you can only use it once.

    Check this out too. Maybe your readers will listen to the BIS.

    http://moslereconomics.com/2010/04/25/bis-getting-there-yet-not-fully/

    Reply

    Tom Hickey Reply:

    Thinking about it more, I would contact Jaime Caruana, General Manager of the BIS, and if see you can get an interview in which to document his description of how banking works wrt the “money multiplier.” You want to get him to say very clearly that the money multiplier is not an ex ante transmission mechanism, as presumed, but an ex post accounting record.

    That would be a real clincher for your argument, and it would also make a contribution. You could do a whole book about it based on your dissertation.

    Reply

  99. giulio Says:

    Thank you Tom, I’ve read and it’s very interesting, but there is a regulation where I can read explicitly
    “for a bank every loan is a new deposit”?

    thank you

    Reply

    WARREN MOSLER Reply:

    it’s not a regulation, it’s an accounting identity and at least used to be stated in all the old money and banking books.

    Reply

    giulio Reply:

    Ok, a loan reduce the abilities (the income) of the same bank to distribute a new loan?
    there is a link between the deposit that the bank has, and the abilities to lend?

    In other words, a bank lend more than the deposits that have?

    in conclusion, there is a creation out of nothing/ex nihilo?

    Reply

    Tom Hickey Reply:

    Banks create money ex nihilo in extending credit. They loan against capital. There is a capital requirement, but banks are not limited by capital since they can rather easily raise it when they need it, i.e., there are creditworthy borrowers demanding loans that the bank deems it can make a profit on.

    Deposits result from loans, and reserves are obtained as necessary to clear drawdowns of deposits. That is to say, when a loan is made, the borrowers deposit account is credited. As those funds are spent, the bank needs to have reserves for settlement in order to clear the checks in the interbank system.

    Ramanan Reply:

    Tom,

    While it is true that deposits come out of loans, banks still need deposits! Haven’t you seen bankers trying to get you to deposit your funds with them ?

    Giulio’s question is an excellent question. Banks cannot depend fully on only *one* of the following markets: Fed Funds, CDs, deposits (both transactional and term), bonds, equities, securitization.

    How banks do in this game – liability management – is an important aspect of success.

    WARREN MOSLER Reply:

    due to self imposed peculiarities of current institutional structure, not inherent in banking

    Tom Hickey Reply:

    The point is that banks do not need either reserves or deposits ex ante to lend. They need reserves to settle and for reserve requirements, and they need deposits for “liability management,” i.e., balancing assets (loans are accounts receivable) with liabilities (deposits are accounts payable).

    The actual money creation process is ex nihilo. This doesn’t say that capital, reserves, and deposits are unnecessary to banking. Only to say that they are ex post. Banks make loans based on demand from creditworthy customers and get capital, reserves, and deposits as needed “afterward”. Of course, this is coordinated among the various departments in the actual process.

    Ramanan Reply:

    Yes, agreed on ex ante.

    But when you explain it to someone, the whole process should be explained. Else people will try to dismiss the argument.

    MamMoTh Reply:

    Why does any particular bank need deposits?

    Loans create deposits, but the loan is an asset which is a source of income, and deposits are a liability which have some costs.

    It seems to me any given bank would be better off making loans and convincing people to move their deposits to another bank, a bit like Warren did as he tells in 7DIF.

    Tom Hickey Reply:

    The asset and liability side of the balance sheet have to balance, so the bank does “liability management.” The bank decides on the least expensive way to do this.

    Ramanan Reply:

    Mammoth,

    Imagine a bank with reserves just equal to required reserves. It makes a lot of loans in one day. The persons borrowing from the bank write cheques and the funds flow to another bank. When funds move out of the bank to another bank B, Bank A goes into an overdraft position at the Fed and bank B has excess reserves.

    The bank’s ability to remain indebted to the Fed is limited. So the bank has to borrow back funds. It can borrow it back from Bank B itself (to which the funds flew).

    You are absolutely right – if banks have unlimited/uncollateralized overdraft at the Fed, banks will be happy to lose deposits. Unfortunately in the real world, they do not.

    WARREN MOSLER Reply:

    the same real world where a fed that didn’t understand banking or the monetary system fostered the liquidity crisis that didn’t need to happen

    Ramanan Reply:

    Mammoth,

    I just described borrowing from another bank. It can attract deposits as well (from nonbanks) .. in which case the mechanism similar to what happened when funds moved from this bank to another described above happens in reverse.

    Sergei Reply:

    Ramanan: “How banks do in this game – liability management – is an important aspect of success.”

    Do not overestimate the importance of it. Loans create deposits on the level of the banking system and banking system has to balance. Banks with excess deposits will try to get rid of those to banks with the shortage of deposits. In fact one could claim that the game theory says that the winning position for banks is not to attract any deposits, i.e. not to pay anything. However bold this claim can be it has its part of truth.

    MamMoTh Reply:

    Right, but if bank A pays more for deposits than what it would pay bank B or the Fed for the reserves, then it’s still better off losing the deposit. I think that was the case in Warren’s story which is the funniest part of his book.

    Sergei Reply:

    “You are absolutely right – if banks have unlimited/uncollateralized overdraft at the Fed, banks will be happy to lose deposits. Unfortunately in the real world, they do not.”

    The volume of retained profits can be the collateral and it is veeery significant for any random bank. Each bank decides what to do with those and in particular it can decide to build its portfolio of liquid assets eligible as collateral. It is all about costs and nothing about quantity. Central banks routinely accept even client loans as collateral.

    Tom Hickey Reply:

    Banks seek customers and depositors are customers.There is a lot to banking other than loans and deposits, like credit cards on one hand and life-long relationships that result in repeat business. Probably the first place most people go for a loan is to their banker, who knows them. So banks have to be full service instead of creaming the top.

    WARREN MOSLER Reply:

    yes, start with ‘soft currency economics’ on this website.

    in the banking system, loans create the bank deposits, they don’t use them up

    Ramanan Reply:

    “The volume of retained profits can be the collateral and it is veeery significant for any random bank. Each bank decides what to do with those and in particular it can decide to build its portfolio of liquid assets eligible as collateral. It is all about costs and nothing about quantity. Central banks routinely accept even client loans as collateral.”

    Yes central banks accept loans as collateral but these are very limited and have to be guaranteed by organizations such as a government.

    Plus I do not know how one can post “retained profits” as collateral. Retained profits are not marketable securities.

    Yes it is about costs but if banks build portfolios, they do so by issuing liabilities.

    Reply

    Sergei Reply:

    “Plus I do not know how one can post “retained profits” as collateral”

    Ramanan, I feel like you are making fun of me. Surely retained profits can not be a collateral. They are a liability. But they need an offsetting asset. Say government bonds. And these can be a perfect collateral. It is upto to the bank to decide what to do with its retained profits.

  100. giulio Says:

    so, the answer of [i]In other words, a bank lend more than the deposits that have?[\i] is

    YES.

    and so, a bank lend money that don’t have, and in every balance the amount of loans is always lower than deposits because the single bank consider a loan that he does a new deposit for himself. the single bank, not the banks.

    right?

    thanks

    Reply

    Tom Hickey Reply:

    An individual bank may loan more than it has in deposits at the time because banks don’t loan ot deposits, as most people think. At the macro level (all banks) loans must equal deposits, because loans create deposits and paying down a loan draws down deposits. The banking system is always net zero.

    “in every balance the amount of loans is always lower than deposits because the single bank consider a loan that he does a new deposit for himself. the single bank, not the banks.”

    Not following you here. The bank in creating a loan creates an asset for itself, the loan being an account receivable) and also a corresponding liability, the deposit being an account payable. When the borrower draws down the deposit to spend what was borrowed, then the banks assets (the loan) exceed the bank’s liabilities in the amount of the drawdown. The bank that does “liability management” to balance assets and liabilities by, e.g., seeking a deposit not associated with a loan on that bank. This say the system stays in balance overall.

    Reply

    giulio Reply:

    Yeah I was talking about the first question, about deposit and loans and only BC creates money ecc, remember? it’s up.

    What I mean is that if the individual bank when lend consider his loan an asset, but also a deposit. no?

    The bank, like you have written, don’t lend what he has, but he creates ex nihilo. He lends promises. Ok, generally, the entire system is net zero, but the individual lend money that doesnt’t have. right?

    Reply

    Tom Hickey Reply:

    The individual banks lend money they don’t have in the sense that a loan is a credit to a deposit account. By entering numbers on its accounting spreadsheet, the bank creates money from nothing. Simple as that, although that is not all there is to banking. But it is the basis of creating bank money/credit from nothing.

  101. giulio Says:

    thanks a lot. last question.

    A loan by a bank reduce the abilities (the income) of the same bank to distribute a new loan?

    Reply

    Tom Hickey Reply:

    No. The bank loans against capital and can always increase capital to accomodate rising opportunities to extend credit profitably. As long as the cost of raising capital is less than the profit anticipated from lending, the bank will seek to raise capital to accomodate loans.

    Note that banks do not lend capital, they lend against (risk) capital. That is, they risk losing capital if the loan defaults.

    Reply

    giulio Reply:

    excuse me, another question. how banks raise capital? they use bond to obtain capital in BC?
    they can use also the mortgage obbligation that he borrower has given for a mortgage loan?

    (my english isn’t excellent)

    Reply

    giulio Reply:

    the borrower

    Tom Hickey Reply:

    “Bank capital is often defined in tiers or categories that include shareholders’ equity, retained earnings, reserves, hybrid capital instruments, and subordinated term debt.” There are different tiers of capital.

    What is bank capital and what are the levels or tiers of capital?

    WARREN MOSLER Reply:

    they sell new stock

  102. Hires Says:

    There was a dispute between me and Giulio.
    He said that a bank needs not to raise any capital in order to lend money. He said that a single bank consider a lending also as a deposit so capital is implicitely raised.
    I said that when some one ask a borrow, he always takes immediately money from bank account in order to buy what they want (otherwise the borrow would be uselesss). So the bank has always immediately need to raise capital selling stocks, bonds or other ways.

    I don’t agree with you when you say
    “An individual bank may loan more than it has in deposits at the time because banks don’t loan ot deposits, as most people think. At the macro level (all banks) loans must equal deposits, because loans create deposits and paying down a loan draws down deposits. The banking system is always net zero. ”
    I think that loaning on deposits it’s better (because it’s convenient) than loaning on capital.
    And when a bank loans on capital, it is not actually creating money. Money is created only when bank loans on deposits. M0,M1,M2, M3 are not affected by “loaning on capital” when capital is retrieved selling new stock.

    Am I right? If I’m wrong, please tell me which is the money aggregate raised up by loaning on capital retrieved by selling stock please.
    Thanks in advance

    Reply

    WARREN MOSLER Reply:

    I’m not sure what you mean by the word ‘on’ as when you say ‘when bank loans on deposits’ thanks

    Reply

    giulio Reply:

    Hires means that banks lend what they have, and occasionally they “go out”, they lend money that temporarily they haven’t. but immediately they must to raise capital because “no one can lend what he hasn’t”.

    I think he means that.

    Reply

    Hires Reply:

    I was referring to your sentence:

    An individual bank may loan more than it has in deposits at the time because banks don’t loan ot deposits, as most people think.

    So if you say that “banks don’t loan on deposits” you are saying that banks loan on something else..
    Suppose a bank has loaned all his capital (exception made for the reserve).
    Then a new customer comes and ask for a borrow. He want to buy a house. The bank will need to raise the capital, for example selling new stock. Right?
    Well, Giulio is saying “no”, there’s no need to raise capital, because any loan is a new deposit so there is no need for any capital. He says that capital is automatically raised. I don’t agree with him.
    Second, I don’t agree with You, when You say that bank does create money when it collects money selling stock and then does loans with that money.
    In that case bank is not creating money. M0,M1,M2,M3 are leaved unchanged.
    A commercial bank increases M1 only when it makes loan taking money from customer’s deposits.
    That is cause of definition of M1.
    Excuse me for my poor technical english, I’m not an economist.
    I hope I’ve been clear this time.

    Reply

    ESM Reply:

    I think you are very confused about what a bank deposit is. A bank deposit is an IOU from the bank. If you give $1MM in cash to the bank, the bank takes the money and gives you a piece of paper with numbers on it that says it owes you $1MM any time you want it. If you take out a loan for $1MM, you give the bank a piece of paper that says you own the bank $1MM plus interest, and in exchange the bank gives you a piece of paper that says it owes you $1MM any time you want it.

    The bank can create as many IOUs as it wants. Just as you can. If I am selling something that you want to buy, but you don’t have any money, I can accept your IOU (i.e. promise to pay in the future). Your IOU is a form of money. It just so happens that bank IOUs (i.e. deposits) are more readily transferrable and have better credit than your IOUs (and in most systems, bank IOUs are acceptable as payment for taxes by the government and are even guaranteed by the government up to some amount per person).

    The only thing a bank needs reserves for is to clear any net transfers of its IOUs at the end of the day (and to satisfy any government imposed reserve minimum). So for example if you write a check for $500K and that check is deposited at a different bank, and nothing else happens that day, your bank needs to instruct the central bank to pay the other bank $500K out of its own reserve account. If it doesn’t have enough money in its reserve account, it will borrow it from some other bank that does, or from the central bank.

  103. giulio Says:

    ok, and what’s the role of refinancing operations? they serve as a way to raise capital?

    Reply

  104. Hires Says:

    The only thing a bank needs reserves for is to clear any net transfers of its IOUs at the end of the day (and to satisfy any government imposed reserve minimum).

    If it doesn’t have enough money in its reserve account, it will borrow it from some other bank that does, or from the central bank.

    That was EXACTLY what I meant to say. I could not find better words.

    More, I’ve stated that, in that precise case, (when the bank has not enough money etc) the bank is not creating money, because M0,M1,M2,M3 does not change.
    Is it right?

    Many thanks.

    Reply

    ESM Reply:

    I was never too clear on the precise definitions of the money supply aggregates, but I think M1, M2, M3 all increase when a bank lends money to a customer. M0 generally wouldn’t change. M0 would increase, however, if the bank borrowed from the central bank.

    Reply

    Hires Reply:

    If the bank is borrowing from central bank, is the central bank the one creating money (not the private bank).
    But if the bank is selling stocks (as you suggested before), M1 is not increasing, cause M1 is substanstially M0 (not those deposited into accounts to avoid a double count) + account balances + some other unrelevant things
    and neither M0 nor deposits are increasing.
    Same applies for M2,M3.
    So I state again, in that case the bank is not creating any money.

    Reply

    Tom Hickey Reply:

    HIres, the cb creates reserves. Reserves are not spendable in the economy. They are only used in the interbank settlement system (Federal Reserve System in the US) to settle accounts among members of the system — the Treasury, foreign entities with FRS accounts, and banks that are members of the FRS. The Fed will exchange reserves for cash with banks, so that banks can meet the demand for cash at their customer windows. All non-cash interbank transactions are settled with reserves in the interbank settlement system.

    When the Treasury spends, it credits private bank accounts. This happens by marking up spreadsheets. Same thing when a bank makes a loan. It credits the borrowers deposit account. This is the creation of money from nothing. However, all money is someone’s liability. When the Treasury credits private accounts, it is in effect distributing tax credits into the economy. This is a net increase of nongovernment net financial assets, since ther is no corresponding nongovernment liability incurred. When a bank credits a borrowers deposit account with a loan, it is creating an account receivable for itself and an account payable for the borrower. This nets to zero.

    When the Treasury credits private back accounts, it has to have reserves to clear. It gets these reserves from the Fed and incurs a corresponding liability to the Fed, which it meets by issuing tsy securities, which the Fed auctions to recoup the reserves it created for the Treasury.

    When a bank makes a loan it has to obtain reserves for settlement when those funds are drawn down. It either gets them from customer deposits or borrows them in the interbank market. The bank may use the reserves that deposit brought in, but it doesn’t loan out the deposits themselves, which are liabilities of the bank, not assets.

    If a bank loan is not repaid in whole or part, the bank incurs a loss as a result of the default. This is a charge against its equity. That is to say, the loan as an account receivable is a bank asset. When bank assets decrease, then there must be a corresponding decrease on the liability side. Equity is on the liability side and it gets marked down. If this affects the banks capital buffer, then the bank must acquire more capital.

    The monetary base is essentially resevers and currency, while M1 is includes demand deposits. When reserves increase the monetary base increases. This adds nothing to nongovernment net financial assets unless the increase is due to Treasury expenditure. This is how government creates money for nongovernment use in the economy, outside the bank settlement system. When banks extend credit, they do so by crediting deposit accounts (loans create deposits). This is how banks create money for nongovernment use outside the banking system in the economy.

    Treasury expenditure creates nongovernment net financial assets out of nothing. The Fed creates reserves out of nothing to clear. The Treasury creates tsys out of nothing to match the resevers. Banks create loans out of nothing which create deposits. This the magic of money.

  105. giulio Says:

    Tom, I understand your argument. but what is really strange is the concept “Taxes function to regulate aggregate demand, and not to raise revenue per se.” nor because it’s false, but I don’t understand why if I see a governement’s balance sheet, there is a heavy spending on interests on debt.

    Talk about the balance sheet of Italy, for example, I see that if I remove the expenditure on interests, I haven’t a deficit. Don’t talk about the problem of deficit, what I mean is, why the government pays interests on a debt? is a political choice? Because if we see, 95% of bond are in the hands of banks, so, “common people” don’t earn really nothing.

    MMT says that takes don’t raise revenue per se, but why they issue constantly bonds. why? it’s always a political choice? Yes, it’s a political choice, but is so stupid.

    Reply

    Tom Hickey Reply:

    Yes, interest on tsys is a subsidy since it is not required operationally. In the view of some MMT’ers, tsy issuance should just be done away with.

    The central bank is only needed for settlement. Treasury could just issue notes directly, as Lincoln did to finance the Civil War without debt.

    It’s a political choice to award subsidies to corporations and the wealthy.

    Entities that are currency users have to finance themselves with taxing or borrowing, however. This includes US states and EZ nations

    Reply

    WARREN MOSLER Reply:

    MMT says ‘federal’ taxes function to raise revenue.

    Italy is not like a US state. It is no longer the issuer of its own currency. Entirely different matter

    Reply

    PJ Pierre Reply:

    @WARREN MOSLER,

    I believe that the above should read:

    “MMT says ‘federal’ taxes don’t function to raise revenue.

    Italy is like a US state. It is no longer the issuer of its own currency. Entirely different matter”

    Or am I missing something?

    Reply

  106. giulio Says:

    Talk about the situation in US, they are not currency
    users, but they have a really big public debt, and also really big private debt. what’s the problem?

    It’s a political choice, really Bernanke/Obama doesn’t understand monetary policy? or they knows that debt is a strong weapon to control people? It’s not conspirancy, but I think that isn’t only an ideological view. (mainstream economists against others, ignorance against knowledge ecc).

    what do you think about?

    Reply

    Tom Hickey Reply:

    Hard to tell. Could be that a number of issues involved.

    A lot of policies are left over from the gold standard days and many people who grew up in that system have not converted their thinking to the new reality of a nonconvertible floating rate regime. That is probably the biggest influence.

    Reply

    giulio Reply:

    Tom, have you ever read something about Maurice Allais?

    http://www.economyprofessor.com/theorists/mauriceallais.php

    if you understand french:

    this book: Pour la reforme de la fiscalitè
    and this:

    http://etienne.chouard.free.fr/Europe/messages_recus/La_crise_mondiale_d_aujourd_hui_Maurice_Allais_1998.pdf

    Reply

    Tom Hickey Reply:

    I had heard of him through his paradox, but that’s it.

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    Reply

  108. giulio Says:

    Tom, Warren

    we can consider the document Soft Currency and the others papers by Wray, Mitchell ecc about central bank operations valid to understand Italy before 2002 (Euro)?

    I mean, bond that drain reserve, State that isn’t revenue constraint ecc.

    Reply

    WARREN MOSLER Reply:

    yes

    Reply

    Tom Hickey Reply:

    @giulio,

    From Wikipedia

    Stage Three [EMU]: 1 January 1999 and continuing
    ▪ From the start of 1999, the euro is now a real currency, and a single monetary policy is introduced under the authority of the ECB. A three-year transition period begins before the introduction of actual euro notes and coins, but legally the national currencies have already ceased to exist.

    emphasis added.

    Legally, EMU countries lose monetary sovereignty at stage three, when they agree to give up their own currencies for the euro.

    Reply

  109. giulio Says:

    Tom, do you speak, or understand italian?

    Reply

    Tom Hickey Reply:

    @giulio,

    No

    Reply

  110. Sam Says:

    Quick question: I keep hearing on MMT sites that private banks could in theory generate an infinite amount of money if there were not politically-imposed reserve/capital constraints — the only limit would be demand for credit.

    This confuses the hell out of me — banks can’t actually issue currency according to MMT, so how would any of the deposits created by such a hypothetical bank actually be something a loanee could draw on? The bank obviously has finite capital, and finite reserves — so how could such a bank ever honor the deposits created by the loans it’s issued?

    Reply

    Neil Wilson Reply:

    @Sam,

    Banks create bank deposits. If your bank is big enough and clears most of the transactions internally they literally don’t need anything else other than their balance sheet to pay people.

    If you pay somebody at the same bank as you then the numbers just move in the bank computer and the transaction is complete. End of story.

    Even with many banks, the amount of reserves required – short of regulation is tiny, since all you need to handle is the change in reserve balances once all the transactions have been netted off.

    So if you send $100 from bank A to bank B and somebody else sends £100 from Bank B to Bank A, then no reserves are required to clear those transactions. They are just contra’d in the ledgers.

    Even if bank A send $200 to Bank B and only gets $100 in return, bank A can have a word with bank B and see if Bank B will *lend* them the reserves overnight for a fee. That creates another contra in the ledgers and we’re back to all square again.

    And all that before we talk about the central bank acting as lender of last resort.

    So you can see that you need regulations to prevent banks creating as much money as they can reasonably sell to people at a profit.

    Reply

    WARREN MOSLER Reply:

    unless you have a govt owned bank…

    Reply

  111. Murray Duffin Says:

    Mr. Mosler,
    I have just recently discovered your work, blog, etc. One link took me here http://moslereconomics.com/2008/04/26/current-proposals
    Very interesting and helpful, but you should stick to economics. Recommendations for Congress a) and e) are both out of place and counterproductive. The only real problem with biofuels (so Far) is energy inefficiency. Ethanol specifically doesn’t make sense energetically. As for efficiency, the technology exists to build safe comfortable cars that get >70mpg. Of course that takes longer, but trying to get Americans to drive 30 mph is simply a way to get any of your other ideas rejected out of hand. If you want to be taken seriously, you must drop that kind of recommendation immediately. If I had read that before reading your economic stuff, I would just have taken you for a nut case.
    Note – I’m an energy freak and have considerable expertise in energy efficiency.

    Reply

    Tom Hickey Reply:

    @Murray Duffin,

    Appreciate your point, and the low hanging fruit is available through conservation. If we focus on energy efficiency, conservation is not only the most simply achieved but also the most cost-effective means.

    The problem with most technological solutions is the vested interests standing in the way of any innovation that would diminish their market share. The energy companies are at the head of this line, and so far the automobile industry has opposed by mandate to increase mileage per gallon.

    Maybe you have a politically practical solution to offer?

    Reply

    Dollar Monopoly Reply:

    @Tom Hickey,

    @Tom Hickey,

    Tom – vested interests is right. why would a monopoly oil distributor want to lose market share? one of the ways i am trying to position MMT is by the opportunity costs associated with managing monetary operations at a suboptimal level.

    it’s rough but something like

    The cost of maintaining suboptimal deficits is…blah blah … also the missed opportunity to invest in R&D that can subsidize next generation technology for the private sector. Technology innovations in energy have the potential for transformational changes to our economy from both a national security and productivity perspective.

    Reply

    Murray Duffin Reply:

    @Tom Hickey,
    Nope. Ive tried the political route for a decade. We will need an energy crisis before we get effective action.

    Reply

    Dollar Monopoly Reply:

    @Tom

    Maybe we need a economic crisis to realize we have mismanaged our monetary operations via fiscal policy so that we can realize the opportunities available to the federal government as the currency issuer. ahh man did i just blow your mind!

    Maintaining suboptimal deficits have direct “real” opportunity costs. Can i get an amen people!

    Matt Franko Reply:

    @Murray Duffin,
    ” Ethanol specifically doesn’t make sense energetically”
    Are you counting the energy input from the sun against ethanol?
    Resp,
    PS “I can’t drive…thirty-five” either! ;) Warren is not hard over on that one I believe…

    Reply

    Murray Duffin Reply:

    @Matt Franko,
    Nope, just the input to planting, cultivating, harvesting and conversion to ethanol. I was referring to the USA and corn. sugar cane in Brazil does better and makes some sense. Ethanol also drives up food prices and requires subsidies, so makes no sense economically either.

    Reply

    Dollar Monopoly Reply:

    @Matt Franko,

    I think it’s referred to as the great corn.

    http://www.nytimes.com/2011/06/25/opinion/25Rattner.html

    Reply

    WARREN MOSLER Reply:

    It’s just an option

    Reply

    Murray Duffin Reply:

    @WARREN MOSLER,
    Not sure what you are referring to. If you mean the 30 mph bit, it is not “just an option”. In the context it was presented its a credibility destroyer. Your central message is too revolutionary and too important to be weakened by such a diversion.

    Reply

    WARREN MOSLER Reply:

    and it would cut our crude products consumption in half…

  112. Dollar Monopoly Says:

    @Matt Franko,

    great corn con that is

    Reply

    Dollar Monopoly Reply:

    @Murray and @Franko

    Read this and i thought of you two – Ethanol Subsidies Besieged

    http://www.nytimes.com/2011/07/08/business/energy-environment/corn-ethanol-subsidies-may-be-in-jeopardy.html

    Reply

  113. Chris C Says:

    I read the Seven Frauds with great interest. I saw a story on CNNMoney stating that taxpayers lost $1.3 gozillion dollars on the Chrysler bailout (http://money.cnn.com/2011/07/21/autos/chrysler_government_exit/) If, as you claim, federal expenditures are not linked to revenue (taxes), then the statement that taxpayers have somehow taken a hit is bogus.

    Am I doig it right?

    Reply

    Chris C Reply:

    @Chris C, – doing, silly typos

    Reply

    WARREN MOSLER Reply:

    It was a loss to tax payers as that spending ‘used up’ aggregate demand created by taxation.

    But it’s not about the exact funds, it’s about aggregate demand/taxation functions to regulate aggregate demand.

    And not that I approve of what the govt did re chrysler!

    Reply

  114. bram Says:

    Any comments on HR 2768?

    H.R. 2768: To cancel public debt held by the Federal Reserve System and to lower the public debt limit by an equal amount.

    112th Congress: 2011-2012

    Sponsor: Rep. Ronald Paul [R-TX14]

    Reply

  115. Anarkist Says:

    hey Warren,

    What value for the economy as a whole, remains in banks being required to match their liabilities (deposits)with their assets (loans) on their balance sheet in a financial system where banks are solely constrained by capital reserves? And in the U.S. and Europe due to the emergence of SIVs even that is no barrier against credit creation. Should there be a shortfall in deposits, the Central Bank will lend overnight funds at the official cash rate. It will never allow a participating banks settlement to fail to clear. Its job is to ensure that they do not.
    http://www.samuelbrittan.co.uk/text14_p.html

    Its immaterial in terms of determining inflation whether money is used to purchase securities which supposedly “back” the original loan. What matters is the volume of credit issued by banks and the speed at which borrowers retire their debt, which determines the quantity of money available to purchase goods and services. All “saving” does is creates a mismatch between a firm or person’s debt and the funds available to repay the loan. Are my claims legitimate or am I totally off course?

    Banks have a vested interest in creating as much credit as there is demand for it, conditional solely on the requirement that borrowers be able to remain solvent long enough to repay the loan. Even that wasn’t necessarily much of a consideration towards the end of the boom years.

    I don’t merely seek to provoke a controversy, but I’m looking into setting up a web based microequity platform where people can collaterize credit offered to SME’s without the cost of compound interest or the pretense of backing the loan with deposits. It would be a hybrid of the E.F. Shumacher Society’s SHARE Microcredit provided through traditional bank channels and Web 2.0 platforms such as Kiva and Prosper.

    http://www.smallisbeautiful.org/share_microcredit.html

    Reply

    WARREN MOSLER Reply:

    liabilities are the accounting record of assets, so they are ‘automatically’ equal
    am i missing something?

    Reply

    Tom Hickey Reply:

    @WARREN MOSLER,

    He probably means that loans (asset) create deposits (liability) and when the deposit is spent, removing that liability from their books, then banks seek other deposits to match their assets and liabilities?

    Reply

    WARREN MOSLER Reply:

    banks are not quantity constrained. the constraint is credit worthy borrowers who apply for loans.
    what matters for the economy is spending, not ‘having money’, whether that spending is from income, savings or borrowing

    Reply

  116. Anarkist Says:

    Thanks for your very prompt reply Warren.

    “liabilities are the accounting record of assets, so they are ‘automatically’ equal, am I missing something?”

    Yes, if you assume an economy without non-bank financial intermediary’s who offer securities for sale, but can’t issue credit such as government social security funds, pension funds, savings and loans associations, finance companies, insurance funds, credit unions, stockmarket brokerage accounts, private equity funds etc. A research paper written in 1958 showed how non bank finance intermediaries held more capital than commercial banks and I’m sure the state of affairs remains, particularly in the wake of the emergence of Structured Investment Vehicles by investment banks, which allows them to merely collect generous fees and to pass the risk onto intermediaries hungry for slow maturing investments.
    This can’t help but produce an asset/liability mismatch as deposits are funnelled into these non bank intermediaries instead of being returned to the issuing banks.

    Central Banks will never allow a bank’s balance sheet settlement to fail to clear so it will oblige the bank to lend it “cash” overnight or for a stipulated term at what we in New Zealand call the Official Cash Rate. Banks here aren’t subject to cash reserve requirements, which is what confuses me when Post-Keynesians, MMTers, or whatever they’re called this week, say banks create loans and credit the money to the client’s account, and seek reserves after the fact. Are deposits and reserves being used interchangably or do they refer to different things? If to the latter why aren’t banks legally obliged to equally match deposits with loans when supposedly securities are meant to soak up liquidity?

    To make things even more complicated, there are varying lending conditions, repayment time frames and schedules, and deposit matury dates. I don’t know how you bankers can keep up with so many variables.

    I’m not asking an idle question. As I explained in my previous missive, I’m in the process of investing the possibility of developing a hybrid community bank/micro-equity web platform. What I’m seeking is confirmation of my view, that demanding that deposits must match the loans on the “community bank’s” balance sheet as a means of soaking up liquity and therefore forestalling inflationary pressures is immaterial.

    I know that its become a priority of Central Banks to manage liquidity through rationing demand for money via dictating interest rate movements. In a boom market interest rates are largely irrelevant as long as a particular avenue of investment offers superior returns compared to the alternatives available. But as I said in the previous comment, banks have a vested interest in ensuring that borrowers have as much funds as they wish, and lending standard slacken as the boom procees.

    Keynes declared that the propensity to save is greater than that to invest pretty much as a permanent state of affairs, he termed it secular stagnation. I think its due to the structural nature of the modern economy that ensures capital flows upwards towards the wealthy who have an even greater incentive to protect the “value” of their investments by spurring ever higher returns largely at the expense of workers, in doing so undermining the very viability of their own enterprises and the very survival of the economic system. It became so bad in the 1930s, that the wealthy capitalists called on the workers to forego buying the products they themselves produced and instead save and invest their funds in the stockmarket. Hmm. It sounds familiar, thats precisely whats happening here. With the inequalities that bedevil our current socio-economic superstructure and the fact that the wealthy possess an overabundance of “money” there will never be a lack of “savings”.
    http://www.salon.com/news/opinion/feature/2010/10/05/lind_america_plutonomy
    http://delong.typepad.com/sdj/2009/04/samuel-brittan-worries-about-secular-stagnation.html

    I would like confirmation whether my thesis challenging the demand that deposits must match loans legitimate, before being faced with objections from banking authorities here. I plan on consulting with the Reserve Bank and I would feel more confidant giving my view a public airing before an authority on the matter like yourself, before I proceed.

    Reply

  117. Anarkist Says:

    I guess I will have to explain why I insist on hoping to be able to create a financial intermediary that is able to create credit without the requirement that borrowers pay interest on their debt. Myself and many others have philosophical objectives against interest. Credit is merely the provision of “time to pay” Credit has been a defining element in every dynamic and expansionary culture. Innovative individuals have always needed credit to invest in and coordinate economic activy. Commoditity currency has always been a constraint on the availability of capital and hindered cultural and material development. Show me a society dominated by physical currency and I’ll show you a static and stagnant one. I question why people should be rewarded for “backing” through their “savings” the offering of credit which largely originates from someone else assuming the role of a debtor to invest in productive activity. People save for all manner of reasons. Prominently because they have surplus funds available that they don’t need to spend on consumptions, or for a safety net in case of a negative change in circumstances etc.

    I also take exception to the imposition of interest on a practical level, because I’m aware of its severely harmful ramifications, because the exponentional growth of compound interest inevitably outstrips the growth of the real economy with its many physical limitations. Historically it has also been used by elites as a form of economic tribute extraction and social dominion against the common folk. In various periods of history, particularly Ancient Israel and Mesopotamia, wise rulers were forced to institute mechanisms to mitigate the worst effects of compound interest through periodically wiping the proverbial slate clean or declaring Debt Jubilees and freeing bonded debt slaves in order to forestall civil disorder.
    http://michael-hudson.com/2004/01/the-mathematical-economics-of-compound-rates-of-interest-a-four-thousand-year-overview-part-i/
    http://blogs.wsj.com/speakeasy/2011/08/06/how-debt-has-defined-human-history/

    The only way a financial intermediary will be able to issue credit without interest, is by being exempt from having to match deposits with the loans on the balance sheet. Very few people are willing to “loan” money without demanding a return and in any case I recognise only being able to supply credit will be able to supply enough capital to fund the ventures I wish to see funded. To ameliorate any inflationary effects of not “backing” the loan, prospective borrowers would have to build a convincing business case that are premised according to the principle of Factor Five, which entails 80% improvement in resource productivity over legacy business and techical processes. The venture would also be formed on a non-profit basis, similar to Kiva.org and would be free from the perverse incentives that bedevil conventional banks which are limited liability corporations.

    Reply

  118. Nik Says:

    Hi Warren,

    In the case of countries which require no required reserves (e.g Australia), how is the interbank market rate maintained between the upper and low band?

    &

    In the case of the U.S., if a bank say is required to hold lets say $100 Million in reserves, can that bank loan out that $100 Million and at the same time accomplish the required reserve by using the discount window, or is there restrictions stating that it can not in fact lend out that $100 Million?

    Regards

    Reply

    WARREN MOSLER Reply:

    The cb does what amounts to making a market for clearing balances (reserves) offering at rates at or above it target and bidding at or below

    Reply

  119. DJC Says:

    Warren (or somebody),

    Could you please provide an explanation of Treasury Tax and Loan (TTL) accounts and how they fit within the framework of MMT?

    Reply

    WARREN MOSLER Reply:

    just regular bank accounts the tsy opens at regular commercial banks, just like you and I might.

    Reply

  120. John O'Connell Says:

    Hey everyone: Linkedin is collecting questions to ask President Obama on Sept 26 in a “town hall” type setting. I asked this one:

    Mr. President, Do you understand Modern Monetary Theory (MMT), and what do you think of it?

    Maybe if enough similar questions are asked, we can get his attention.

    Reply

    Adam (ak) Reply:

    @John O’Connell,

    Mr Obama is interested in winning the elections. He is NOT interested in MMT, MTM, TTM or whatever. The survival of the fittest and negative selection are key factors determining who wins power in modern Western democracy. There is no room for complacency. There are real issues facing Mr President that is pretending to be a truly progressive while playing golf.

    Look I know for sure how this process works as one of my schoolmates (and later Uni colleagues) is a minister in Poland. He wasn’t smart enough to graduate form our Electronics department. He was smart enough to befriend the Archbishop and play soccer with the current PM.

    The person who asks that question about MMT will be escorted away. It is still better than in Belarus where bones are usually broken usually after the intervention. Democracy is about paying respect to ordinary people and Mr Obama is a true democrat. Your bones will not be broken. Are you happy? Will you vote for Change, vote for Hope, vote for Obama (TM)?

    Reply

  121. CybrWeez Says:

    Warren, you talk about trade deficit being a good thing. This article talks about how Keynes was against large trade deficits, and claims the US’ large deficit is the source of our problems. The idea is stimulus money is spent, but winds up in other countries b/c they are actually making the things we buy, or winds up with the ultrarich, which doesn’t help anybody.

    I kind of get your idea that we’re just giving away paper for others’ hard work, but doesn’t the US need some work?

    Reply

    WARREN MOSLER Reply:

    read ‘the 7 deadly innocent frauds’ on this website yet? good chapter on all that!

    Reply

  122. Steve Bongardt Says:

    Warren – good job on Schiff yesterday. I am a fan of both of yours frankly, but disappointed with Peter. Rarely are they really debates but he cuts off his guests when he doesn’t agree or takes things to extremes and extrapolates out through his schemas. As an example remember his confusion initially discussing your move/taxes? It took him a long time to adjust. His paradigm is partly correct, but doesnt apply to governments who make their own currency. Unfortunately I think he is the only one for us smaller investors (with investment vehicles) which are close. I wish you had been able to complete your thought/question to him on “what happens when you send cash to the treasury to pay your taxes?” A few thoughts – 1) Ask him that question again 2) Read his book “What makes an economy grow and why it crashes?” and criticize it per MMT (fairly easy – it doesn’t account for more than one fiscal model – govts that really create their own money and other entities that don’t coexisting – the fish analogy is not exactly correct – it is a finite quantity and must be labored for) 3) Regarding MMT – one possibility I feel is that even if you are correct and I believe you are, human nature and psychology may never allow it to work – government will never allow itself to be at an optimal size and spending when (almost all) politicians are looking in the short term. I feel there is alot in behavioral economics re human behavior that may go against your valid economic monetary theory. Keep up the good work.
    R,
    Steve

    Reply

    WARREN MOSLER Reply:

    thanks, agreed, and note serious Austrians like Ed Harrison are MMT consistent

    Reply

  123. Heraclitus Says:

    Hi Warren. I’m fairly new to MMT and have been sharing it with as many people as I can. Living in the south, I spend most of my time arguing with Austrian folk. After sharing your “Seven Deadly Innocent Frauds of Economic Policy” with one of them, the one critique he offered was:

    “The government deficit DOES reduce savings, by (after some lag) diluting the real value of the dollar. Mosler obscures this by talking as if the dollar’s buying power was constant, and totally unaffected by creating money out of thin air. That’s a rookie mistake, to look at nominal dollars than real (inflation adjusted) dollars.”

    I found it amusing that he referred to you as a rookie as if reading a little Rothbard and Mises makes him an expert on such matters. Still, I wanted your take, as I don’t trust my own competence at this juncture to provide a good answer. Thanks.

    Reply

    WARREN MOSLER Reply:

    Govt. deficit spending adds exactly that much in nominal savings, to the penny.

    The question is whether the value of that nominal savings keeps up with ‘inflation’

    That depends on other govt policy. If govt spends on a price constrained basis, as with an elr/jg
    employed buffer stock, internal price stability can be sustained as desired.

    Furthermore, though a slightly different point, is the idea of the value of ‘a’ dollar vs the value of ‘all the dollars’.

    While one dollar buys less than it did 100 years ago, ‘all the dollars’ but the entire year’s real gdp, which is considerably enhanced from what it was 100 years ago, even when population adjusted. And our real consumption and real standard of living is a function of the current real level of gdp.

    Reply

  124. Heraclitus Says:

    But does the GDP figure accurately reflect our standard of living and consumption, when it is “artificially” inflated by Wall Street, rather than representing the “real economy?”

    Reply

  125. Meph Says:

    I just thought I’d share this recent essay from Martin Feldstein who basically is outlined MMT.

    http://www.project-syndicate.org/commentary/feldstein42/English#comments

    Reply

  126. Jim Says:

    http://moslereconomics.com/2010/10/04/exchange-rate-policy-and-full-employment/

    The link to the document is broken!

    Reply

    WARREN MOSLER Reply:

    michael is on it

    Reply

  127. Samuel Says:

    Great site and very informative. My question is how does the fractional reserve banking system affect the money supply? I have searched the site and haven’t found any information regarding the topic.

    Thanks for all your hard work and providing clarity about the monetary system.

    Reply

    WARREN MOSLER Reply:

    what do you mean by fractional reserve banking? read ‘soft currency economics’ yet?

    Reply

  128. Will Richardson Says:

    What do you make of this interesting piece on local currency being adopted in Bristol with a Credit Union behind it and the currency being allowed to pay local rates (and council tax?)

    http://www.bbc.co.uk/news/uk-england-bristol-16852326

    Reply

    WARREN MOSLER Reply:

    they’ve been reading this blog?

    Reply

    WARREN MOSLER Reply:

    just posted it on the blog, thanks!

    Reply

  129. phil Says:

    Hi Warren,

    Could I just ask you quickly:

    Do you believe that the banking system should be nationalised? Is this an MMT policy prescription?

    Thanks,

    Philippe.

    Reply

    WARREN MOSLER Reply:

    read this yet?

    http://www.moslereconomics.com/?p=8968

    it’s a policy option depending on how you want risk priced

    Reply

  130. phil Says:

    Thanks

    Reply

  131. Matt P. Says:

    I suggest we get Warren on Russ Robert’s EconTalk podcast. I mean he had Bill Black on recently. Here is my attempt today:

    Hello Russ,

    I have greatly enjoyed your podcast over the past couple of weeks
    after just discovering it. If I may suggest a guest, could you
    explore the MMT (Modern Monetary Theory) school of thought that has
    gained a bit of traction over the last few years? It was even
    featured in the Economist just last month. I would love to hear a
    discussion between a classically trained scholar like yourself and
    someone like:

    Bill Mitchell – http://bilbo.economicoutlook.net/blog/
    Warren Mosler – http://moslereconomics.com/
    or some of the scholars from Bill Black’s shop in Kansas City.
    James Galbraith is also a follower I believe

    In any case, I stumbled across these theories a few years back and
    really became fascinated by them. Back in 2008/09 they seemed to be
    the only ones really preaching that we were more likely to become
    Japan than Zimbabwe with regard to inflation/rates for instance.

    To the extent it matters, I come from a center-right background and
    what really attracted me was their belief in generally very low
    taxation. I also really like the way the deconstruct/demystify the
    monetary and banking system and use accounting principles as a base
    for their policy prescriptions.

    Keep up the good work!

    Reply

    WARREN MOSLER Reply:

    thanks!

    Reply

  132. john newman Says:

    Warren,
    After listening to your podcast on NEP I was tooling around the more remote parts of this site for the first time and stumbled on photos of your catamaran from 2008. With a little help on styling above waterline that could be the boat everyone has to have. Have you considered styling it up for the market? It could be the MT900s of the sea!

    Reply

    WARREN MOSLER Reply:

    haven’t done that, but feel free to present a design for me!

    Reply

    john newman Reply:

    OK, so here’s a quick stab at it:

    http://www.lnarchitecture.com/kestrel.php

    Reply

  133. Will Richardson Says:

    Merryn Somerset Webb at Money Week supports a part-time job guarantee!

    See the end of her piece;

    “guarantee everyone a community-related part time job – but maybe this will end up being a step in that direction. I note that several other commentators are now suggesting it too.”

    http://www.moneyweek.com/blog/workfare-a-step-in-the-right-direction-20800

    Why stop at a part-time job, why not through in full time with Education for a JET (Job Education Training) Guarantee like in Norway?

    Reply

  134. phil Says:

    Hi Warren, I have four basic questions. Any response would be much appreciated:

    1. Do you think that MMT might be compatible with small government and low taxes, or is it inherently biased towards big government and high taxes? (I’m assuming that MMT would always involve some form of the ELR if it were to be fully implemented).

    2. Does MMT require a degree of nationalisation (i.e. of banks/ corporations) and strict regulation, or is it compatible with no nationalisation and a hands-off approach to regulation?

    3. Would you say that MMT economists have different political and ideological positions, or are you all more or less the same?

    4. Do the main MMT economists have different understandings of what MMT is or of how it could be implemented?

    Thanks Warren (and Sada).

    Reply

    WARREN MOSLER Reply:

    1. yes. all of my proposals actually reduce the ‘physical’ size of govt. though with some it writes larger checks even as it does less.
    2. see my proposals for the banking system- http://www.moslereconomics.com/?p=8968- which dramatically reduce the need for regulation.
    3. Different
    4. I don’t have any differences with myself ;)

    Reply

  135. RodS Says:

    Warren,

    I’ve fully read your Seven Deadly Innocent Frauds treatise and spent a few days reflecting. Intriguing to say the least, here are my key concerns:

    * Long term, a government unconcerned with borrowing large sums in its own currency and focused on prosperity via extensive trade deficits is destined to one day receive a new message from its creditors: Here is your new trade bill and, oh by the way, you will pay in XYZ currency (not the debtor nation’s) and here is the new ratio of your currency to our currency in which you will pay.

    In the mid-term the United States, following your prescription, will proceed to lose the US dollar status as the global default currency (as your post on Japanese buying Chinese yuan highlights). Once other countries lose confidence in one’s currency, they will require payment in theirs.

    Once the mid-term milestone is met, the long term comes a lot faster than you can change your philosophy. It is doomed to self-interested excess.

    * A philosophy devoted to Super-Smart governmental control of the economy is turning the keys over to the most self-interested, bloated, least productive and least efficient or effective sector of our community. Economic productivity growth over the past 30 years is due to the tremendous Information Age revolution, with attendant improvements in every other sector of society (including your auto industry). Government’s role in the Information Age? Their ignorance forced them to ignore it, except when it came time for campaign donations

    Bottom line, innovation stops when government takes the lead role in the economy. When innovation stops, productivity improvement stops, and we get calls for hiring folks to dig the ditches to stay employed (which happens to be one of your proposed solutions).

    * Inflation can NOT be driven solely by what government is willing to pay. If government gave everyone $100,000 to buy their votes (funny today, wait about five years) and refused to pay any more for required services and goods, what on earth makes you think that prices won’t go up anyway? Once more money is distributed to the economy, forces beyond government control take over, and inflation begins.

    And, yes, it starts with expectations. Take today. Folks are waking up to the price of everyday living items going up 8-10% per year. What will be their reaction going forward as the economy slowly trudges forward? Can the government come in and refuse to pay any price other than last year’s price? Sure they can, it’s called price controls. It’s been tried before… disastrously.

    * An export-driven economy can rapidly turn to imports and population wealth generation. Witness China as we speak.

    ——————————————————————————
    Really, your philosophy is a great short-term fix, until the self-interest excess becomes obvious to all. Then it’s payback time. It appears to work best for the most self-interested (e.g. the US) until we are no longer the largest bully on the block. Then we are not allowed to buy all our standard-of-living-enhancing export goodies. We won’t be able to pay for them.

    Worst of all, your philosophy is based on a slanted business experience, one steeped in debt trading and arbitrage. Debt is good! Excess spending is good! It’s a gift from nationalistic currency heaven! Wow, letting government completely off the hook, allowing complete irresponsibility (the unintended consequence of your philosophy) is the best prescription for long term economic health. Whoever would have tried that before?!?

    My recommendation: Spend some time thinking of potential unintended consequences of your philosophy. Write a new book on the “Seven Deadly Unintended Consequences of My Philosophy.”

    Then we can sit down and have a balanced debated and discussion.

    In the meantime, bask in the glow of the easily led, who will proudly exclaim the superiority of your new modernist theory.

    Reply

    WARREN MOSLER Reply:

    worst case a nation is ‘forced’ into balanced trade by market forces you sort of describe. that’s no reason for it to be a policy goal.

    what does your second point have to do with mmt/the 7dif?

    your missing the point on how monopoly works- any monopolist is necessarily price setter

    yes, you can go from net exports to net imports and enhance your real terms of trade.
    in fact, I’d highly recommend it to any net exporter

    The 7dif isn’t a philosophy, it’s a description of how it works and available policy options.

    And now that you know how it works, feel free to discuss/debate the actual policy options on this website, thanks.

    Reply

  136. Sergei Says:

    “worst case a nation is ‘forced’ into balanced trade by market forces you sort of describe. that’s no reason for it to be a policy goal.”

    It is an explicit policy goal since it implies an inter-generational transfer – from consumers today who enjoy it now to workers tomorrow who will have to pay for it tomorrow.

    Reply

    WARREN MOSLER Reply:

    if there’s no external debt the next generation doesn’t have to ‘pay’ for current trade deficits

    Reply

    Sergei Reply:

    @WARREN MOSLER,

    Warren, I am sorry but you are lost here. Terms of trade is the way future generations will pay for today’s profligacy. Say gasoline will cost double and your kids will have to earn it before they can burn it.

    Reply

    WARREN MOSLER Reply:

    yes, worst case is always balanced trade.

    and real terms of trade depend on lots of things but not last year’s trade gap

    Sergei Reply:

    @Sergei,

    Terms of trade also depend on the past. You never start from scratch. To argue that past is irrelevant is dishonest.

    Sergei Reply:

    @Sergei,

    “yes, worst case is always balanced trade.”

    No, first you pay for the past excesses and then it will be balanced.

    WARREN MOSLER Reply:

    Note that all the dollars obtained by non residents over the last 50 years aren’t nearly enough ‘buy back’ what they exported to us,
    which would have to be bought from willing sellers at market prices.

    nor was there ever a promise of any kind that they would.

    Sergei Reply:

    @Sergei,

    “Note that all the dollars obtained by non residents over the last 50 years aren’t nearly enough ‘buy back’ what they exported to us”

    Warren, you appeal to the claim that the worst that can happen is balanced trade. But if/when such thing happens, you can NOT claim that the exchange rate will be defined by the balanced trade level. Much more likely is that the exchange rate will force you into positive trade to pay for past excesses before it gets to the balanced trade level. And if that is the case then it implies an inter-generational transfer. The burden of proof that it does NOT happen is on you. A claim is not enough. Therefore, “net import is a benefit” is a politically stated goal of inter-generational transfer of real resources. *Personally* you have full right to claim it. But not more than that.

    WARREN MOSLER Reply:

    right, the exchange rate doesn’t matter.
    it can’t force you into a trade surplus.

    export revenues pay for imports, worst case.

    see ‘exchange rate policy and full employment’ on this website thanks

    Sergei Reply:

    @Sergei,

    “right, the exchange rate doesn’t matter.
    it can’t force you into a trade surplus.”

    It can and it most likely will. Because you have a financial liability to foreigners which will put pressure on your “trade-balanced” exchange rate. You can not ignore the existence of the financial sector.

    WARREN MOSLER Reply:

    the exchange rate alters prices of both your imports and exports, presuming you sell at ‘world’ prices.

    so how does it force anything?

    MamMoTh Reply:

    @Sergei, I think Sergei’s point is the debt will bring the exchange rate down enough to turn the country into a net exporter in order to repay the debt.

    WARREN MOSLER Reply:

    that can be allowed to happen and most govts would think it a good thing.
    but even with a weak currency the nation doesn’t have to net export if the leaders don’t want it to.

    Sergei Reply:

    @Sergei,

    “so how does it force anything?”

    Because there is an overhang of financial liabilities due to past trade deficits which will be paid for in exports. Once you retire liabilities to foreigners by exporting then you can start talking about balanced trade etc. And not before. If you talk before then you are talking about a politically motivated position of inter-generational transfer of resources. Fine but please stay it upfront :)

    WARREN MOSLER Reply:

    so in the case of japan/us, they hold over $1 trillion of US tsy secs.

    so with time are you saying Japan is forced to sell them and buy US goods and services that get sent to Japan?

    yes, they always have the option to import US goods and services, but as a matter of their policy the never net do that.
    and may never do that. and if they try to there are all kinds of things we can do to not let it happen.
    we can have export prohibitions of anything we want, for example.

    Neil Wilson Reply:

    But there is no valid theory of exchange rates to suggest that will be the case.

    So you have no idea where the exchange rate will go – because the economists who study this stuff for a living have no idea where the exchange rate will go.

    Interest rates on Government Bonds are but one component. One of the others is the return on business assets.

    As one goes down the other goes up if policy is domestically focussed.

    Who wins? Nobody knows. That’s like predicting the stock market.

    All we can say about the exchange rate is that it will fluctuate, and that if you are working to improve the output in your country that will reflect in the expectations.

    Neil Wilson Reply:

    @Sergei,

    “Because there is an overhang of financial liabilities due to past trade deficits which will be paid for in exports.”

    Are you guaranteed to get a dividend when you purchase stock in a company? Is that dividend stream *guaranteed*?

    No.

    There is no guarantee that a foreign central bank hoarding your currency will be allowed to transfer it to anybody else *at all*.

    Monopoly power – remember.

    Sergei Reply:

    @Sergei,

    Neil: So you have no idea where the exchange rate will go

    Then neither I nor you can make any claims in this regard. Agreed? And I did not claim anything. I just question the logic of Warren’s claim which I find unjustified.

    Sergei Reply:

    @Sergei,

    Neil: There is no guarantee that a foreign central bank hoarding your currency will be allowed to transfer it to anybody else *at all*

    In your defense of otherwise weak positions you sometimes go too far.

    You have no power to execute any control on what happens outside of your sovereign borders. Foreigners are free to transaction in your currency at their will. And this act will influence the exchange rate exactly like it happens all the time.

    If your position is to close access to the payment system for foreigners then please make such a claim openly. Do not hide behind vague claims. But bear in mind that noone will take such claims seriously unless you are taking about North Korea or something.

    Neil Wilson Reply:

    @Sergei,

    How does a foreign central bank settle to a domestic bank in the domestic currency without a transfer at the domestic central bank?

    They can’t.

    The domestic central bank can restrict the amount of funds that are transferred between its accounts if it so wishes – if that is required to prevent ‘currency dumping’ in the market, say.

    In the same way as the domestic government sector can confiscate, via taxation, foreign bank holdings at the central bank.

    That is the essence of capital controls – a tool that can and is deployed where necessary to ensure the smooth functioning of the market.

    And that means that foreign banks are permitted to purchase exports and permitted to hold central bank reserves. They do not have a God given right and there is no guarantee they will get anything for them (for example if the foreign country went to war with the domestic country).

    “I just question the logic of Warren’s claim which I find unjustified.”

    I’m sure you do. But you have no basis for that.

    The domestic currency is a simple public monopoly – with all the power (and responsibility) that entails.

    WARREN MOSLER Reply:

    as an example, with euro dollars you can have offshore dollar loans creating offshore dollar deposits which get transferred among offshore agents

    Sergei Reply:

    @Sergei,

    Neil, what capital controls are you talking about? Do you really understand what the claim here is? Do you say that fx-rates are established ONLY by trading between residents and non-residents and thus what the central bank can influence with its controls? Most of the fx trade actually occurs between non-residents. And that is non-residents who take the fx-risk and have to be persuaded to take it. The way to persuade them to take this risk can be to offer them what they want. No confiscation or taxation will help you in this. It is very childish to make such arguments if you are a net borrower/importer and thus have no bargaining position against the ROW.

    “But you have no basis for that.”

    Sometimes I feel that you argue just for the sake of arguing and not argument. You should try to understand the other position and not just relentlessly push for your own one. And I guess I know your position pretty well with all those confiscation, taxation, monopoly, control and so on arguments as I had it before. But then changed my mind. You need to change your tactics and argumentation if you want to convince me that I was wrong to change my mind. Repeating all that stuff does not help. I know it already.

    But beyond and above all this … since you can NOT make a clear claim that the resulting fx-rate will correspond to the balanced trade level, that risk alone is enough to expose the political bias of your economic position. Fine for you. But please do not sell it to me. I will not buy it. I will NOT buy an economic theory, whatever its name, which tells me that I can enjoy driving SUVs now because it is not me but my kids who will have to pay for it with harder work.

    Sergei Reply:

    @Sergei,

    oh and regarding this question of yours:

    How does a foreign central bank settle to a domestic bank in the domestic currency without a transfer at the domestic central bank?

    Easy. Asking such questions just shows how dogmatic your views are. They all bank at the Bank of Kiribati which has an account at the Bank of Banana which has an account at the Bank of America. You will never know what has happened behind your back. You will only see your exchange rate falling.

    Neil Wilson Reply:

    @Sergei,

    “Asking such questions just shows how dogmatic your views are. They all bank at the Bank of Kiribati which has an account at the Bank of Banana which has an account at the Bank of America. ”

    In which case the NFA are with the Bank of America (which is under domestic regulation) and not locked out of circulation by the foreign central bank.

    That may be why you’re missing the point here.

    “You will only see your exchange rate falling.”

    I see only a pre-conceived viewpoint. Unless you can move that you simply won’t see what Warren is getting at.

    Sergei Reply:

    @Sergei,

    Neil: In which case the NFA are with the Bank of America.

    Wow. Are you still on a gold standard?! I am shocked. Neil, check the simple stats like daily turnover in the fx market and daily turnover in the Fedwire. No matter what volume of regulation you put on BoA it will NOT see what is happening. It.will.physically.not.see.it. But the exchange rate will be falling.

    fyi the main fx market in the world is in London and the top fx dealers are all non-US banks. Even if these banks have operations in the US they do not report about their operations elsewhere to the Fed and the Fed has no control over them.

    Neil: I see only a pre-conceived viewpoint.

    Neil, I have seen these things happening in the real world. I.e. I have seen a clueless central bank trying to fight an uncontrollable drop of exchange rate due to dealings of foreigners between each other. Ha. You probably should check with Mr.Soros about how the real world works. Not the pre-conceived viewpoints on what is possible and what not, but the real stuff.

    Anyways, if you a net importer with the baggage to carry the only way you can import is to convince foreigners to hold your promises and that your promises including old ones have value. But people are irrational. And people are money-hungry. And they want to be paid for the risk. And the price you will have to pay them for risk they take is part of the inter-generational deal that you want to impose on your kids. That is all what I claim. Very simple. As long as risk is greater than absolute zero there is a transfer happening.

    Unforgiven Reply:

    @Sergei,

    Sounds like you’re using constants where you should be using variables.

    “I have seen a clueless central bank trying to fight an uncontrollable drop of exchange rate due to dealings of foreigners between each other. ”

    Cite, please?

    Sergei Reply:

    @WARREN MOSLER,

    ah… obviously it does NOT matter in which currency the debt is denominated. The devaluation will be the same.

    Reply

    WARREN MOSLER Reply:

    devaluation and relative value changes are two different things

  137. Dimm Says:

    Barter networks in Greece using Alternative Units (not money)

    http://www.guardian.co.uk/world/2012/mar/16/greece-on-breadline-cashless-currency?newsfeed=true

    Reply

  138. john newman Says:

    Follow up to 132 above:

    http://www.lnarchitecture.com/kestrel.php

    Reply

  139. Dan W Says:

    Hi Warren,

    Two things:

    1. Here is a recent letter that I wrote to a large listserv in my neck of the woods vis talk of Post Office closures: “…I don’t have a firm opinion on the Post Office issue, per se. I do have opinions about post office jobs going away while the “top 5%” grow wealthier, but that’s a different conversation. My point is this: A nation that issues its own currency can never technically, and from an accounting standpoint, go broke. Sure, it could experience inflation that may disproportionately hammer the middle class and poor, but it cannot go broke. AND, since the U.S. remains the most powerful economic force in the world, and since the dollar remains the world’s reserve currency, the FED still does have a lot of latitude vis-a-vis monetary policy. The issue, then, is not about the country being broke: it is about how money is created and who has access to that money. The U.S. Treasury could have a TRILLION dollars in loans and obligations (bonds) monetized by the Federal Reserve tomorrow, and those monies could be dispersed to states and municipalities for whatever purposes these entities saw fit. The money is always there: it’s just a matter of hitting a few keys on the appropriate computer and adding those funds to reserve accounts at The FED. BUT, such policies are also inherently destabilizing (if not carried out with great care and forethought) and, by their very nature, inflationary. And in the end, without real and substantive government regulation, as those new trillions are captured by a growing super-wealthy financial class, and as this new class of individuals (for example) bids the price of energy and equities and other commodities to the moon, the rest of us find daily expenses increasingly impossible to manage. So, again, the nation is not broke. In fact, the nation has access to all of the money it wants/needs. The issue is that loose monetary policies perhaps benefit an ever-shrinking circle of corporations and individuals, and if we don’t address THIS issue, our democracy is actually in trouble. Thanks for letting me post…” Dan

    2. I have been “invited” by two fairly large AM radio stations to do a weekly program, based upon my ANGRY MODERATE Cable TV show. Since this is my foot in the door, so to speak, I have to pay for air time. I am trying to find sponsors for my shows ($ doesn’t go to me…it goes directly to the stations. I am not trying to make a cent here). The weekly price is $100 for one station, $200 for another. I thought maybe you are some of the folks here might be interested in helping sponsor my shows, as much of what I discuss during the shows is in agreement (to a large extent) w/MMT and debunking the ongoing myths.

    Thanks for considering this idea.

    Dan W
    Etna, NH

    Reply

  140. Heraclitus Says:

    Hi. I realize you’re probably very busy, but I thought I would ask anyway since I consider you an “authority” on this issue. I was having a discussion with someone who seems to have a good grasp of our monetary system, but a disagreement arose with regard to bank lending and its impact (or lack thereof) on inflation. As I understand it, only federal deficit spending contributes to inflation, correct? Anyways, here is the other guy’s position:

    ” Loans do not net to zero, as they are money lent with interest, and money + interest is what is repaid (when/if it is repaid). If I get an auto loan to buy a new car, the bank creates the money for the loan out of thin air, and the car is then paid for. This car, once driven off the lot, immediately depreciates in value, so the value of the car cannot be supposed to equal the value of the loan. Every fractional reserve loan is literally an inflation of the money supply (since more money is on the books than there was before the loan).”

    ” Say I get a $100,000 loan for a $100,000 car. The bank creates the $100,000 (it did not exist before the loan). I pay the auto-dealer the $100,000, and I get a car. I work hard and repay the loan on time with interest, so now the bank has $106,000 (which it did not have before).
    In summary, I have a car, the dealer has $100,000, the bank has $106,000, and we started with $0. This is inflation, not deflation.”

    ” I see what you mean about the banks not being in circulation, but you must see that since the bank did not loan me $100,000 of their money, they put $100,000 into circulation when they made the loan.”

    Does the creation of credit itself constitute inflation? Does the profit the bank earns off of interest not contradict the idea that loans “net to zero?” Don’t bank profits end up in circulation eventually?

    Thanks.

    Reply

    WARREN MOSLER Reply:

    bank loans ‘create’ equal bank deposits as liabilities for the assets.

    some define ‘inflation’ as ‘total bank deposits’ regardless of the actual price level so for these people and their definition loans create inflation.

    how are you defining inflation?

    Reply

  141. Jason B Says:

    Warren, could you please comment on where, if anywhere, Mr. Hussmann is wrong?

    “The willingness of people to hold a given amount of base money, per dollar of nominal GDP, is intimately tied to the rate of return that they could get on an interest-bearing security. Higher interest rates reduce the demand for zero-interest cash. So if there is upward pressure on interest rates, and the Fed leaves the money supply alone, how do you reach equilibrium? Simple – nominal GDP becomes the adjustment variable. If there’s not enough real GDP growth to absorb the excess base money, prices rise to do the job.

    “Likewise, expanding the amount of base money per dollar of nominal GDP puts downward pressure on Treasury bill yields and short-term interest rates, but really only if there are no inflationary pressures in the system. Clearly, if inflationary pressures are present (suggesting that the monetary base is already too large), an expansion in the monetary base won’t produce lower interest rates. Rather, it will accelerate those inflationary pressures as nominal GDP is forced to keep up with the monetary base – even if real GDP isn’t growing at all. All hyperinflations are built on this dynamic. That said, it’s worth emphasizing that untethered money growth is invariably a reflection of untethered fiscal deficits (the central bank just buys the government debt and replaces it with money). So significant inflation is ultimately not a monetary phenomenon as much as it is a fiscal one.”
    FROM: http://www.hussmanfunds.com/wmc/wmc120423.htm

    Thanks!

    Reply

    WARREN MOSLER Reply:

    seems to be reversing cause and effect though the conclusion isn’t wrong?

    Reply

  142. jim Says:

    Hi Warren,

    In ‘Full Employment and Price Stability’ you write that “The current monetary system is a classic monopoly with the traditional analysis of monopoly sufficient to describe all aspects”.

    In other places you state that the government is the monopoly supplier of ‘its’ currency, or ‘its’ money, but that banks also create ‘money’ (credit/ deposit money) when they make loans. Banks presumably also determine the rate of interest that they charge on their loans.

    How is the first statement (that the monetary system is a classic monopoly) compatible with the fact that banks create money, and that the govt only has a monopoly on the supply of certain forms of money (currency, reserves etc)?

    Thanks.

    Reply

    WARREN MOSLER Reply:

    yes, the banks are designated agents of the govt that has decided their bank deposits are eligible for the payment of taxes

    Reply

    jim Reply:

    But the banks create those deposits as and when they want to (by extending credit).

    A ‘monopoly’ is usually defined as:

    “The exclusive possession or control of the supply or trade in a commodity or service.”

    How can the monetary system be a monopoly if banks create their own form of money (which makes up most of the overall ‘money supply’)?

    The government may regulate the system to a greater or lesser degree, but does not have exclusive ‘control’ over it, does it?

    Thanks again.

    Reply

    imtheknife Reply:

    @jim,
    Banks have permission from the federal government to create dollars, but only with certain terms. They cannot just create whatever money they want and spend it however they want and have that be the end of it- typically, liabilities are required such that money created by banks must ultimately also be destroyed by banks (that is, an equal and offsetting amount). Only the federal government can do that, and only the federal government can grant that power unto others (such as the central bank, in limited scope, and private banks, through the power of credit creation).

    WARREN MOSLER Reply:

    right, it’s called regulation and supervision

    WARREN MOSLER Reply:

    i say the govt and/or it’s designated agents is the single supplier of that which it demands in payment of taxes.

    fed member banks are currently govt’s ‘designated agents’

    Reply

  143. jim Says:

    Also, by ‘their bank deposits’ do you mean their (the banks’) reserves at the central bank?

    Reply

    WARREN MOSLER Reply:

    all the bank’s liabilities that can ultimately be used to pay taxes.

    reserves are the fed’s bank deposits which count as well

    Reply

    jim Reply:

    Can bank deposits pay taxes? It was my understanding that the actual payment happens in reserves. If I send in a cheque to pay my taxes, that cheque represents a promise by my bank to transfer reserves to the treasury on my behalf.

    Only a fraction of overall tax payments actually needs to be settled in reserves however, due to the fact that govt spending to banks usually offsets much of the transfer from banks.

    Have I got this wrong?

    Reply

    jim Reply:

    Regulation and supervision doesn’t equal ‘monopoly’. Many types of business require licences, and are regulated by govt agencies.

    “They cannot just create whatever money they want and spend it however they want”

    No, but neither does the govt control banks’ creation of credit. Most businesses face restrictions on what they can and can’t do – that doesn’t make them part of a government monopoly.

    “the govt and/or it’s designated agents is the single supplier”

    Shouldn’t that be “the govt and its designated agents are the only suppliers”?

    Given the above, this would imply at least a duopoly (or oligopoly) of some sort.

    Ok, if government wanted to control everything that banks do they ultimately could, but at present they don’t, and they never have. Instead the govt issues charters and sets the rules of the game, as they do with other industries.

    Thanks.

    WARREN MOSLER Reply:

    govt controls bank credit extension to the extent it wants to.

    and if it messes up a lot of out of control/inflationary consequences can follow.

    WARREN MOSLER Reply:

    you are conflating assets and liabilities a bit.

    your bank deposit is fdic insured.

    your write a check to the govt. and the fed debits your bank’s reserve account and credit’s tsy’s fed account.

    they don’t bounce your check because the bank might not have ‘sufficient’ reserve balance, they just let your banks balance go to where it goes, positive or negative.

    if it goes negative, that’s functionally a loan to your bank from the fed.

  144. jim Says:

    Thanks for the replies.

    On this point:

    “govt controls bank credit extension to the extent it wants to.”

    We could say the govt controls everything to the extent that it wants to. Or in many cases, to the extent that the population allows it to.

    Reply

    WARREN MOSLER Reply:

    yes, making govt the monopoly supplier of business licenses, etc.

    the govt allows its member banks to make bank loans which create bank liabilities called bank deposits which the govt has also decided to accept for payment of taxes.
    It regulates/restricts this process and examines and supervises it to ensure compliance.

    If that puts ‘supplying the thing demanded to pay taxes’ outside of your definition of a public monopoly fine. You’re entitled to any definition you select.

    Reply

  145. jim Says:

    “they just let your banks balance go to where it goes, positive or negative”

    Is there a limit on how far a bank’s balance can go negative, out of interest?

    Reply

    WARREN MOSLER Reply:

    yes, if your equity capital falls below the regulator’s comfort zone, or your liquidity, or your asset quality, or your management’s capabilities, or your earnings, or your liquidity, the regulators are supposed to shut you down

    Reply

  146. Jim Says:

    “It regulates/restricts this process and examines and supervises it to ensure compliance.”

    So what happened leading up to 2008? The govt momentarily lost control of its ‘monopoly’, or what?

    Reply

    WARREN MOSLER Reply:

    the govt got taken by lender fraud, where loan officers used fraudulent income statements and fraudulent appraisals to build volume and get paid bonuses.

    regulation is a work in progress.

    and public monopolies do mess up all the time, but that doesn’t make them any less the monopoly

    Reply

  147. Jim Says:

    Thanks for the replies again.

    Re: A discussion over at Mike Norman’s on the question of whether central banks might be compelled under certain situations to issue foreign currency denominated debt in order to manage exchange rates. The argument made by Ramanan was essentially that truly ‘free-floating’ currencies don’t really exist, as there will always be conditions under which CB’s will have to intervene in fx markets. Although this is most relevant in the case of countries with weak or developing economies, a significant fall in the value of the dollar (as the result of balance-of-payments crisis due an out of control CAD) would lead to intervention in fx markets by the Fed, entailing the issuance of foreign currency denominated debt, and then possible problems with repaying that debt.

    For example:

    “When a nation is a net importer, a nation has to finance this by hook or crook. For the us it is relatively simple because exporters TO the US purchase dollar denominated assets. For other nations it’s not that simple. Let’s say Toyota sells cars in Thailand. Now Toyota will repatriate funds back to Japan – which leaves a Thailand bank indebted in Yen because the Thai bank is acting as a dealer in foreign exchange markets. The Thai bank has to keep refunding this liability but it has to keep its net open position low because of regulatory requirements and self imposed requirements/discipline. So the banking system as a whole has to attract funds from abroad. This of course may be limited by how much foreigners are willing to lend and one strategy is a slightly higher interest rate by the central bank to attract funds.

    However many times even this is insufficient and a shift of funds abroad leaves banks with a growing net open position. In the balance of payments language this is seen in the item “other investment”. You can see this mentioned in some IMF research on nations having troubles in the fx markets. This can be quite risky and hence the central bank intervenes in the markets. The central bank is not just preventing the currency from depreciating. It is helping the banking system from acquiring huge open positions. Since the central bank is limited on this by the amount of reserves, the Treasury or the Exchange Stabilization Fund/Treasury issues debt in foreign currency. And these institutions coordinate the activities. By no means is the treasury borrowing funds in foreign currency in order to make expenditures in domestic currency. The objectives are different.

    So typically nations’ governments acquire foreign currency debt. Else they risk their currencies being unacceptable in the international money markets. You can’t go and ask them to not borrow in foreign currency.”

    What do you think?

    Thanks.

    Reply

    WARREN MOSLER Reply:

    Seems he’s saying if your currency goes down making exports too expensive you need to borrow fx to either make the purchases directly or to support your currency so you can use it to buy things.

    I’ve never seen that happen apart from Wiemar where deficit spending hit 50% of gdp and was used to sell the mark to buy the gold and fx needed for war reparations.
    So even then with the policy of selling one’s currency it would make no sense to buy fx to buy your currency to support the purchase of imports?

    And Zimbabwe where output fell 80% and nominal spending stayed the same or rose driving up prices wasn’t ‘too many imports’ considered part of the problem?

    In general, when a falling currency results in reduced imports and increased exports that policy is deemed a success, and not something to reverse?
    Today, nations get severely criticized for running weak currency problems which presumably to their benefit and the expense of others?

    Yes, they are all backwards on the issue, but this is about what a nation might be ‘forced’ to do.

    Reply

    jim Reply:

    “The central bank is not just preventing the currency from depreciating. It is helping the banking system from acquiring huge open positions”

    I think the point is that severe currency depreciation could bring a country’s banks down, and that the CB would have to step in to stop this from happening.

    Reply

    MamMoTh Reply:

    @jim,

    Indeed. The problem is if those banks made loans in foreign currencies. Then the government must let those banks go bust and customers lose their deposits, or bail them out absorbing the foreign debt, which is what happened in Latin American countries in the 80s.

    WARREN MOSLER Reply:

    why would it bring the banks down?

    MamMoTh Reply:

    Because when the local currency is devalued people default on their bank loans in foreign currency.

    WARREN MOSLER Reply:

    I wouldn’t allow banks to make foreign currency loans, particularly if not fully covered by foreign currency deposits of at least equal maturity. It’s playing with fire with ‘public funds.’

    Neil Wilson Reply:

    @jim,

    Please remember that for an international transaction to succeed both the physical movement part of the transaction must be in place *and* the financing part.

    If the transaction cannot match an import with an export at that point in time *and* nobody will hold the denomination the transaction is in then the transaction *will not happen*.

    All you are saying here is that the private banks funded a lot of foreign transactions and get caught with their pants down due to some unanticipated move on the currency market.

    Well in that case there needs to be a well oiled administration process to put the banks into administration, bin the bad debts and return the rest of the bank to function.

    The key to all this is to ensure that the system can bin banks when they get into trouble without causing too many systemic ripples to the domestic payment system.

    Banks have to be allowed to go bust.

    WARREN MOSLER Reply:

    agreed, and no reason for the payment system to malfunction.

    MamMoTh Reply:

    @Warren,

    I wouldn’t allow banks to make foreign currency loans, particularly if not fully covered by foreign currency deposits of at least equal maturity. It’s playing with fire with ‘public funds.’

    Agreed, but the fact is in most developing countries banks issue loans in foreign currency and people save in foreign currency. And it all works pretty well until it doesn’t.

    MMTers should come up with a realistic plan to de-dollarize an economy.

    WARREN MOSLER Reply:

    no need. just keep the govt’s member and insured banks on a tight leash, and let the rest go bankrupt as needed, supporting full employment with fiscal policy at all times.

  148. jim Says:

    Ok, thanks.

    The discussion was intially about why Mexico, despite issuing its own floating currency, had to borrow money from the IMF in 2009 following the Peso’s sharp drop to a record low.

    Ramanan previously suggested that the US (or any other currency-issuing country) could potentially find itself in a similar situation in future as the result of a balance of payments crisis:

    “In the scenario constructed, the balance of payments position weakens over the years (and I have mentioned that roughly in 2020 it weakens). In 2022, foreigners are no longer willing to finance the debt. This may be due to a capital flight or due to the inability of the banking system to maintain a low net open position in foreign currency. The depreciation of the domestic currency isn’t sufficient to clear the fx markets and the official sector (either the central bank or the government’s treasury) necessarily has to intervene in the foreign exchange markets by issuing debt denominated in foreign currency. The government is then acting as the borrower of the last resort and the objective is to use the proceeds to partially have more foreign exchange reserves and/or to sell the foreign currency proceeds from the debt issuance to clear the fx markets. The government is then left with a net liability position in the foreign currency. Soon the external situation worsens to the point requiring official foreign help – such as from the IMF – which promises to help and requires a restructuring of the debt both in domestic and foreign currencies.

    Free marketers have a blind belief in the markets and the theories are built on the assumption that markets always clear. The recent crisis has highlighted that this isn’t the case. Even for the case of Australia – whose currency can be considered close to being pure float – has had issues in the external sector and the Reserve Bank of Australia had to borrow in US dollars from the Federal Reserve (via swap lines) to help Australian banks meet their foreign currency funding needs during the crisis.”

    Any thoughts?

    Reply

    Neil Wilson Reply:

    @jim,

    It’s just a slippery slope logical fallacy.

    “The depreciation of the domestic currency isn’t sufficient to clear the fx markets and the official sector (either the central bank or the government’s treasury) necessarily has to intervene in the foreign exchange markets by issuing debt denominated in foreign currency”

    That ‘necessarily’ has to be explained as are the sequence of ‘ifs’ required to trigger it.

    Just let those institutions that are underwater go bust and have the systems in place to deal with the fall out from that – primarily the requirement to fully nationalise all the banks that fail, and/or limits on the foreign currency exposure of domestic banks.

    All I see here is an issue that is easily designed around – make sure entities with foreign currency exposure can go bust properly.

    Reply

    Sergei Reply:

    @Neil Wilson,

    @Neil Wilson,

    “That ‘necessarily’ has to be explained as are the sequence of ‘ifs’ required to trigger it.”

    Congress has assigned the U.S. Treasury primary responsibility for international financial policy including exchange rate. Similar responsibilities exist in all countries.

    As for “ifs” the burden is on you to prove that *nothing* will ever-ever trigger it.
    But never say never.

    Besides “ifs” there are inter-generational transfer which occur via international trade and debt.

    Reply

    WARREN MOSLER Reply:

    Mexico had other options.
    and i think they may have done it to get cheaper dollar funding for their banks who were funding in dollars funding their dollar loans.

    Reply

  149. jim Says:

    Thanks Neil,

    So, are there any conditions under which you think a persistent and growing current account deficit might be a problem?

    Do you think a country like the US could ever face a serious ‘balance of payments’ crisis? What about smaller countries with limited resources, such as the UK (problems with import substitution), or ‘developing’ countries?

    Given the extent of international trade, how would you limit domestic banks’ foreign currency exposure?

    Also, how do you explain Mexico turning to support from the IMF in 2009 (after a sharp depreciation of the Peso), despite the fact that Mexico issues its own floating currency?

    Reply

    Neil Wilson Reply:

    The current account deficit can only grow if there are people willing to save in the currency of issue. Otherwise the transactions that bring about that deficit simply cannot happen.

    Since they are standing the exchange risk of that decision, why is there a problem?

    It’s just the same as a domestic individual saving in the currency, and the solution is the same. If there is an excess of spending at any point in time due to a run down of savings, tax it away at that time – or if necessary slow the transaction system down with capital controls.

    “Given the extent of international trade, how would you limit domestic banks’ foreign currency exposure?”

    By separating the domestic arm out and regulating its insured activities. It has to be boring and steadfastly stick to clearing payments.

    The other services of a bank are then just the same as any other firm – if they screw up, they go bust and the creditors lose money.

    “Also, how do you explain Mexico turning to support from the IMF in 2009 (after a sharp depreciation of the Peso), despite the fact that Mexico issues its own floating currency?”

    The UK turned to the IMF in 1976 for no good reason.

    Just because you have a Jet Fighter doesn’t mean that the pilot automatically knows how to fly it, or use all its weapons. They have to be trained.

    Going to the IMF is always a choice.

    The whole excitement about the external sector is based around analysing it as though it is external to the system you are looking at.

    The best way to look at it is as two objects each subject to the same real and nominal constraints interacting. There is nothing scary about foreigners.

    Reply

    MamMoTh Reply:

    @Neil Wilson,

    The current account deficit can only grow if there are people willing to save in the currency of issue. Otherwise the transactions that bring about that deficit simply cannot happen.

    That’s totally wrong, backwards, and disproved by reality.

    Reply

    Neil Wilson Reply:

    @MamMoTh,

    “That’s totally wrong, backwards, and disproved by reality.”

    Except that it isn’t.

    Both the financing chain and the physical chain have to both come together at the same time for a transaction to happen.

    It must be matched in the opposite direction or somebody must hold the ultimate currency risk. And if they do then there is a risk they will be wrong and lose out.

    And holding the currency risk is ‘saving’.

    MamMoTh Reply:

    Both the financing chain and the physical chain have to both come together at the same time for a transaction to happen.

    Nonsense, and timing is totally irrelevant.

    It must be matched in the opposite direction or somebody must hold the ultimate currency risk. And if they do then there is a risk they will be wrong and lose out.

    Yes, there must always be somebody holding a currency risk.

    But what matters is who is holding that risk, and in which currency.

    There have been enough CAD crisis to prove the point.

    Neil Wilson Reply:

    @MamMoTh,

    “But what matters is who is holding that risk, and in which currency.”

    Which is saving. Which is what I said.

    “There have been enough CAD crisis to prove the point.”

    All that proves is that the people running the show didn’t know what to do.

    That does not prove it can’t be done.

    Neil Wilson Reply:

    @MamMoTh,

    “Nonsense, and timing is totally irrelevant.”

    It’s completely relevant. If the timing isn’t concurrent then somebody is saving.

    Which is what I said in the first place.

    Sergei Reply:

    @MamMoTh,

    Neil: It’s completely relevant. If the timing isn’t concurrent then somebody is saving.

    You definitely do not get it. It is not about saving. NOT AT ALL. There is a nice youtube on that topic.

    WARREN MOSLER Reply:

    no, it’s totally correct, and as a simple point of logic

    MamMoTh Reply:

    no, it’s totally correct in the case of the US and maybe a handful of other countries, but it’s totally wrong for the rest of the world where trade deficits are financed with foreign debt.

    WARREN MOSLER Reply:

    govts don’t have to ‘finance trade deficits’ with foreign debt or anything else.

    it’s a private sector matter that doesn’t demand govt. intervention,
    it’s when govt intervenes that the issues raised here begin.

    Sergei Reply:

    @MamMoTh,

    Warren: it’s a private sector matter that doesn’t demand govt. intervention,

    Any private matter which creates instability requires government intervention as stability is generally considered to be a public good. You might choose to ignore some types of instability but that is a political decision. It is not an economic argument.

    WARREN MOSLER Reply:

    yes, stability in the real economy re optimizing real terms of trade.

    a trade deficit improves real terms of trade, and fiscal adjustments can always sustain full employment

    ESM Reply:

    @MamMoTh,

    @Sergei:

    “Any private matter which creates instability requires government intervention as stability is generally considered to be a public good. You might choose to ignore some types of instability but that is a political decision. It is not an economic argument.”

    Sure, except that the problem with government intervention in this case is that it actually exacerbates instability because it prevents markets from clearing based on participant’s (uncoerced) indifference levels.

    Would you recommend that the government intervene in the stock market to reduce its volatility? If not, would that be based on a political argument or an economic one?

    Sergei Reply:

    @MamMoTh,

    ESM: Would you recommend that the government intervene in the stock market to reduce its volatility? If not, would that be based on a political argument or an economic one?

    And why is this instability bad? You should not read things you want to read (aka pro-blindly-government) which are not there.

    ESM Reply:

    @MamMoTh,

    @Sergei:

    “You should not read things you want to read (aka pro-blindly-government) which are not there.”

    What a deliciously un-self-aware comment. I did not imply that you were blindly pro-government. My point was that government intervention to reduce instability in the marketplace often creates more instability, in which case an argument against can be an economic one.

    In the case of fx markets, I think the painful dislocations actually happen when governments attempt to support the value of a currency. The currency ends up trading far from its equilibrium value, until one day, the pressure is too great to bear and it collapses.

    If the fx market were allowed to roam unrestricted like a free-range chicken, then negative feedback mechanisms would help maintain a stable equilibrium. For example, if the dollar weakened, US exports would become more competitive and imports would become less attractive. Also, investors would find investment opportunities in the US to be cheaper at the same time domestic business was booming from selling more goods and services to both foreigners and residents alike.

    Sergei Reply:

    @MamMoTh,

    ESM, I respect your comments but sometimes you just push over the edge. And this is the case here.

    Above all we surely understand that nothing is stable. You might say that I was not specific enough to point out about which instabilities I was talking about. I thought it was not needed given the whole previous discussion of persistent CAD imbalances. Please note that I did not talk about fx imbalances. That is the argument typically brought up by opposing crowd saying that Japan or China will never ever sell their dollars at once. So what said I. Instead I mentioned many times that the problem is NOT in China or Japan.

    The type of instability I was talking about is the one similar to the global supply chain disruptions caused by the earthquake in Japan. If government could intervene and prevent the earthquake from happening surely everybody would agree with that.

    Now transpose the natural disaster like earthquake shaking the global economy into the national disaster due to equivalently *quick* move of the fx-market. Would you intervene to prevent it?

    However even this is not the point of instability. It is just a *disputed* consequence. Can you intervene into a consequence? Seriously, what are you talking about?

    The discussion here is about the reason and whether intervention is required into the reason so that this reason does not threaten the economy with consequences.

    Jim Reply:

    “If there is an excess of spending at any point in time due to a run down of savings, tax it away at that time – or if necessary slow the transaction system down with capital controls”.

    So if a country experiences a severe depreciation in the value of its currency it can counter this by a) stopping people from selling the currency (or financial assets denominated in the currency), and b) quickly raising taxes on those that are selling the currency/assets?

    1) Is this really feasible?

    It would require the ability to quickly impose controls and taxes in response to a rapidly developing, complex situation. The government doesn’t have the ability to suddenly raise taxes in this way (I don’t know about capital controls).

    2) Don’t you think such actions could lead to even worse problems? Wouldn’t such authoritarian actions scare off investors even more?

    - Such actions may be necessary in a crisis, but if that crisis was initially created by allowing a CAD to get wildly out of control, then perhaps it would be better not to let that happen in the first place?

    In a currency/balance-of-payments crisis, people get scared and start ‘dumping’ the currency (as they do in a hyperinflation), leading to a collapse in value. Ideally it would be better to avoid ever getting to that point – just as it would preferable to avoid a hyperinflation altogether, rather than having having to fight it by ramping up taxes and imposing price controls.

    If you find yourself having to do that, then you’ve already screwed up.

    First you’ve brought about a fall in the value of people’s money (depreciation/ inflation) by allowing CAD/ spending to get out of hand, then you’ve ‘solved’ the problem by stripping people of their money and imposing controls on them. They might have a good reason to accuse you of theft, among other things!

    Such behaviour is unlikely to help a country’s economy overall.

    “The UK turned to the IMF in 1976 for no good reason”

    In 1976 Sterling was plummeting, inflation was going through the roof and unemployment was growing. Are you saying the solution would have been to put up taxes? Would that really have resolved the situation? (Same question wrt Mexico).

    Thanks.

    Reply

    MamMoTh Reply:

    @Jim,

    If you find yourself having to do that, then you’ve already screwed up.

    Indeed.

    Argentina is currently worth looking at. They seem to be clutching at straws to get the situation under control.

    WARREN MOSLER Reply:

    their mmt people are long gone

    Sergei Reply:

    @Jim,

    “1) Is this really feasible?”

    It is not about feasibility. Taxing transactions is a senseless economic policy. Warren said that many times.

    WARREN MOSLER Reply:

    the point of taxing transactions should be to limit the transactions, not to raise revenue for the federal govt

    Neil Wilson Reply:

    @Jim,

    “So if a country experiences a severe depreciation in the value of its currency it can counter this by ”

    Go read what I said again. You have misread it.

    WARREN MOSLER Reply:

    if i recall correctly the ‘inflation’ wasn’t monetary but caused by crude prices being passed through?

    unemployment doesn’t help that, and high interest rates make it worse as well.

    the better response would have been 0 rates, fiscal policy to support full employment without govt. chasing price higher with it’s spending policies.

    MamMoTh Reply:

    @Warren,

    their mmt people are long gone

    Who were their mmt people? Do you know what happened to them?

    I don’t know how to describe the people left, but the situation there is quite bizarre, almost surrealistic.

    Last week, the Argentinian government produced an ad of an Argentinian athlete training in the Falklands for the Olympic Games with the slogan “to compete in British soil we train on Argentinian soil”.

    The day after, the head of the Argentinian Olympic Committee complained that many athletes couldn’t even train because the gear they needed to import was held by the customs and they were told they needed to export something before they could get authorized to import.

    Anyway, the british or kelpers came up with a hilarious spoof of the ad:
    http://youtu.be/VetuOlwcmqU

    WARREN MOSLER Reply:

    Daniel Kostzer was my contact at the labour ministry. he’s long gone.

    Sergei Reply:

    @Jim,

    Warren: the point of taxing transactions should be to limit the transactions

    Great and what is wrong with fx-transactions per se? Why do you want to limit them? People are free to trade or? You keep on saying that imports are good and then you want to tax them? How do you import without selling USD for goods? Selling USD does not kill anybody, does not harm environment, does not do anything bad. It is just an exchange of two electronic records. Why do you want to tax it if *Americans* decide to sell USD and buy say yuan? Not the Chinese selling USD as Neil tries so hard to defend.

    WARREN MOSLER Reply:

    did I state i supported taxing fx transactions somewhere?

    Sergei Reply:

    @Neil Wilson,

    “Since they are standing the exchange risk of that decision, why is there a problem?”

    The problem is in the sudden change of assessment of that risk. Stability of any kind is public good. You can not privatize it which is what you apparently want with such fx policy.

    Reply

    Neil Wilson Reply:

    @Sergei,

    “The problem is in the sudden change of assessment of that risk.”

    And why would it be sudden rather than gradual?

    It’s another ‘what happens if the chinese spend all their money tomorrow’ line.

    They won’t – and for the same reason a nuclear war didn’t happen.

    Sergei Reply:

    @Sergei,

    Neil, “the problem is not and has never been in China. Warren stated that zillion of times”

    that is the second time I say it. Importunately you tend not to read what other say

    Neil Wilson Reply:

    @Sergei,

    I don’t read people who resort to ad hominem no.

    Sergei Reply:

    @Sergei,

    “And why would it be sudden rather than gradual?”

    Because that is what normally happens.

    Sergei Reply:

    @Sergei,

    “It’s another ‘what happens if the chinese spend all their money tomorrow’ line.”

    And again you are over-fixated on China whereas the problem is not there and has never been there.

    WARREN MOSLER Reply:

    When anyone spends their spending power by ‘lifting offers’ it tends to drive up prices while it lasts.
    Then things tend to settle back, ex govt. ‘interference.’

    Neil Wilson Reply:

    @Sergei,

    “And again you are over-fixated on China whereas the problem is not there and has never been there.”

    Ad hominem. Naughty.

    Let me help you out.

    what happens if the Japanese spend all their foreign currency tomorrow.

    Or if you don’t like the Japanese either substitute in pretty much any or all of the states in the top 20 or so of this list: http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance

    WARREN MOSLER Reply:

    if ‘they’ spend all at once by paying offered prices those prices tend to rise until the spending subsides.

    remember, they can only buy from willing sellers at market prices.

    Anders Reply:

    @Sergei, surely you can’t discuss CAD (ie flow) risks without looking at the stock concept of the net international investment position (NIIP), and the currency in which claims are denominated.

    If a NIIP is big and negative, it is reasonable for foreign investors to ask what might happen if the currency declines. For countries with fixed FX or foreign ccy liabilities, a decline in the FX rate could actually worsen the NIIP. For the US or UK, a decline in the FX rate would improve (shrink) the NIIP.

    In other words, the fact of liabilities being denominated in domestic ccy makes FX movements an automatic stabiliser, or a negative feedback loop. Asian USD-denominated debt in the late 1990s led to a positive feedback loop, where Hooke’s Law applied.

    It is only with a positive, rather than negative, feedback loop, that there is a special reason for foreigners to fear a fall in the currency, and therefore a potential incentive for foreigners to ‘beat the rush’ by dumping their claims.

    Sergei Reply:

    @Anders,

    Do not tell to Neil that he needs to look at something because he will just reply “Ad hominem. Naughty.” His problem is that he suffers from ad hominem himself. Not being able to even admit or consider an even theoretical possibility of a possible problem is a pure sign of logical fallacy. And that is beside other obvious issues like inter-generational transfer of wealth which is a clear political position. And a blind defense of it from someone as smart as Neil looks very embarrassing to me. But whatever.

    Anyways not what I wanted to say here.

    I wanted to emphasize – do not focus on foreigners alone! fx market needs both foreigners and locals. Remember Warren repeatedly mentioning short USD positions due to QE? Do you think they were *exclusively* foreign originated?! What about Japanese shorting JPY for years? Does it mean that the rest of the world has some strange desire to save in JPY?

    Yes, stocks are important. And currency composition. And there are all types of loops. But if there is one thing for sure it is that imbalances are sometimes resolved in an explosive manner with all types of by-side effects. And if there is another thing for sure it is that CAD imbalances are more often than not resolved in an explosive manner.

    Anders Reply:

    @Sergei, I’ll gladly stay out of you vs Neil as I respect you both.

    Where I struggle to follow your argument is that I can’t see how or why a CAD imbalance could ever be resolved ‘explosively’ where liabilities are denominated in local ccy. Take the UK: some investors feel the NIIP is a bit big, so they sell some UK assets – GBP weakens – the NIIP shrinks – investors’ nervousness evaporates. I just don’t see why anyone would ever dump UK assets in an uncontrolled manner. Can you sketch out how it would happen?

    Best wishes

    Sergei Reply:

    @Anders,

    Anders: Can you sketch out how it would happen?

    E.g. animal spirits.

    Why were investors so confident in Greece until 3 years ago and now Bundesbank runs a 600bn euro plus position. Yes, I know it is eurozone and so on. But hold on! Wasn’t the same eurozone 3 years ago as well? What has changed?! Estonia entered and changed it all? Which “how” changed between now and then? It is not about “how”. It is about “can” like in “can it happen”.

    I guess the whole argument is about who has to prove the claims being made. And to make a long story short some time ago I was confident that it was Ramanan who had to prove it. Now I think that the burden of proving is not anymore with him. So I was clearly in the “how” camp back then. Well, generally I am still in the “how” camp. But please notice that if you answer “yes” to the question of “can” then your solution to the problem of “how” might be completely different. It probably can even be a better one! And if it probably can be a better one why do we blindly throw it away?

    The world is not black and white of ivory towers as per Neil. The action always occurs in the grey area. And so the argument is not whether 2+2 equals 4 like in imports equal benefits. The argument is about the complex world of all types of possible inter-relationship, pre-existing economic mistakes, institutional structures, geo-political agendas, and so on. In the ideal world Neil is right. And I will sign it as well. But then in the ideal world the problem does not even exist. Noone will export more than import. So what problem do claims like “what happens if the Japanese spend all their foreign currency tomorrow.” solve then? Such claims are meaningless in such world!

    But our world is not like that. Unfortunately.

    Anders Reply:

    @Sergei, when you say “can” is the key word, I agree, and construe it as in “a large number of foreign investors selling local currency assets CAN lead to a worsening NIIP and therefore to a crisis and defaults”.

    By contrast, if lots of foreign investors started panicking and dumping GBP, the NIIP would narrow sharply to a level where no one could possibly worry. The UK’s NIIP was a negative 25% of GDP in 2007 and shrunk to 7% a couple of years later following a currency devaluation. This strikes me as the definition of a self-righting system.

    You mention Greece, but according to ‘my’ narrative, Greece falls into the camp with non-local ccy liabilities, and so is a classic case where it CAN suffer a crisis (even if it may take years for investors to start panicking).

    What am I missing?

    I did quiz Ramanan on this a while ago but his answers just confused me :-((

    Sergei Reply:

    @Sergei,

    Anders, not only foreign investors can dump the assets but also locals. Historically most devaluations were triggered by the local population which in a panicky mode tried to preserve their hard-earned cash. The obsession with China is completely misplaced. Yes they bought dollars and yes they are not likely to sell them all at once. But as Bill likes to say – so what?!

    Looking at NIIP is a good thing but arguments that NIIP drive exchange rates are very far fetched. We all understand it. Theoretically you can have a devaluation also with a positive NIIP when your assets are illiquid real assets but liabilities are all liquid financial ones. And obviously you can have an appreciating exchange rate with a growing negative NIIP. Panics come and panics go They are not triggered by NIIP reaching any particular level.

    I mentioned Greece for the animal spirits argument. Everybody was happy funding them until 3 years ago at ever decreasing spreads. And I mean it – seriously happy! And in this particular case nothing of substance has changed on the 15th of September 2008. However now everybody is very unhappy. Same world, same eurozone, same greece and same germany, same deficits, same rules and even much easier due to ECB but … Yes, they have fixed exchange rate. But they had the same fixed exchange rate 3 years ago. What has changed?

    Anders Reply:

    @Sergei, I agree that NIIP is one of many factors driving the FX rate, and there is clearly no single threshold of NIIP which constitutes a problem for ‘risky’ countries (or for ‘safe’ countries). NIIP provides a loose rule of thumb, but ‘animal spirits’ also come into it. The more negative NIIP gets for a ‘risky’ country like Greece, the more likely it is that investors will suddenly panic. There was definitely a ‘Wile E Coyote’ period for Greece when animal spirits alone kept yields right to Bunds – but eventually the _possibility_ of an explosive correction in NIIP (ie crisis, default and write-offs) prevailed.

    I’m trying to understand your point of view, so I’m trying to see how the same ‘movie’ would play out for the UK.

    If UK residents were suddenly panicked by reading too much about how bankrupt Britain is, and started dumping UK assets, they would quickly find that the weakening GBP had not only shrunk the NIIP, but that it had also made foreign assets increasingly expensive. Trying to find bargains abroad would be like running up a slope that got steeper and steeper. Eventually this shift would be self-stabilising at a lower FX level, and a lower NIIP. The devaluation would inject some non-monetary inflation into the economy, but the is no reason this should lead to an inflationary spiral (indeed it hasn’t done in the UK since 2008). (I should also point out that most domestic asset managers are pension funds and insurance companies, which need to hold the bulk of their assets in GBP anyway.)

    So considering likely motivations of both foreign and domestic investors, I struggle to see the ‘explosive’ scenario for the UK.

    Sergei Reply:

    @Anders,

    How many UK residents or any residents for that purpose know what NIIP is, not speaking of level of NIIP of UK? People would not care less.

    But you are again in the “how” mode. I do not know how. Every “how” is different. How do ponzi schemes appear? What is the trigger? There are no rules. There is no “how”. Anything and nothing can trigger that snowball. BUT if you are running a persistent CAD then disruptions can be almost guaranteed. Everybody used to blame the earthquake in Japan for about 6m of disappointing pretty much *global* GDP results. Something that is not sustainable can not be sustained.

    Anders Reply:

    @Sergei, “something that is not sustainable cannot be sustained”

    Presumably you don’t think this principle means that a rising debt/GDP necessarily spells disaster?

    Surely one can generalise in this way: in a situation of imbalance, will investor fear make the imbalance more or less acute?

    You seem to want to insist that investor fear can worsen the UK’s imbalance – but when asked to justify or explain this, you either (1) simply assert that it can’t be explained (with your ‘how’ vs ‘can’ point) and that the balance of proof is not on you, or (2) cite examples like Greece which lack local currency denominated debt. I think this may be the dead end I reached with Ramanan.

    Sergei Reply:

    @Anders,

    If you ask about rising public debt/GDP then yes I think it is bad. The argument is very simple. Public debt is pre-funded latent demand. A structural break in the private sector behavior can unleash this spending power, trigger raising prices and a positive feedback loop between the two. Neil would say here that raising taxes should do the trick. You would say that raising prices will stabilize the debt/gdp :) And in general I would agree. However I dislike this idea on political grounds for pretty much the same reasons as for the CAD case. Such tax increases constitute an inter-generational transfer. Past mistakes of fiscal management are kicked down the road until those mistakes accumulate to such an extent so as to require unconditional taxing of savings.

    The same story is true for CAD. Persistent CAD deficits today and a structural break in behavior trends some day in the future will trigger an inter-generational transfer. As long as the possibility of a structural break is greater than zero, this will constitute a political position of kicking today’s economic problems onto the future generations to solve.

    As I said it is not about HOW but about CAN. I think that the probability is definitely not zero meaning my answer is “yes, it can happen”. And it does not matter how high it is. And it does not matter what will trigger the break in behavior. These are secondary questions which we can start considering but only after we agree on the principle question. Even if the probability is non-zero it still does not mean that this crisis scenario has to come true. Lots of other things can happen between today and tomorrow and change that probability tomorrow.

    Finally if you say that that the probability is zero, then the burden of proof is on you. Because it is *your* statement which explicitly limits the range of possible outcomes :) whereas I try to consider all possibilities.

    WARREN MOSLER Reply:

    if you are driving down a road and you know you need to turn left in a few miles you don’t do it early to get it out of the way

    Sergei Reply:

    @Sergei,

    Warren: if you are driving down a road and you know you need to turn left in a few miles you don’t do it early to get it out of the way

    It is a very bad analogy. Let me try put it this way: in the long-term we are dead anyways so why bother getting good health today.

    WARREN MOSLER Reply:

    First, the currency is a public monopoly, not some endogenous market creation. So govt is necessarily in control of this monopoly it’s created, for better or for worse.

    in this context, unspent income isn’t ‘unhealthy’ but a natural desire giving ongoing tax liabilities continuously draining the fish bowl. tends to make you want to save a bit of the water coming in.

    A monopolist knows or should know it will, directly or indirectly, necessarily by setting price and letting output/sales adjust to demand.

    So as savings desires change, that is, as the demand for net financial assets that can only come from govt spending changes, the currency monopolist makes corresponding fiscal adjustments to meet his goals of full employment and price stability.

    But he doesn’t adjust today’s fiscal balance/aggregate demand, boosting unemployment today, because he believes he will need to do it years down the road in response to projected levels of future savings desires.

    Of course today we try to balance the budget even with very low long term inflation projections and a very high output gap, with both political parties pushing same.

    Anders Reply:

    @Sergei, OK – I used a bad example in asking what you thought of rising debt/GDP; I was sure (from previous postings; either I’ve got confused, or you’re a different Sergei, or you’ve morphed substantially) that you would find that unproblematic. This isn’t my main interest in engaging with you here, but in short my own position is that fiscal sustainability is all about managing down the blended interest rate, not necessarily about tax. With a CB putting ceilings on yields, almost any permutation of NGDP growth and primary budget balance can mathematically be made sustainable.

    But on the burden of proof point, you’re still talking in abstracts, rather than sketching out a potential, illustrative, chain of events. Any chain of events I can conceive of (that ‘left turn’ Warren refers to) is fundamentally benign. Isn’t the right analogy here climate change? If some scientist comes along and warns of a highly destabilising consequences of climate change that could occur in the future, most people would expect such a scientist to provide a sketch of how such events might ensue, rather than retorting “well since you haven’t proved that climate change won’t have these highly negative effects, you need to treat my account as correct”. And climate change scientists have indeed tried to sketch out in detail various ways global warming could play out.

    It’s interesting that you look at both budget and current account deficits, even for countries with monetary sovereignty, as potentially sources of ‘explosive’ adjustment leading to severe crisis. Do you have any non-arbitrary way of determining when a country is in the ‘danger zone’ by your model?

    WARREN MOSLER Reply:

    it’s notionally mathematically sustainable for the issuer of the currency at any interest rate.

    climate change is a different animal

    Sergei Reply:

    @Anders,

    there is nothing I can prove here. And I do not have any model. All I have is certain reservations about far-reaching claims made by MMTers because the whole history of the world proves otherwise. They in the end might be right. I do not know. However such reservations are definitely need to be addressed. But guess what happens instead :)

    Countries comes and go. Empires come and go. Political systems come and go. Civilisations come and go. And they all have reasons for being gone. But apparently there is nothing in this world that can shake the fiscal power. Well, the problem is that many of those things that have gone have gone for economic reasons. The fiscal does have the power to paper-over the short-term problem of unemployment. But I am far less convinced that it can solve THE problem of unemployment in a sustainable way. Not just for employment but for a country and its political system. Budget deficit is an indication of an inefficient economic setting. As inefficiency increases so has to increase the budget deficit and/or unemployment. But a blind increase in budget deficit does not necessarily change the trend of efficiency. Budget deficit is always a symptom and a reason at the same time. It might provide some time for the private sector to adjust itself. But I am less than sure that it alone is a sufficient condition. Required – most likely. Sufficient – pouch…

    All I have is a doubt. Unfortunately my doubt is an either/or doubt. And my doubt is a long-term doubt. I do not challenge and short-term impacts of fiscal deficits. What is short-term and what is long-term depends on individual countries and their economic positions.

    WARREN MOSLER Reply:

    when taxing ends the currency ends.

    a federal budget deficit is a sign of the other sectors collectively net saving. to the penny

    Sergei Reply:

    @Sergei,

    Warren: when taxing ends the currency ends

    so what?! I am not obsessed with currencies. In my life I have already lived through a couple of currency reforms and life goes on. I should have added that currencies come and currencies go.

    Warren: a federal budget deficit is a sign of the other sectors collectively net saving. to the penny

    so what say I again. How does it address my concerns of long-term economic efficiency and sustainability? If there is no long-term solution to sustainability then all your arguments will likely collapse under political and/or economic weight.

    There is an obvious need to step over these pre-coded answers and build a model which can answer real questions. Not trying to cope with symptoms of problems after they are realized and it is too late, but coping with the problem itself.

    What is the problem of budget deficits? What is behind it? Why does private sector need to save? Does it really need to save? Or maybe WE FORCE IT TO SAVE WITH OUR ECONOMIC POLICIES? Why don’t you tax today most likely *less* than you want to tax tomorrow?

    I never say any coherent answer to these and similar questions. All I see it equal to the penny and taxing is king.

    WARREN MOSLER Reply:

    have you read the 7 deadly innocent frauds?

    Anders Reply:

    @Sergei, so ultimately the basis you are providing for your long-term doubts over the sustainability of high budget deficits or current deficits, is that there are many historical examples of currencies coming to an end.

    That’s fair enough, and seems a reasonable basis for concern. But MMT has a direct response to this fear: (1) it observes that currency demise has historically only occurred in countries lacking monetary sovereignty, and (2) it sketches out how imbalances are likely to be unwound in practice in a monetarily sovereign country.

    You don’t seem to have any retort to this other than to point at the many historical currency crises and asset that monetary sovereignty can’t make a difference.

    The analogy here seems to be a serious bacterial infection where suddenly a doctor prescribes penicillin. The doctor says “people won’t die now, thanks to the penicilllin”. You seem to be like someone saying “but look at all those other people who have died of the disease”. If you really think the people are going to die, the right approach should really be to explain why the penicillin doesn’t work.

    Sergei Reply:

    @Sergei,

    Warren: have you read the 7 deadly innocent frauds?

    Yes, I did. And the best example of full employment with price stability is an agricultural feudal society. How does your solution ensure we go in the other direction?

    Thank you.

    Honestly, I am tired of it. You probably lost me as an MTT supporter. I guess I am not the first one. Not sure if you care though but I stop caring

    WARREN MOSLER Reply:

    we have already gone in another direction.

    problem is unemployment which is evidence the deficit is too small.

    but you already know that, so well done!

    Sergei Reply:

    @Sergei,

    Anders: If you really think the people are going to die, the right approach should really be to explain why the penicillin doesn’t work.

    Exactly. Rather than increasing the doses of penicillin and probably killing the patient from an overdose it is more fundamental to admit that there is a disease, out of possible millions, which should be cured and each disease requires its own treatment if we want to ensure best results possible. Otherwise it all reminds me of QE and similar stuff. If it did not help, then surely the dose was too low. So we need to increase the dose and then wait a bit more. But then Warren himself said many times that QE probably makes the situation worse, not better.

    Anyways, as I wrote above I stop arguing. The MMT is adamant in that it has monopoly on being right. I see no value to spend my time any more. So I join Ramanan whether is good or bad. And I am also reconsidering my attitude towards MMT overall. The other MM seems more reasonable to me. At least they seem to be ready to accept that this world is not perfect.

    Again, it might be that MMT is perfectly right. But to me it looks like string theory in physics. Super-cool but useless because it can not be proved or disproved with our level of knowledge and technology.

    WARREN MOSLER Reply:

    MMT is ‘true by identity’ which doesn’t ‘prove’ anything but can’t be violated either

    like a + b = b + a is true by identity, doesn’t prove anything, but can’t be violated either.

    Anders Reply:

    @Sergei, how very sad. I know Ramanan has been turned off MMT based on the CAD question but you seem to be even more disillusioned than him (and, frankly, the MMR guys), despite having read 7DIF.

    Your attacks on MMT’s positive prognosis on deficits seem entirely superficial, I’m afraid to say. In my penicillin analogy, if you don’t trust a doctor’s positive prognosis, you should discuss how penicillin is claimed to work (and, yes, the proper dose). What you are doing is akin to saying “nothing has worked so far, so this new ‘penicillin’ drug can’t possibly work”.

    When you effectively say that large deficits may lead to severe currency crises – but that it’s unclear at what point a government ought to start re-prioritising deficit reduction, it’s frankly just hard to know what to make of that.

    You seem more concerned by fundamental economic issues such as why there are insufficient private sector jobs; that’s certainly laudable, but I don’t see why you can’t focus on structural private sector concerns whilst maintaining an MMT approach (ie get NAFA right, solving for inflation) at the same time.

    Sergei Reply:

    @Sergei,

    Anders: I don’t see why you can’t focus on structural private sector concerns whilst maintaining an MMT approach

    That is exactly what I am interested in and that is what MMT refuses to do. Just follow the Warren’s and Neil’s comments above. “If all you have is a hammer then every problem looks like a nail”. MMT deprives itself of everything that deviates from its main line.

    I have a suspicion that the MMT approach (supply NFA solving for inflation) is misplaced. Demand for NFA is both a symptom and a problem. I do not believe in the “cut taxes whenever there is unemployment” since that is exactly the same as “cut interest rates whenever there is whatever”. And now we are staring at the zero bound with no way further to go while guys like market monetarists gain the ground.

    I do not see how the MMT approach solves THE problem. Not A problem of excessive demand for NFA because this demand is by definition always excessive. How can it be otherwise?! But THE problem whatever that is at any point of time. MMT sounds like if your engine starts burning oil just pump some more because oil is what it needs to run. Well, until it starts swimming in oil and breaks down beyond repair.

    And the Warren’s response to my example of agricultural society with full employment and price stability is beyond any imagination. MMT clearly owns a monopoly on truth and nothing can be questioned. Instead of answers one gets “have you read that” and “have you read this”.

    It is a pity.

    WARREN MOSLER Reply:

    you could make all savings contributions after tax money instead of the current pre tax money if you want to reduce savings desires.

    and altering interest rates isn’t the same as altering fiscal balance. you did say you read the 7 dif?

    once your working knowledge of monetary operations is in place we can move on to what remains problematic for you.

    Sergei Reply:

    @Neil Wilson,

    “The current account deficit can only grow if there are people willing to save in the currency of issue.”

    That is not even funny any more. You are too fixated on China vs USA with exclusive focus on China. The problem is not and has never been in China. Warren stated that zillion of times.

    Reply

    MamMoTh Reply:

    @jim,

    So, are there any conditions under which you think a persistent and growing current account deficit might be a problem?

    Of course, that’s what happened in pretty much all the recent crisis.

    Do you think a country like the US could ever face a serious ‘balance of payments’ crisis? What about smaller countries with limited resources, such as the UK (problems with import substitution), or ‘developing’ countries?

    As long as the US dollar is a world reserve currency, the US is pretty safe and can still get a free lunch at the expense of the rest of the world.

    Given the extent of international trade, how would you limit domestic banks’ foreign currency exposure?

    International trade is not the only thing to look at. Most domestic developing economies are dollarized to some extent.

    Also, how do you explain Mexico turning to support from the IMF in 2009 (after a sharp depreciation of the Peso), despite the fact that Mexico issues its own floating currency?

    Probably to avoid that a liquidity problem becomes an insolvency problem, again.

    Reply

    WARREN MOSLER Reply:

    disagree with the first half

    Reply

  150. Jim Says:

    I would really love to believe the MMT line that current account deficits are ‘never a real problem for countries that issue their own floating currencies’. However, this discussion leaves me unconvinced – thus far at least.

    MMTers are very concerned with controlling domestic inflation within a (hypothetical) closed economy. But at the same time they seem to be completely uninterested in the potential risk/threat posed by an ever-expanding CAD.

    If you have a policy dedicated to controlling domestic wage-driven inflation (JG), then perhaps you should also have some similar well-thought out policy for controlling the effects of (possible) substantial fx currency depreciation (as the result of balance-of-payments crises) – especially given the MMT policy recommendation of ever greater budget and CA deficits.

    ?

    Reply

    WARREN MOSLER Reply:

    it’s not about ‘never a real problem’ but about defining the word ‘problem’

    they never stop you from sustaining full employment and optimizing real terms of trade, for example.

    Reply

    Sergei Reply:

    @WARREN MOSLER,

    “they never stop you from sustaining full employment and optimizing real terms of trade, for example.”

    Lets assume “yes, they cant”. But why are you sure that such outcome is economically better than any other?

    Reply

    WARREN MOSLER Reply:

    it’s half the fed’s mandate, for one thing, so Congress must think it’s for the public good

    Sergei Reply:

    @Sergei,

    Warren: it’s half the fed’s mandate, for one thing, so Congress must think it’s for the public good

    Yes, and Congress also ordered Treasury to look after the exchange rate. Might not qualify for half of the mandate though.

  151. Sergei Says:

    Warren: did I state i supported taxing fx transactions somewhere?

    Of course not! And that is exactly what I am trying to tell Neil. And so I used you and your argument to point out that he is wrong.

    sorry that I used confusing “you” in my comment. Was not supposed to mean “you” :)

    Reply

    Neil Wilson Reply:

    @Sergei,

    Switching to Strawman now I see.

    If you’re going to have a rant at least read the stuff first.

    Reply

    WARREN MOSLER Reply:

    if i thought ‘speculation’ was a ‘problem’ with regards to public purpose I’d consider it.

    Reply

  152. MamMoTh Says:

    Warren,

    govts don’t have to ‘finance trade deficits’ with foreign debt or anything else.

    Governments can find themselves in the need to finance imports with foreign debt, for instance when they import energy which is often a public monopoly.

    it’s a private sector matter that doesn’t demand govt. intervention,
    it’s when govt intervenes that the issues raised here begin.

    This is how the discussion started. It is basically a private sector matter, that is, a domestic banking sector matter that is exposed to fx risk, and the government either bails it out and takes the foreign debt on its books, or lets the banks fail, people lose their deposits, local currency collapses further and things get worse, etc.

    In both cases you have a crisis.

    Reply

    FDO15 Reply:

    Sergei and Mammoth are right here and MMT contradicts itself badly in these arguments. Warren likes to say that banks are public/private partnerships, but when it’s convenient he makes them the bad guys. When locals borrow in a foreign currency and cause a domestic problem it is inherently a government problem unless they want to suffer a crisis. So the Mosler solution is either 1) The government shouldn’t get involved or 2) the government should get involved and take on the burden caused by the private sector. In either case you get an inevitable crisis.

    Reply

    WARREN MOSLER Reply:

    I don’t recall specifically supporting those positions?

    Reply

    Mario Reply:

    @MamMoTh,

    the government either bails it out and takes the foreign debt on its books, or lets the banks fail, people lose their deposits, local currency collapses further and things get worse, etc.

    why can’t the government not bail out the banks, let the bad banks fail, AND guarantee people’s deposits?

    Reply

    Neil Wilson Reply:

    @Mario,

    “why can’t the government not bail out the banks, let the bad banks fail, AND guarantee people’s deposits?”

    It can, but that would solve the problem and leave certain people with less outliers to feel anxious about.

    I’m coming to the view that half the problem here is with the bankruptcy and liquidation process. We need a ‘pre-pack’ administration process for banks so that a bank can be reset rapidly.

    The other half is mistaking a solvency problem for a liquidity problem. I wonder if it would be better to use administration rather than ‘lender of last resort’ in the majority of cases.

    Reply

    WARREN MOSLER Reply:

    All good points. Comes back to my criticisms of the FDIC. For some reason pundits go after the Fed when the problem is the FDIC

    WARREN MOSLER Reply:

    It can, does, should in the US. ‘Failing’ means shareholders losing all their funds and new shareholders taking over, as pretty much happened to many US banks over the last few years, including the very largest. It’s about turning over the equity holders, not bull dozing the buildings.

    Reply

  153. giovanni zibordi Says:

    I am not sure of how to come back on a topic on the website, yesterday it was too late to keep posting for me due to time zone differences, otherwise I would have come back. So if I can add something to the tax bonds for Italy I will try here that seems a thread updated everyday

    (By the way, the debate in Rimini will be somehow taped or streamed, but I am not sure of the details, I am not part of the organization per se, just a trader and economic blogger during my downtime (www.cobraf.com). But it will be a big audience in attendance I believe, like 7-800 people and should be fun. So I was gonna summarize the Tax Bond proposal in Italian, on a one page leaflet and distribute it a couple of thousands around the ITforum and I wanted to make sure of the details. Some peopole that were interested forwarded it to Italian economists and it seems the objections come from accounting issues, like the definition of cash in the governemnts income statements… I not was going to address them, because I believe are technicalities that any gov can solve by law. Also in Italy we have already a huge backlog of credits toward the gov (30 billions…) because it is very slow to pay and there is now a discussion about letting companies, that are going under now by the thousands, use them to offset their taxes. Again there is resistance because “experts” claim that the State will have less cash… Did someone make it into a proposal in the Iris Parliament ?

    Reply

  154. y Says:

    Hi Warren,

    more on this debate from over at Mike Norman’s site. The following comment is by Ramanan, in response to your ‘let the bad banks fail comment (above):

    “Really not sure about Warren Mosler’s proposals. He can let banks fail in their international setting but that effectively is losing credibility in front of the whole world. Good or bad, the State is forced to support banks to maintain financial stability. Of course it should regulate more but there is no regulation which can circumvent the problem of foreign funding”

    What do you think?

    Reply

    WARREN MOSLER Reply:

    not sure what ‘credibility’ means in this context or why it matters?

    what is ‘the problem of foreign funding’?

    Reply

    Neil Wilson Reply:

    @WARREN MOSLER,

    The credibility of those believing this is a problem, most likely.

    The job of the domestic central bank is to maintain the *domestic* payment system – since by definition that is the limit of its power. It should not be to maintain the existence of any particular commercial bank. Maintaining particular banks is one of the failings of this particular crash!

    The ‘problem’ that certain people see can be dealt with by making sure that there is a ‘pre-pack’ administration mechanim for banks, and that the commercial banks are left in no doubt that the central bank will use it.

    Reply

    WARREN MOSLER Reply:

    the problem is they don’t fathom my proposals:

    http://www.moslereconomics.com/?p=8968

    y Reply:

    The argument being made by R, I think, is as follows: when a country runs a current account deficit, its banks necessarily become indebted to foreigners in foreign currency and thus need to attract funding from abroad. If the domestic currency experiences a large and rapid depreciation, this can endanger the domestic banks, who become unable to close their open positions in foreign currency. R argues that in this situation, allowing the banks to fail is not a realistic option, as this would further reduce the confidence of foreign investors and make it even harder to attract foreign funds. Therefore, in such a scenario, the central bank is ultimately forced to step in to avoid a full-blown crisis. This means using its foreign currency reserves, or perhaps engaging in a currency swap arrangement with foreign central banks. In extreme cases, either the central bank foreign reserves are insufficient to the task, or swaps aren’t available or adequate, meaning that the treasury then ends up having to issue debt in a foreign currency.

    WARREN MOSLER Reply:

    pretty weak argument.

    the US runs said deficit, and our banks don’t have any fx debt to speak of, for just one example.

    banks don’t have fx debt unless they want to. and they can only do what’s permitted by regulation

    Neil Wilson Reply:

    @Neil Wilson,

    ” R argues that in this situation, allowing the banks to fail is not a realistic option, as this would further reduce the confidence of foreign investors and make it even harder to attract foreign funds.”

    Yes that’s the argument. And it doesn’t stack up – given that it inevitably causes the central bank to fail.

    It’s a classic slippery slope logical fallacy.

    You don’t need to attract the ‘confidence’ of foreign investors. You need to get back to earning foreign currency by selling stuff.

    Put the failed banks into administration and those owed foreign currency by them take the hit.

    Problem sorted.

    Foreign currency reserves are part of the buffering mechanism that government should maintain – along with strategic oil stocks, etc so that it can smooth out supply shocks in essential supplies during an sort of ‘black swan’ crisis.

    They should not be there to prop up bank’s gambling habits.

  155. y Says:

    “given that it inevitably causes the central bank to fail.”

    Would borrowing in foreign currency inevitably cause the government to fail?

    Reply

  156. y Says:

    I’m thinking, in the above situation, any borrowing in foreign currency by the govt would largely be to help banks close their open foreign currency positions, not to fund any other type of expenditure. As such, why should it necessarily pose a serious problem for the govt?

    Mexico was given a line of credit by the IMF in 2009, following a sharp fall in the Peso. The IMF credit line cooled the crisis and led to the Peso gaining in strength. The debt does not appear to pose any repayment issues for Mexico, and the Mexican economy has done ok since then, as far as I’m aware.

    Reply

    WARREN MOSLER Reply:

    right, so if a euro bank has made dollar loans to, say, a US company in europe,
    and that bank is having trouble borrowing dollars to fund that loan,
    the CB could, operationally, help by lending dollars to that bank to fund its dollar loan,
    with the CB taking the loan as collateral.
    this sort of makes the cb the lender.

    but if i were in Congress I’d vote against allowing US member banks making loans in fx in the first place.

    Reply

    Neil Wilson Reply:

    @WARREN MOSLER,

    But the key point there is that it doesn’t have to, and can only do it to the extent that it has existing dollars.

    For a single entity getting into liquidity trouble there is no reason it shouldn’t do that to smooth trade.

    But during a systemic crisis that is a dangerous play. The foreign CB likely won’t have enough dollars to go around.

    Ireland is awkward because it is in the Eurozone, but the state guaranteeing the banks’ debt was a crazy move. They could have pushed the cost onto Ireland’s creditors by simply resolving the banks (which in effect is what Iceland did).

    In some respect it was more important that Ireland resolved the banks – since their system is constrained by the currency peg.

    “I’d vote against allowing US member banks making loans in fx in the first place.”

    Yep. The entities taking on the FX risk ought to be completely ring-fenced from the domestic payment and lending system.

    Reply

    MamMoTh Reply:

    @Neil Wilson,

    The entities taking on the FX risk ought to be completely ring-fenced from the domestic payment and lending system.

    Impossible. They are part of the domestic payment and lending system.

    WARREN MOSLER Reply:

    regulators successfully prohibit all kinds of banking activities. this is an easy one to prevent

    Neil Wilson Reply:

    @Neil Wilson,

    “Impossible. They are part of the domestic payment and lending system.”

    They need to be able to go bust without causing a systemic effect is what I’m getting at.

    They cannot be too important to fail. Too important to fail things are public goods.

    ESM Reply:

    @Neil Wilson,

    “They cannot be too important to fail. Too important to fail things are public goods.

    At the risk of being tautological (since it’s not clear what “fail” means), I would rephrase to say that nothing is too important to fail. If people believe otherwise, then there will be a moral hazard problem.

    This is not to say that the government shouldn’t swoop in and do something to mitigate the collateral damage. This is easily done, however. In the case of a bank, shareholders get wiped out and unsecured creditors (whether they be bondholders, large depositors, pensioners, swap counterparties, or employees) take a haircut.

    I can’t really think of a good reason for the government to bail out a bank because of an fx exposure gone awry. Seems like a good opportunity to haircut some (non-voting) foreigners if you ask me.

  157. y Says:

    Warren,

    “the US runs said deficit, and our banks don’t have any fx debt to speak of, for just one example.

    banks don’t have fx debt unless they want to. and they can only do what’s permitted by regulation”

    Ramanan:

    “When a nation is a net importer, a nation (note: not the government, but the private sector) has to finance this by hook or crook. For the US this is relatively simple because exporters TO the US purchase dollar denominated assets. For other nations it’s not that simple.

    Let’s say Toyota sells cars in Thailand. Now Toyota will repatriate funds back to Japan – which leaves a Thai bank indebted in Yen because the Thai bank is acting as a dealer in foreign exchange markets. The Thai bank has to keep refunding this liability and keep its net open position low, because of regulatory requirements and self imposed requirements/discipline. So the banking system as a whole has to attract funds from abroad.”

    - If funds suddenly start to flow out of a country with a large CAD(capital flight), this causes a rapid depreciation of the currency, leaving banks (such as those above) in an increasingly bad situation (a growing net open position in foreign currency).

    Under normal circumstances a gradual depreciation is nothing to worry about, but under capital flight/ crisis conditions a sudden depreciation can lead to an even greater outflow of funds, further threatening domestic banks.

    At this point the CB has to decide whether to intervene in the market
    to stabilise the situation, or allow the currency to keep falling and the banks to fail.

    Ramanan argues that typically the central bank ‘has’ to intervene by using its fx reserves, or doing fx swaps, as letting banks fail would just exacerbate the situation. However, in a crisis fx reserves or swaps could be inadequate, and as such the treasury could be ‘forced’ to borrow foreign currency to provide the support needed to stabilise the domestic currency and stop the crisis from becoming a full-blown economic collapse.

    Reply

    ESM Reply:

    @y,

    Ramanan always got smacked around when he posted that stuff here. And yet he continues to torment us from beyond the blog :^).

    “Now Toyota will repatriate funds back to Japan – which leaves a Thai bank indebted in Yen because the Thai bank is acting as a dealer in foreign exchange markets.”

    Ok, so Thai customer pays for car with baht. Toyota gets Thai baht deposit at Thai bank. Toyota wants to exchange that for yen. Why is the Thai bank involved in the fx transaction unless it wants to be? Toyota can sell baht, buy yen from anybody in the world. Maybe the Thai bank makes the tightest market, I don’t know. But that’s a separate issue from importing and exporting. As long as the fx market is free, the rate will be in equilibrium at all times between buyers and sellers of the baht/yen cross. And it doesn’t matter who the buyers and sellers are. Sellers of baht could be (indirectly) a Thai trying to buy a Toyota RAV. Or perhaps a Japanese investor pulling out of Thailand. Or perhaps it’s George Soros. Who cares?

    If the sellers of baht are more aggressive than the buyers, then the baht will depreciate. No big deal. And when it goes down, you’ll find (usually) that the sellers of baht become less aggressive and the buyers more aggressive until a new equilibrium is reached. Every so often a panic happens, and the baht might overshoot on the downside. Not so good for Thais who want to buy Toyotas I guess, but it will only be a temporary situation. And in any case, the likelihood of a panic depreciation is much greater if the government has intervened to prevent (actually postpone) the necessary adjustment.

    Reply

    y Reply:

    Thanks ESM.

    Any idea why Mexico (which has a floating currency) asked the IMF for a credit line in 2009, following the Peso’ fall to a historic low?

    “As the global situation has deteriorated, Mexican asset prices have fallen sharply in line with the global market sell off, and GDP growth has slowed sharply. While Mexico’s underlying fundamentals remain very strong, and the balance of payments position is manageable, the open capital account and close global financial linkages––on top of close trade links with the United States––could expose the country to potential downside risks.”

    Reply

    ESM Reply:

    @y,

    I used to trade emerging market debt, but I’ve been out of the market for a while so I doubt I have any special insight.

    That being said, I’ve long considered the IMF to be the most worthless multilateral institution on earth. I suppose the Mexican authorities felt it was worth getting below market interest loans in dollars in exchange for mouthing sweet nothings in the ears of IMF officials. All other things being equal, such loans subsidize the terms of trade for Mexican residents.

    Actually, one thing I do remember is that the Mexican government was very aggressive (and savvy) about buying back their own dollar- and euro-denominated debt. So perhaps they liked the idea of having a free credit line to do a little debt arbitrage when and if the $hit hit the fan.

  158. y Says:

    “They need to be able to go bust without causing a systemic effect is what I’m getting at.

    They cannot be too important to fail. Too important to fail things are public goods.”

    Is that an argument against nationalising the banking system?

    Reply

  159. Renzie Says:

    Hello Mr. Warren Mosler,

    May I know your opinion on the Philippine stock market?

    Best regards,

    Renzie

    Reply

    WARREN MOSLER Reply:

    don’t follow it

    Reply

  160. y Says:

    Hi Warren,

    Do you think QE contributed to higher commodity and energy prices, as lower bond yields and interest rates encouraged more investors to move into those markets in search of higher returns? If so, what does this mean for your preferred zero interest rate policy? Wouldn’t this lead to more speculation in commodity markets, and thus higher inflation?

    Reply

    WARREN MOSLER Reply:

    japan has had 0 rates for going on 20 years. has it cause any of this?

    Reply

    y Reply:

    what about the yen carry trade?

    Reply

  161. Beshiva Says:

    Hi ~ Is there a place to buy 7DIF wholesale with volume discounts for fundraising sale at OCCUPY events? Thanks. ~ Chris Wroth, creator of the OCCUPY THE SQUARE game

    Reply

    WARREN MOSLER Reply:

    yes, email me, warren.mosler@gmail.com

    Reply

  162. FXTradeX6 Says:

    Just looking for your view of this. Pretty sure this guy is way off base.

    http://www.marketwatch.com/story/canadian-banks-stress-test-pro-talks-europe-2012-05-25

    Reply

  163. y Says:

    Hi Warren,

    I’m trying to understand how to apply the MMT description to the UK situation – any suggestions? Libor, Bank Rate, etc. Does the Bank of England control rates in the same way that the Fed controls the Fed Funds rate?

    Thanks

    Reply

    WARREN MOSLER Reply:

    yes, the boe controls the cost of funds for the banking system

    Reply

    y Reply:

    Does the boe control the interbank rate through OMOs like the Fed? It seems that the boe just sets the discount rate (Bank Rate) and lets the interbank rate adjust itself.

    Reply

    WARREN MOSLER Reply:

    when the discount rate is the target rate and has no ‘stigma’ it amounts to the same thing

  164. J T Says:

    I admit that I only today have discovered the book. It is mind-blowing. I think it is the holy grail for Keynesian principles, and perhaps truly beyond what the congress can comprehend. I also think of Christ, turning over tables in the temple at this type of finance.

    The true folks who pay for the system are those remaining unemployed, and starving. It might be easy to say, lay at the teet of the govt, and dont worry about it. It goes against the spirit of most folks who must earn their way.

    The principles, while possible, take the fact that the USD is the reserve. There are some delicate issues, and we live in most interesting times.

    Best regards for Mr. Mosler

    Jeff ps, I sent the link (7 frauds ) to Bob Moriarty, to whom I write often. His site is 321gold.com / respected fella.

    Reply

  165. J T Says:

    And, if the system is the correct system (7 frauds) / then the answer is, that the users of the system (have) lived with a foot in each domain. One the rule of credit, the other the rule of commodity of money. This has truly led to an anemic use of the policy, and now we may be forced to inflate massively, raise employment, and thank god – lift my mining shares. Ha!

    All good. I am making popcorn now for the show. Not sure but I think we are in for fireworks.

    Reply

  166. J T Says:

    lastly, you might want to reverse your order / new and input at the top / keep initiating topic also at top / old entires below

    Reply

    WARREN MOSLER Reply:

    michael will look into that thanks!

    Reply

  167. mwnl Says:

    Thanks for SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY…

    It would do a lot for the public discussion if your account of how things work was presented in the popular media…

    Reply

    WARREN MOSLER Reply:

    thanks, been trying, feel free to do same!

    Reply

  168. y Says:

    Hi Warren,

    What do you think Argentina needs to do to bring down its high inflation rate?

    Thanks..

    Reply

    y Reply:

    Also, what do think are the causes of Argentina’s high inflation?

    Reply

    WARREN MOSLER Reply:

    I haven’t looked at Argentina’s stats in quite a while. How high is their inflation? Do they consider it a problem? Do they ‘index’ public sector wages?
    What is the rate of nominal wage growth? Rate of import and export price growth? What % of cpi growth is taxes, etc?

    Reply

    y Reply:

    The Argentine government claims inflation is around 10%, but independent estimates are far higher. The Economist magazine estimates it to be around 25%. The president claims that inflation isn’t a problem but not many people seem to agree with her. I don’t know about the other stats.

    Reply

    MamMoTh Reply:

    @WARREN MOSLER,

    as far as I know wage increases have followed the unofficial inflation rate rather than the official one, for quite some time.

    public spending has considerably raised in terms of % of gdp.

    their trade surpluses have turned into a trade deficit, especially due to imports of energy so they’ve imposed all sorts of import controls, some of them quite ridiculous like the need to export 1$ in order to be able to import 1$ that turned companies that import cars into exporters of wine, soy, etc…

    since this didn’t work out well enough, they’ve restricted the purchase of dollars to “those who need them” which triggered a run on the peso and the unofficial “blue” dollar is now at about 6 pesos when the official one is at 4.50

    Reply

    WARREN MOSLER Reply:

    So maybe an indexation issue?

    MamMoTh Reply:

    @MamMoTh,

    There is no indexation as far as I know, but wage increases have followed the unofficial inflation anyway I understand.

    WARREN MOSLER Reply:

    ok, that could explain it. how large is the annual deficit/gdp?

  169. Mindblown Says:

    Hi Warren,

    Its awesome to see you website. I’m just reading your book and Im having to re-read it every few paragraphs because your model is totally different from what I have come to understand.

    I’m of of the Austrian school persuasion which has made the most sense to me till now. I was wondering what are your thoughts on the Austrian school, in particular the writings of F. Hayek and Ludvig Von Mises.

    I’m a regular reader of mises.org and the CATO institute. For market stuff I have started reading Casey Research, Contrarian Investing J, Marc Faber , Lew Rockwell, Peter schiff etc,

    What are your thoughts about the pro and shortcomings in the Austrian framework? Also your thoughts on precious metals…

    Reply

    WARREN MOSLER Reply:

    Haven’t been to their websites in a while.
    A lot of their proposals might make sense in the context of a gold standard or other fixed fx type of regime, but seem inapplicable with fiat currency/floating fx policy.

    Reply

  170. Mindblown Says:

    Hi Warren,

    I have been reading more and I realize that you follow MMT. I would love to know what you think about MMR (Modern Monetary Realism) http://monetaryrealism.com/
    which I found today.

    and also my question above about the Austrian school.

    Thanks

    Reply

    WARREN MOSLER Reply:

    Haven’t been to the MMR website. Anything interesting to report?

    Reply

    Newbie Reply:

    @WARREN MOSLER,

    Warren here is a link to MMR’s own declaration of how they differ from MMT: http://pragcap.com/understand-the-modern-monetary-system/how-is-mmr-different-from-mmt – might be good bang for your bathroom reading buck in terms of determining whether there are legitimate differences, if so how you would respond, and if not, to point out the straw man that they use for MMT.

    Reply

    WARREN MOSLER Reply:

    i agree with Bill here:
    “The reality is that the JG is a central aspect of MMT because it is much more than a job creation program. It is an essential aspect of the MMT framework for full employment and price stability.”

    MMT can provide a framework for a policy goal.

    If the policy goal is full employment and price stability, the MMT/jg framework makes sense.

    if the policy goal is rising unemployment and economic and social collapse, the mmt/austerity frame work is for you!

    much of the rest of what they say display faulty logic and straw men which I’m sure they’ll figure out over time and modify as needed, eventually coming back to ‘soft currency economics’

  171. y Says:

    Hi Warren,

    According to The Economist, in 2012 Argentina has a govt budget deficit of 0.6% of GDP. The country also has a current account deficit of 0.2%.

    Total government spending equals approx 37% of GDP

    The nominal wage index rose by 27% in 2011.

    Further Argentina stats from http://www.tradingeconomics.com:

    2011 govt budget surplus of 0.2%
    2010 budget surplus of 1.4%
    2009 budget deficit of 1.5%

    (Despite the surpluses total govt expenditure has been growing steadily at about 32% year on year).

    2012 annual GDP growth rate = 5.2% (down from all time high of 11.8% in 2010).

    2012 Govt debt to GDP = 44.2%

    2012 Unemployment rate = 7.1%.

    2012 Benchmark interest rate = 9% (same since 2010).

    - The Peso has been steadily depreciating against the dollar since 2008.

    - According to the CIA world factbook 30% of the population is under the poverty line.

    - The government has been financing itself in part by borrowing directly from the central bank and from social security funds.

    - The government has also introduced price controls (notably on energy), import restrictions and capital controls. They have also re-nationalised the oil company YPF.

    - Argentina has apparently been facing supply problems in key sectors, partly due to a lack of private investment.

    —–

    I can’t find stats on the rate of import and export price growth, or tax % of cpi growth.

    Reply

    WARREN MOSLER Reply:

    a mixed policy bag for sure, but you can’t fault the real growth rate?

    Reply

  172. y Says:

    Re: Wynne Godley,

    Do you know if he wrote anything about the sustainability of growing/persistent current account deficits (contradicting his previous work)? In the work I have read he usually comes back to the view that they are ‘unsustainable’ in the long run.

    Did he think that countries other than the US could sustain large CADs indefinitely? The UK, for example?

    Thanks.

    Reply

    WARREN MOSLER Reply:

    don’t recall

    Reply

    anon Reply:

    So when you say he agreed with you on the CAD question, do you mean he said to you one day, ‘you’re right’?

    Reply

    WARREN MOSLER Reply:

    yes, i recall questioning something he wrote in a levy article where he said something like the only answer for the US was to reduce the CAD.

    I asked why the deficit couldn’t be expanded. He said it would need to be 9% which the politicians would never do.
    I said that as an academic he should have pointed that out and even recommended, then offer the reduced cad as an alternative given his perception that
    9% is too much for politicians to approve. He agreed with me.

  173. y Says:

    Perhaps the reason he thought politicians wouldn’t approve it is that it might be a bit too much like taking a leap into the dark. The *possible* risks are what might scare people. They would have to be absolutely convinced that an expanding CAD/ budget deficit combo posed no future threat if properly managed. It seems like Godley wasn’t convinced of this himself.

    If there was a way to demonstrate beyond reasonable doubt that the expanding CAD/budget deficit combo simply wasn’t a problem, then that would be great…

    Reply

    WARREN MOSLER Reply:

    the causation is that it reflects non resident ‘savings desires’

    Reply

    y Reply:

    but ‘savings desires’ can diminish as well as increase. A large holder of US NFAs deciding to sell up could rapidly change the overall situation, with a sharp fall in the value of the currency as the result. If this turnaround was sigificant enough it could potentially result in runaway inflation and other serious economic problems, couldn’t it? That would be a currency crisis or balance of payments crisis type situation.

    Reply

    WARREN MOSLER Reply:

    not ‘runaway inflation’
    just a ‘one time’ adjustment that would tend to ‘correct’ after it runs its course, all else equal.
    and inflation isn’t an economic problem per se. the ‘value’ of the currency is just a numeraire

    y Reply:

    If inflation isn’t a problem per se, then why bother trying to maintain price stability?

    WARREN MOSLER Reply:

    It’s a political imperative. People vote against inflation, to a fault.

    y Reply:

    Do you not think (high) inflation can have negative economic effects?

    WARREN MOSLER Reply:

    maybe, just never seen any studies that concluded that.

    Sergei Reply:

    @y,

    Y: If inflation isn’t a problem per se, then why bother trying to maintain price stability?

    They do not stabilize prices. They stabilize changes of prices. And 2% is a purely randomly selected goal.

    Sergei Reply:

    @y,

    Y: Do you not think (high) inflation can have negative economic effects?

    What is high? It is a question of social/political choice with regards to the redistribution of financial wealth. There can hardly be an economic answer

    ESM Reply:

    @y,

    @Sergei:

    “And 2% is a purely randomly selected goal.”

    Not randomly selected. It’s designed to be as close to zero as possible while providing a buffer against deflation, which is thought to have much stronger feedback to the downside.

    “There can hardly be an economic answer”

    Well, there isn’t a mathematically rigorous answer, but it seems likely that uncertainty grows as inflation (and thus the returns demanded on investment) get larger in absolute value. Being off by 20% on your inflation forecast is not such a big deal for an inflation rate of 2%. Being off by 20% if the inflation rate is 20% is a much bigger deal.

    Still, the Turkish economy managed to operate with 100% inflation rates. I don’t think that anybody would claim that the Turkish situation was ideal though.

    Finally, it’s clear that at some level of inflation people will stop using the fiat currency for conducting most transactions. If prices are changing materially intraday, that would be pretty burdensome and annoying.

    WARREN MOSLER Reply:

    agreed. and turkey actually had some pretty good real growth at that time

    Sergei Reply:

    @y,

    ESM: Not randomly selected. It’s designed to be as close to zero as possible while providing a buffer against deflation

    Well, it is a random choice, isn’t it? I mean “as close to zero as possible”. Why not give everybody a larger margin for error? And what is so bad about deflation? Isn’t it a natural state of the economy due to productivity? Why do you need central banks to fight against natural forces?

    ESM: “it seems likely that uncertainty grows as inflation (and thus the returns demanded on investment) get larger”

    Hm, inflation premium might go up but investment risk premium might go down. Net-net? It is likely that people will undertake more investment and development projects since they will have an inflation cushion behind them (like China). On the other hand people might save less and spend more requiring less intervention by the government.

    Yes, there are negative sides as well. We do not argue about individual sides. But I have a feeling that moderate inflation rates (but higher than 2%) definitely help dynamism of the economy.

    MamMoTh Reply:

    @WARREN MOSLER,

    other negative effects of inflation are loss of competitiveness in the case of fixed exchanges like Argentina in the 90s and the PIIGS in Europe.

    also as already pointed out very high inflation leads eventually to the dollarization of the economy to avoid changing prices all the time.

    Reply

    WARREN MOSLER Reply:

    don’t forget imports are benefits, exports costs.
    and why does that kind of ‘dollarization’ matter as long as the govt provisions itself with its currency of issue and keeps fiscal at full employment balance?

    MamMoTh Reply:

    @MamMoTh,

    imports are a benefit, exports at cost, but don’t forget no one is really stupid. there’s only one country, or a handful at best, that can get all the benefits from imports just by increasing a number in a computer.

    moreover, in dollarized economies governments fail to provision themselves with their own currency of issue and keep fiscal at full employment balance. they eventually trigger a run on the currency

    WARREN MOSLER Reply:

    you’re entitled to your opinion

  174. y Says:

    Sergei, do you think hyperinflation has negative overall economic effects? I’d say it probably does. Go backwards from there. At which point does inflation stop being ‘bad’ and start being ‘good’ ‘overall’?

    Reply

    Neil Wilson Reply:

    @y,

    I believe Randy has said that there is little empirical evidence of negative impacts of inflation less than double figures (10%).

    And that may be less in countries that have inflation protection for their working citizens (state pensions, housing provision an unions able to negotiate wages).

    Reply

    Neil Wilson Reply:

    @Neil Wilson,

    “And that may be less in countries that have inflation protection ”

    That’s less negative impact btw.

    Reply

    WARREN MOSLER Reply:

    I think in that study it was in nations with inflation less than 40%- no ill effects on output and employment

    Reply

    Sergei Reply:

    @y,

    Y: do you think hyperinflation has negative overall economic effects?

    Hyperinflation does not happen just for fun. There should be special reasons for it.

    Reply

    WARREN MOSLER Reply:

    probably

    Reply

    Sergei Reply:

    @y,

    Y: At which point does inflation stop being ‘bad’ and start being ‘good’ ‘overall’?

    I do not think we will ever be able to answer this dynamic question.

    There is clearly a certain society benefit coming from inflation (think about ability to “paper over” real innovations that failed) and at the cost of certain part of population. But then in the USA this will be a different part of population than in Japan. Can you build a mathematical model around it?

    Reply

    Tom Hickey Reply:

    @Sergei,

    Is the second derivative that counts. That makes valuation excessively instable to do business at some point.

    Reply

    MamMoTh Reply:

    @Tom Hickey,

    agreed, it’s not inflation per se that impairs economic calculation as Austrian love to say. it’s rather the difference between actual inflation and the expected inflation.

    Unless profit margins are really thin, no one is really hurt if expected inflation was 10% but actual inflation is 12%. But it’s another story if it’s 100% and 120% resp.

    WARREN MOSLER Reply:

    as long as full employment is sustained the output is there to be had

    Sergei Reply:

    @Tom Hickey,

    “Is the second derivative that counts”

    Nope. Unless you have an inflation targeting central bank. And even then I am not 100% sure because banks are in the nominal business, not real. And bank liabilities do provide negative returns.

    Tom Hickey Reply:

    @Tom Hickey,

    Don’t see how how you get to that conclusion, Sergei. If prices are changing weekly, daily, then hourly, the economy breaks down. During some hyperinflatiions, workers ended up getting paid hourly and their wives rushed off to market to exchange the currency for goods before prices rose even further. When the distribution system breaks down, the game fails, and there is a reset.

    Sergei Reply:

    @Tom Hickey,

    Tom: If prices are changing weekly, daily, then hourly, the economy breaks down

    Do not see how you get to this conclusion, Tom. Prices always change weekly, daily and even hourly and nothing break down :) For instance I was once booking a flight to visit my friend. Checked flight data and price in the morning, called my friend during the day to agree on timing, came home to book the flight and … the price was different. WTF said I and went to sleep. And next morning I booked the flight for the price. On the other hand have you seen a serious software industry which keeps track of prices informing your real-time about changes? I personally use it and find it very convenient. Nothing breaks down. It is an illusion.

    And hyperinflation does not come only because someone changes prices. It needs more, much more. If it was easy to hyper-inflate the crisis would have been over 3 years ago.

    Tom Hickey Reply:

    @Sergei,

    y; “At which point does inflation stop being ‘bad’ and start being ‘good’ ‘overall’?”

    There are winner and losers. Really depends on the political clout of interest groups.

    But “inflation” is widely unpopular politically because it sends a signal that the monetary authority is not doing its job very well. There’s a practical political reason that Congress and the president are is willing to give the “politically independent” central bank the task of conducing monetary policy. They are the one’s that get blamed, unless the deficit is high, in which case the perception is that Congress is creating “too much money” so that excessive money is driving up prices.

    Bonkers wrt to operational reality maybe, but that’s the cognitive-emotional bias that’s operative.

    Reply

    y Reply:

    Personally I’d be scared witless if inflation was in double digits, and I’d probably feel deeply angry at the govt if it was responsible. I think I’d probably move my money out of the country asap and possibly leave too if I could.

    y Reply:

    Though I’ve not been in that situation so I can’t be certain.

    Tom Hickey Reply:

    @Tom Hickey,

    When the US was offering double digit yields, I was it T-bills. It was great. I got to go on vacation as a trader. What trader could beat that, guaranteed?

    MamMoTh Reply:

    @Tom Hickey,

    it’s not bonkers when you see your income or savings being eaten away by inflation

    Tom Hickey Reply:

    @Tom Hickey,

    Yes, but at the same time your debt position is improving if you have large debts as many workers do — mortgage, car payments, etc. You can negotiate for higher wages, and your nominal debts remain unchanged.

    MamMoTh Reply:

    @Tom Hickey,

    Yes, but at the same time your debt position is improving if you have large debts as many workers do — mortgage, car payments, etc.

    In most countries where there is or was high inflation and it was a problem, workers didn’t have much debt. They usually don’t even own a car, or a house.

    Tom Hickey Reply:

    @Tom Hickey,

    That true, but in those countries is the inflation demand-side/financial or supply-side/real in the sense of non-financial? It’s rising resource costs, i.e., commodity (food) and energy (oil) prices, that has been creating inflation in the emerging world over the recent past, not monetary issues leading to excessive effective demand relative to output capacity.

    WARREN MOSLER Reply:

    right!

    MamMoTh Reply:

    @Tom Hickey,

    wrong, as recently discussed, in the case of Argentina

    Tom Hickey Reply:

    @Tom Hickey,

    MamMoTh “wrong, as recently discussed, in the case of Argentina”

    I don’t know enough about Argentina to comment.

  175. y Says:

    If interest rates are held below inflation (or, say, the base rate is held at zero as per MMT), and the government is simultaneously pursuing a high-single figure inflation policy (for example), do you not think people would accuse the government of stealing their savings?

    In fact, with a permanent zirp and any level of inflation, do you not think people will accuse the government of theft, or stealth taxes at the very least? (And not just ‘Adam Smith Institute pundits).

    Reply

    Sergei Reply:

    @y,

    Y: do you not think people would accuse the government of stealing their savings?

    As a matter of fact demand deposits by definition make negative inflation adjusted returns. And term deposits as well. Did you see revolts against banks?

    Accusations can go only where there can be a reason given. Since mainstream can not and does not want to come up with explanations WHY inflation occurs (despite all bla-bla-bla about prices they do not analyze prices as such) then it is of course easier to resort to no inflation rhetoric.

    Reply

    WARREN MOSLER Reply:

    some will. but ‘savings’ isn’t limited to holding cash

    Reply

    y Reply:

    Is there anything to be gained from a higher level of inflation, say above 2% but under 10%?

    Reply

    Neil Wilson Reply:

    @y,

    It rots debt. Nothing reduces your mortgage like inflation – proper inflation with wage rises that is.

    Businesses that make mistakes gain from inflation, since rising prices cover up the failing. Pretty much all the so called ‘property developers’ in the last asset bubble were bailed out by ever rising asset prices.

    Couple that with a state backed earnings related pension scheme and decent social housing and there is simply no need for individuals to do long term savings – with all the uncertainty that entails.

    And that likely means less excess savings desires in the first place that the state has to offset.

    The people who gain from low inflation are financial asset holders. For pretty much everybody else its largely a relative issue.

  176. y Says:

    Only those in secure well paid or unionized employment will get those regular inflation indexed wage rises. Poor low paid workers will just see prices rising remorselessly around them.

    “Couple that with a state backed earnings related pension scheme and decent social housing and there is simply no need for individuals to do long term savings”

    The point is, though state support in retirement and provision of housing is to be welcomed – people don’t want to be completely dependent on the state. They want to be able to save, accumulate wealth and not have that wealth destroyed on purpose by government policy.

    “The people who gain from low inflation are financial asset holders”

    So anyone who is trying to save and accumulate wealth and who doesn’t want to have to turn to the government for everything?

    Reply

    WARREN MOSLER Reply:

    you can turn to the govt for a transition job until you get old enough to retire on my proposed $2500 per month social security benefit.

    Reply

    y Reply:

    Sounds fine, but what about those with higher aspirations? Who want to save, and feel confident that the value of their savings is not being purposefully, remorsely eroded by high-inflation low-interest government policy?

    Reply

    y Reply:

    A low or zero interest rate policy only seems right if inflation is also kept low.

    WARREN MOSLER Reply:

    bus tokens don’t earn interest and bus companies change their price all the time.

    the presumption that the currency itself should be an investment vehicle maybe needs to be rethought.

    Tom Hickey Reply:

    @y,

    The JG is a temporary transition job that alleviates temporary involuntary UE. It is not meant to address the chronically unemployed. That is a different issue altogether, and one that the US has not really approached intelligently, let alone successfully because most see the chronically unemployed as perpetrators rather than victims. Sos the solution has been to lock them up, and a whole prison industry has been created to exact rent from doing so.

    WARREN MOSLER Reply:

    they don’t have to save by hoarding cash.

    there are lots of choices with inflation components to them

    Tom Hickey Reply:

    @WARREN MOSLER,

    The higher the interest rate, the higher the interest payments. According to MMT, high rates have an inflationary bias.

    Reply

    WARREN MOSLER Reply:

    i agree that seems to be the case

    y Reply:

    Higher interest rates are only inflationary if government debt is large enough for the interest payments to become inflationary. This would occur if the interest payments were progressively so large that peoples’ savings desires diminished and spending out of this income increased.

    So it’s not higher interest rates per se, rather the combination of large govt deficits/debt and higher interest rates, which is potentially inflationary.

    WARREN MOSLER Reply:

    though depending on the propensities to consume, higher rates could be ‘inflationary’ in any case.
    and they do increase the cost of investment which supports higher prices.

    if paying interest on ones tokens was a good idea you’d think bus companies would pay interest on their tokens, airlines would pay interest on frequent flyer miles, football stadiums would pay interest on tickets outstanding, etc. etc. or at least one of them would try it which hasn’t happened in the history of the world?

    Neil Wilson Reply:

    @y,

    Have a look at what ultimately backs pensions in payment.

    There may be a desire to be ‘free’ from the government amongst certain people in the US.

    But look behind the curtain and you’ll find it is largely an illusion. Government interest income is the safest way to provide a guaranteed long term income stream. There is no operational difference between a state pension and a government interest income stream diverted via a private pension company.

    They’re all elaborate political illusions – like the idea that Social Security is funded.

    Financial savings in excess of current investment requirements have to be neutralised in some way. The savings market does not automatically clear at full output. Something has to intervene to stop a depression.

    And PK and MMT work shows that investment generates savings, so you simply don’t need to encourage savings. You need to encourage spending.

    Pensions are always a current output issue. Rationally the best way to deliver old age pensions is for the currency issuer to grant individuals a pension based on some agreed distribution algorithm. Taxation then makes space for that if necessary in current output.

    Reply

    y Reply:

    Ok, good point.

    However, my issue is regarding the acceptability of high rates of inflation, especially when the government pursues a low interest or zero interest rate policy.

    People’s money, whether its cash or deposits or whatever, is their personal property. So does the government actually have a right to pursue policies which actively destroy the value of that property over time?

    I’d say there has to be a balance between individual rights and the benefit to society as a whole. So inflation which is directly caused by government policy (as opposed to other factors) can be deemed acceptable if it remains reasonably low/moderate and predictable. High rates of inflation, directly caused by government policy, are much more ethically dubious (esp. if the government is pursuing a zirp), unless perhaps they are demanded by some sort of national emergency.

    Also, isn’t it the case that the higher the inflation rate is, the more erratic and unpredictable changes in the rate (esp. accelerations) can become? Not only does this start to overstep the boundary when it comes to property rights, it also makes forward planning and investment more difficult.

    Reply

    y Reply:

    An other problem with inflation above a certain level is that it tends to begin to accelerate, meaning that it becomes more difficult to control, no?

    Once people get used to high levels of inflation their future “inflation expectations” also become more difficult to moderate. This can engender a culture of “seller’s inflation” and wage-price spirals which becomes embedded in the general mentality and business practices. You can end up with a culture of endemic inflation which can only be subdued by ruthlessly clamping down on the economy.

    WARREN MOSLER Reply:

    beware the inflation expectations fairy!

    Neil Wilson Reply:

    @y,

    Does the private sector have the right to destroy the value of ‘personal property’. Can share prices go down? Can businesses go bankrupt? Can investments go bad?

    Can there be bubbles in gold, property or pork bellies?

    There is no absolute right to value, and there is no absolute right to the value of savings.

    Bear in mind that under neo-classical theory excess savings are supposed to be eliminated by the market *automatically* – by the processes of bankruptcy and capital destruction.

    Savers are expected to lose in a bust.

    WARREN MOSLER Reply:

    govt can tax your house which reduces the present value accordingly?

    and many nations have had high but stable rates of inflation for considerable periods of time

    WARREN MOSLER Reply:

    agreed!

    Reply

  177. y Says:

    “beware the inflation expectations fairy!”

    Why do you think expectations are unimportant?

    I suppose if you see inflation as a kind of tax then I’d probably vote for the party which promised a lower inflation tax, unless you can convince me that high inflation might really be beneficial in some way. So far the main thing seems to be that it makes debt repayment easier. Is there anything else?

    Just to be clear, roughly what rate of inflation do you personally think might be best ‘in general’?

    People only use bus tokens to pay for bus rides. They don’t tend to save them up to buy food or houses or anything like that. Apples and oranges when you get to the specifics, surely?

    Reply

    Sergei Reply:

    @y,

    Y: Why do you think expectations are unimportant?

    Because they have been consistently wrong. That is the only explanation why have had circular trends in interest rates. Even Fed with all its machinery has been proven wrong on its estimates of inflation for years and decades. For if they were right then rates would not have shown any catch-up dynamic.

    Inflation expectations is one of the greatest economic non-senses of this world

    Reply

    MamMoTh Reply:

    @Sergei,

    Even Fed with all its machinery has been proven wrong on its estimates of inflation for years and decades.

    that doesn’t mean inflation expectations are not important.

    they are, anywhere where inflation is high enough and the difference between actual and expected inflation can mean your business goes bust

    Reply

    Sergei Reply:

    @MamMoTh,

    “that doesn’t mean inflation expectations are not important.”

    hm, it might be they are important. My point rather was that we are very hopeless to say what they are. Despite all of our best efforts we have been very wrong, consistently wrong and wrong for years. Do you still want to bet on them or just give up and come up with something more relevant and useful?

    MamMoTh Reply:

    @MamMoTh,

    inflation expectations is not the same thing as inflation targeting by the CB.

    when inflation is high enough, inflation expectations play an important role in decision making, from investment to wage negotiations.

    WARREN MOSLER Reply:

    but the theory in question states that they cause inflation

    Sergei Reply:

    @MamMoTh,

    “inflation expectations is not the same thing as inflation targeting by the CB.”

    I did not say they are the same. I said that even CBs are hopeless at measuring inflation expectations. So maybe these expectations in reality do not even exist? Maybe it is not enough to say that there is something on the micro-level and that it defines the same thing on the macro-level? Maybe on the macro-level it is a zero sum of all micro inflation expectations plus some random animal spirits.

    MamMoTh Reply:

    @Sergei,

    Inflation expectations do exist. And they are quite easy to measure, either directly with a survey or indirectly from some inflation indexed financial instrument.

    Imagine an expected inflation of 50% or more and how it will influence your decisions about your future costs, prices or wage.

    Sergei Reply:

    @MamMoTh,

    “Imagine an expected inflation of 50% or more and how it will influence your decisions about your future costs, prices or wage.”

    A couple of years ago, when QE just started, half of financial markets was expecting hyperinflation (many still do) and another half expected deflation. On average it is pretty much zero that we got at the macro-level. But you still had two micro-halves. So what value did those micro expectations have in the first place?

    WARREN MOSLER Reply:

    that’s a different point.

    WARREN MOSLER Reply:

    that too!

    Reply

    MamMoTh Reply:

    @y,

    unless you can convince me that high inflation might really be beneficial in some way. So far the main thing seems to be that it makes debt repayment easier. Is there anything else?

    and that’s only a distributional effect that nets to 0 benefit overall

    Reply

    y Reply:

    The Bank of Canada and the Bank of England have managed to keep inflation within their target range – on average – since inflation targeting was adopted. Before inflation was higher, and more erratic. If their techniques and theories are wrong, how do you explain that?

    Reply

    Sergei Reply:

    @y,

    “Before inflation was higher, and more erratic.”

    So? Since they adopted inflation targeting why have they been always behind the curve in cutting rates? Why did the rates show everywhere such a consistent trend downwards in the last 20-30 years despite all their inflation targeting efforts? It should be more simple. Hike the rates -> bring inflation down to your targeted range -> move rates around a little bit to contain inflation around your target. And yet they rates have been trending down for years and years. So now we are at zero and what are your inflation expectations? My grandma does not have any. I asked her. She even does not know what it is. And that cohort in a broad sense is increasing in size, share and spending year after year.

    y Reply:

    Agreed about the general trend downwards. What would you say are the causes of that?

    However, the immediate effect of adopting an inflation targeting ‘regime’ was pretty extreme in the case of both the BoE and the BoC.

    In 1991 the Bank of Canada adopted inflation targeting. At the time inflation was at just under 7%. By 1992 it had fallen to 2% and it stayed more or less in the target range (1-3%) until 2004, when it briefly popped up to just over 4%. After that it again remained more or less in the target range, apart from 2008 when it went above 3%, then in 2009 when it went into deflation briefly, and in 2011 went above 3% again.

    Before they adopted the inflation target, inflation was always over 4%, after having come down from the 13% high of the late 1970s. The stats are similar for the Bank of England.

    Perhaps the sudden drop in inflation at the beginning of the 90s, and then the steady rate from then on, was due to something other than inflation targeting? I don’t know, I’m hoping you might have some other data which might shed light on this.

    WARREN MOSLER Reply:

    much the same happened in countries without inflation targeting

    WARREN MOSLER Reply:

    studies have found no statistical difference between inflation rates of currencies with and without inflation targeting policy

    WARREN MOSLER Reply:

    reread the 7 dif? the currency is a coercive monopoly.

    Reply

    y Reply:

    Might it not be better to say that the currency is a democratic monopoly? It’s only coercive in the sense that everything the democratically elected government decides to do involves a degree of coercion. If it decides to make walking on the grass illegal, and then you walk on the grass, you’ll have to pay a fine or go to jail. Same with taxation. If a party was elected with a large enough majority to completely change the monetary system, they could.

    Reply

    WARREN MOSLER Reply:

    the fine/jail is the coercive part that all kinds of govs employ

    y Reply:

    Sure, but the monetary system could be changed if the democratic process determined that to be the outcome.

    If enough people wanted to go back to a gold standard, or make taxation illegal, for example, then that could happen.

    So the currency is “a coercive monopoly” only in the sense that it is based on certain laws which people have to abide by and are not permitted to break. If people try to break these laws, then they will ultimately be enforced by the government in some way.

    However, the creation of those laws in itself is no more a coercive process than any other democratically determined law-making process.
    The population is not coerced into accepting those laws as unchangeable. They exist essentially because enough people want them to exist, within a democratic society.

    I realise society is not that simple but that’s the basic logic.

    As such the currency can be described as democratically determined system of laws. And these laws will be enforced if need be, as with all laws within a democratic society.

    The government has a monopoly on the currency and a monopoly on the use of force within its jurisdiction. But the government is subject to the democratic process. As such, for the currency to be described as a ‘coercive monopoly’, democracy itself would have to be described as a coercive monopoly.

    WARREN MOSLER Reply:

    agreed though I’d say we have a more of a semblance of representative government vs a ‘democracy’
    ;)

  178. y Says:

    “There is no absolute right to value, and there is no absolute right to the value of savings.”

    You might not have a right to always win in the market, but shouldn’t you at least be protected from ‘excessive’ government appropriation of or degradation of your property? ‘Excessive’ being a term up for debate of course but still valid nonetheless.

    I accept the case for low to moderate, more-or-less predictable inflation, but beyond that I’m not convinced. Rothbardian types of course believe that the government has no right to take anything from anyone without their individual consent, which strikes me as being wholly unrealistic, as well as somewhat unethical (as it means everyone, including future generations, is subject to an individual’s passing whims and fancies).

    Reply

    Neil Wilson Reply:

    @y,

    “You might not have a right to always win in the market, but shouldn’t you at least be protected from ‘excessive’ government appropriation of or degradation of your property? ”

    I’d prefer to the protected from excessive private sector appropriation of my property, my government and my currency system and their degradation of my property and my families standard of living.

    ‘of the people, by the people, for the people’ if I recall correctly.

    You’re blaming the wrong guy.

    Reply

    WARREN MOSLER Reply:

    or protect the economy from an output gap

    Reply

    WARREN MOSLER Reply:

    no one forces you to save in anything in particular.
    for example, fresh fish doesn’t hold value, so no one saves in that.
    so what?

    Reply

    y Reply:

    To take an extreme example, imagine inflation is raging at such a high level that before you can even take your day’s pay to the shops to buy your dinner the value of your money has fallen and you can no longer afford as much as you could when you were paid at the end of your shift. That would clealy be a pretty awful situation. If the government was responsible for it, it would also be deeply unethical.

    So work back from that extreme situation until you reach a point where inflation is at a level that can be deemed acceptable from the point of view of individuals with regard to their property.

    Reply

  179. y Says:

    I agree with you on that one but I thought the two were not mutually exclusive? Protection from both, balance rather than opposite extremes.

    Apart from the debt repayment thing (couldn’t this also be solved with some debt jubilees as per Steve Keen?), what in general might be the real benefits of high inflation not offset by additional costs of high inflation?

    Some other costs might include: reduction in private investment, reduction in productivity, inefficient allocation of resources, increased ‘shoe leather costs’ and menu costs (wasteful use of resources).

    Reply

    Neil Wilson Reply:

    @y,

    “Some other costs might include: reduction in private investment, reduction in productivity, inefficient allocation of resources, increased ‘shoe leather costs’ and menu costs (wasteful use of resources).”

    Again empirical research has shown no impact from quite high levels of inflation.

    So the data is against you on that one. We’ve already had thirty years of economic policy based upon belief. Isn’t it time we had some informed by the data?

    Reply

    y Reply:

    What do you think might be a better rate of inflation to ‘target’ then, in general? If you think 2% is too low , do you think 4% could be better, or 6%, 8%, 10%, 15%? Could you also just clarify what you think the real benefits of high inflation would be? Do you think high inflation is working well in countries like Argentina? Thanks.

    Reply

    WARREN MOSLER Reply:

    I think we could easily have full employment without excess demand

    WARREN MOSLER Reply:

    not so much that there is an advantage to higher inflation,
    just that inflation hasn’t been observed to reduce employment/output

    bankruptcy laws are today’s debt jubilees. and yes, they need to be rethought

    Reply

  180. y Says:

    Hi Warren,

    I don’t fully understand why you think a permanent zero interest rate policy would not lead to higher inflation, or hyperinflation. It seems that in a non-deleveraging scenario, a permanent ZIRP would make it extremely cheap, easy and tempting for anyone to borrow as much as they could to buy whatever they wanted, rapidly driving up prices. What’s to stop people and businesses from going on a massive credit binge when credit is permanently so very very cheap?

    What mechanisms or tools do you advocate for controlling bank lending, if not interest rate changes?

    Reply

    y Reply:

    “I would make the current zero interest rate policy permanent… because the non-government sectors are net savers of financial assets, this policy hurts savers more than it aids borrowers, so a fiscal adjustment such as a tax cut or spending increase would be appropriate to sustain output and employment.”

    http://moslereconomics.com/wp-content/pdfs/Proposals.pdf

    Are you suggesting here that with a non-zero interest rate, tax cuts or spending increases would not be appropriate to sustain output and employment? Do MMT policies depend on a zero interest rate?

    Reply

    WARREN MOSLER Reply:

    It means that with today’s institutional structure rate hikes are probably expansionary/inflationary and less of a fiscal deficit would be appropriate to sustain full employment (all else sort of equal)

    And that rate cuts are contractionary/deflationary and require larger govt. deficits than otherwise to sustain full employment.

    So i prefer lower rates and, for a any given size govt, lower taxes.

    Reply

    WARREN MOSLER Reply:

    japan’s had near 0 rates going on 2 decades with none of those outcomes.

    borrowers pay a risk adjusted rate which is higher than 0.

    assets get priced on their risk adjusted rate of return which is higher than 0.

    the only entity that ‘borrows’ at a 0 nominal rate is the govt of issue and it’s
    spending is necessarily political in any case.

    bank lending is directly controlled by laws regarding assets/loans including quality and capital.

    Reply

    y Reply:

    Japan was in deleveraging mode for most of that period. I don’t know what the situation is like there now..

    Would you advocate changing capital requirements (in repsonse to changing conditions) to control bank lending, for example?

    “with today’s institutional structure rate hikes are probably expansionary/inflationary”

    - Do you mean with a fiat/credit money system? i.e. that higher rates wouldn’t be expansionary/inflationary in a gold standard system?

    Do you have any reserch which has shown higher interest rates to be expansionary/inflationary? Or low rates to be contractionary/deflationary?

    Don’t higher rates tend to encourage higher savings desires, whilst also reducing the incentive to borrow?

    If inflation is being driven by rising oil prices, couldn’t higher interest rates raise the value of the currency, thus offsetting the rise in oil prices?

    Thanks

    Reply

    WARREN MOSLER Reply:

    I support a 10% bank capital requirement to keep the math simple for the regulators.

    Japan needs a higher budget deficit given their ‘savings desires’ including mandatory pension type contributions

    On a gold standard higher rates attract foreigners looking to earn interest on their gold,
    which they earn at ‘taxpayer expense’.

    There was some research showing that with high debt to gdp ratios rate hikes are expansionary biases.

    The income effects of rate hikes/cuts seems to rule.

    Doesn’t seem to happen that way

  181. y Says:

    “Japan needs a higher budget deficit given their ‘savings desires’ including mandatory pension type contributions”

    Don’t the higher deficits just feed the saving desires, with people becoming less willing to invest in business, perhaps because they see the government debt as excessive and entailing future tax hikes? So the economy continues to bounce along the bottom, with business confidence gone and everyone just saving the money which the government pumps out? Maybe it becomes a negative feedback loop, where higher government deficit spending increases pessimism about the future direction of the economy, rather than boosting confidence, and so leads to more defensive behaviour, i.e. higher saving?

    Perhaps instead of increasing its deficit, the government should tax away more individual and corporate savings, and then spend them or redistribute them to those that will spend them?

    Or otherwise, how much higher do you think the japanese deficit needs to be at present, if not 10%?

    Reply

    WARREN MOSLER Reply:

    it’s possible, but my guess would be seeing more govt spending is a net add to aggregate demand.
    but even if you’re right, that just means that for a given size govt. taxes can be cut that much more,
    until desired spending resumes. as a data point, we know 0 taxes mean the currency won’t buy anything/infinitely higher prices as there’s no demand for yen at all with no yen tax liabilities. and they have tried tax hikes, which only set things back.

    I’d start with a 3% of gdp fiscal adjustment, and see what happens. I’d also have a transition job in place, to facilitate the movement from unemployment to private sector employment.

    Reply

    y Reply:

    Given that you say higher interest rates can be expansionary/inflationary, maybe the BoJ should raise interest rates? Do you think this might encourage spending and investment, more than the current zero-rate policy?

    Reply

    WARREN MOSLER Reply:

    I think it would add to aggregate demand, but it’s not my first choice of fiscal adjustments.

  182. y Says:

    Do you think Japan’s aging population could cause problems for the ‘sustainability’ of government deficit spending?

    Reply

    WARREN MOSLER Reply:

    no, see the 7dif

    Reply

  183. y Says:

    Hi again,

    How would you stop excessive lending against real estate (and other assets) to stop huge asset price bubbles from developing, as in the run up to 2008? (if not by altering interest rates?)

    Thanks!

    Reply

    WARREN MOSLER Reply:

    for one thing, if you sustain aggregate demand at full employment levels it’s not all that much of a ‘problem’

    Reply

    MamMoTh Reply:

    @WARREN MOSLER, that doesn’t prevent a bubble from forming and all the mess it creates when it pops.

    Reply

    WARREN MOSLER Reply:

    right, though sustaining sufficient demand for full employment radically changes the nature of the ‘mess’
    like the crash of 87 created a financial mess of sorts, but the real economy pretty much never felt it so it’s pretty much lost to history

    Tom Hickey Reply:

    @y,

    IMHO, bank regulators should be looking at bank assets in terms of risk and getting concerned with bubble-like activity. That should be a signal to look into what is going on with appraisals, underwriting, etc. especially when the FBI says there is massive fraud happening. The chief regulators should also be considering systemic risk in addition to individual banks. A determination should be made on this basis to regulate credit extension more prudently and lower asset valuation based on increasing risk, requiring banks to hold more capital as a loss reserve.

    Reply

    WARREN MOSLER Reply:

    that’s exactly how they see their job.
    the problem is the regulators I’ve met via my bank exams are far from qualified and often genuinely just plain bad people as well.

    note that my banking proposals cut banking down to minimal activities that require maybe 1/100 the regulators and supervisors today’s policies require.

    Reply

    Tom Hickey Reply:

    @WARREN MOSLER,

    Well, the buck stops at the chief regulator which is the head of the FDIC and ultimately the Fed chair. Greenspan and Bernanke were malfeasant. The explosion of systemic risk falls on their heads.

    WARREN MOSLER Reply:

    Often felt like I was the only one on FDIC head Sheila Bair’s case back then, with everyone else harping on the banks.

    It’s all been a failure of government

    y Reply:

    That’s like blaming a crime spree on the police.

    Criminals don’t stop being responsible for their crimes just because the police are incompetent or corrupt.

  184. y Says:

    Sorry if this sounds pedantic, but shouldn’t the statement “The funds to pay taxes and buy government securities come from government spending” be “The funds to pay taxes and buy government securities come from government spending OR government lending”. ?

    Reply

    WARREN MOSLER Reply:

    yes, or, ‘and/or govt. lending’
    likewise, the value of the currency is a function of prices paid by govt when it spends and/or collateral demanded when it lends.

    ;)

    Reply

    y Reply:

    When you say “the funds to pay taxes and buy government securities come from government spending” do you mean spending by the treasury or spending by the central bank?

    Reply

    WARREN MOSLER Reply:

    could be either. the fed is the ‘scorekeeper’ of the dollar
    when the tsy decides to spend, it instructs the fed to credit a member bank account

    y Reply:

    But the treasury has to have credit in its account before it can spend, no? Doesn’t it have to get that by taxing or borrowing?

    WARREN MOSLER Reply:

    yes, but with the rest of our institutional arrangements that’s not, functionally, an obstacle/constraint on spending.

    Neil Wilson Reply:

    @y,

    You only need credit in your account if there is somebody who is prepared to bounce your cheque.

    Name the person who is prepared to bounce the government’s cheque – and expects to remain in their job.

    No law without enforcement.

  185. y Says:

    ok, thanks.

    Reply

  186. y Says:

    “yes, but with the rest of our institutional arrangements that’s not, functionally, an obstacle/constraint on spending.”

    Are you saying that there are no conditions under which the Federal Reserve might refuse to cooperate with the Treasury?

    “You only need credit in your account if there is somebody who is prepared to bounce your cheque.”

    The Fed could bounce Treasury cheques if the Treasury has no credit in its account, no?

    Reply

    WARREN MOSLER Reply:

    i’m saying as a practical matter the tsy can always and immediately get a credit balance in its account by selling t bills to primary dealers in any quantity.

    Reply

    Tom Hickey Reply:

    @WARREN MOSLER,

    if there is no debt limit imposed?

    Reply

    WARREN MOSLER Reply:

    not extending the congressional debt limit is congress telling its tsy not to spend.

    no reason tsy or the president should spend if so ordered by congress not to

    Tom Hickey Reply:

    @Tom Hickey,

    But the issue is that it is a mixed signal. It isn’t only about future spending. Congress has already made the appropriation, contracts have been entered into by agencies, interest is due, and then Congress decides it doesn’t want to pay and reneges on contracts entered into in the name of the US.

    ESM Reply:

    @Tom Hickey,

    “… Congress decides it doesn’t want to pay and reneges on contracts entered into in the name of the US.”

    That is Congress’ perogative. In any case, the US government (functioning only through the executive branch) has other ways to raise money besides borrowing. It has lots of assets to sell off. It could also allow taxpayers to prepay taxes at a discount.

    Tom Hickey Reply:

    @Tom Hickey,

    I am not sure that SCOTUS would agree Congress can do renege on contracts entered into, ESM. See Perry v. US (1935)

    Anyway, if the US did this, it would set a disastrous example and set a horrible precedent for the nation and world. Who would honor contracts they didn’t see in their interest anymore?

    ESM Reply:

    @Tom Hickey,

    Very interesting to cite a case where the SCOTUS actually upheld a rather egregious instance of breach of contract by the government as evidence for the claim that the government is not in fact allowed to breach contracts.

    Not saying you don’t have a point, but the irony is striking.

    It’s quite similar actually to the recent Obamacare decision, where SCOTUS basically said that the Act was unconstitutional but resorted to sophistry to uphold it anyway.

    Tom Hickey Reply:

    @Tom Hickey,

    I am not a lawyer and not qualified to say much about it. beowulf originally surfaced it and he thinks is is germane.

    See Defaults, Debt Ceilings and the 14th Amendment by Robert A. Levy. And this is from the right. Robert A. Levy is chairman of the Cato Institute and a constitutional lawyer.

    ESM Reply:

    @Tom Hickey,

    I’m not a lawyer either, but I suspect my deficiencies in understanding constitutional law are outweighed by Robert Levy’s deficiencies in understanding finance. I disagree with him that there is little distinction between questioning the validity of a debt and actual default. I have considerable experience in that area, and there is a world of difference. The historical context makes it clear that the drafters of the 14th Amendment understood the distinction as well. I also disagree that authorization of spending in excess of current tax revenues is equivalent to authorization of borrowing. As I’ve pointed out, it is possible (and indeed quite common) to spend in excess of income without borrowing. Also, some spending authorization is still discretionary (both in amount and in timing). Not everything that Congress authorizes spending for is a contractual obligation.

    roger erickson Reply:

    @Tom Hickey,

    “if the US did this, it would set a disastrous example and set a horrible precedent for the nation and world”

    Just interview any of the remaining native american tribal governments on this point.

    Laws never get in the way of the will of the current electorate, good or bad. That’s been known since Roman days.

    Tom Hickey Reply:

    @WARREN MOSLER,

    Well, I doubt we will find out, since I doubt that the president will do anything on that order. He will craft a deal that suits his agenda.

    Reply

  187. y Says:

    Hi,

    I got this from vimothy. He doesn’t agree with your statement that “the funds to pay taxes and buy government securities come from government spending” (or lending). I tried to explain what I thought you meant but mangled it so he got the wrong end of the stick.

    How would you respond to the following?:

    Vimothy:

    “Critically, though, Tom is confusing flows of funds with money. Money is created by a process of (in the modern world, bank and non-bank) intermediation. Private sector financial institutions intermediate against illiquid assets to create liquidity. If the government changes its tax rates, it doesn’t affect their ability to do this in any immediate sense.

    If the government borrows, then it has to borrow from the saved income of the private sector. The funds that it borrows come from the income generated by the economy. Money is just another asset that is useful in the course of this activity. When the government taxes it is taking income from the private sector. When the government borrows it is taking saved income from the private sector. That is what funding represents: income. Income is denominated in money, but it is not the same thing.

    ….

    The private sector needs outside money. The central bank supplies this elastically, leaving demand to determine the actual stock at its target rate.

    Government spending has no first order effect on this process, which is undertaken by the central bank. (Specifically, the CB issues outside money against high grade short term notes in repo operations known as open market operations, or OMO.)

    The private sector also needs inside money. This is created by private financial intermediaries. In the course of financial intermediation, private financial intermediaries need outside money to settle obligations between themselves, so that you can imagine a Perry Mehrling style hierarchy of money, with outside money at the top.

    When the government taxes or borrows “in its own currency”, it doesn’t literally borrow its own currency! That would be weird and absurd. It borrows savings and taxes income denominated in its own currency (and often in foreign currencies as well).

    When I buy a bond, I pay using a liquid bank liability, which is denominated in dollars or pounds or euros (or whatever). I don’t literally stuff an envelope full of cash and post it to the treasury department.

    This represents a capital flow: the government borrows my saved income.”

    Reply

    Neil Wilson Reply:

    @y,

    Ah vimothy. Struggles with the idea that there is more than one position from which you can view the battlefield.

    The central bank *is* government. That’s the MMT analysis – a consolidated central bank and Treasury balance sheet. That way you don’t get confused with irrelevant excess accounting journals. You get to see the Wood rather than the Trees.

    The beneficial owner of the central bank is the treasury, and in many jurisdictions the legal owner is the treasury as well. Therefore a consolidated balance sheet is and entirely appropriate analysis tool.

    The government sector has to first buy something from the non-government sector so that the non-government sector has the central bank reserves to settle the tax bill.

    That can be a mortgage asset if policy in the government sector deems that suitable.

    To clear the repo the non-government sector entity would have to get central bank reserves from somewhere to buy the mortgage asset back. To do that it, or some other entity with a central bank account, would have to sell something else to the government sector.

    So you see it is always prior government sector spending that funds the tax bill – one way or another.

    Calling the mechanism collateralised loans, Repos, OMOs, operational standing facilities, asset purchase schemes or whatever doesn’t alter the underlying fact. Government sector bought something from the non-government sector in return for government sector money.

    ‘Spending’ in normal language.

    “This represents a capital flow: the government borrows my saved income”

    Yes but the point is that you bought the bond at the rate on offer, the government didn’t come knocking at your door begging for your money.

    The government is no more ‘borrowing’ your money with a bond than a bank is ‘borrowing’ your money by offering a savings account.

    In reality it is your wish to save in safe government sector assets, rather than spend (and therefore getting taxed) that is driving the interaction. And it is that ‘desire’ that is the driving force.

    Austerity has shown that to be the case in spades. The government cuts back on spending and net private spending *does not* increase. Therefore the savings have to have been ‘pushed’ onto government.

    Reply

  188. Save America Says:

    http://freedomfest.com/ I have been bouncing around the freedom fest in Vegas, I don’t see Warren anywhere, or many people that want to talk about MMT. I tried to engage peter schiff, he knew warren from the senate run, and g. edward griffin told me he would read warren’s book when I gave it to him 2 years ago, but he didn’t want to talk about it with me, oh well.

    Is any other MMT people here that are familiar with mosler? Mosler why aren’t you at freedomfest? LOL! It is so finished, nobody here really knows MMT or wants to talk about it, they all want to talk about gold and leaving the country to go live in belize or some other sillyness. EPIC FAIL. Steve moore, reason magazine, robert kiyosaki and his wife seem to be the best chance MMT memes have here – LOL! Poor Dad! LOL!

    I thought the purpose of this blog was to get the word out, why is there so little “enlightenment” at freedom fest?

    The one high point so far for me: http://www.facebook.com/photo.php?fbid=320857501338106&set=a.320803291343527.72212.101869563236902&type=1&relevant_count=1&ref=nf

    Firefly SCIFI making a difference on college campuses!

    Reply

  189. y Says:

    Hi Warren,

    Would you agree with the libertarian assertion that taxation is theft? Or that taxation “violates property rights”?

    (People may quote your reply btw)

    Thanks.

    Reply

    WARREN MOSLER Reply:

    taxation is the route taken to provision govt.
    yes, it is coercive.

    Reply

    y Reply:

    Do you see any ethical problems with that coercive aspect?

    What’s the ethical justification?

    For Libertarians government coercion through taxation is necessarily unjust, immoral etc – no different to any other type of “theft” or forced appropriation.

    Reply

    y Reply:

    (I’m referring to “right-wing” libertarians)

    Peter Shaw Reply:

    @y,
    I suggest ethics is not relevant here.
    The proper function of general taxation is to enable the poor economically. This (in principle) produces a stable, vibrant economy as benefit, as it makes full use of resources.
    The direct effect of tax on spending (ie “personal”) is to enrich the public sector (as WM says).
    From this aspect, government can be viewed as a charitable monopoly; monopolies are naturally coercive.

    Ethical issues arise if government perceives itself as thief or protection-racketeer, but that’s quite another story.

    btw This indicates that any unemployed voter supporting austerity is exhibiting self-destructive behaviour.

    WARREN MOSLER Reply:

    seems you are saying in your opinion, the proper function of govt is to enable to the poor, and that you cast your votes accordingly.

    also, I never said ‘enrich the public sector’ but ‘provision the public sector’ as directed by the electorate, which includes you.
    ;)

    WARREN MOSLER Reply:

    it’s about public purpose.
    the only way to effectively provision the military, legal system, etc. is via some means of coercion?
    i’m open to alternative suggestions.

  190. Peter Shaw Says:

    I previously skipped some context -
    The private sector provides for itself. The public sector has dependents (eg schoolchildren, the ill, and the elderly*) to provide for out of taxation. The balance of tax pays public sector costs (incl the security and legal systems you mention). Additional private-sector tax surely goes directly into public-sector budgets, which tend to be spent in full; this is my sense of “enrichment”. Note that it doesn’t really reduce demand, only shifts it from private to public sector (MMT writings don’t always make this clear).
    By “poor” I meant principally the involuntarily unemployed (ie the target of MMT’s Job Guarantee).

    A government must set standards (hopefully with informed consent). I suggest that enforcing democratic standards isn’t exactly coercion in the sense that a monopoly is free to use it.

    *You might perhaps ask the elderly how economically usless they consider themselves.

    Reply

    WARREN MOSLER Reply:

    have you read ‘full employment and price stabiliy’ on this website? it’s the original MMT ‘full discussion’ of elr/jg

    Reply

  191. y Says:

    Hi Warren,

    Are Fed liabilities (base money/ currency) also Treasury liabilities, or are they Treasury assets?

    How does the Treasury account for them on its balance sheet?

    Federal Reserve notes are officially defined as ‘liabilities of the Federal Reserve System and obligations of the the United States government’ – which would imply that they are acttually Treasury liabilities (‘obligation’ being just another word for ‘liability’).

    This would make sense in the context of taxation. For example, when the government imposes a tax on the population, the population’s tax liability is the Treasury’s asset. Thus, when the tax is paid, Treasury liabilities (currency) are returned to the Treasury, extinguishing both the Treasury’s liabilities and the Treasury’s (tax) asset. (This is what you describe as the Treasury “shredding” dollar notes paid in tax). However, how does the Treasury actually describe this process in its accounts?

    Furthermore, when the Treasury borrows, something different appears to happen. It receieves one type of (its own) liability (currency) and issues another in return (a bond). Are the liabilities it recieves (currency) therefore ‘extinguished’, as when it receives tax payments, or not? If so, what is the asset held by the treasury against which the liabilities are ‘extinguished’?

    When the Treasury borrows its own liabilities (as it does under currenct arrangements when it deficit spends) do they become Treasury ‘assets’?

    Thanks, I hope that wasn’t too muddled!

    Reply

    WARREN MOSLER Reply:

    Fed liabilities are the reserve balances on its books ‘owned’ by the depositors- member banks, foreign govs, agencies, etc.

    Fed assets include the tsy securities it owns.

    Tsy liabilities are the tsy secs outstanding.
    tsy assets include balances in fed accounts.
    tax liabilities are generally not counted as assets until the funds hit the tsy’s account

    Reply

    y Reply:

    ok, thanks for that,

    However, doesn’t that contradict the following?:

    “Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues.” (United States Code).

    http://www.law.cornell.edu/uscode/text/12/411

    Federal Reserve notes are the physical version of electronic reserves (i.e. fed liabilities), implying that Fed reserves are also “obligations of the United States”. As such they must also be obligations of the Treasury, no?

    If this is the case, how can they be both Treasury “obligations” and at the same time Treasury “assets” (given that an obligation is a liability)?

    Thanks

    Reply

    WARREN MOSLER Reply:

    they are, functionally, reserve balances on green pieces of paper, and as such fed liabilities and assets of the holder

    y Reply:

    isn’t odd though that they can be called “obligations” of the US government, and at the same time “assets” of the US government? How does that work?

    Is there maybe something wrong with the Treasury’s accounts? They describe obligations as assets..

    WARREN MOSLER Reply:

    tsy’s are assets of the trust funds and the fed, liabilities of the tsy, right?

    y Reply:

    Yes.

    My point was, the US code describes federal reserve notes as “obligations” of the United States government. Yet the treasury describes them in its accounts as treasury “assets”(and therefore “assets” of the US govt). How can they be both?

    After all, when the Fed receives federal reserve notes, it doesn’t count them as “assets” does it?

    WARREN MOSLER Reply:

    Right
    They are Fed liabilities and assets of the entity that holds them
    And if you hold your own liabilities you are “net 0″

    y Reply:

    If fed liabilities are treasury assets, doesn’t that invalidate your argument that paying taxes ‘destroys’ money?

    (You pay taxes to the treasury, not the Fed, after all).

    WARREN MOSLER Reply:

    paying taxes removes net financial assets from the ‘non govt’ sector.
    your account gets debited and the tsy’s account gets a credit.
    the tsy is in the public sector

    y Reply:

    Understood, but under current arrangements the tsy holds the tax money in its account as an asset and then spends it. Its account is credited when taxes are collected, and then debited when it spends. So no money is ever destroyed by this process (under the current set up). Is this correct?

    WARREN MOSLER Reply:

    I guess it’s a matter of semantics/contexts re the word ‘destroyed’

    taxes remove balances from the non govt sector, and in the case of taxes being paid with actual cash- old $20′s for example- the US govt shreds them, which qualifies as ‘destruction.’

    and for the economy, balances in the tsy’s account are, per se, of no consequence whatsoever. it’s just ‘accounting’ on ‘the gov’s side of the ledger’ so as far as the economy is concerned they are as good as non existent.

    But in any case, the context of ‘taxes destroy dollars’ is that they are removed from the economy by the govt. thereby reducing net financial assets. And I suspect I never have used that term ‘taxes destroy dollars’ in the manner others do, even when I use the shredder imagery.

    y Reply:

    Thanks for the response and clarification, much appreciated.

    Cheers!

  192. CybrWeez Says:

    You may have answered somewhere before, you can point me there if so. I thought I heard that the amount of US “debt” is equal to amount of money in the private sector. How do we know that’s the case?

    Reply

    WARREN MOSLER Reply:

    depends on how you define ‘money’

    govt debt= net financial assets of the non govt sectors of that currency to the penny

    Reply

  193. Neil Wilson Says:

    @y,

    Money is destroyed when looked at on the consolidated government sector balance sheet.

    Remember that the system is not flat. There are various viewpoints and various abstraction levels on the same system depending upon what it is that you are doing.

    There is a system where a company holds its own shares in ‘Treasury’ and you can produce a balance sheet with them on. But at the consolidated level those shares don’t exist – because they conceptually they can’t. A company cannot really own itself.

    Reply

    y Reply:

    are you saying that central bank liabilities are also treasury liabilities? If not, I’m not sure I understand your point.

    Reply

    WARREN MOSLER Reply:

    central bank liabilities and tsy liabilities are both liabilities of Congress.

    Reply

    y Reply:

    ok, that makes sense. Thanks.

    By the way, when the Treasury issues coins, (under current arrangements) can it only issue as much in coins as it has in credit in its Fed account? Or could it in theory issue as much money as it wants to in the form of coins?

    Are coins described as Tsy liabilities or Fed liabilities?

    Cheers.

    y Reply:

    let me know if all these questions are getting tedious!

    y Reply:

    ok!

  194. barb baco Says:

    I cant get your spam protection to add correctly

    Reply

  195. Gian Luca Fiorani Says:

    Good morning, Professor, My name is Gian Luca Fiorani, I was in Rimini last October and I’ve just finished reading his book (7 innocent fraud capital). A technical question, but the U.S. government has the right to go overdrawing its accounts with the Fed? Thanks in advance.

    ps: Thank you for your work and thank you.

    Reply

    WARREN MOSLER Reply:

    copy/pasted from facebook:

    Warren Mosler
    First, Congress is the ‘boss’ of the Fed and Treasury. Functionally they are both agents of Congress.

    7:42am
    Warren Mosler
    Second, there is currently a ‘no overdraft’ policy where the Treasury is not permitted by Congress to have a negative balance in its account at the Fed. This is purely a ‘self imposed constraint’ Congress has placed on itself, and the same Congress that would order the Treasury to spend can change this self imposed restriction.

    7:43am
    Warren Mosler
    Third, the Treasury has established a primary dealer network where dealers are required to buy all treasury securities at auction, where they are free to bid whatever prices make sense for them, and where the Fed will lend the dollars to make the purchases. Because of this the ‘no overdraft’ rule has never even come close to being tested, and likely never will.

    7:44am
    Warren Mosler
    Therefore, the self imposed constraint is likely to remain in place and be of no consequence. And should it somehow be of consequence Congress can simply change it. Hope this helps!

    Reply

  196. Jon Moore Says:

    Steve Hanke John Hopkins/Cato Institute gave an interview on econtalk.com a couple weeks ago. The title was hyperinflation but most of the discussion was on US money supply and current low risk of inflation. Thought would be relevant to your interests. Unfortunately after an interesting discussion on monetary policy both Hanke and Prof Roberts show their misunderstanding of current fiscal situation but still pretty good. I sent a recommendation that Russ interview Warren. .http://www.econtalk.org/archives/2012/10/hanke_on_hyperi.html

    Reply

  197. Ed Says:

    Hi Warren,
    After reading lot of your material, I wanted ask if I have the correct “jist” of your main themes. So, could you let me know if my understanding is on point or off?

    1) Basically, all money is created by the government via the fed?

    2) The way the fed creates money is by essentially making electronic journal entries into accounts thereby creating the “digital cash”. This digital cash is usually issued to banks, based on a fractal reserve basis of sorts…then the banks make loans as appropriate.

    3) The banks or the fed can “order” physical/hard cash from the treasury as needed, but it gets accounted for through the feds digital accounts. But for the most part, the digital cash does the job of “printing money” out of thin air.

    Questions:

    1) When the fed creates “digital cash”, does this newly created money “have to be” offset by a debt asset such as a loan, a mortgage, or treasury bond?

    2) I like the idea of a tax holiday, but does the govt have to fund it with debt or can it just have the fed create the digital cash to pay for it?

    3) From my reading of your material, in general it seems that since we can “create money of thin air” we have the ability to solve a lot of our perplexing issues as a nation and as a society if we could find the courage to just do it, no? (we always have no problem printing money to go to war, but can’t do it to help ourselves…how ironic)

    4) The two big bogey men seem to be “inflation” and “debt”. How can we overcome everyone’s fear of these two? People have been terrorized to believe we would have massive inflation. As for debt, people can’t stand looking at it, so why not just print money without it?

    Thanks.
    Ed

    Reply

    WARREN MOSLER Reply:

    have you read ‘the 7 deadly innocent frauds’ on this website?

    Reply

    Ed Reply:

    @WARREN MOSLER, Yes, i read it, but i’m not an economics major so still trying to absorb it from an avg persons perspective. I loved everything i read in it, but it seems a bit counter conventional from my previously formed cnbc thinking….:-), so i’m trying reform my perspective and my questions above linger after reading. Thanks.

    Reply

    Nihat Reply:

    @Ed,

    Apparently, the law requires the government to issue debt for its deficit spending, period. (This is a self-imposed constraint, a political arrangement, has history, may or may not be useful/needed/justified anymore, etc. A separate discussion…) So, net money is created by deficit spending (not by issuing “digital cash” per se), but is offset by debt. However, again apparently, this debt can sometimes vanish as the fed is free to do whatever with the treasury bonds it has: sell ‘em to private third parties, keep ‘em, or forget about ‘em. There is some –possibly deliberate– uncertainty there, but considering that the fed and the treasury are of the same government nation, the space of policy options can be said to be wide open.

    Hey, I am a non-economist, too. What I say above are some of what I’ve learned (hopefully correctly) from this blog mostly, plus a few others.

    WARREN MOSLER Reply:

    Hi,
    When tsy net spends the fed credits the ‘reserve account’ at the Fed of the bank of whoever gets those dollars.

    Those dollars could simply sit in reserve accounts, and today some $3trillion do just that.

    Or, the govt can offer tsy secs, which are just alternative accounts at the Fed, called ‘securities accounts’

    If congress wanted, they could suspend all sales of tsy secs and just let the deficit spending sit as balances in reserve accounts

    Ed Reply:

    @Ed, so all we need is for the fed to “forgive” a chunk of the debt owed by the treasury. Every body wins….:-) A decrease in debt, continued necessary govt spending, and thus a healthy economy. I didn’t say all the debt just a big healthy chunk to get out and stay out of the rut we always get into.

    Or what do you think about this for an idea, adjust our “self imposed constraints” so that the fed creates $2 of funds for treasury use from every dollar of debt issued by the govt?…I really like this idea the more i think about it, any downsides?

    WARREN MOSLER Reply:

    violates ‘Lerner’s law’

    don’t concede the principle!

    Why not just limit tsy issuance to 3 month bills- close enough to cash- and run whatever deficit is needed for full employment?

    Ed Reply:

    @Ed,
    Ok, not familiar with lerners law, so i googled it. Still don’t fully understand….assuming it’s the marshall-lerner condition. Goes something like, currency devaluation doesn’t improve balance of payments?

    “don’t concede the principle”…which one?

    as long as spending is tied to deficit increases, people will have a problem with it in general, as we are conditioned to understand huge debt is bad for us.

    Reply

    Mathew Forstater Reply:

    @Ed, FYI, “Lerner’s Law” is what Warren called Abba Lerner’s position that one should never say something one knows to be incorrect for reasons of political expediency. Lerner was specifically thinking of issues regarding government budget deficits, national debt, etc. Lerner criticized especially deficit doves in this regard, arguing for example that the deficit is not really as big as it looks, or that the budget can be balanced over the cycle, or that if we have a capital budget then we can disguise deficits, etc. See my discussion under Lesson #12 in http://www.levyinstitute.org/pubs/wp272.pdf

    Reply

    Ed Reply:

    @Mathew Forstater, mat thanks for the reply, took a while to read your link, but it was interesting….still processing all this. But i still don’t get how it applies to my post. i had 2 points:
    a-let the fed forgive some of the treasury debt to reduce the overall level of debt. or
    b-let the fed create $2 of funds for $1 of treasury debt created…

    when warren said this would violate lerners law, was it meant that we should not be bashful of massive debt and deficits, instead wear them as a badge of honor of sorts. And that my points a or b would take away from this???

    thks

    WARREN MOSLER Reply:

    it’s like if you had a mortgage with a bank on your house, and then you got enough money to buy it back from the bank.
    in theory you still owe the money to yourself, and you could publicly ‘forgive the debt’ to yourself.

    When the fed buys the tsy secs for the economy it’s as if the tsy never issued it in the first place.

    Ed Reply:

    @Mathew Forstater, also another question: what’s the benefit of 3m treasuries vs. I guess, 10/20/30yr terms? is it just that they are the lowest interest bearing bonds?

    WARREN MOSLER Reply:

    the interest rate is approximately the same as what the fed pays on excess reserves, so for all practical/economic purpose they are the ‘same’

  198. Ed Says:

    “Apparently, the law requires the government to issue debt for its deficit spending, period. (This is a self-imposed constraint, a political arrangement, has history, may or may not be useful/needed/justified anymore, etc. A separate discussion…)”

    opened up a separate thread for this one to discuss it seperatly. In my mind this is what it all boils down to.

    I’d be fascinated to hear more of your thoughts on whether the “self imposed constraints” should be re-evaluated and adjusted for our modern world.

    Reply

    WARREN MOSLER Reply:

    no reason not to eliminate them, but once understood we can live with them

    Reply

    Nihat Reply:

    I think I share Warren’s view on this question. I understand that there are purists who’d rather have no govt debt to be issued whatsoever. I’d rather have a hybrid system where the govt is able to take either route, issuing debt when there is savings demand to be met, spending without borrowing when there isn’t such demand (subject to price stability constraints of course). For there is always going to be legitimate desire for secure savings instruments that the private sector can’t necessarily provide over the long haul. But, wait a minute, as far as I understand, this is what we have right now, albeit somewhat opaquely owing to the fed’s nominal autonomy with regard to the fate of treasury bonds it holds. Actually, this technocratic opaqueness may be not such a bad arrangement as it kinda helps keep politics out of it –to the extent it does, of course. Also, like Warren said, the treasury has the option to issue short-term securities with near-cash effects.

    Oh, there are also those who believe that the existing laws allow the treasury to mint a, say, 60-trillion platinum coin, deposit it with the fed, and then spend against it. Of course, the congress passes the budget, and the executive spends only what it is thus authorized to spend. But, their point is, this would be a terminal blow to deficit hawks, debt worriers. I don’t know exactly if this is totally possible or a pure fantasy, but it sure would be very interesting to see tested.

    All these aside, Ed, regarding “our modern world” aspect of the question, the first thing that captured my imagination about MMT was how it was, in essence, a theory of all-powerful monarchs. Who else can spend first and tax later, right? You wanna believe that, in a democratic republic, too, we can achieve for our collective selves what a benevolent and just monarch can for his subjects, but no, it ain’t that easy. Anyway, I find this political angle fascinating…

    Reply

    Ed Reply:

    @Nihat, hi nihat/warren thks for the responses.

    in swirling all these ideas around in my thick head, i can’t see what the downside is to enable deficit spending without issuing debt, or at least on some sort of ratio basis, say $2 deficit spend for $1 debt creation (or 1.5/1 etc). i want the cake and eat it too….:-)

    Reply

    WARREN MOSLER Reply:

    all net govt spending ‘creates’ that many net new dollars, which are all govt liabilities/debt.

    Nihat Reply:

    @Ed,

    I don’t know but inflation is always a concern. Pegging yourself to a fixed deficit-to-borrowing ratio constrains your policy space, doesn’t it? In other words, it appears to me that there is always going to be a certain maximum amount the government can net spend (after taxes and borrowing) without causing inflation. Say, given a certain size economy, employment condition, growth targets, etc., it is $2 for this coming fiscal year:

    Net Sp. = Total Sp. – taxes – debt = 2

    But you fix: debt = 1

    That leaves us with: Total Sp. = taxes + 3

    Therefore, you’ve ultimately pegged your total spending to taxes, which you can’t control/change quickly as you wish from year to year, let alone within a fiscal year. I think, debt is the nimbler instrument here, so it better be left free, don’t you think?

    WARREN MOSLER Reply:

    that’s why i propose fiscal adjustment be a function of the bodies in the unemployment line

    Nihat Reply:

    @Ed, also, a mistake in my interpretation of what you fix. It should’ve read:

    – — –
    Net Sp. = Total Sp. – taxes – debt = 2

    But you fix: debt = deficit/2 = (Total Sp. – taxes)/2

    That leaves us with = Total Sp. = taxes + 4
    – — –

    The conclusion doesn’t change, but I wanted to avoid further misunderstanding.

    Ed Reply:

    @Nihat, nihat, my thought on this would be for example something like:

    Net sp = $2T
    $2T = $1T (from taxes) + $1T (in deficit spend)
    New debt or additional debt created fr deficit spnd =’s $1T.
    Assuming the fed financed the entire deficit spend, the govt owes the fed $1T + interest. This shows up as a debt of the treasury….

    So what i was proposing was that since the govt holds a very special place in the monetary system, they should take the liberty to be able receive a multiple of every dollar of debt they create at the central bank. 2-1, 1.5/1, etc.

    It could be a higher multiple when unemployment is hi, and a lower multiple when unemployment is low to keep things in check.

    So if the govt needed to deficit spend $1T this year, then the govt should only have to create $500b in debt to the trsy as an example.

    See, as i read through a lot of warrens ideas,mmt stuff, I love the possibilities of what could be done. But it all seems to me to be based on increases, maybe massive increases in the govt debt…..Understanding govt debt isn’t as bad a thing as household debt. However, my guess is the average person will never embrace the concepts of mmt because they are conditioned to believe big debt is bad for them so big debt must be just as bad for the govt too.

    Reply

    Ed Reply:

    @Ed, should have been total spend = $2T

    Nihat Reply:

    @Ed, I see your point, but isn’t it something of a distinction without difference if you’re gonna let the ratio vary depending on the employment condition?

    WARREN MOSLER Reply:

    remember, the ‘debt’ is just dollars in securities accounts at the fed, vs dollars in reserve accounts at the fed.
    any reason, apart from interest, why you care which account the dollars are in?

    Ed Reply:

    @Ed, my thought is, mmt sounds great to me and what i’ve learned about it so far, but i just can’t see how average, non-economist, type of folks will ever accept it as long as big debt is a result.

    So, instead of trying “convince” avg folks that govt debt is really ok to achieve all the benefits of mmt, why not figure out a way to not call debt….well, debt….:-)

    Nihat Reply:

    @Ed, I guess, we are now squarely back in square one, violating Lerner’s law… :)

    I think that MMT, while holding that deficits are necessary and debt is fine, exposes at least one way why debt –large public debt, that is– is problematic. And it is this: the larger your savings are, the bigger vested interest you have in the economy’s being run sub-optimally. An optimally-run economy with full employment and general supply-demand balance would probably disagree with attempted fast consumption of large aggregate savings, by responding to such an attempt with inflation. Of course, this applies to a particular debt composition, where few savers have saved too much (e.g., China?). Otherwise, millions of people may have saved trillions in total (for retirement, for instance), and I don’t see why they’d be dismayed by an optimally-run economy

    I don’t know, have I said anything new? Other than pointing to the futility of saving more than you know what to do with?

    WARREN MOSLER Reply:

    Dont forget more ‘savings’ is in stocks

    Ed Reply:

    @Ed,
    Nihat, ahhh, now i think i see the downside. that is when too much savings coagulates it doesn’t recirculate, no? that’s where taxes come in to play to reclaim and recirculate, right?

    Now, if there is excess savings coagulating, as in the 1% and record corporate profits in their coffers, are taxes needed to free up that money for re-circulation?

    As for china, yeah, they really need to start buying back some stuff from the u.s. and let their people enjoy some of their hard work and keeping the money recirculating.

    WARREN MOSLER Reply:

    best to re read the 7dif, thanks!

    when there is unemployment for any reason, the govt always has the option of a fiscal adjustment to restore demand.

    that includes a slowdown from unspent income- the govt can cut taxes and/or increase spending- make the deficit larger- to sustain full employment

    Ed Reply:

    @Ed,
    hey warren, aren’t stocks just fiat currency of the “capitalists”?….lol.

    WARREN MOSLER Reply:

    no

  199. Ed Says:

    Another thought for discussion. The Legal Tender Act of 1862

    My understanding, this is kind of where it all started. During the
    civil war, the govt pretty much ran out of gold. They needed a way to pay for the the guns, amo, uniforms, food, soldiers etc and the rest of the war effort. There wasn’t enough money to buy bonds, no fed yet, so the govt straight up printed $450m, declared the money legal tender for all debts pub/private. and wamo, the factories hired workers, people had money to spend, the army had it’s necessities, and the stock market jumped. And this money was non interest bearing (unlike fed notes today).

    Now it sounds like it was easy, but the battle that went on within congress was probably much worse than the fiscal cliff debates. But you also had the yahoo’s who swore the sky would fall, the rivers run dry, and the usa would become defunct. Turns out the were dead wrong.

    Lincoln straight up gave the country the adrenalin shot it needed. All by printing money without creating debt, or at least not additional debt.

    If it worked in wartime, can’t understand why it’s not used today to prime the economy when needed.

    Reply

    WARREN MOSLER Reply:

    those dollars were accepted for payment of taxes and hence govt liabilities/debt.

    Reply

    Ed Reply:

    @WARREN MOSLER, let me run this scenerio by you:

    I live in NJ. We need a new train tunnel into Manhattan (as the current was built before steam engines…joke…but it is very old and decaying). The state can’t afford the additional debt to fund it.

    Let’s say, the trsy asked the fed for the $15b to cover the cost. The fed gives trsy the $15b,and the trsy gives the fed $15b bond (iou). Upon completion of the tunnel, A market value of $20b is assesed to the new tunnel, the trsy exchanges the title to the new $20B tunnel in order to retire the $15B bond.

    At the end of the year, the fed turns over the title to the trsy, as it does with other profits the fed generates.

    Does the govt now have a $20B asset without creating $15b in debt?….:-)

    Reply

    WARREN MOSLER Reply:

    it just means the 15 billion is sitting in reserve accounts the fed rather than securities accounts at the fed

    Ed Reply:

    @Ed, so i guess that means if we wanted to, we could build that tunnel, put people to work and create a great piece of infrastructure without increasing govt debt because the funds from the fed used to build it sit in reserve accounts? sounds good to me!…..:-)

    Nihat Reply:

    @Ed, it wasn’t for free. I take it that those monies sitting reserves are what’s been paid to builders et al. You caused the government to issue to them 15 billion in god-damn tax credits, and burdened the IRS for some time to come.

    WARREN MOSLER Reply:

    Except they don’t want to use them as evidenced by the output gap

    Ed Reply:

    @Ed, nihat, so tax them, get some revenues back, let the rest circulate…as the builders have to pay the workers and buy materials from the factories. Plus, we have a new piece of badly needed infrastructure built with workers who would other wise be sitting idle…is that good or bad?…again if it didn’t add debt.

    warren, the output gap point was over my head could u clarify?..thks

    WARREN MOSLER Reply:

    output gap = lost output due to unemployment.

    it’s not about ‘money circulating’ whatever that means.

    it’s about sufficient spending to sell the output at full employment.

  200. Enrico M Puddu Says:

    Dear Mr Mosler,

    Despite my almostZero knowledge in macroeconomy I feel that the MMT could help the current British economy.Am I wrong?

    Have you ever been invited in UK for consultation purposes?

    Enrico MP

    Reply

    WARREN MOSLER Reply:

    recognition of how the monetary system actually works (mmt) would show the way to full employment in no time. anywhere.
    never been invited to the UK for consultation purposes

    Reply

  201. Enrico M Puddu Says:

    Thanks for your reply.
    It’s a pity nobody here in UK know, talk and debate about your work.
    I hope that soon it will happen at least by some academic or top politicians.I am none of these but I welcome any suggestion to”spread your words”.
    My best regards

    Reply

    Ed Reply:

    @Enrico M Puddu, just to add to your point enrico, it’s a pity people everywhere don’t have more discussion about mmt and warrens idea’s. it seems with mmt we have the means to address a lot of what ails us, if people understood this stuff more. all i hear on the mainstream media is debt/deficit is evil, run govt like business, blah blah.

    and the funny part is thats what people “like” to hear, so the media seem to slant more programming towards that. like mike norman said in his video post, when he went on talk shows, he got low ratings talking about mmt.

    i think mmt needs to embracing some marketing spin for it to catch on more.

    Reply

    Ed Reply:

    @Ed, and warren, in 7difs, you scared me with the larry summers/rob rubin stories.

    do you think bernake/geitner at least get the points summers/rubin didn’t?

    Reply

    WARREN MOSLER Reply:

    if they do they aren’t saying…

  202. enrico Says:

    thanks for your reply ed.I totally agree with you.
    Seems we have the same brain here.:).
    If the good wolf mmt want to catch more sheeps (as we live in the marketing,consumers world) it has to use the same tactics that ie. Football clubs,Music shows and Fizzy drinks companies do.Sad but true.er, Who is gonna fund that anyway?

    PS I meant to write more but i forgot to re-add my name and when i clicked the back button all my comment was erased.:(

    Reply

  203. Ed Says:

    Ok been reading more and more, so I need some perspective on this.

    If the govt wants to spend, say, $1B. The trsy gives the fed 1b in 30yr bonds, the fed credits the trsy 1b in dollars. It’s a net 1b to trsy acct and the fed carries the 1b liability (debit) by holding the bonds. Seems like it evens out, right?

    Assuming the bonds are held to maturity, the trsy has to pay something like 1.8b to the fed. That’s $1b in principal + 800m in interest.

    Where did the govt get the other 800m? well, I’m guessing they had to issue 800m new debt to pay it.

    So, it would appear it costs the govt 1.8b in payments for the benefit of 1b in spending.

    What is the problem with doing this?:

    Govt wants to spend $1b. The trsy gives the fed 1b in 30 yr bonds. The fed credits the trsry $1.8b in dollars (face amount plus interest).

    The trsy acct is plus $1.8b, then the fed creates 2 liabilities (debits) into the fed accounts, one for $1B in face amount of bond, and a second debit in a special account for the interest. When the trsy makes an interest payment, it’s a minus to trsy account, credit to the interest account where the fed was holding the interest debt.
    This way when the govt has paid the full amount of the bond + interest, it would still zero out.

    Now, if a private party wants to buy the $1b in treasury bonds, that’s fine, the buyer gives the treasury the $1b cash, the buyer gets the bond, but then the fed issues the interest to the trsy and creates a debit into the feds trsy interest account…..just makes it sort of a two step process.

    My thought is this, since the govt is the sovereign responsible for the origin/creation of money it could do this, no?

    Under the current way it works, the money to pay interest in never seems to be created by the govt, interest is paid for purely by new debt. (By not creating the money to pay the interest too, in my mind, the source of all of our budget quams). Using the current scenario, requires the govt debt to continuously grow and snowball in order to provide funds to expand the economy.

    It seems because the interest is treated as an expense rather than a debt, it doesn’t get accounted for at the point of money creation. And because of this, the govt is always in catch up mode. If we accounted for (by creating the funds for) the interest as additional debt at the point of money creation, wouldn’t this allow for a much better budget/spending/taxing system?

    Please help me understand this one….thks

    Reply

    WARREN MOSLER Reply:

    the fed isn’t allowed by Congress to buy bonds directly from the treasury

    Reply

    Ed Reply:

    @WARREN MOSLER, ok, thats a technical. i’m looking at it from fundamental.

    at the time the govt creates its debt, it never funds the full amount of the debt to be paid, just the face amount of a bond.

    So why wouldn’t we want the govt, on a fundamental basis, to fully fund (create the full amount of money to be owed princepal + interest) at the time it issues a bond. (assuming on the technical side we could make a process for it).

    Thanks.

    Reply

    WARREN MOSLER Reply:

    why does this matter?

    Ed Reply:

    @Ed, because i’m trying to add up the numbers. all the in’s and outs at the fed are supposed to add up, right? but the interest is never accounted for as a liability that is there.

    so by accounting for it up front with the bond creation, the “true cost” of the govt issued tax credits (pricipal + interest) becomes what the govt can spend.

    and as long as the funds to pay the interest on the bonds face amount aren’t created at the same time the face amount of the bond debt is created, it puts us in the negative into infinity.

    using my example above:
    $1b in govt spend currently = $1.8b in tax credits..eventually. ultimately a very unbalanced accounting, no?

    WARREN MOSLER Reply:

    1 billion is the present value discounted at the going rate at the time

    Ed Reply:

    @Ed, if the govt is the origniator/creator, why should it have to discount it in order to spend it?

    assume we started from scratch and the govt only borrowed $1b over 30 yrs, then spends that $1b. Well there is only $1b in circulation to take back as taxes to pay off the pricipal, there is no more money in circulation to further tax to pay the interest. But it still has that liability.

    Where as if they borrowed $1b, created 800m, spent the 1.8b, they can now tax back 1.8b to pay back bond + interest.

    With out creating the money to pay the interest and spending it, we can never reconcile the accounting, in my mind anyway…:-)

    WARREN MOSLER Reply:

    remember, it’s all best thought of as the govt spending first, which creates credit balances, and then ‘borrowing’ which means agreeing to pay interest on those balances, for purpose other than ‘attracting funds to borrow’.

    The presumption is the payment of interest somehow ‘fights inflation’

    Nihat Reply:

    @Ed,

    Why on earth do you worry about having to pay interest over or at the end of a thirty-year period, but not even blink about paying all that interest now?

    Ed Reply:

    @Ed, hi nihat, i not saying pay the interest now. I’m saying the should spend it now so it can tax it back over time.

    the govt must spend first in order to put money into the system, then govt can then tax back and pay its expenses, right?

    If the govts total debt on $1b trsy bond is $1.8b. I’m saying the govt should spend $1.8b into the private sector first, so it can then tax back from the private sector an amount = to the $1.8b “full” debt obligation.

    but since the govt only gets the face value of the bond, the govt should do this by telling the fed to just “mark up the trsy acct” to add the 800m cash. call it sovereign perogative or what ever.

    The fed could keep a seperate account to just track the interest debt and payments so it has an accounting.

    WARREN MOSLER Reply:

    yes, govt ‘spends first’
    it doesn’t ‘tax it back to pay expenses.’
    it pays first, as above.

    Nihat Reply:

    Ed, this is very similar to our earlier exchange above. You seem to be after having a fixed way of govt spending beyond taxes and borrowing, and trying different rationales for it. I just don’t see the need for a fixed way (or ratio; see above). I’d defer to the teacher, but my understanding is that all manner of deficit funding is already possible (from practically 0% to 100% borrowing).

    Ed Reply:

    @Ed, nihat, in my previous post i was just thinking print more money than borrow, but didn’t know why.

    my point here is that a $1b govt bond costs the govt $1.8b. but the maximum recoverable tax by the govt is still only $1b….leaving a 800m shortfall in govt spending, is this not correct?

    Or another way to look at it is, it winds up costing the govt $1.8b in debt payment to spend $1b, the way we’re currently doing it. Isn’t govt spending supposed to at least equal govt debt? This is what’s throwing me off.
    thks

    WARREN MOSLER Reply:

    again, the fed sets rates, presumably for public purpose…

    also, future interest payments are part of future budget forecasts

    Nihat Reply:

    Ed,

    I feel you are thinking from the viewpoint of a private sector entity like me or you. Certainly, we won’t take a loan and put it under the pillow; we’ll use it, spend it on a consumer product, buy a home, operate a business, etc. But when the government borrows, it is very much like putting the borrowed amount under the pillow. There are pool or bathtub analogies out there. They go like this: govt spending is water pouring into the tub from the spigot, taxes are draining water from the tub, and govt borrowing is filling a bucket from the tub and putting it aside. When time comes to pay that govt debt back, you dump the bucket’s content (principal) back into the tub. The interest owed on that debt becomes part of govt spending at that time (or over the term of debt). The catch is, unlike me or you, the govt isn’t burdened by the principal at all, as it’s been waiting under the pillow, or in the bucket. Unlike you and me, the govt can do this because the interest isn’t a burden to it, either.

    Does that make you jealous?

    :)

    Ed Reply:

    @Ed, ok nihat, i had to chew on this a bit. i like your tub analogy, i would add this to your example for my point…:-)

    every gallon of water the govt is sending out the spigot (trsy) into the tub (the economy) was borrowed from the waterbank(fed) “before” it went into the tub. The waterbank got the water to lend the govt from the well in the govts backyard at no charge. And as a bonus, for every gallon of water the govt sends out the spigot, it will owe the waterbank 1.8 gallons back (principal + interest) over time. Now the govt can drain (tax) the tub to payback the loan to the waterbank, but it can’t drain it fast enough to keep up with the what it owes the waterbank.

    When the govt pays back the .8gallons in interest, its paid with more water borrowed from the waterbank too.

    Since every dollar the govt spends is backed by debt, how can it be the govt spends first? it may create the money at the fed, but it’s done so the govt can borrow and then spend, no?

    WARREN MOSLER Reply:

    try just looking at the actual monetary operations as described in the 7dif

    to spend, the tsy instructs the fed to credit a member bank’s account at the fed.

    debits and credits don’t ‘come from’ anywhere

    and the rates paid by tsy are, whether it knows it or not, set by a vote at the fed,
    with congress authorizing the fed to be able do that as it’s agent.

    the fed can decide not to ever pay interest after which the govt won’t pay any interest on new spending.
    it’s a political decision.
    the govt pays interest because it wants to, whether it knows it or not

    Ed Reply:

    @Ed, warren
    “again, the fed sets rates, presumably for public purpose…”

    I like the qualifier of “presumably”…:-)

    “also, future interest payments are part of future budget forecasts.”

    agreed here, but is it conceivable that at some point interest payments can = all taxes collected, then what happens?

    WARREN MOSLER Reply:

    a bell rings and someone at the fed gets an electric shock when he tries to credit an account?
    not
    Nothing happens. spending is still via the fed crediting accounts and taxing by debiting accounts
    get over it, mate!

    Ed Reply:

    @Ed, that’s why i’m hanging out hear, trying to get over it!….but it’s hard…..lol.

    I will say, i was doing pretty good at letting go until i read this one a couple of times:

    http://moslereconomics.com/2012/11/26/italian-article-this-am/

    With that, i accept what is, but do see, improvement opportunities on “what is” as well.

    If the debt means, basically, nothing, then what could be done to get ourselves out from under that which holds us back.

    what i liked about that italian blog post i reference above, in addition to your picture along with JFK, was there were some pretty interesting, thought provoking, structural reform ideas discussed.

    with that i have to ask this one: just as, so many people freak over govt debt, i guess there are as many people who would freak if the govt said no more debt, we’re just “printing the money” (much like lincoln and congress did in 1862)and it worked fine then. (why is this not discussed more today in economics?)

    So since we can’t seem to live with govt debt, we probably couldn’t live without it. so as a compromise, what would the problem be with this:

    the interest paid on govt debt is done with “printed money without corresponding debt issued” and all face value debt is paid from taxes collected. This would produce a happy medium, no? enable the govt to keep spending ahead of debt accumulation, while preserving a govt backed debt security that pays interest, maybe even a “healthy” balanced budget. run some numbers through this, scenerio, is it good or bad?

    Again, if it’s all just fiat money anyway, why burden ourselves fretting over ginormous debts, if they don’t really mean anything? Now if the debt does mean something, then that’s a whole other story.

    In my mind this is how you could actually get to Moslers Fica tax holiday, increase ss to 2k/mo min., etc. i’m guessing your great ideas will never have a real shot as long as snowballing debt stands in the way.

    cheers…:-)

    WARREN MOSLER Reply:

    keep reading the ‘mandatory readings’ beginning with soft currency economics a few times over to help it all ‘sink in’ thanks
    you’re still completely missing the point

    Nihat Reply:

    Ed,

    I believe the waterbank (the Fed) is really a superfluous entity if we want to get to the bottom, to the principal, of it all. I am not qualified to second anything technical Warren says, but the accounting settlement you seem to be after probably doesn’t exist as the government is meant not to end. It’s a rolling thing.

    In your example, the interest on govt debt was close to 2% annually (/w annual compounding). Hardly an impressive rate if you are seeking to save for retirement. At the end of 30 years, when the govt is to pay 80% interest, your economy (the water in the tub) has probably grown by more than that. How? By virtue of govt debt that has matured in the meantime. I think…

    Corrections are welcome, but to me, the bigger difference between the govt’s deficit spending with borrowing and without borrowing is that the first kind joins the economy after a delay (stirring effect is immediate nonetheless). The interest that it may bear is a transfer which may be legit or not.

  204. Amir Says:

    Mr Mosler,

    I read your books and enjoyed a lot. Want to know your opinion on Russian default and its reasons. cant get my head around the fact a country defaulted on its own currency denominated obligation?

    Many Thanks

    Reply

    WARREN MOSLER Reply:

    not to put you off, but do read ‘exchange rate policy and full employment’ on this website, thanks, under ‘mandatory readings’, and let me know if it doesn’t fully answer your questions, thanks!

    Reply

  205. Adrian Says:

    Hi Warren

    I came across your name, and website & writings, via Columbia Law School’s excellent talk series http://www.modernmoneyandpublicpurpose.com.

    I am based in Switzerland, and I have 15 years experience in derivatives market-making, plus 10 years experience in large bank Basel 2 and economic capital modelling.

    I have questions regarding derivatives markets and central banks:
    generally,
    “Why is the Federal Reserve not more engaged in derivatives markets, and I mean engaged as participant trader, i.e. as provider of liquidity, so as to put an end to the fear-mongering (= high implied volatilities) that leads to panics, and to the fear-forgetting (= low implied volatilities) that leads to bubbles?”
    more specifically,
    “Why doesn’t the Federal Reserve target various implied volatilities much as it targets inflation?”
    “Why doesn’t the Federal Reserve publicly set maximum and minimum implied volatility targets in those derivatives markets (e.g. S&P500 stock index derivatives) for which the underlying and derivative premium are denominated in USD, and then intervene, as required, if and when traders take it upon themselves to ignore the Federal Reserve’s targets. Since no coalition of market-makers is a match for the Federal Reserve, the Federal Reserve would always be able to dictate its maximum and minimum implied volatility targets on the market. After a few fights, traders would soon understand that the Federal Reserve is a different kind of market-maker, and the Federal Reserve would not even have to intervene in the markets themselves, but only communicate its new targets for maximum and minimum implied volatilities for a set of derivatives markets.”

    Thank you and best wishes
    Adrian

    Reply

  206. Auburn Parks Says:

    Dear Mr Mosler:

    I have just recently discovered MMT and have seen your policy interview with the, I’m assuming, editorial staff of the Norwich Bulletin on youtube. I am wondering if you plan on running for office again? If you were, I would love to be able to sign up and volunteer. I have seen very few political candidates with the awareness and honesty to actually propose governing according to reality instead of by doctrine and dogma. Look forward to your response which I sincerely hope is in the affirmative.

    Sincerely,
    Auburn Parks III

    Reply

  207. Jure Jordan Says:

    I want to write about upcoming Warren’s Zurich presentation on March 25th.

    I think that the most potent of the presentation is about fiscal transfers.
    EU is under the spell of Mundell’s “optimal currency area” and believe that persistent deficit and surpluses can and must be dealt with. Not understanding that such permanent deficit and surplus areas exist within every state, currency union, dollar or euro standard pegged currencies, regions within states, between cities, between areas within cities and in household. Fiscal transfers are essential mechanism that can keep currency union alive long term. Redistributive mechanism that counters distribution upward of capitalist economy, between rich and poor, between surplus and deficit areas is esential to long term functioning of any system and size.

    Fiscal transfers by unified tax, retirement and health system, military production investment in poorer areas, state investment into deficit areas infrastructure to reduce regional finacial constraints or ECB guaranting deposit insurance of all EU banks independent of individual country budget are all ways of keeping Nominal Surplus Circulation (as i like to call it) going uninterupted.

    On another note, i would like to write about MMT wider acceptance and confusion that initialy creates.
    Reading Kaldor i got idea that largest confusion comes from basic assumption under MMT operates. It is not given nowhere i could find. The basic assumption that separates MMT from neoclasical economic theory.
    Neoclassical economics is based on movement of goods and services while analizing economy and implying that such movement is also moving currencies, not other way arround as MMT is all about.
    Neoclassicals imply that value of goods and services is precisely reflected in prices of those goods and proceed as nominal value is same as real value. But along the way there are contradicting problems that are insolvable since prices change. That is the reason they all preffer that prices be fixed by gold standard to reflect true values of goods and services in order to get away with anoying discrepancies.

    I believe that this assumption by MMT that flow of currency dictates the flow of goods and services should be the starting point of any description of MMT to contradict neoclassical basic assumption. Flow of money or Nominal Surplus Circulation is what dictates flow of goods and fiscal transfers are countering destributive effects of surplus areas accumulating more and more liquidity from deficit areas preventing sufficient distribution of real values within deficit areas.

    Reply

  208. WARREN MOSLER Says:

    Yes.
    Only worn notes for the most part.
    I took a ‘short cut’ in the book when I said the IRS agent would shred the old twenty dollar bills when in fact he would pass them on to another agent who would pass the on to the actual shredder, but the point remains that the issuer of a currency is the only entity that shreds what it receives in payment, as it doesn’t ‘need’ the bills the same way all others ‘need’ them. Sorry for that shortcut!!!

    Reply

  209. Benson Njonjo Ndehi Says:

    Kenya listened to the IMF / World Bank for 4 decades with devastating results. In Jan 2003, our new president decided to ignore them with spectacular results. Please see the charts below for current account deficits and GDP per capita since 1980.

    http://screencast.com/t/1oI8Zsuzk

    http://screencast.com/t/pPKTE1oo

    Reply

  210. Elwood Anderson Says:

    Modern Money Theory (MMT) is a logical interpretation of how taxation and finance works in an economy with its own fiat currency. Although the movement has been around for some time now, it has not gained much traction with the economic community, let alone the electorate. The main reason is that it has been an academic and intellectual movement, when in reality, it is more than that. Faced with competition from the outdated economics of the gold standard and the austerity movement which accompanies it, it must expand into a political movement. It’s competition is highly political with organizations like the Peter Peterson foundation and neoliberal think tanks funding propaganda and the Tea Party movement to hang on to old thinking, while MMT embraces a more realistic approach appropriate to our fiat money centered economy.

    MMT is more than finance and taxation. It embraces a jobs buffer to keep people employed to maintain their skills and esteem, making a transition to private employment and upward mobility more possible. It emphasizes productive activity rather than speculative activity to promote real growth. It recognizes demand as the main driving force in the economy, not accumulation of capital that sits on the sidelines. To implement these principles requires political action. This requires funding for grassroots education and recruitment of political candidates who understand and will promote it at the precinct level and for advertising to counter the political actions of the neoliberal austerity advocates.

    It’s time to find substantial donors who will fund a political action committee to this end and to start a program of individual contributions from the rank and file if MMT and its economic and political aspirations are to become mainstream. Warren Mosler’s political campaigns have demonstrated that a wider political approach is necessary.

    Reply

  211. Benson Njonjo Ndehi Says:

    Finland’s obsession with maintaining a budget deficit of less than 3% of GDP is gonna cost them their AAA rating anyway due to persistent negative economic growth.

    http://www.bloomberg.com/news/2013-10-22/euro-s-best-rated-nation-loses-jobs-as-finnish-firms-bleed-money.html

    Reply

  212. Tom Hickey Says:

    @John Kissinger,

    Try this.

    Bill Mitchell, The role of bank deposits in Modern Monetary Theory

    There are additional links within this post, too.

    Reply

  213. Tavner Says:

    The Bank of England just released its Quarterly Bulletin 2014 Q1, and has three videos accompanying the bulletin. They explain that loans create bank deposits
    and banks monetize bankable assets. Here is the link http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx , I believe that it validates everything that MMT has said or almost.

    Reply

  214. Jason Says:

    Would love to get Warren’s take on this article:

    http://www.advisorperspectives.com/newsletters14/Larry_Summers_Sleepless_Nights.php

    Thanks!

    Reply

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