Soft Currency Economics

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118 Responses to Soft Currency Economics

  1. Andy Grundrisse says:

    I just want to say that many years ago I had the honor to work for Warren Mosler when he was a fixed income money manager in West Palm Beach. He was the most brilliant and successful fixed income money manager I ever met, and I met lots of them. He never cheated, or took unfair advantage, he succeeded through sheer mental acuity, he was simply smarter than everybody else. And he was totally a stand up guy. Unfortunately for me, he didn’t suffer fools, so I didn’t last very long. And I am not smart enough to understand all of his monetary theories, but I am smart enough to know never to take the other side of a Warren Mosler trade.

  2. SMOB says:

    How can other governments and citizens of a net export economy with a currency pegged to the US Dollar learn from this?


    good question. most just suffer from lower real terms of trade

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  4. Dan says:


    I’m trying to understand the ‘impossibility’ of future debt monetization. Here’s where I’m confused…

    “However, fear of debt monetization is unfounded, since the Federal Reserve does not even have the option to monetize any of the outstanding federal debt or newly issued federal debt. As long as the Fed has a mandate to maintain a target fed funds rate, the size of its purchases and sales of government debt are not discretionary. Once the Federal Reserve Board of Governors sets a fed funds rate, the Fed’s portfolio of government securities changes only because of the transactions that are required to support the funds rate.”

    This seems to ignore quantitative easing and a zero interest rate policy.

    “The Fed’s lack of control over the quantity of reserves underscores the impossibility of debt monetization. The Fed is unable to monetize the federal debt by purchasing government securities at will because to do so would cause the funds rate to fall to zero.”

    Right. And now we have a fed funds rate that is effectively zero.

    “If the Fed purchased securities directly from the Treasury and the Treasury then spent the money, it’s expenditures would be excess reserves in the banking system.”

    Right, excess reserves have grown dramatically in the last 3 years.

    The Fed would be forced to sell an equal amount of securities to support the fed funds target.The Fed would act only as an intermediary. The Fed would be buying securities from the Treasury and selling them to the public. No monetization would occur.

    That is exactly what is NOT happening as the Fed increases its balance sheet.


    that was in the context of an interest rate target above 0 and a fed that didn’t have permission from congress to pay interest on reserves. i think that was specified in the paper somewhere?

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  6. Erik V says:

    Hi Warren,

    Just got done reading SCE. One question that comes to mind is if we lived in a world run like you propose, could you see a situation where firms are operating at/near full capacity and need invest in additional capacity, but are restrained from doing so in the amount necessary by too high interest rates or too low equity valuations?



    not to worry, market prices work to ensure that investment ‘crowds out’ consumption.

  7. JT says:

    If as you say – our FED and Govt both dont understand how a true fiat system works – does that truly mean that we can pay the debt off any time we want? Just by creating the asset? I never quite got the savings / investment equals debt issue. To much living in a asset backed world of yesteryear perhaps?

    Seems if you are correct, all we need to concern ourselves with is inflation. Deflation should never be used as a tool.


    first, read the 7dif on this website?
    second, funds spent and not taxed ‘rest’ in the economy as some combo of cash (Fed notes), reserves (balances in Fed accounts), and tsy securities (also balances in Fed accounts).
    spending adds to one or more of those three, taxing results in a reduction.
    Together these constitute ‘net savings of dollar denominated financial assets in the economy’
    That is, the ‘debt’ = the economy’s savings of net dollar denominated financial assets.
    To the penny.

    So in that light, what does ‘paying off the debt’ actually mean?

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  9. Erik V says:

    After reading this, there are some questions about saving and investment that come to mind.

    1) Do you view a GDP composed of more investment and less consumption as a good or bad development? (I believe productivity growth comes from investment so I would have to say good.)

    2) If more investment is good, what policies get us moving in that direction if increased saving may actually decrease investment?

    3) Does the cost of capital matter at all in this theory for the level of investment? Don’t saving decisions, the tax code etc have an effect on the cost of debt and equity?


    the point of the economy is consumption directly or indirectly, so the decision of the nature of the desired output to at some point consume is the driver.

    the real cost of real capital is the real goods and services that go into producing the capital goods.

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  11. Luigi says:

    So, the definitive difference is that relations between taxpayers and EMU nations, are horizontal relations, and relations between ECB and member nations, are vertical relations. I mean horizontal and vertical in the MMT/chartalist way of describe.

    So pay taxes it’s like to pay another person via banks, functionally. reserves are “shifted”.




    however taxes also remain as coercive, non market events that ‘distort’ accordingly

    Luigi Reply:


    Warren, deficit spending by member states in Europe, can create problem to ECB to set interest rates? I mean, excess reserves in the system that drive overnight rates below the central bank’s target etc


    no, they set the overnight rate with the same tools all cb’s have

    Luigi Reply:


    sorry, I haven’t formulated very well my question.

    Deficit spending by member states, add (or shift?) reserves in the system, so they are in excess and so could potentially be a problem for the CB. ECB set the overnight like all CB, but there is a potential problem? or there is not the same relation between deficit-reserves-interest rates, typical of USA and others?


    same as when the us states borrow to spend. a non issue for monetary policy

  12. Luigi says:

    “The difference is the state/euro member nation is not the issuer of the currency, so it’s constrained by its ability to fund itself through taxing, borrowing, asset sales, etc.”

    Yes, I understand the difference, but technically it seems the same. I mean, taxes don’t go nowhere also in EMU (reserves are destroyed, so technically they don’t fund nothing, they are just bit), but the difference is that they are forced to have a positive account, while sovereign government choose to have a positive account, but it’s only a congress choice.

    I understand right?

    “think of the issuer of anything of spending that thing first, and then collecting it via the likes of taxing and borrowing”

    could you explain this point? I don’t understand (probably I have problem to translate). Thanks a lot.


    if a tax was paid to the ECB the reserve balance would be eliminated.

    but if you pay a tax to a member nation, your bank’s reserve account is debited and the gov’s is credited.

    and yes, net financial assets of the non gov sector are reduced by your payment, if you include that nat gov as ‘government’ which isn’t wrong to do.

    the issuer, the ecb, like the Fed, is best thought of as spending first, and then ‘funding’ itself/accounting for what it did in one form or another.

  13. Luigi says:

    Warren, in Mundell-Fleming model there is a form of crowding out that act on exchange rates. In the example about a government’s deficit they talk about a “raise in interest rates after a deficit spending, so a raise in interest rates persuades people to invest in national economy, so there is a great capital inflow, and the inflow makes the local currency stronger compared to foreign currencies. Strong exchange rate also makes foreign goods cheaper compared to local goods. This encourages greater import and discourages export and hence, lower net export.”

    So, in this model and in this view deficit spending is useless.

    What I don’t understand is the raise in interest rates after a deficit spending, why? it’s the same model that see “deficit spending=raise in interest rates” or there is something? I mean, this model seems wrong.


    yes, it’s fixed exchange rate stuff. doesn’t apply to current floating fx/non conv. currency policy

    John O'Connell Reply:


    It could be explained as a simple supply/demand thing. Increased selling of bonds would drive down the price (= higher interest rate). There is an assumption that selling the bonds is required when there is a deficit, and that the selling by one branch of government (Treasury) is not offset by buying by another branch (Federal Reserve).

    Luigi Reply:


    Two things:

    Do you know about papers or document by MMT that confute/talk about some model like ohlin-heckscher or Stolper-Samuelson?


    I’ve linked your documents and many other by Scott, Stephanie etc to my professor. He says “interesting, but there is no math. They make assumptions, but there isn’t any mathematical demonstration”.

    I think that some documents don’t need a mathematical demonstration, but they are only some facts. Anyway, what’s your view? Why he asks about some “mathematical demonstration”?

    Tom Hickey Reply:


    Ask him if he is familiar with Godley & Lavoie, Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth (Palgrave Macmillan, 2007) on the basics of SFC modeling.

    Hereis Bill Mitchell’s short encapsulation of SFC modeling. Bill also has quite a bit of criticism of mainstream models.

    You could also point him to Scott Fullwiler’s “Interest Rates and Fiscal Sustainability,” Working Paper No. 53, July 2006 here.


    Pavlina’s math model is at

    Luigi Reply:


    Thanks Tom, and Warren. I don’t think that he knows Godley, he has a general neoliberal view of economics. I know SFC and I have read many times billy blog on this matter. But it’s difficult to persuade someone to study other documents.

    When I linked him some MMT documents, he says something like “they write in economic journals that nobody read, you know, this heterodox economics is very strange..” etc etc.

    anyway, thanks, I have a doubt that is not on topic, can you help me?

    If government spending creates reserve balances, and taxes and bond sales destroy them, how europan nations can collect taxes in order to spend euro? I mean, the result of taxation is the same, no?


    good question. it’s just like the US states.

    When they spend, their account is debited, and the counter party’s account is credited

    This adds balances to the ‘non govt’ sector is you count the states as govt.

    And the reverse happens when a state taxes.

    The difference is the state/euro member nation is not the issuer of the currency, so it’s constrained by its ability to fund itself through taxing, borrowing, asset sales, etc.

    PJ Pierre Reply:


    Federal taxes destroy (uncreate) RB in the sense that RB are a Fed Govt liability. When an IOU is returned to the issuer it ceases to exist. An entity can not be liable to its self.

    In contrast, the euro is not the issued liability of the euro zone governments. It is the issued liability of the ECB. In the sense the euro zone nations are users of the euro and must collect them to spend.

    Luigi Reply:

    @PJ Pierre,

    Thanks PJ, another doubt that I have is:

    How rolling over to pay for the redemption of maturing securities, can be a way to have funds on the account (not because spending is constrained by revenues, but because they have to have a positive account), if new “revenues” are used to pay maturing debt? I mean, it’s a sum 0, no?

    So, how could this “finance” public spending? (I know that issuing debt is a monetary operation, not a fiscal)

    And so, there is really some operational relation between Treasury that redeem its maturing debt and Treasury that issues new debt?


    think of the issuer of anything of spending that thing first, and then collecting it via the likes of taxing and borrowing

  14. John O'Connell says:


    With respect to your statement that the government must spend “first” in order to create financial assets with which the people will pay their taxes:

    Before there was a fiat system, there was money and the people were able to pay their taxes. When the government ran a surplus, the people were able to pay their taxes, even though the taxes exceeded government spending. Clearly there is money in the system that is there even when government does not spend.

    I think the main point is that government deficits create (additional) financial assets in the private sector, but I don’t see a chronological dependency. Because our experience tells us that there is no such dependency, I think it is confusing and distracting for you to say so, and detracts from the credibility of your message.

    Is there another way to make the point without the chronological implication?

    Matt Franko Reply:

    @John O’Connell, “Before there was a fiat system, there was money ”

    Can you expand on that? Resp,

    John O'Connell Reply:

    @Matt Franko,

    In 1970, before we went to fiat in 1971, there was money and people paid their taxes. Taxes were < 20% of GDP, so even with no government spending at all, we could have continued paying taxes for at least 5 more years before we ran out (assuming GDP dropped by 20% a year due to the recession).

    Yes, it's eating our seed corn, but we did have seed corn. We did not create a fiat monetary system from zero, there was a functioning monetary system before fiat, and we inherited all the elements of it, including all its financial assets and ability to pay taxes (and, unfortunately, some of its economic "laws" that were no longer true).


    yes, on a gold standard you can dig up gold and pay taxes with it. same with other fixed fx policies.

    not applicable to fiat


    when the gov is the unique issuer of its currency how else can anyone, from inception, get any to pay their taxes?

    how can you get bus tokens until after the bus company issues them?

    only if ‘money’ is something that can be had ‘externally’ can taxes be paid first?

    John O'Connell Reply:


    All true, but we did have money, gotten externally, before fiat. The bus company was in existence and accepting gold nuggets in exchange for tokens, before they decided to accept only tokens and no longer convert gold nuggets. People already had a supply of tokens left over from the “old days”.

    John O'Connell Reply:


    By “from inception”, do you mean that a government arises and issues fiat currency in a society that previously had no government and no currency? Like the baby-sitting co-op? I agree that in such a case the government must spend “first”, because the society had no currency at all prior to fiat.

    But when has that happened? All primitive societies, as far as I know, devloped hard currencies before they had formal governments. If they transitioned to fiat currencies, they did it somewhat in the same way as the US, first issuing a convertible currency, and then eventually making it non-convertible (fiat). But when they went fiat, they already had a quite ample supply of currency in circulation, and that remained currency (money) and was accepted for tax payments.

    Countries in the real world aren’t like the baby-sitting co-op, which had to issue a supply of scrip before the first baby was sat for.

    I think your insistence on the use of “first” implies a time relationship that clearly does not exist, and is confusing, when applied to the activity of any single time period. It would be better for you to focus on CHANGES in money coming about only by the relationship of government spending and taxation, and allowing that taxes in one period can be paid using money that existed from prior periods (i.e., tax in April, spend in December).

    Tom Hickey Reply:

    @John O’Connell,

    But when has that happened? All primitive societies, as far as I know, devloped hard currencies before they had formal governments.

    David Graeber, Debt:The First 5000 Years

    Book Description
    Publication Date: July 12, 2011
    Before there was money, there was debt

    Every economics textbook says the same thing: Money was invented to replace onerous and complicated barter systems—to relieve ancient people from having to haul their goods to market. The problem with this version of history? There’s not a shred of evidence to support it.

    Here anthropologist David Graeber presents a stunning reversal of conventional wisdom. He shows that for more than 5,000 years, since the beginnings of the first agrarian empires, humans have used elaborate credit systems to buy and sell goods—that is, long before the invention of coins or cash. It is in this era, Graeber argues, that we also first encounter a society divided into debtors and creditors.

    Graeber shows that arguments about debt and debt forgiveness have been at the center of political debates from Italy to China, as well as sparking innumerable insurrections. He also brilliantly demonstrates that the language of the ancient works of law and religion (words like “guilt,” “sin,” and “redemption”) derive in large part from ancient debates about debt, and shape even our most basic ideas of right and wrong. We are still fighting these battles today without knowing it.

    Debt: The First 5,000 Years is a fascinating chronicle of this little known history—as well as how it has defined human history, and what it means for the credit crisis of the present day and the future of our economy.

    See also L. Randall Wray, Understanding Modern Money.

  15. Ross Jackson says:

    Warren, I am relatively new to this site, and I find your ideas quite thought-provoking. I have a few questions.

    1. You state that “Insolvency is never an issue with inconvertible currency and floating exchange rates” (“7 Deadly…”, p. 97), with which I agree. But why would it be an issue with a fiat currency that was “pegged” to the US dollar rather than floating? Secondly, I should think that in both cases an additional condition of no insolvency would be that there is no net foreign currency debt (that could not be paid off with money created in the domestic currency.)
    2. You write that, in a deficit situation, the Fed need not sell exactly the amount of T-Bills necessary to mop up the excess funds, although selling less would mean an increase in money supply with the accompanying risk of inflation and a zero Fed funds rate due to excess reserves in the banking system. (Incidentally, would the zero Fed funds rate apply only at the margin or to all the Fed loans at a bank with an excess?). Do you have any examples of this actually being done to stimulate demand (i.e. government spending not fully covered by borrowing or taxation)? In the absence of such examples, it is difficult to demonstrate that the mainstream claim that it is necessary to have borrowing or taxation before we can spend is wrong. Instead we have just a difference of interpretation of the accounting, and frankly, their interpretation seems more credible in the absence of a “falsifying” example.
    3. I find it difficult to get my brain around the discussions about savings and investment, both in mainstream discussions and in MMT discussions. It would seem to me that, in a fiat world as you describe, business investment is not dependent on savings at all, as it is financed primarily by bank loans that create new money by issuing credit. This would seem to be true even if all the “private and corporate” savings in a deficit situation went into T-Bills to satisfy the Fed’s condition of no change in interest rates. The classical accounting balance states:

    G-T = S-I (assuming the current account is in balance for simplicity of presentation). (G=government spending; T= taxes; S= Savings; I= Investment)

    Assuming a deficit, (G-T) >0, this equation implies (incorrectly) that all investment comes out of savings, which was certainly true under a gold-based currency and an exogenous money supply. But when dealing with a fiat currency where banks can create new money as required, it is not so. It would help understanding if we defined a new variable, B, for net Bank-created new money, in every way equivalent functionally to government expenditures, and if we split savings into 2 components, STB +S1, where STB is the amount placed in T-Bills in order for the Fed to maintain interest rates at current levels (according to MMT theory) or necessary to “finance” the debt (according to Mainstream economists). Let us also split investment into two components, I1, which is real investment financed by S1, i.e. net savings after satisfying the T-Bill requirement, and IB as investment financed by new bank money. (IB=B).

    Thus: G-T = STB + S1 –I1.

    Under these assumptions, since STB = G-T, this leaves us with: S1 = I1, which is a tautology stating that the net savings remaining within the banking system (after satisfying any Fed open market operations, STB) equals the investment financed by the savings remaining within the system.

    Note two things that are not intuitively obvious from the original equation.

    (i) In the original equation, I does not represent total investment at all, as we are missing what may well be the major part, that part financed by new bank money, IB. We could, for example rewrite the original equation as follows:

    G+B-T=STB+S1 –I1 +IB. (where IB =B and STB=G-T).

    The total real investment is IB + I1.. Now, in the real world, when economists talk about savings, they are usually (but not always) referring to S1, the “amount available for real investment” (i.e. T-Bills are not real investment). Since S1 is, by the above accounting, independent of the size of the deficit or surplus, the mainstream has a point when they reject the MMT claim that an increased deficit means increased savings. Warren is, however, right if we define savings as S1 + STB, which increases with a deficit and decreases with a surplus. So, in a way, both sides are right. However, the mainstream is wrong if it claims S1 decreases in a deficit and increases in a surplus (as Rubin apparently claimed). What increases in a surplus is the cash from the public’s sale of T-Bills that allows taxes to be paid. Confusion arises due to lack of clarity on whether we are talking about S1 + STB or S1.
    (ii) S1 is not affected by a budget surplus or deficit under the assumption of Fed sterilization of deficits and surpluses.

    Anyway, the above arguments help me to get my brain around “savings and investment”. Does this way of looking at it make sense to others? I would be glad to hear any comments.



    You write that, in a deficit situation, the Fed need not sell exactly the amount of T-Bills necessary to mop up the excess funds, although selling less would mean an increase in money supply with the accompanying risk of inflation and a zero Fed funds rate due to excess reserves in the banking system.
    If i said that last part i was mistaken. It just sits as reserve balances with no further effect on anything beyond a possible modest effect on the term structure of rates.

    As for savings, you may be attempting to ‘answer the question that isn’t being asked’
    real savings comes from real output not consumed.
    Nominal savings is a measurement of financial assets, which are ‘offset’ by financial liabilities as a matter of accounting, so they grow endogenously.
    Net financial assets for any given sector must originate from outside that sector, as a matter of the same accounting

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  17. Ppmax says:

    I’ve read 7/frauds and lots of other stuff here, other blogs, Wikipedia, etc, and my head literally exploded with the simplicity and elegance of your ideas. Full force of logic indeed.

    The thing i am having a hard time finding is how these ideas morph from theory to practice. Perhaps my ignorance about the mechanics of the fed and treasury and how they function in relation to spending approved by congress is to blame…for example, if Warren was head of the Fed, can these ideas be implemented without legislative approval/changes? Would the full employment plan be possible by decree?

    Practically, the tax side of the equation appears the most difficult to change, given that our current tax policies are for the most part incomprehensible to the average person…and legislator. On that note, I don’t believe I’ve read any position on changes to the tax code: does this operational model resonate most closely with, flat, consumption based, or other tax model? At brass tax level: how to divide the burden of taxes most equally? (or is the assumption that taxes are progressive in nature?) would a consumption based tax, similar to sales taxes paid at the tiller, retard spending if income, capital gains,etc were eliminated? Perhaps this to broad a brush to influence specific behaviors (eg buying solar panels–how to incent).

    Lastly, suggestion for your campaign: you need a series of viral Internet videos to promote these ideas and gain mainstream exposure. An honest, elderly, retiree, tired of the chaos, politics, and bickering, who can explain in simple metaphors why sovereign currency nations are not like households re budgets and spending.

    I explained all this to mom by explaining the economy is like a bathtub with a faucet and a drain. The goal is to fill the bathtub, then let the water drain at a rate such that water doesn’t overflow (inflation). This bathtub is special in that it can grow if you get the faucet and drain to work in harmony. With this simple metaphor I also was able to convince a tea partier of the necessity to radically increase spending now!

    Lastly, one of the appealing aspects of this model Is the apparent manageability of the system. Surely this is also a selling point…

    Kindly, and good luck


    thanks, use the tub imagery myself, but i like the extension to the tub growing