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.

Q&A

Hooverprintingpresses asks:

“People will be offering their possessions and their labor for sale to try and get the cards to pay the tax”

Says who? Thomas Paine? Didn’t he go to jail for awhile?

Warren, so ultimately I am being told that I will have some thug with a gun lock me up in a small room if I don’t play ball with the “rules” some other human being has made for me. Heck like my friend in prison said – three meals, free AC, TV, free medical, nice gym and library, no taxes. He encourages everyone to sit down and get arrested – since I know you are a big thinker – what percentage of the population can you “allow” to develop this mindset and be locked up before the model breaks down? You assume all your agents will WANT to pay taxes and sell their services/labor to avoid jail, but I know more and more people who are just choosing to sit down and are tired of the treadmill and jail is not a big enough deterrent to motivate them to run on your treadmill.

I went to the local court last year and watched the judge look at the 200 or so people that day who did not pay lots of things, taxes, child support, alimony and he told one of the non paying mothers who owed child support that she was going to jail, and she said Judge, you can’t lock us all up, there isn’t enough resources to imprison everyone.

You are correct.

The currency is only as good as the government’s ability to enforce tax payment.

Some taxes are easier to enforce than others, which is why I keep coming back to a real estate tax as the base case. If you don’t pay the tax, the government sells the house. They don’t even have to know who owns it.

I don’t like income tax because of the high compliance cost. I know it sounds high, but those costs might be 10-15% of GDP when you include all of the time spent in record keeping, laws, contracts, and enforcement.

And the fact that there is so much money in tax law means that the brightest and the best gravitate to those positions. So instead of having our brightest and best cure cancer, they are working in difference places in tax law and, of course, other places in the financial sector.

It is the biggest brain drain in human history, and it’s getting larger everyday.

Also to your question, if we legalize most of the drugs and take the money out of that sector, there should be plenty of room in the jails at least for the near future. But with the real estate tax, of course, there is not jail, apart from the odd case of fraud; the property just gets sold if the tax isn’t paid.

One last thing, we already have a national real estate tax at the local level. So, switching over from all the federal taxes to a federal real estate tax should be relatively simple and add substantially to our real standard of living.


Russel asks:

Any reason why the Saudi’s are allowing the price of oil to slide?

Just a guess. The futures liquidations were large enough such that holding spot prices up and letting futures free fall would have made it obvious the Saudis are price setter.

There also could be some liquidation of physical inventory going on in which case they would have to let inventories fall before resuming control of prices, or else actually buy in the spot markets which is out of the question of course.

It’s like if some pension fund had a hoard of NYC subway tokens and decided to sell them ‘at the market’. The price would go down from the current $2 price until that selling pressure abated. Then the price would go back to whatever NYC was charging.

So most likely they just let this inventory liquidation run its course, and then work prices higher again.

Much like happened in Aug 2006 with the massive Goldman liquidation and again in a smaller way at year end back then.


Jim Baird asks:


Hey Warren,

I noticed the crude spreads have slipped back into contango today. Are the ETFs up to their old tricks?

For sure inventory conditions have shifted, but they always seasonally shift up around this time. Could be ETFs to some degree.

More interesting, if the Fed is still up to their old ways, this would signal to them that markets are anticipating higher prices down the road, rather than elevated inventories, and may nudge them to hike sooner than otherwise.


Hi Warren,

Do you think there is any chance that the Fed ever puts us into a steeply inverted curve, say something like 10% short rates with 6% long rates? Hard to imagine that happening with the housing market weak, but what do you think?

Very high probability – I’d say 85% chance if, as I expect, crude stays here or goes higher. maybe a lot higher.

Hiking causes inflation to accelerate via the cost structure of business, so when they start hiking, inflation accelerates. Guaranteed!

Only a major supply response will break the inflation. Like pluggable hybrids in 5-10 years or cutting the national speed limit to 30mph, which is highly doubtful.


Why would shareholders approve the sale of Bear Stearns at $2 per share?

Answer, they may not. They may take their chances with getting more $ in bankruptcy.

Or a higher bid might surface.

The Fed has turned Bear Stearns into a ‘free call’ with their non recourse financing,

And the Fed has moved spreads of agency and AAA paper back towards ‘fair value’ with their open-ended funding lines. This removes ‘liquidity risk’ and allows the securities to return to being priced on ‘default risk.’

This has dramatically increased the business value of Bear Stearns.

The large shareholders can now say no to the sale, maybe add a bit of capital or take on a ‘business partner,’ and outbid JPM for the remaining shares (if needed).

Might even start a bidding war.

There could still be well over $60 per share of value for the winner.

And there’s a reasonable amount of time for them to put something together.

And maybe this was Bear’s plan all along.

They knew they needed Fed funding to maximize shareholder value, and the JPM involvement to stabilize their client base and buy the time to find a real bid.

(CNBC now showing a chart showing $7.7 billion in breakup value.)


Seth asks:

For 2 a share is Chase getting a boat load of non prime paper that over time is worth a lot more than 2?

From what I’m hearing it’s already worth maybe 75 or more.

And the Fed gave JPM a free call.

The $2 is the least that it’s worth, as the fed is providing non recourse funding for the assets at prices that support the $2 price.

And at the same time the Fed took action to restore pricing of agency and AAA assets to more accurately reflect their actual default risk, which is near zero.


This is different. In this case the moral hazard is in not funding the primary dealers. It’s too easy for the predators (other dealers, hedge funds, etc.) to first get short the stock and then start a run on any broker that has to have any non tsy inventory financed and drive them out of business.

By funding the primary dealers who are in good standing (they report their finances to the fed) and regulating capital requirements and haircuts predators are kept at bay and shareholders continue to assume the business risk of the primary dealers.

Steve asks:

And the Fed has said in times of crisis they will not punish the many for the few.

Moral hazard is not a fixed doctrine. It requires flexibility and in times of crisis they accept that their action (the Fed’s) will not address the doctrine. On balance it is a price (overlooking moral hazard) they must pay for the greater good.

They have done it in the past so doing it again reflects a degree of consistency not a change in policy.


Paul asks:

How do you respond to the moral hazard argument of the Fed bailing out Bear Stearns?

I’ll let the word ‘bailout’ go for now, and begin by saying the liability side of banking is not the place for market discipline, and it’s also probably not the place for market discipline for the Fed’s appointed (anointed?) ‘primary dealers.’

(I will also not here question the idea of having primary dealers in the first place, but don’t take that mean i approve of that setup, thanks!)

So given the Fed wants primary dealers, it then follows there are specific securities they go along with this assigned role.

Presumably those would include the likes of tsy secs, maybe agency paper, maybe AAA rated mtg backed securities, etc.

Presumably also are functions the Fed wants its primary dealers to perform, like being market makers, providing some notion of liquidity, etc. etc.

And, presumably, the Fed has some notion of public purpose behind this entire creation.

So, given all that, to support this ‘institution of public purpose,’ it behooves the Fed to ensure the primary dealers themselves have the available lines of credit to perform this vital public function (almost hurts to write that”¦).

The bank primary dealers do have ‘guaranteed liquidity’ and so are safely able to function as primary dealers, knowing they can always finance their inventory positions. This can be done via raising fed ensured bank deposits, and borrowing from the fed by using their inventory as collateral, etc.

The non banks were at a disadvantage to the banks in that they relied on the banks to fund their inventories.

Bear Stearns got shut down when the banks said ‘no’ for non credit related reasons. Bear had perfectly good collateral that they held as part of their primary dealer function (as defined by the govt regulations), and the banks said no, perhaps because they had their own internal issues.

The same would happen to the banks, and the entire economy, if the Fed simply said no to the banking system and one morning and didn’t open the payments system.

It’s just one of countless flaws in the institutional structure that doesn’t get noticed until it’s a problem, no matter how many times I’ve pointed it out to ‘authorities.’

So to your question, while I do see a lot of other moral hazard issues, I don’t see this as one of them.

The Fed simply told JPM to deal with Bear in the normal course of business and lend vs qualifying collateral as has always been the case, and as is the case when the Fed lends to JPM.

Let me know if I’m missing something, thanks!

483 Responses to “Q&A”

  1. Mitch Says:

    I am trying to understand the Fed’s control (or lack thereof) over interbank lending rates. In that context, why would effective Fed Funds clear at 4.50%, if any bank (primary dealer or not) can now go to the Fed and borrow at the discount window for 2.00%?

    Reply

  2. warren mosler Says:

    didn’t notice that, but have noticed the ny fed has been struggling to do a fundamentally simple task. nuff said…

    Reply

  3. Mitch Says:

    I just heard an interesting interview on Bloomberg radio with Steve Hanke from Johns Hopkins. I am interested in Warren’s toughts on his take on an impending inflationary step function.

    http://media.bloomberg.com/bb/avfile/Economics/On_Economy/vsX6Ql1Ykhn4.mp3

    Reply

  4. warren mosler Says:

    his claim to fame is expertise on currency board arrangments, which he supports. we had a nice exchange and he agreed it cost the country with a currency board maybe 5% of gdp as they need to export to fund their domestic ‘money supply’/net financial assets, but thought it was worth it.

    more recently he’s been leaning to a more ‘flexible’ currency board arrangement of some sort. If he lives long enough he’ll come around to floating fx, i think.

    he says we should ‘hold the line on exanding the fed balance sheet’

    what does that mean and why should anyone care? (apart from the foreign swap lines)

    he said the federal govt had taken on too much debt

    he’s totally confused.

    misses the entire point of agg demand and fiscal policy.

    Reply

    Jason Reply:

    Warren,

    Just read the 7 Deadly Frauds. In terms of both education and relevancy, I think you need to deal with the “financial crisis” and your explanation for what it is and how we got into it. I’ll be more specific… most people believe that the crisis is the result of “too much debt”.. some feel it’s public (government) and others private, some a combination. You have dealt clearly with the government debt issue, but have avoided any discussion of private debt. In many people’s eyes, these two debts blur together so a typical reader is going to end up confused. This is even more true in that the USA was running seemingly significant federal budget deficits just prior to the crisis which reinforces the commonly held belief that debt was the cause.

    Also, as an aside, I attempted to find the Basil Moore book you mentioned with the title you supplied him and it doesn’t seem to exist….

    Reply

    warren mosler Reply:

    hope to get to those parts soon.
    don’t know what the story with basil’s book.

    try elgar publishing?

    Reply

    Tom Hickey Reply:

    Agree with Jason. There is a mix up many people’s mind about debt in relation to the crisis. They either lump public debt with private, or think it was public debt that caused the crisis.

    Most people don’t get that there are two types of money in use, currency issued by the government and bank/credit money, since they are both denominated in dollars. Nor do they understand the process of money creation through issuance, on the one hand, and bank lending, on the other.

    I generally start an explanation with the question, What is money? The answer lets me know where I need to go from there. Most people have only a vague and confused idea, and many think that money is the cash in their wallet.

    Reply

  5. Igor Rasmussin Says:

    Warren:

    I’ve been catching up on your latest musings. I felt that instead of the stimulus package, a 5 year income tax holiday on families earning less than $100k per year would immediately stimulate the economy and put cash in the hands of those with the greatest propensity to consume and pay off their debt. Biggest problem solved! Of course, instead we received 8 years of pent up pork for every democratic congressman and senators districts to the tune of about $70 billion spent so far…not enough to move the economy or cause an Obamaboom!

    I know you’ve always believed in deficit spending as a means of generating minimal unemployment and non-inflationary growth, as long as the government’s bid is being hit instead of the government lifting offers. That said, I can’t agree that your idea of a base wage for work in non inflationary. There is a value to the private sector of having an unemployed stock of labor where the gap in private wages so far exceeds unemployment wages that wages can be kept down. To the extent that you’re paying $8 per hour for government jobs, you effectively push up wages in the private sector and cause inflation because the gap has been reduced. The value to the private sector of having people suffering and starving means that the unemployed will take less just to stop the suffering and starvation. At $8 per hour (or whatever the number is), labor may not leave the government make work sector to go to the private sector for some small incremental increase. Perhaps they won’t like their boss. Perhaps they’d really have to work. Perhaps they’d not have the flexibility to get every government holiday off. Perhaps it’s a longer drive. Whatever the case, your employment program is lifting the offering and creating a competition with the private sector for labor. It is inflationary. Couple that with the insidious loss of wealth through printing the currency and creating bigger reserves in the banking system and you’ve reduced the standard of living in this country. If bigger budget deficits were always the answer, you’d be able to convince a far greater audience that your theories are correct. When you pay $8 per hour to do nothing, $8 per hours becomes worth nothing.

    Reply

  6. warren mosler Says:

    first,deficit spending doesn’t generate anything. its the lack of a sufficient sized deficit that’s restrictive and keeping millions in the unemployment lines. the currency is a simple public monopoly and as with any monopoly the monopolist restricting supply results in excess capacity (unemployment)

    second, if the $8 job may indeed result in the gap you describe widening. But that’s a one time adjustment, and not inflation.
    And $8 is my suggested starting point, and ultimately only a numeraire around which the rest of the prices structure fluctuates with changes in relative value, etc.

    third, there should be no loss of wealth if the deficit goes up funding the elr pool. In fact, any increase in output adds to real wealth.

    last, as long as you must show up for work to earn the $8 an hour you are at least selling your time which does have value. it’s very different from paying someone who doesn’t have to sell his time to get it.

    Reply

    Igor Rasmussin Reply:

    Warren:

    In the real world, their time isn’t worth anything to anyone other than themselves. Also, once this program goes into effect in the real world (unless you continue your run for President and win and end term limits!), it won’t be long before that $8 per hour moves higher, pushing up wages in the private sector. After all, these are voters and the more people you have eating at the government trough, the more votes you keep. In theory, it might be a great program. In reality, it would be abused by politicians.

    As to the budget deficit, I laugh every time I hear that we’re borrowing money from China to fund our deficit. They obviously have our dollars because we buy their products and they buy our “debt” with those dollars. They could sell the dollars and weaken our currency but that might be mutually assured destruction as they peg their currency and need us to buy their formaldehyde laced drywall to avoid social unrest in their own country. That said, the idea that we haven’t run large enough deficits seems a bit of a stretch. Yes…under Clinton we patted ourselves on the back for generating a surplus which ultimately contributed to a recession and a meltdown in stocks from 01-03 but after that, we were running sufficiently large deficits. In fact, if inflation is the measure of whether or not the deficits are large enough, our inflation rate if measured properly using true housing cost up to 2005 instead of owners equivalent rent was probably north of 5%.

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  7. warren mosler Says:

    yes, there can and likely will be political opportunism as there has always been. But at least we’ll get a few good years while I’m in charge and set an example of how things can be. And also release the knowledge of how it all works, for whatever that’s worth.

    and with inflation a function of prices paid by govt when it spends (and collateral demanded when it lends) we can have full employment (as currently defined) and price stability. See ‘Full Employment and Price Stability’ on this site, thanks.

    Reply

  8. Igor Rasmussin Says:

    Speaking of your statement “I swear to tell the truth, the whole truth, and nothing but the truth so help me god” in your campaign appearances, you indicate that you ran a hedge fund for 15 years and never lost any money? I recall hearing in the investment community about two funds you did manage that lost significant value. One was your original fund and one was investment in Russian debt. Any truth?

    Reply

  9. warren mosler Says:

    that was after i turned over control to my other partners at the end of 1997. my only contribution to the Russian fund was the name-

    The High Risk Opportunities Fund

    And it was the name that saved them from any subsequent legal action.

    Reply

  10. Igor Rasmussin Says:

    What about your original fund called Triple I? I’ve heard from families in the Chicago area that they lost a huge chunk of money in that fund on auto loans including during the period before you turned over the funds. If you’re going to really run for president, you need to document that your partners were responsible for the loss and they’ll need to accept the blame or you might have some problems! That would be really unfortunate since I believe you have a great take on monetary and fiscal policy…although I still don’t 100% believe that the government jobs program won’t be inflationary!

    Reply

  11. warren mosler Says:

    I think that came later, if I recall correctly, and it’s a long story but it wasn’t my doing. In fact, after one of my partners agreed on funding plan I pointed out a major flaw in what he did.

    Also, the losses for those loans- the company was named Aegis- were mainly lost income, especially after we sold the servicing arm for a pretty good profit. It was unpleasant but not material, and, again, not my doing.

    Find out what year they claim to have lost money. I’m pretty sure you have that part of the story wrong.

    Then again, at age 60, I don’t fully trust my memory without looking things up!

    Reply

    Igor Rasmussin Reply:

    OK. All that notwithstanding, why would Russia default on its debt if it was only a data entry at its own central bank?

    Also, is it true that the IRS shreds money if you pay them in cash?

    Reply

    zanon Reply:

    Russia was trying to run a fixed-fx regime in 1998. Therefore, it was not only a data entry problem.

    Reply

    Rubin Reply:

    Igor, Rubin said the entire financial crisis that happened then broke down to one key point. The nobel prize winning economists involved and many others assumed the world banking system would not let a NUCLEAR armed power fail financially. Now Igor I would like your thoughts, why would these really smart people think it would NEVER be allowed for a NUCLEAR armed power to go into financial ruin? My thoughts are they thought well – if the country descends into chaos – nukes will fall into bad hands and bad things will happen in other parts of the world. In fact some bankers may have a nuke go off in one of thier yacht clubs where all thier super yachts are docked – for example. I can relate to this line of thinking and agree if I were in their shoes I would also think the same way – cause it looks like to me that is EXACTLY what has happened in Russia – nukes and nuke knowledge has left that failed state into terrorist hands and look at the resources that is being spent now to keep these guys at bay. So what I don’t get, is that it seems those people who made those bets were RIGHT, letting a nuclear armed power fall into financial ruin could be the death knell for us all, so now I want to know – why didn’t those dumbazz bankers and financial types DO MORE to keep that financial crisis from transpiring? I don’t feel as safe as I did in 1996, and the stress is killing me. Certainly some guys somewhere could have changed some zeroes somewhere and kept things together no? Who was the geniuses who said NO, damned be the nuclear problems from a failed russian state, we need to be honest on our accounting or whatever.

  12. warren mosler Says:

    russia had a fixed fx rate and shut down when they ran out of $ reserves. they had the option to float and keep things going from there but didn’t understand how to do that.

    I think it’s a different part of Treasury that does that.

    http://www.bigsiteofamazingfacts.com/what-does-the-government-do-with-old-money

    Reply

  13. warren mosler Says:

    russia had a fixed exchange rate policy. they shut down when they ran out of dollars and didn’t know to simply switch to a floating fx policy until maybe 6 months later when they reopened the CB.

    http://www.bigsiteofamazingfacts.com/what-does-the-government-do-with-old-money

    Reply

  14. zanon Says:

    Question for you guys:

    When the Government buys something from the private sector (spends) how is that accounted for?

    Private sector deposit account gets credited, as does the reserve account at the Fed. But what does the Treasury debit? Its reserve account at the Fed?!

    Reply

    Matt Franko Reply:

    Zanon,
    I dont know if it is technically a “debit” (suggest email to Scott Fullwiler), but it does show up on the Treasury’s
    Daily Statement as a “withdrawal” (right hand column) from the Treasury’s Fed. Reserve account yes.
    BTW that link is to the last daily of the Govts fiscal year (Govts 2009 is now over), matt

    Reply

  15. Warren Mosler Says:

    yes, the tsy has an account at the fed, and one our self imposed constraints is that the tsy account can’t run an over draft at the fed

    Reply

    zanon Reply:

    So what happens when the Treasury’s reserve account hits zero?

    My question is, since the Treasury prints money whenever it spends, you get a credit in deposits (on the liability side), how is this balanced on the asset side? Does the Treasury credit its own reserve account?

    Reply

  16. warren mosler Says:

    if the balance in the tsy reserve account at the fed is 0, and the tsy writes a check to someone anyway, the fed is supposed to bounce it.

    the tsy reserve account at the fed is just like the reserve accounts for the banks and foreign govts. except the banks can run overdrafts and the tsy can’t.

    Reply

    zanon Reply:

    OK, completely bizarre, but OK. Spending time on this site has shown to me that completely bizarre is normal.

    How close is the Treasury account to zero now — where can you look that up? How does the Treasury reserve account get money to begin with — via taxes?

    Reply

  17. warren mosler Says:

    tsy funds its account with borrowing and taxes, and also uses private bank accounts called tax and loan accounts

    should be on fed statements

    always a few billion or so in the tsy account

    more on settlement days when securities are delivered

    Reply

  18. dissenter Says:

    Igor says: In the real world, their time isn’t worth anything to anyone other than themselves.

    Igor I have some american girlfriends who believe you should pay them to go shopping with you, buy them gucci bags and shoes and dinners and houses and cars just for gracing you with thier time, the sad thing is many of them are fat over 50 slob women who still think they are 20 year old small tiny hotties, you have HIT THE NAIL on the head my man, these idiots think they still have VALUE to anyone else, a fantasy in thier own peter pan make believe. Our government actually implements laws and social customs to cater to this peter pan make believe of this INSANE people, thereby ruining our entire nation.

    Igor says: Also, once this program goes into effect in the real world (unless you continue your run for President and win and end term limits!), it won’t be long before that $8 per hour moves higher, pushing up wages in the private sector. After all, these are voters and the more people you have eating at the government trough, the more votes you keep. In theory, it might be a great program. In reality, it would be abused by politicians.

    Yes, once the voters get comfy with the idea of voting in people who will raid the public treasury for them, well history is full of examples going back 2000 years where nations fall after that point. All my friends who kept buying houses to flip, I said hold up, where is the wage inflation to sustain these prices, they laughed. I said with global wage arbitrage sending jobs away from USA, why do you think a moldy shack on the beach should be worth 1 million. Then I found out IGOR, I went to some foreign countries and they won’t even take US dollars anymore, so yes, shopping machine princess can get paid thousands a day for her TIME, and millions for her worthless shack, because US dollars are turning into worthless monopoly money anyways that some foreign banks won’t accept anymore.

    Reply

  19. Worked onWallStreet Says:

    Warren:

    Back to the “I swear to tell the truth, the whole truth and nothing but the truth so help me God” as your campaign suggestion requiring truth in your statements, I ask you this:

    I remember speaking to you regularly in 1998 while you were running your fund company. I would also guess, if I’m correct, that your name was on the offering circular for the funds you claim you weren’t running. And, I just went on this website http://www.iiioffshore.com/about/leadership.php and you’re prominently featured as still being involved with this company. So…are you telling the truth, the whole truth, and nothing but the truth so help you God that you had nothing to do with the failure of High Risk Opportunities? Did you allow your name to be used in a document for that fund? Were you paid by that entity? Are you telling the truth now or were you telling the truth then because it doesn’t seem you could be telling the truth both times.

    Reply

  20. Phil Gomez Says:

    Warren,

    You have some real solutions here that most people in the US are not hearing (in fact, as you must know, they are hearing a lot of nonsense from nearly all the major media outlets). I would recommend that you seriously consider hiring a communications consultant or a media firm to help take your proposals and craft messages that would be more easily received, understood, and spread by average Americans.

    There is a tendency — especially among academics — to dismiss the importance of crafting messages to one’s audience. They think that all such “crafting” is “dumbing down.” That’s not what I’m talking about. You can communicate accurately while still getting better reception and understanding with well-crafted messages.

    Anyway, I look forward to hearing more.

    Thanks,
    Phil

    Reply

  21. Clarification Please Says:

    Mr. Mosler, can you please clarify a few things? First, if you managed a fund that was based upon your deficit premise, the fund shouldn’t have failed. If it did fail, there had to be other circumstances. It seems you and others have referenced the fixed fx policy of Russia. What is to say that the dollar wouldn’t be the victim of your policies? If the government runs a large enough deficit and increases reserves in the system, scarcity value of the currency is diminished. The dollar would become weaker and inflation would be the price we’d pay for your policies. If not, why?

    Also, while elements of your policies and statements on your home page make sense, it is a little hard to believe that nobody in the world of economics or at the fed can possibly understand what you’re saying. Let’s say you’re right. Why haven’t you developed a bigger following and why hasn’t it been accepted in the mainstream. Surely these people just can’t be stupid? Finally, if you’re really running for president, accepting donations, and want to be fully forthcoming, why don’t you address the issue that you’re still listed as part of a fund company that had failed funds but you claim you never lost any money in videos posted to your own website? The “I’m 60 and don’t remember” routine when you’re dealing with a complete fund failure seems a bit hard to swallow.

    Reply

  22. Eduardo Obregon Says:

    In countries that debase their currencies by spending too much and taxing too little, the end result seems to be high or hyper inflation. Normally, for there to be hyper inflation, a country usually owes debt denominated in another currency that they can’t service. While the US need for oil is not a debt per se, it is a somewhat inelastic need that, for all practical purposes, is an external debt to keep this country going. If that’s the case, isn’t the US exposed to hyper inflation should the oil producing countries decide to reject dollars for oil? While we may have a monopoly on our own currency, we certainly don’t have a monopoly on oil!

    Reply

    Tom Hickey Reply:

    That’s what we have a military for. Why do you think we are spending all that money and have a huge presence in the ME and Central Asia? “It’s the resources, stupid.” Terrorism, not so much. Good excuse to be there in full force.

    Reply

  23. Jason Says:

    As far as I can tell, every premise on your website is based on the US being able to print its own currency and under those circumstances, perhaps your theories make sense. However, with the price of gold rising on a daily basis, perhaps the U.S.(and other printers) are being told enough is enough! We no longer believe your wampum will be worth anything in ten years. If a run out of the dollar (and into gold) continues, your theories become moot, no?

    Reply

    Scott Fullwiler Reply:

    Run on the dollar means the dollar’s value falls, exports increase, trade balance improves, jobs created in export industries, GDP rises. Where’s the need to abandon issuing the currency? Did the US govt suddenly become unable to collect taxes? Indeed, this is PRECISELY what the US govt wants, apparently, when they complain about other countries manipulating exchange markets to keep their currencies undervalued vs. the dollar.

    Reply

    warren mosler Reply:

    with very rare exception,they aren’t theories or philosphy, just accounting reality.

    so far the rise in the price of gold has been a shift in relative value, and not ‘inflation’

    it does reflect views of those who believe inflation is coming, but that’s another story

    Reply

    Matt Franko Reply:

    Jason,
    WRT gold vs other assets, I think in a similar fashion chicken wings (fatty skin & bones) are currently going for $3.99 per lb. and there are shortages reported (football?), while chicken thighs (more meat) are going for $1.50 per pound.
    I dont think we should be making public policy due to a (to me somewhat irrational) increase in the price for wings or in a similar fashion a precious metal. Put the citizens first and look at utilization & employment instead.

    WRT oil, you perhaps can get methanol for $3.00 per gallon here which is not much more than we are paying at the pump for gas now.

    Reply

  24. I Swear To Tell the Truth! Says:

    Mr. President,

    You’re running for the highest office in the land. You’ve got videos posted to this website where you say that candidates who are dishonest should be put in jail. You claim that you had nothing to do with your old firm that blew up one or more funds. In fact, you said you turned over that firm to your partners before it had problems in 1998! Then I saw this posting:

    James River’s Start-up Hedge Fund Raises $5.3M – CBL

    By Citybizlist Staff

    MANAKIN-SABOT , Va. — James River Capital Corp.’s start-up hedge fund III Futures Neural Network LP has raised $5.28 million in pooled investment fund interests from four investors, according to a Reg D filing with the U.S. Securities and Exchange Commission.

    James River Financial Corp. in Manakin-Sabot , Va. , and general partner III Associates, by Boca Raton, Fla.-based III Offshore Advisors, also are named as principals of the uncapped fund.

    Others are executive officers Kevin Brandt, Paul Saunders, Garth Friesen, William McCauley, Warren Mosler, Michael Reger, Clifford Viner, Scott Wyler, Sanjiv Sharma, Robert Printz, Francis Feeney and Laura McGrath.

    Why don’t you tell someone (anyone) the truth. You’re either involved as a hedge fund manager and being dishonest in some of your earlier replies or you’re not involved with a hedge fund and you (or your former partners) have a posting with the SEC that is dishonest. Which one is it, President Mosler?

    Reply

    WARREN MOSLER Reply:

    “In fact, you said you turned over that firm to your partners before it had problems in 1998!”

    Yes, I turned over control to them. I still have a 13% interest.

    “Why don’t you tell someone (anyone) the truth. You’re either involved as a hedge fund manager and being dishonest in some of your earlier replies or you’re not involved with a hedge fund and you (or your former partners) have a posting with the SEC that is dishonest. Which one is it, President Mosler?”

    As i’ve said all along, i’m a 13% partner. I have no trading authority, I live and work in St. Croix, and i’m not involved in the partner meetings in Florida.

    Reply

  25. John Lutz Says:

    As a keen student of your views (7 Deadly Frauds), I wonder how they apply to government OUTSIDE of federal, cf, financial crises in states like Calif, et al.

    These entities don’t/can’t create their own money. (or can they, as in Bank of North Dakota?) http://www.counterpunch.org/brown01052010.html

    jcl

    Reply

  26. C Recker Says:

    If the government cuts taxes per your proposal and issues debt then it is a transfer of relative wealth in the economy?

    Why should we pay interest on our own money? This is how the private central banking system transfers wealth from people to bankers.

    Why doesn’t the US Treasury do the following:

    1. Absorb the Federal Reserve payments system
    2. Use US Tresury Notes interest free (Greenbacks) and purchase all publicly held Treasury and Mortgage debt.
    3. Require 100% reserve banking to absorb the currency.
    4. Move to banks as utilities and a single capacity (investment advisor, broker, 100% reserved bank for payments) model in the financial sector.

    Appreciate your thoughts.

    Reply

  27. Dagman Says:

    Hi Warren

    I read your 7 frauds book and it is the what I have looking for all these years. Everytime I tried think about deficit and taxes it never made any sense but thanks to your book it´s like I was blind and now I can see.

    Anyhow I had a question about something I don´t quite understand. In your theory why does the government pay interest? What purpose does it serve? Is it to dampen spending in the private sector?

    Reply

  28. Andrew Says:

    Hi,

    Dmitri Papadimitriou asserts that our trade deficit with China is a bad thing and suggests using a cap and trade system to equalize trade: http://www.levyinstitute.org/pubs/op_1.pdf

    I assume that you don’t agree. Can you explain Mr. Papadimitriou’s position? Do you know why he might think that our trade defecit is bad?

    Reply

    Tom Hickey Reply:

    Andrew, I haven’t read the article you cite, but Henry C. K. Liu does not like persistent trade imbalances (everyone’s deficit is someone else’s surplus as an accounting identity) because it is disruptive to the domestic economy in both deficit and surplus nations. The Chinese export real resources to the US, which means that the Chinese consumer economy lags and only certain sectors in China benefit and it’s not the workers, who do not enjoy the benefits of what they make. The US in turn exports factories and jobs to China and only certain sectors benefit, and again it is not the workers, who get cheap trinkets but lose their jobs and bargaining power. Imbalances are, well, imbalances. They have consequences that favor some over others, Liu claims unfairly.

    Reply

    Ramanan Reply:

    It is a well-kept secret that the theory of international trade – the entire story about the benefits every country can gain by exchanging its goods with other countries — depends on the assumptions that (1) trade between countries is balanced and (2) trade does not alter the level of employment or unemployment. employment or unemployment. To exaggerate only a little, international trade theory proves convincingly that a set of prices can be found such that agents, coming to market with given quantities of goods, can all go away carrying alternative and, to each agent, superior baskets of goods.
    But the very point at issue, and the strategic predicament to which this Brief is drawing attention, is that international trade, if it is endemically unbalanced, threatens to impart a disinflationary shock to the U.S. economy that would cause severe unemployment and that the shock would then be transmitted to the rest of the world.

    - Wynne Godley, 1995

    Reply

    Tom Hickey Reply:

    Very prescient.

    Reply

  29. Tom Hickey Says:

    “Let’s say you’re right. Why haven’t you developed a bigger following and why hasn’t it been accepted in the mainstream.”

    Have you any idea how long it took Jesus Christ to get some traction? Warren doesn’t even do miracles. :)

    Reply

    zanon Reply:

    Forget mainstream.

    Why hasn’t MMT gained a single advocate in first, second, or third tier econ department?

    austrians are taken more seriously than MMT

    Reply

    Tom Hickey Reply:

    Zanon, I don’t believe that is fair comparison. When one chooses to work out of paradigm, one’s employment opportunities are limited unless and until the paradigm changes.

    While I had written in in-paradigm dissertation on a currently hot topic, I had to face that choice myself in my field, since I was chiefly interested in something that was out of paradigm. I chose to pursue what I thought was important, even though I was warned that it would “disrupt” my career track, which, of course, it did.

    I also took an unconventional approach to a socially and politically hot subject in my master’s thesis, and was told by the department that it would be used against me in future career-wise. I went ahead with it anyway.

    What I am interested in is just now gaining ground in the field, long after I was in the job market. No regrets here, though.

    Reply

    zanon Reply:

    Toms Hickey:

    This is entirely fair comparison.

    Expecting common person to understand accounting and bank oepration is moronic. They will go ask experts, which are economists in university. These people will say MMT are crazy.

    If MMT is correct, and I think it is, you should be able to win academic argument. take someone who has tenure (of which there are many) and is in frst, second, or third tier univeristy. we are now at maybe 2000 people.

    Convince ONE of them of MMT.

    Tenure person does not need to worry about getting tenure. third tier university does not need to worry about respect, as they have none.

    Tom Hickey Reply:

    With that I agree. By the time that one is so invested one’s career, one has put blinders on and can no longer see objectively. One can only see through those ideological glasses. That is why some sort of upheaval is required for change. Apparently the present upheaval is not enough to shake things up.

    Mainstream economists were found to be with no clothes but they just blithely wander down the same path naked, not noticing. I was really glad to see Her Majesty the Queen call them on it, but they just came up with the ridiculous excuse that it was the result of a “shock” that no one could have seen coming. And we are being ruled by these losers.

    I guess they will have to drive the world into a second great depression for any change to come about, and then the outcome is uncertain. Could be a prelude to a repeat of the run-up to WWII in some fashion.

    WARREN MOSLER Reply:

    i take it as a personal failure

    Reply

  30. nystockguru Says:

    What do you think of the GM IPO being released next month in terms of timing and what do you think a reasonable market cap should be?

    Reply

  31. SethM Says:

    Hi Warren,

    I came across your website and read your 7 Deadly book. I was amazed by how neatly you cut through the false complexity and clearly described what is in essence a very simple system. I had in the back of my head similar ideas and questions to the points you addressed, but I had never been able to formulate them or fit them into a coherent model until now. Thank you very much. But now when I read the financial press I suffer from the same sense of maddening frustration that no doubt you and most everyone else who has come across your ideas does as well. I truly hope that your ideas will become accepted among enough citizens that we turn our society towards prosperity for all sooner rather than later.

    Also a quick question: what is your take on QE? Is it a non-event such as a simple asset swap or is there more going on? What do you think will be the likely results? Thanks.

    Reply

    WARREN MOSLER Reply:

    welcome aboard, and do help get the word out!

    qe is a non event apart from the resulting modestly lower rates, which don’t do much if anything per se and may even net reduce demand

    lots on qe on this website so have a look

    Reply

  32. Jake H Says:

    Hey Warren,

    I have read your book 7DIF and was debating with a friend and was unable to answer one of her questions. My question is if we are not governed by issuing debt to countries, then what is the purpose behind our doing so? Wouldn’t it in essence work for a government to spend how ever it wants and use taxes to cool or heat up the nation?

    Thanks,
    JH

    Reply

    WARREN MOSLER Reply:

    yes. govt debt functions as interest rate support, not to cool demand per se.

    and, in fact, the case can be made that higher rates are inflationary. in other words, the fed has it backwards.

    Reply

    Unforgiven Reply:

    Warren -

    I’m trying to imagine a MMT world where inflation controls suddenly become necessary. With individuals that are running it to the edge, servicing interest on credit, what happens when the Gov raises property tax rates, which then get passed on to renters? Would the credit issuers be forced entertain jubilee? I’m looking for the rule here, not the exception, in a MMT economy.

    Reply

  33. Andrew Says:

    Warren,

    Why does the US borrow money from the Fed? Why doesn’t it simply print the money? Assuming the continuation of the current system, does the interest rate that the US pays to the Fed for the privilege of borrowing matter? Can the Fed choose not to lend money to the US?

    Reply

    Tom Hickey Reply:

    Andrew, the US does not “borrow money” from the Fed, nor does it “borrow money” through issuance of tsy’s. Government “borrowing” is a canard.

    Please consult the mandatory readings in the menu bar above. I suggest beginning with Warren’s “7 Deadly Innocent Frauds,” where he dispenses with these myths.

    Reply

    Andrew Reply:

    Help me. The paper talks about the treasury “changing numbers in bank accounts.” But these are accounts at the Fed, right? If the government can change reserve accounts at the Fed, how is the Fed independent? People like to say “The government can’t print money, that’s the job of the Fed.” What are they saying?

    Does Geithner just call Bernanke and ask him real nice to put some money in some bank accounts, or what? If this is how it works, can Bernanke refuse?

    Reply

    Tom Hickey Reply:

    Andrew, the Treasury and Fed are government agencies. They work closely together to manage operations.

    When people say that the government can’t “print money,” that ‘s the job of the Fed, they don’t know what they are talking about. What they should be meaning is that only the Fed controls its spreadsheet and while other entities have access to the FRS for settlement purposes, only the Fed can change reserves up and down. Reserves are Fed liabilities, and they are balanced by assets on the Fed’s balance sheet.

    http://www.federalreserve.gov/monetarypolicy/bst.htm

    When Treasury needs reserves to clear its checks and electronic deposits then it must get them from the Fed. The Fed cannot just give the reserves to the Treasury because, by law, the Treasury cannot run an overdraft at the Fed. So the Treasury issues tsy’s is the amount of reserves required. The Fed is prohibited by law from simply switching reserves for tsy’s directly. It must auction off the tsy’s, which is does through it primary dealers, who then sell them to other nongovernment entities. This drains the reserves created by Treasury expenditure from nongovernment, since the nongovernment tsy purchases are paid for in reserves that go to the Fed. The tsy issuance drains the excess reserves created by Treasury deficit expenditure, enabling the Fed to hit its target rate. Thus,government expenditure and taxation are fiscal operations that increase and decrease nongovernment net financial assets, and tsy issuance is a monetary operation that drains excess reserve and only serve to change the composition of assets held and the term structure of government liabilities, although interest paid is fiscal and increases nongovernment NFA. When the Fed purchases tsy’s through OMO or POMO, it withdraws interest and credits its profit to Treasury.

    Andrew Reply:

    But this takes money from a private sector account (the purchaser of the tsy) and sticks it in another private sector account (say General Dynamics, who sold a tank to the government), doesn’t it?

    In order for deficit spending to really increase private sector money, doesn’t the Fed have to just mark up some accounts without debiting others? Isn’t this what the QE thing is all about?

    Tom Hickey Reply:

    Treasury puts money in a private sector account, like General Dynamics, at the General Dynamics bank. The Treasury’s mark up of the bank account has to clear between GD’s bank and the Treasury’s bank (the Fed). The Fed cannot just add reserves to the Treaury’s account since, by law, the Treasury cannot run an overdraft at the Fed. So the Treasury issues tsy’s in the same amount as the deposit to GD. Now the Fed has an asset (tsy’s) corresponding to the reserve liability in creates by putting the reserves in the Treasury account at the Fed for settlement.

    But the Fed cannot by law just add the tsy’s to the asset side of its balance sheet either. It has to sell the tsy’s at auction. When it does that, it sells its asset, the tsy’s, for reserves equal to the reserves it put in the Treasury’s account. The Treasury expenditure “paid for” the tsy’s, i.e., the net financial assets that the Treasury’s expenditure added to the economy, here GD, were automatically saved by someone buying the tsy’s, and the Fed account balances, with the reserves credit to the Treasury and debited to the Fed credited back to the Fed by the tsy sale, with the buyers bank’s reserve account debited, which is reflected in the debiting of the buyers deposit account on the banks books. The Fed is just an intermediary here, which is want a bank does.

    In OMO and QE, when the Fed purchases tsy’s, the Fed just takes tys’s onto the asset side of its balance sheet and credits (puts reserves into) the buyer’s banks FRS reserve account, balancing the asset (tsy’s) with a corresponding liability. The bank has increased assets (reserves) but a liability to the seller of the tsy’s. So the bank credits the tsy seller’s account in that amount, balancing it books. It’s just an exchange of assets that changes the composition of assets and term structure of government liabilities. Net financial assets are unaffected.

    You really have to do the accounting to understand how this works correctly.

    Andrew Reply:

    Tom,

    Thanks again for your help.

    So, back to the MMT claim that the government has to spend the money into existence before people can pay it as taxes. How does that work? Where does the money come from? You’re saying that it has to borrow it from the private sector, which in turn has borrowed it in the form of a loan from a bank. Is this correct?

    If the government can’t “make” money other than through a debt, how can things work? It’s like MMT people want to say that government can just make money, but really, it can’t – it DOES have to borrow, and it can’t be a signature loan from the FED that the FED can write off. It DOES have to borrow from the private sector. But you are also saying that there will always be dollars out there that people will want interest on, so there will always be demand for tsys. So it’s OK to deficit spend, because there will always be demand for tsys – there is no choice if you want to earn interest.

    It’s like there is the incredibly complicated and unnecessary infrastructure to enable federal deficit spending that just keeps economists employed.

    I think I’m getting more confused instead of less confused. Please correct any apparent misunderstandings.

    Tom Hickey Reply:

    Andrew, you are getting confused by your preconceived ideas. The government creates money out of nothing. Just a few keyboard strokes. The Treasury creates a deposit in an account electronically by using its keyboard or physically by sending a check. Similarly, it creates tsy’s by a keystroke. The Fed creates reserves with keystrokes, too. All of these things function as “money” as far as the economy is concerned. Where did this money come from? The computerized spreadsheets, just like the points that appear on a scoreboard.

    When Treasury marks up a deposit account or cuts a check that gets deposited, Treasury has a liability of the amount created and the person receiving the deposit has an increase in assets. The Treasury did not borrow to create that liability. There is no liability created in the private sector. treasury just created the deposit by a few keystrokes.

    The funds that Treasury creates are used to buy tsy’s, which Treasury also creates with a few keystrokes. This means that the net financial assets that Treasury injects into the economy get saved in aggregate as tsy’s. The national debt is really nongovernment saving of net financial assets created by government. Only government can create net financial assets, since all bank money that is created by loans nets to zero.

    Let’s look at the details. When the Treasury disburses funds, someone receives some funds in their deposit account created either electronically or by depositing the Treasury check. When these funds are spent, e.g., by check, this transaction has to be settled in the interbank system, so the bank of the person who received the deposit has to settle that check with reserves for it to clear. Since the bank did not make a loan to create this deposit, it is not responsible for providing the reserves itself. This is the Treasury’s responsibility. So the Treasury needs reserves for settlement of its disbursements in the interbank settlement system.

    But the Treasury cannot create reserves itself. Only the Fed can create reserves. The Fed is the Treasury’s bank, so the Treasury has to get the reserves from the Fed Since the law prohibits the Treasury from running an overdraft on its account at the Fed, it has to get the reserves from the Fed so other way. To do this, it issues tsy’s in that amount, which the Fed sells at auction as I explained above.

    This may look like borrowing but it is not, because in aggregate the net financial assets that the Treasury injected into the economy are used to buy the Treasuries, since Congress requires a $-4-$ offset of deficits with tsy issuance. Tsy’s come into existence through deficits. In effect, what has happened in aggregate is that the money created by deficit expenditure gets saved as tsy’s. There is no borrowing going on here. This is money creation out of nothing, since the Treasury creates both the deposits and the corresponding tsy’s and the Fed intermediates by creating the reserve used in settlement and recoups them through tsy sales at auction. In this way, Government waves its magic wand and nongovernment net financial assets increase in aggregate and are saved as tsy’s in aggregate.

    In fact, it is not operationally necessary to issue tsy’s at all. It is a political requirement that can be repealed at the discretion of Congress. It is just a façade made to look like the government is borrowing from the private sector when government is actually providing the private sector with the “borrowed” money. It’s sort of like a parent giving a child an allowance and then borrowing some it back at interest to teach the child the value of saving.

    You and many others are confused by the sleight of hand, so to speak. Government money creation is dressed up like borrowing to conceal that what is really happening is creation out of nothing. It is probably thought that if people realized this, they would not value state money. But the real value of state money comes from its status a legal tender in payment of debts, specifically obligations to the government in the form of taxes, fees and fines. This necessitates that people obtain state money.

    beowulf Reply:

    f the government can’t “make” money other than through a debt, how can things work? It’s like MMT people want to say that government can just make money, but really, it can’t – it DOES have to borrow, and it can’t be a signature loan from the FED that the FED can write off.

    “A signature loan the Fed can write off”? We’re talking about the United States Government, not a fly by night timeshare salesman living in a rent by the week trailer. Uncle Sam pays his debts, one of the reasons the government borrow is to provide investors, here and abroad, a source of risk-free investments. And yes, the Government can create money at any time without borrowing, as a matter of fact it does.

    The Mint does not distribute coins into the monetary system. That’s the job of the Federal Reserve, which has to buy them at full price.

    Even though a quarter costs the Mint only about 6 cents to make, Fore said, the Fed buys it for 25 cents. The difference — called seigniorage (pronounced SEEN-your-ij) — goes straight into the general fund, where it substitutes for borrowing from the public and lowers the government’s interest costs.
    http://www.msnbc.msn.com/id/6620800/

    WARREN MOSLER Reply:

    Yes, the Fed changes the numbers in the member bank reserve accounts which are data on its spread sheet

    The Fed Chairman is appointed by the President, confirmed by Congress, who have decided after that to not tell him what to do.

    And yes, Geithner has no authority to order the Fed to do anything, and Bernanke has strict instructions from rules and regulations as to how he’s to conduct most operational aspects of monetary operations.

    Operationally, when taxes are collected the Fed is required to debit the accounts of taxpayer’s banks and credit the Tsy’s reserve account.
    And when Tsy secs are paid for the Fed is required to debit the buyer’s fed account and credit the tsy’s fed account.
    And when tsy spends the Fed is required to debit it’s account and credit the accounts of the recipients, on instructions from the tsy.

    etc.

    WARREN MOSLER Reply:

    it wouldn’t matter.

    The Fed executes spending simply by crediting member bank accounts.

    This increases member bank reserve balances, on which they have to pay interest to support the interbank rate and term structure of risk free rates in general.

    Tsy securities are just alternative accounts (called ‘securities accounts’) at the fed that function to support the term structure of rates.

    see ‘soft currency economics’ under ‘mandatory readings’ on this website.

    It’s the paper that got all this MMT stuff started

    Reply

  34. Andrew Says:

    Tom,

    I appreciate you’re attempts to help me understand, but I’m still not getting it – we’re getting mired in accounting, I think.

    I understand that money is just numbers in a spreadsheet. That doesn’t help. Let me outline some steps and you can tell at which step I misunderstand.

    1) The government wants a tank, so it puts 10M in GD’s account. GD sends a tank to Afghanistan.
    2) The government creates a promise to pay someone 10.1M 30 years from now (a treasury).
    3) China says, OK, I’ll take you up on that – I’ll give you 10M for that treasury.
    4) The government takes 10M from China’s bank account.
    5) Deal done. There is 10M more in GD’s account and 10M less in China’s account.

    If this is correct, there is no new money, as the same amount was added to GDs account as was removed from China’s. The government also says that it will put 10.1M in China’s account in 30 years.

    If what you are saying is that the government can do this deal an infinite number of times, then fine, but that is conceptually different than saying that the government just “makes money” by adding to people’s bank accounts.

    Reply

    Tom Hickey Reply:

    There is new money added to the system when the Treasury credits a deposit account. That same amount of money that is added is required to be saved as tsy’s. Thus, the new money added to the economy by deficit expenditure gets saved as “the national debt.” The Treasury gives GD the funds for the fighters it is delivering to the AF just by crediting GD’s account. Chinese companies have sold stuff in the US, and China decides it prefers to save those dollars in tsy’s for whatever reasons it has for doing so. GD is willing to exchange some fighters for dollars and China wants to save dollars in that amount. These transactions occur simultaneously. That’s it.

    Only the government can increase nongovernment net financial assets, because all financial assets created by banks and other private lending nets to zero. The net financial assets that deficit expenditure adds are the national savings, erroneously called “the national debt.”

    Also notice that operationally the deals with GD and China are correlated but not causally related. They are correlated in this instance because Congress has placed restraints on the operational reality of the fiat currency by preventing the Treasury from issuing currency without a corresponding issuance of tsy’s. This is not required operationally, but imposed politically. This is a needless continuance of operations under a fixed rate convertible monetary regime, where actual borrowing is necessary. This make the current policy look like borrowing, even though it is not.

    The Treasury does not “get the money” from China’s purchase of tsy’s that is spends at GD. It just spends it and China independently saves the same amount in tsy’s, which Treasury also creates at the stroke of a key. The reserves that the Fed provides for settlement (clearing) are also created by the stroke of a key. All this is really only accounting that transpires on the government’s spreadsheets, which gets reflected on various banks’ spreadsheets, and then it shows up in various accounts, like GD’s account at its bank.

    The government does indeed create money by crediting bank accounts. It also creates a savings opportunity by issuing tsy’s and agreeing to pay interest on them. All this could be done with paper notes printed at will by the government. The electronic accounting just substitutes for the printing presses and paper and the trucks that would be needed to transfer the paper around among the banks and to the various participants in transactions. It’s called electronic banking and the government runs it through its spreadsheets at Treasury and the Fed, all settlement other than cash transactions clearing through the FRS using reserves.

    Reply

    Andrew Reply:

    So,

    I take it that you accept my example as accurate, right?

    But you say:

    Congress has placed restraints on the operational reality of the fiat currency by preventing the Treasury from issuing currency without a corresponding issuance of tsy’s

    I think that this is the problem that people have with the statement that the government “can just create money by crediting bank accounts.” It can create ASSETS, but Congress has prevented it from creating money – most people wouldn’t call a treasury “money.” You also say that the part of the transaction that I described involving China looks “like borrowing, event though it is not.” That is not a reasonable statement. To 99.9% of people that transaction is known as borrowing. If it isn’t borrowing, what is it?

    In order for the current scheme to work, my example has to work forever. You would, I believe, assert that this is guaranteed because there will always be excess cash (reserves) in bank accounts for which people would like interest. But this is much too obtuse for most people to understand or accept. Unless the government DIRECTLY creates money (say, by just increasing GD’s account by 10M and eliminating the transaction with China), then people will worry about the government’s solvency.

    Rather than argue “don’t worry about the deficit, we will always be able to pay our debt”, I would think that people should be arguing for direct government control (elimination of the requirement to issue treasury securities). Then the whole idea of solvency DOES go away and perhaps deficit hysteria can die.

    Thanks again,

    Reply

    Tom Hickey Reply:

    I agree that tsy issuance is logically confusing, operationally unnecessary, and constitutes a subsidy for bondholders. Therefore, it should ideally be eliminated.

    But it is still necessary to understand the existing system correctly. Currency is a financial assets. Tsy’s are financial assets. Corporate bonds are financial assets. Equities are financial assets. Etc.

    All nongovernment created financial assets net to zero, because every nongovernment created fiancial assets has a corresponding nongovernment created liability. Government created financial assets do not net to zero because government money creation injects financial assets into nongovernment without creating a corresponding nongovernment financial liability when it deficit spends.

    The deficit spending creates nongovernment net financial assets. Tsy issuance does not “take money out of the system” in the sense of withdraw (destroy) nongovernment NFA, as does taxation. Tys simply stores nongovernment NFA at interest, and the interest paid on the tsy’s increases nongovernment NFA. This constitutes a subsidy to bondholders, since it is operationally unnecessary, although it can be argued that tsy issuance serves the public purpose of encouraging saving.

    Tsy’s act like bank CD’s. They are savings accounts at the Fed, as it were, instead of deposit accounts, which are called reserve accounts at the Fed. These are regularly switched back and forth, depending on liquidity preference, just like demand and time deposits in the commercial banking system.

    Saving in any form of financial asset represents postponed consumption. Like cash, financial assets represent potential claims on real resources. The difference among financial asset types is in liquidity and risk.

    Ramanan Reply:

    “I agree that tsy issuance is logically confusing, operationally uannecessary, and constitutes a subsidy for bondholders. Therefore, it should ideally be eliminated.”

    - Just wondering what if the private sector starts bidding up assets because of this ? Not to mention low interest rates providing incentives to purchase homes and blow up house prices. Asset management firms may like so much money sitting idle ? .. Just wondering.

    Tom Hickey Reply:

    Ramanan, if there were no tsy’s then financial assets would be composed differently to be sure. But those seeking to save at low risk/high liquidity would likely seek out comparable private vehicles that offer high liquidity and low risk instead of higher risk or lower liquidity assets. There are also state bonds and munis, which are necessary for government entities that are not monetarily sovereign.

    It can also be argued that it some of this financial capital would be invested productively. I am proposing a more comprehensive approach that would involve taxing away economic rent — land rent, monopoly rent, and financial rent, thereby creating a disincentive for speculation in financial assets, with corresponding incentives to encourage productive investment.

    I agree that tackling on aspect of the overall global problem as it is manifested in national problems amy result in imbalances. What we need is an approach to economics that looks at the global economy as a closed system and constructs an integrated sustainable solution.

    Tom Hickey Reply:

    Ramanan, I would also like to see government/cb’s completely divorced from interest rate setting. This introduces distortions into risk assessment, which is best left to the private sector, with governments relying on fiscal policy.

    I would also like to see government out of the fx markets, and let the market adjust floating rates independently of government intervention. No pegs either. Let’s stop pretending we have “free trade” and either have it or not have it.

    WARREN MOSLER Reply:

    a monopolist is necessarily price setter.

    the currency is a (simple) public monopoly

  35. Andrew Says:

    Make that “your” instead of “you’re” in the previous note. Sorry. Which there were editing of these things.

    Reply

  36. Charles Yaker Says:

    As I understand it the Federal Governement doesn’t need gas revenue to fund operations or road maintenance so the only need for gas taxes would be consumption reduction. But that is not their purpose so truckers who can’t pass on their tax expenses to others are penalize unnecessarily. Thissituation probably impacts independent truckers the most and makes them vulnerable to Warren’s message.
    Does this sound correct?

    Reply

    Tom Hickey Reply:

    Increasing taxes with a huge output gap and high unemployment is insanity, especially taxation that directly affects effective demand, hence has a high negative multiplier.

    Increasing the gas tax is like increasing the price of oil. It spreads through the economy since it raises basic cost of goods sold, since transportation is a cost that gets passed on. Moreover, as a regressive tax it reduces discretionary income by increasing maintenance costs. This also spreads through the economy.

    Taxes on petroleum do, however, adjust price toward true cost, i.e., production costs plus externality. In addition, by increasing the price of gasoline it makes alternatives like hybrid and electric vehicles more attractive. The problem is that they way electricity is produced at present involves externality that skews true cost, too.

    Reply

    Charles Yaker Reply:

    My concern comes from the thought that if one could educate trucker’s possibly through the use of billboards as to the true nature of taxation and the fact that they are paying more then their fair share. It might be possible to reach the tipping point necessary to bring Warren’s views in out of the cold.

    Reply

  37. Dan F Says:

    I have a Q that is an offshoot from your TeaParty video.

    You gave a scenario about how China sells the US tee shirts and money is then put into a reserve account. China can then choose to by Treasury bonds. In this case the Fed is just changing what accounts the transactions are stored.

    My question is what if Walmart buys products from China. I assume Walmart transfers funds from a US bank to bank in China. How does that transaction get registered? How is it tracked in China? I assume a US bank has a reserve account but does a China also have a reserve account?

    Reply

    WARREN MOSLER Reply:

    when walmart pays for what it buys walmart’s bank’s fed reserve account is debited and the fed reserve account of the bank they are making payment to is credited.

    the bank in china could have a fed reserve account but more likely it has a US bank that acts as a correspondent on its behalf

    Reply

    Tom Hickey Reply:

    Dan, you might be interested in this if you want to understand more about China and the RMB. Pettis buries some of the myths.

    Michael Pettis, China: What the PBoC Cannot Do With Its Reserves

    Reply

  38. Peter D Says:

    Warren and others.
    What is the easiest way to see that “loans create deposits”? Is that an irrefutable statement or a subject to debate?
    What is the main implication from this fact?
    If possible, on a dummy level :). Thanks!

    Reply

    hbl Reply:

    Peter D,

    It’s a fact. If you’d like to literally “see” it, try my macroeconomic balance sheet visualizer:

    http://econviz.com/balance-sheet-visualizer.html

    Choose “Bank Loan” from operations, click “Run Operation”, then mouse over the “Banks” and “Households” labels below the corresponding balance sheets to see what changed.

    Reply

    Peter D Reply:

    Hbl, thanks a lot for that, awesome tool, I’ll be playing with it. But if we were to summarize the idea in words that a dummy (like me) could understand?
    My failed try:
    “Bank A gives a loan to person X. If the bank doesn’t have reserves to back this loan then it can:
    1) acquire the reserves from other banks (paying some interest rate) or even a Fed discount window (even higher rate?) If the person X deposits the money in another bank, then indeed a deposit was created, but if he doesn’t? Where are the created deposits in this case?
    2) attract another depositor Y (again, with a promise of paying some interest rate) – but this could be not immediate, even though this shows where the deposit is coming from.
    What am I missing?

    Reply

    jorgejrl Reply:

    Under your scenario 1)We assume the person took the loan to spend it somewhere…a home for example, a car, college etc….whoever ends up with the money will deposit it and thus a deposit is created.

    The rare case when someone borrows to put the money in a cave is when a deposit is not cretaed by borrowing…

    hbl Reply:

    “If the person X deposits the money in another bank, then indeed a deposit was created, but if he doesn’t? Where are the created deposits in this case?”

    If you’re talking about cash (physical currency), try playing with the “Bank Customer Deposits/Withdraws Currency” operations in the visualizer. Technically that is a different step than the initial loan itself, so the loan still created a deposit even if only temporarily. (Perhaps some loans never go through the deposit creation step? I haven’t seen that discussed…) But if that newly created deposit is withdrawn as cash, the net effect post-loan is still that broad money supply has been increased (whether in the form of a deposit or currency). And as you’ve observed in your comment the central bank will ensure that at a macro level the banking system can acquire the reserves it needs, enabling still more loans to be extended.

    I’m not clear on the rest of your question(s) and whether they’ve been answered by others here.

    WARREN MOSLER Reply:

    just simple accounting. When a bank makes a loan they credit a bank account for ‘the money’ at the same time they book the loan.

    it’s right at the beginning of every money and banking text.

    Reply

    Tom Hickey Reply:

    PeterD, intuitively it seems that banks must get deposits first and the loan them out. Moreover, this idea is extended to the concept of “fractional reserve banking,” i.e., that banks can loan out more than their deposits because of the “money multiplier.”

    Even out it seem correct intuitively, it is not how things work. Banks do not in fact loan out deposits. They risk their capital in extending credit, just as any other lender does. The difference is that usually lenders have to actually lend their capital. If you borrow five from me, I give you five from my wallet, and you owe me the five. But not all lending works like this. think of co-signing a loan for someone. You are risking your capital in case of default, but you are not actually putting up anything out of your pocket.

    Banking works like this. Bankers just credit the borrowers deposit account and offset it with a debit — a loan as an account receivable, as it were. Most deposits are withdrawn through non-cash transactions that require settlement in the interbank system in reserves. The bank either uses reserve it has in its reserve account or else borrows the reserves as needed. The bank makes money loaning through the difference between its borrowing cost and the interest it charges on the loans it makes.

    Reply

    Peter D Reply:

    Thanks, everybody! I think I can see where my misunderstanding was coming from: in the case where money is just withdrawn as cash, it does not create a deposit (at least for some time), but this is not what usually happens.
    I guess the next question would be: what is the main implication that MMT draws from this fact? Is it the one that Warren and others constantly mention – that banks are not lending not because of insufficient reserves but only because of insufficient number of credit-worthy people? Are there other important insights that can be drawn?
    Also, if this fact is so obvious, why so many people still think that we have a fractional reserve system?

    Reply

    Tom Hickey Reply:

    PeterD, it can be seen from the above that since banks are risking their own capital, they are extending credit based on creditworthiness of applicants and demand for loans rather than an excess of funds they are pushing out the door.

    The insight here is that increasing reserves will not force lending because the transmission doesn’t run that way.

    Why do people still think that we have a fractional reserve system? Ignorance on the part of the “experts” that still spout this stuff even though it has been long debunked, and it’s what most people hear from “respected sources.”

    Reply

    WARREN MOSLER Reply:

    loans create deposits which are bank liabilites and also govt liabilities as they are fdic insured and acceptable for payment of taxes.

    actual cash and tsy secs are also govt liabilities- alternatives to bank deposits.
    so in that sense cash and bank deposits are pretty much the same thing, except with one you get a white bank statement with the balance or a computer read out, and with the other you get a green piece of paper with the numbers on it.

    the insights are that banks are not reserve constrained, and that the fed controls price (rates) and not quantities of govt liabilities

    Reply

    Tom Hickey Reply:

    To elaborate on what Warren says here, cash and reserves are interchangeable government liabilities that serve for final settlement of transactions. That is to say, to settle a transaction the counter-parties either exchange cash directly or settle through banks indirectly in through reserves in the interbank system (FRS in the US). The rest is built on top of this for convenience, e.g., checking, credit cards, wire transfers, etc. But the transaction is not finally settled until cash or reserves are exchanged and recorded. So in the accounting there is the settlement in the FRS and that is then recorded by the respective banks in their customers’ accounts.

    Neil Wilson Reply:

    It’s obvious that a sovereign fiat currency using nation has no need to pre-fund initiatives, but they still carp on as though they do.

    Common sense isn’t that common.

    Reply

    Peter D Reply:

    I know, obvious things are not so obvious, but nevertheless you guys were able to explain it to me in a couple of comments (admittedly, I might not be seeing all there is to it). Can the “experts” be almost uniformly either (a) ignorant, (b) stupid, (c) unwilling to listen/learn or (d) deliberately misleading? Just wondering how come the obvious is so marginalized…

    Reply

    Tom Hickey Reply:

    The mainstream view is based on gold standard thinking, and the mainstream want desperately to pretend that the world are still on the convertible fixed rate system instead of the nonconvertible floating rate (fiat) system. Once it is admitted that the world is on the fiat system, then there are no central bank “reserves” in the traditional sense of being tied to the amount of gold and government does not need to fund itself with taxes or finance itself with debt. The idea is that if this ever got out, it would be inflationary and money would disappear as a store of value.

    Gold standard thinking is also the basis for thinking that the government budget must be balanced over the business cycle and the notion that the national debt cannot be repaid.

    The basis of misunderstanding is thinking that government finance under a fiat regime is the same as household and firm finance, i.e., revenue constrained, whereas the government as monopoly provider of nonconvertible floating rate currency is not operationally (financially) constrained. This mistake is encouraged through imposition of political restraints to mimic the gold standard.

    The objective of gold standard thinking is to preserve the function of money as a store of value, without regard for consequences such as unemployment. The beauty of MMT is that shows how to use a fiat currency to achieve full employment along with price stability.

    WARREN MOSLER Reply:

    me too

  39. Henry Says:

    Re: Just wondering how come the obvious is so marginalized…

    Probably there is no single reason. I always think of Dr. Semmelweiss who was pilloried for insisting that doctors wash their hands before delivering babies. Mind-sets, assumptions, previous education or indoctrination, create the lens through which we look. It is very difficult for most people to step outside this complex of factors.

    Then there are the other usual reasons: peer pressure, money interests, etc.

    The banksters wouldn’t want a savvy public. You don’t get the big bailouts that way: you have to terrify the booboisie and the politicians who represent them to be able to extort such sums. You have to sell yourself as indispensable: “too big to fail.” Of course, funding campaigns also is very convincing. It all adds-up.

    Warren’s experience with people who grasped an idea and then went ahead to say the opposite because it was politically expedient, is typical. Most people’s integrity and courage are average, by definition.

    Changing a paradigm is one of the most difficult tasks in the world; it takes a long time. What is crucial is to affect the top of the social-intellectual-power pyramid; the rest will then follow–if there is time; if it be a real possibility.

    Reply

    Tom Hickey Reply:

    “Re: Just wondering how come the obvious is so marginalized…”

    “It is difficult to get a man to understand something when his job depends on not understanding it.” — Upton Sinclair

    Reply

    Matt Franko Reply:

    Tom,

    Wanted to show you what this fellow (Bill Still) is doing wrt ‘new media’, internet, etc with his project on “no bonds”. I dont think he understands the role of reserves 100% but it is interesting none the less, and probably moves the ball forward. Looks like he has achieved some funding goals. Link below. Resp,

    http://www.kickstarter.com/projects/billstill/first-interactive-book-no-more-national-debt?play=1&ref=search

    Reply

    Neil Wilson Reply:

    He’s got it the wrong way around, but the ‘do it via currency not bonds’ is correct.

    Makes a change from the fractional reserve nutters who are quite happy to have currency issued to replace deposits, but go pale when you suggest doing the same to replace government bonds.

    Tom Hickey Reply:

    Thanks, Matt. This guy did Money Masters, which went viral. I encourage everyone to view this as well as taking a look at Chris Martenson’s Crash Course, which has also gone viral. There is a huge interest in monetary reform, and these are the sources that many people are taking their cues from. Lots of good intentions but the wrong solutions due to failure to understand modern monetary ops.

    Someone needs to do this for MMT, or else convert these guys. Video with state of the art production value is the way to go in the digital age.

    Tom Hickey Reply:

    Another guy to get to is Charles Ferguson of Inside Job. He’s got a thing on MIT World, too.

    This is where people get their info, in addition to Oprah, John Stewart, Steven Colbert, of course.

    MMT needs an answer to Glenn Beck in the world of infotainment.

    Ramanan Reply:

    superb video Tom. Yet to watch “Inside Job”. Charles Ferguson has an excellent understanding of the details of the crisis.

    ESM Reply:

    I haven’t watched the video in its entirety, but from the web page, it certainly appears that Charles Ferguson is coming at the origins of the crisis from the wrong direction.

    It was the government which set up the flawed rules and incentives, as well as the market distortions (e.g. implicit and explicit subsidies for home ownership, and the underdeserved power of the Nationally Recognized Statistical Ratings Organizations). It was inevitable that the financial sector would adapt to those rules and distortions. I don’t believe it worked the other way around, where the financial sector forced the government to adapt to its designs and wishes.

    Ramanan Reply:

    I don’t know much about American politics, but you have to give him the benefit of the doubt ESM.

    He talked very nicely of the events surrounding the Lehman failure and briefly touched upon the events beforehand which led to the deregulation.

    Likely he understands the psychology of people in the government too. He mentions about people in the financial world working for the government etc.

    Bill Black and Charles Ferguson appear together here in this video http://www.youtube.com/watch?v=ffHFjlqIzKE

    Tom Hickey Reply:

    ESM, I don’t think it is possible to separate business/finance and government in the US owing to influence. Anyway, in a capitalist society, government is the agent of capital. That’s one of the reasons it is called “capitalism.”

    beowulf Reply:

    “It was the government which set up the flawed rules and incentives, as well as the market distortions (e.g. implicit and explicit subsidies for home ownership, and the underdeserved power of the Nationally Recognized Statistical Ratings Organizations). It was inevitable that the financial sector would adapt to those rules and distortions…”

    I’d agree with most of that, you’re looking it from the right direction, widen your gaze. Why was the government so intent on making home buying as cheap and widely available as possible? The wage-productivity gap.
    http://www.rdwolff.com/sites/default/files/graph_april_10.JPG

    Even if productivity as measured on this chart is overstated and real wages is understated (by not including, say, costly health benefits, which unskilled jobs rarely offer) the gap would still be enormous. Instead of taking steps to close the wage-productivity gap, the government took active steps to expand it. It neglected to expand social insurance (healthcare, pensions, subsidizing daycare for mothers who need it) or to index the minimum wage. Instead it adopted an open borders policy for both low skill illegal immigrants and high skill H1-Bs and a free trade policy that’s immiserated American workers who lose their to , as Auerback put it yesterday, “synthetic immigration”, the government left a huge hole in aggregate demand.

    Instead of doing something about wage productivity gap (which might require admitting there’s a problem), it was easier for politicians of both parties to set policies that led to anyone who asked nicely (or at all) a mortgage. Here we are after the work, and I don’t think the Administration realizes that even with the economy technically out of recessions, that hole in the ocean– that’d been filled by bum mortgages– is still there.

    zanon Reply:

    beowulf:

    never will the same person who say wage/productivity gap is too big ALSO say that we need to stop letting low skill mexican peasant flow into US

    Reply

    beowulf Reply:

    I’m not a robot Zanon, I have feelings. :o)
    And yes, I think the wage productivity gap is too big and ALSO we need to stop letting low skill workers from anywhere flow into the US. When we run out of poor people, we can order more, but not till then.

    I know both liberals and conservatives who share that view, but I take your point that never will the same POLITICIAN say both.

  40. Henry Says:

    Yes, that is certainly a big part of it; but just a part, I think.

    Reply

  41. Peter D Says:

    Another question.
    Suppose you’re establishing a new country. You have a big population willing to work, but not necessarily enough energy resources, such as oil (something like China). Suppose you’re even running an MMT regime.
    You know that exports are costs, so, you want to keep stuff you produce at home, but you still need to buy oil from abroad. You then need to run trade surpluses just to get dollars needed to buy oil. Is that correct?

    Reply

    Neil Wilson Reply:

    My policy proposal (based on my current understanding) would be that the country can import as much as it likes as long as the importer takes the local currency. These are essentially discretionary imports.

    However if the country has required imports (oil being one) for which it must pay in a foreign currency then these imports must be ‘paid for’ by equivalent foreign currency export earnings.

    So the ‘foreign currency’ external sector should be in balance but the ‘domestic currency’ external sector should ideally be in deficit (as that is essentially economic agents in other countries that have decided to join your currency zone).

    I now await Warren to come along and tell me why my understanding of foreign exchange is deficient and this is unnecessary :)

    Reply

    beowulf Reply:

    Its fairly simple because you can get dollars selling Uncle Sam long or selling him short (or both as we’ll see). First, You sell Uncle Sam long, you ally yourself with the Pentagon. Defense treaty, basing lease, American intelligence officers need legit passports, a safe place deport Gitmo detainees, a reliable supporter at the UN. Heck, offer to start a military just so you can send your troops to Afghanistan (it’ll be fine that they don’t leave the US airbase that will look just like the one back home). All of these favors will be repaid… with dollars, or if its oil you need, the US will arrange for Saudi Arabia or Kuwait to hook you up. That’s what friends are for.

    Second, you sell Uncle Sam short, that is you take tax revenue out of Tsy’s pocket by passing super strict bank secrecy laws and super lax incorporation law. And of course low or non-existent taxes thanks to steady stream of banking and corporate user fees siphoned off the river of US dollars that flow into tax haven countries. The Pentagon won’t care and the Tsy can’t do much even if they did.

    Anyway, that’s how Bermuda did it back in the day. For over 40 years, it hosted a US Naval Air Station, for which the Navy paid tens a million (of US dollars) a year in rent. It would have been a bargain for free, before the US military built and operated the international airport, the only way a tourist (with their US dollars) could fly in was by flying boat. A pity the base (but not the airport!) was closed down in 1995. But its OK, Bermuda now collect 70% of its tax revenue from user fees (in US dollars I trust) on offshore financial services, and the tourist keep coming.

    So just your typical three sector economy, 1. US air bases (or anchorage if the Pentagon wants to build you a port), 2. US tax evaders, 3. US tourists. I don’t think you have to worry about a foreign currency deficit. :o)

    Reply

    Tom Hickey Reply:

    See the movie, The Mouse That Roared.

    WARREN MOSLER Reply:

    yes, worst case, you need export revenues to pay for imports.

    Reply

    WARREN MOSLER Reply:

    worst case, you need to have exports sufficient to pay for your imports

    Reply

  42. Andrew Says:

    Does money created by the Fed through the purchase treasury securities ever vanish? Is it different than commerical-bank created money in that it isn’t owned to anyone?

    Reply

    Tom Hickey Reply:

    Andrew, the Fed just switches asset forms, e.g., reserves to tsy’s and back. It does not increase or decrease nongovernment net financial assets in the process.

    The Treasury, following the directions of Congressional appropriation, injects nongovernment financial assets through expenditure, increasing nongovernment NFA through deficit spending. Similarly, taxation withdraws nongovernment net financial assets. This is why MMT focuses on fiscal rather than monetary.

    Reply

    beowulf Reply:

    “Does money created by the Fed through the purchase treasury securities ever vanish?”

    Well D.D. Cooper disappear with $200,000 in Federal Reserve notes. But that’s the exception, otherwise no.
    http://en.wikipedia.org/wiki/D._B._Cooper

    In fact, to follow up on Tom’s point, I’d suggest checking out Cullen Roche’s “Understanding Modern Monetary Capitalism” page, he said something worth considering…
    The currency unit created by the state via deficit spending can only be extinguished by payment of taxes. Therefore, a modern monetary system can best be thought of as a system of debits and credits where government deficit spending credits the private sector and payment of taxes debits the private sector.
    http://pragcap.com/resources/understanding-modern-monetary-system

    It only by Tsy spending that ‘net financial assets’ are created. NFAs can shift between reserve account (bank “checking accounts”) and securities account (bank “savings accounts) but they never disappear. It is only by Tsy taxation that NFAs are destroyed. Which reminds me of another Steven Wright joke, I wish the first word I ever said was the word “quote,” so right before I die I could say “unquote.”
    So spending is quote and taxing is unquote. :o)

    Reply

    WARREN MOSLER Reply:

    yes, when it sell securities or when operating factors, like tsy balances, reduce reserve balances

    Reply

    Andrew Reply:

    I understand the first part. Can someone expand on the second part (operating factors)?

    Reply

  43. Tom Hickey Says:

    BTW, when I inveigh against “the evils of capitalism,” please don’t conclude that I am recommending either socialism or feudalism. I am saying that all factors need to be integrated in a balanced way in order to produce a synthesized result that is harmonious and sustainable.

    Also, I don’t believe that land, labor and capital are the only major factors, or labor and capital, if land is included as capital, as some would have it. For example, energy, environment, and human resources are also key factors that are often overlooked. That biases outcomes away from sustainability, for instance.

    Reply

  44. Andrew Says:

    Could a large state with budget troubles create its own currency to help alleviate its problems? Could it, say, pay suppliers and employees partly in dollars and partly in “CalBucks”, and then when it collects tax, demand some percentage of that tax be paid in “CalBucks”?

    Reply

    WARREN MOSLER Reply:

    operationally, yes, but legally, probably not.

    i do think states can issue tax credits that can be used to pay state taxes, which would do the trick and be much like what you are describing.

    Reply

  45. Dan F Says:

    I am understanding much better how the Fed works but I do have a question that I am not sure about.

    With the stimulus spending. Say for this conversation Congress approved 100m to be doled out to the states.

    1) I assume that would increase the debt by 100m. So is the debt made of from both treasuries and government spending?

    2) Is the only way to remove that $100 debt would be through taxation? What happens when if the government makes money, as an example, in interest payments?

    Thanks

    ps Warren are you presenting anywhere in the near future?

    Reply

    WARREN MOSLER Reply:

    not presenting anywhere in the near future.

    100m to the states would increase what we call the national debt by that amount.
    It also adds that much in net financial assets to the sectors outside of govt.

    yes, taxation or interest paid to govt both remove those financial assets from the non govt sectors.

    Reply

  46. Danf Says:

    Another Q. Reading your book. You state a scenario (pg. 43/44) where $100b in treasuries are purchased. Your point is once the money is moved from a reserve account to a treasury account the government can then take the money from the purchase and spend it increasing bank accounts. So result is the non-government sector ends up with both $100b in increased accounts AND $100b of new treasury securities.

    I don’t understand the “AND $100b of new treasury securities”. Once the Fed spends the $100b how are the securities of any value other than a promise to pay?

    Also, I read this commentary “The End of China’s Surplus”

    http://www.project-syndicate.org/commentary/feldstein32/English

    I am totally confused on how this would happen since I seriously doubt that the US would ever export more into China than it imports?
    And are low interest rates due to selling treasuries?

    TIA

    Dan F

    Reply

    WARREN MOSLER Reply:

    the securities are a promise to, at maturity, debit your securities account and credit your reserve account.
    problem with that?

    Reply

    Dan F Reply:

    Since the “AND” was accentuated I wasn’t sure if there was some other value in the securities that I missed.

    The biggest hang up people have is that they believe that the securities need to be in reserve. I liken it you buying a CD at a bank. You pay for the CD and the bank turns around and uses the deposit to fund other activities. Money is not kept in a vault it is used. Also there seems to be the idea that China can demand payment (or want to be paid) at a point prior to the security maturing.

    Anyhow, thanks for your response.

    Reply

  47. Peter D Says:

    Found this comment on Ezra Klein’s blog:

    “tax receipts are currently running at around 15% of GDP.
    Also, corporate tax receipts are at 2% of GDP, and they’ve come down steadily from 6% in the 1950s.
    And the total tax burden (federal, state, local) at under 27% in the US is the fourth lowest in the developed world, just behind South Korea (in first and second place are those economic powerhouses Mexico and Turkey).
    The bottom line: our taxes are very low compared with how much we spend, compared with the rest of the world, and compared with our own history. Any talk of further tax cuts is the height of irresponsibility.”

    What would be a good counter-argument to this? So, we are paying relatively low taxes (compared to the rest of the world) but those are still too high to sustain the AD we need. Is it the consequence of our high standard of living?

    Reply

    Tom Hickey Reply:

    The balance sheet recession and its causes arising from financial instability are not being addressed. Deficits are too low given the output gap/employment rate, and taxation is not well targeted. Moreover, QE is a fiscal drain, too. Finally, the causes of the financial crisis that spilled over into the real economy not only remain in place but have been augmented through lack of accountability and reform, and bad policy.

    Reply

    Peter D Reply:

    Can you elaborate on
    1) “taxations is not well targeted”
    2) QE
    3) what about taxation prior to the crisis? It was still low but adequate to the conditions then?

    I’ll get back to beowulf’s comment, it could also explain much, thanks!

    Reply

    Tom Hickey Reply:

    1. Taxation should chiefly be targeted at economic rent, which unproductive and parasitical, instead of at factors of production.

    2. QE removes the interest that would have been paid on tsys from nongovernment. QE also takes risk-free assets off the table and encourages increased risk assumption, running the risk of blowing more bubbles.

    3. The trend for a long time has been to reduce taxes on economic rent and shift taxation to worker income. Pursuit of economic rent instead of productive activity creates perverse incentives. Moreover, since the inception of monetarism and NAIRU, full employment has been redefined to provide a buffer stock of unemployed “to control inflationary expectations.” This has disadvantaged workers by undermining their bargaining power and driving them into unsustainable debt. The dual factors of unsustainable private debt and excessive leveraged speculation resulted in financial instability that became unsustainable and the financial system collapsed, taking down the real economy with it.

    Peter D Reply:

    But are all those unique to the US? What is unique to the US that makes the relatively low taxation to be still too high?

    Tom Hickey Reply:

    “What is unique to the US that makes the relatively low taxation to be still too high?”

    The problem is not taxes too high but the deficit too low for the combination of domestic propensity to save and the CAD, as indicated by the output gap/employment rate. The deficit can be increased either through increased budgetary expenditure or lower taxes, or some combo of those.

    ESM Reply:

    ““What is unique to the US that makes the relatively low taxation to be still too high?”

    Tom alluded to this in his second attempt to answer the question, but the unique factor is that the rest of the world wants to accumulate dollars. In order to accumulate dollars they net sell us goods and services in exchange. Thus, much of US aggregate demand is satisfied by production abroad, leaving excess production capacity here. To put it more succinctly, the US government has to run large enough deficits to satisfy domestic savings desire AND foreign savings desire (in dollars), and the foreign savings desire is significant.

    Nobody outside of South Korea, Turkey, or Mexico particularly wants to accumulate significant savings in won, lira, or pesos, respectively, so government debt and deficits in those countries will need to be lower to maintain the value of the currency.

    Tom Hickey Reply:

    To follow up on ESM, theoretically trade imbalances are supposed correct through an adjustment of exchange rates. However, governments purposely depress their currencies in order to maintain export advantage, as well as erect barriers to imports is so far as they can within WTO rules. This distorts the international marketplace, resulting in persistent trade imbalances that should in theory correct automatically through rate adjustments.

    This is an other instance of the fallacy of composition. While countries try accumulate trade surpluses in order to import jobs, It is not possible for all countries to run trade surpluses simultaneously. The actual problem is insufficient global demand owing to dumb fiscal policy worldwide as a result of neoliberalism’s dominance.

    Ramanan Reply:

    ESM,

    “Nobody outside of South Korea, Turkey, or Mexico particularly wants to accumulate significant savings in won, lira, or pesos, respectively, so government debt and deficits in those countries will need to be lower to maintain the value of the currency.”

    If you read a bit of MMT, they argue that Turkey’s current account deficit is “indefinitely sustainable” and there is another on the Mexican Peso with assumption that the current account is caused by foreigners’ desire to save in the Peso.

    Firstly neither of these nations import in their own currencies. More importantly, the Mexican Peso collapsed in 2008 and the nation had to be bailed out by the IMF.

    Turkey’s central bank is fighting a battle with the currency markets at the moment and may have to deflate demand.

    Both nations face issues with employment.

    As far as the US is concerned, policy makers do not and _cannot_ boost demand in the way suggested here and that is what Ben Bernanke’s “unsustainable” talk is all about. Though he is far from understanding any PKE.

    US Treasuries have become the modern equivalent of Gold and the fact that the rest of the world ships products to the US is a correlated fact about the US current account. Its partly driven by the Chinese policy of keeping its currency undervalued.

    If a strategy to boost demand through a strategy of increasing government expenditure and/or reducing tax rates is followed, the public debt and the negative net overseas assets rises forever only to be cut off by deflating demand.

    Depending on the “markets” to do the trick – i.e., adjust by change in the value of the currency is like believing in the invisible hand.

    One can say that growth puts the public debt and the net overseas assets on a sustainable path. Unfortunately it does not. In the long run, assume full employment is needed, and is achieved. The growth above the population growth may be difficult to achieve. At any rate, the growth number which prevents the public debt and the net overseas assets from rising forever needs to be large when considering other factors such as income paid to foreigners.

    You give a big license to foreigners to speculate on your currency if such a strategy is followed (just relaxing fiscal policy to achieve full employment and not worrying about the external sector) – because indebtedness to foreigners keeps increasing.

    WARREN MOSLER Reply:

    i respectfully don’t agree with most of the above

    Ramanan Reply:

    “This distorts the international marketplace, resulting in persistent trade imbalances that should in theory correct automatically through rate adjustments.”

    How come you changed your language from “imports are benefits” to wishing for trade balancing ?

    Tom Hickey Reply:

    Ramanan: “US Treasuries have become the modern equivalent of Gold.”

    Would it be more correct to say that the US dollar has become the equivalent of gold in that gold was effectively the numeraire in the Bretton Woods convertible fixed rate system where the rate was fixed by dollar-gold convertibility. When convertibility was removed, the floating dollar became the global numeraire. Therefore, it was considered in everyone’s interest to have a stable dollar.

    Bretton Woods was based on the US being the world’s largest economy and most powerful nation, as well as the largest holder of gold. After Bretton Woods failed when Nixon unilaterally end convertibility, the EZ was designed to challenge US hegemony by creating an integrated economy of comparable size with its own currency.

    WARREN MOSLER Reply:

    for a given size govt, the right level of taxation is that which results in full employment.

    so for the size govt we have, we are obviously grossly over taxed

    Reply

    Peter D Reply:

    This I understood. The question was what was unique about US that the gap had to be larger than for other countries.

    By the way, Warren, do you think you could score an interview with Ezra Klein? His blog, I think, is widely read. My own exposure to MMT came through his interview with Jamie Galbraith (and I, in my turn, already converted some people). He, unfortunately, doesn’t seem to have gotten what JK was trying to say to him. Maybe it is because Jamie sounded kinda radical (“deficits don’t matter” kinda radical :)). He also did not explain the simple truth behind sectoral balances that make govt deficits imperative.
    I wrote to Ezra urging him to talk to you, but who am I? On the other hand he claims to read all his email. His address is wonkbook@gmail.com

    Reply

    WARREN MOSLER Reply:

    big trade deficit allows for lower taxes than otherwise, along with other demand leakages like pension fund contributions, etc.

    never heard of Klein but will send an email

    beowulf Reply:

    Good kid, in his mid 20′s, started blogging while an undergrad in California. Heas staff writer/blogger at liberal journal American Prospect and is now a writer/blogger for the Washington Post. I like Ezra, but conservatives were right that Ezra starting the journolist discussion group was a bad idea.
    http://en.wikipedia.org/wiki/Ezra_Klein#JournoList

    He and his buddy Matt Yglesias (who started blogging as a Harvard undergrad at about the same time) are two of the sharpest liberal bloggers, though Matt is more in paradigm (or as one reader put it, “Matt Yglesias’ painfully slow odyssey towards Minskyite MMT, Part 11″.
    http://yglesias.thinkprogress.org/

    Oh here’s Jamie Galbraith explaining to Ezra why deficits don’t matter.
    http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html

    MamMoTh Reply:

    Warren:
    “for a given size govt, the right level of taxation is that which results in full employment. so for the size govt we have, we are obviously grossly over taxed”.

    Is it so? Do you think there is always a right mixture of government spending/taxation that yields full employment however it is defined?

    If the government were to cut taxes, and people saved that taxes, how would that fill the output gap?

    Reply

    WARREN MOSLER Reply:

    yes,

    unemployment is the evidence that there isn’t enough govt spending to satisfy the need to pay taxes and net save

    if tax cuts triggered higher savings desires then taxes are still too high

  48. beowulf Says:

    Should an economy ever reach stationary equilibrium, all stock variables as well as all flow variables would be constant; and that if all stock variables, including government debt, were constant, government receipts would have to equal government payments… A necessary condition for the expansion of the economy is… If the tax rate were held constant, government expenditure would have to rise… if government expenditure were held constant, the tax rate would have to fall… obvious shortcoming to the original [Carl] Christ formula in that it applies only to a closed economy. This defect is easily remedied by adding exports to government expenditure (injections) and imports to taxes (leakages).
    http://findarticles.com/p/articles/mi_m1093/is_n1_v41/ai_20485331/

    Our fiscal stance is too low to sustain full employment and should be adjusted up by either reducing demand leakages (taxes, imports) or increasing demand injections (govt spending). Per Wynne’s quote above, our fiscal stance should reflect the 4% of GDP (close to $500 billion) trade deficit, which has the same fiscal impact as a tax of like amount.

    Reply

    Peter D Reply:

    So, Beowulf, if I understood you correctly it is US trade deficit (and the demand leakages associated with it) that make the current level of taxation (relative to spending, naturally) inadequate to sustain the right level of AD? The other countries have either lower trade deficits or higher spending?

    Reply

    beowulf Reply:

    If I had to pick one factor, yes it’d be trade. South Korea for example has (IIRC) a 3% of SK GDP trade surplus, exports are added to govt expenditures as demand injections.

    In US terms (since SK is much smaller), 4% of US GDP of$14.5 trillion, trade deficit is -$580 billion, but if US instead had (like SK) a 3% trade surplus, it’d be +$435 billion. In other words, a shift towards $1.015 trillion AD.

    Now you see why the President is so rah rah for increasing exports. Once he boxed himself him with the deficit hawk rhetoric, he took fiscal stance adjustments off the table. Except for reducing the trade deficit (I’ll believe it when I see it, he should just cut taxes by like amount). I’m not sure how else he can gin up AD without increasing the budget deficit.

    Reply

    Matt Franko Reply:

    Peter,
    for instance, if the US Military would let them, the Chinese military would airlift laborers across the Pacific Ocean complete with midair refuelings and 35 hour flights and paratroop in laborers to cut our lawns for $15, with a tweezer if necessary if we wouldnt let them bring mowers. That is what US labor is up against. Resp,

    Reply

    Peter D Reply:

    Beowulf, Tom, ESM, Matt, thanks!
    It all becomes much clearer now that we can put the finger on CAD as the major factor.
    Do our uniquely high health care costs play a role here to? I guess yes, from the side of spending, making the deficit bigger.

    Reply

    Tom Hickey Reply:

    Peter D, problems arise from lack of inefficiency or effectiveness. “Efficiency is doing things right, and effectiveness is doing the right thing.” (attributed to Peter F. Drucker)

    Effectiveness trumps efficiency socially and therefore politically. Economics is chiefly concerned with efficiency. Efficiency is positive and non-normative. Social and political effectiveness is both positive and normative, because society is norm-based, that is, ordered by rules rather than natural (purely positive) outcomes.

    Modern society, being based on polity, is governed by policy and policy is determined by politics in systems involving choice. In a liberal democracy different views of governance compete, based on differing norms and visions, which determine different worldviews.

    At times, the competition is between different paradigms, e.g., capitalism v. socialism as a guiding economic idea. In other circumstances, the competition is within an overarching paradigm.

    The overarching paradigm in the US today is economic neoliberalism (free markets, free trade, and free capital flow), and political neo conservatism, i.e., exporting democracy American style, which is really plutocratic oligarchy, and neo-imperialism, which is really neo-colonialism with client states instead of colonies. The establishments of both parties are committed to this paradigm and argue around the edges of it, which is a reason that most politics is a distraction from real issues.

    For example, if the CAD is the problem, then China is the problem, and the solution is beating China, either by “out-competing,” which means a race to the bottom in wages, or else instituting a new Cold War, which is beneficial to the military-industrial-governmental complex.

    The solution in my view is approaching the world as a closed system in which all are interdependent and designing a system based one, “One for all and all of one.” (The motto of the three musketeers — actually four — of Dumas’ novel of that name.) This is not difficult to do. We already know how to do it. It just requires coordination and cooperation (integration) instead of chiefly competition and control, which are the basis of neoliberalism/neoconservatism/neo-imperialism as a global model.

  49. Tom Hickey Says:

    Ramanan: “How come you changed your language from “imports are benefits” to wishing for trade balancing ?”

    I agree with Marshall that imports are benefits at full employment. At under full employment a persistent CAD means that the country is exporting jobs. That the is the real problem for the US, much more than the CAD, the deficit, or the debt as absolute numbers or ratios of GDP, etc. All real problems are real rather than financial, although financial problems can lead to real problems, i.e., problems in the real economy.

    I have been consistently arguing that the overall approach needs to be one that approaches the global economy as a closed system. I see the problem as being one of lagging global effective demand. If the world approached economics in terms of balancing supply and demand sustainably, then the trade balances would simultaneously be resolved by getting to full employment (redefined). Imports are benefits at full employment. The problem now is that nations with CAD’s are exporting jobs and nations with CAS’s are importing inflation leading to social unrest. Those conditions result in trade imbalances with real consequences.

    Reply

    WARREN MOSLER Reply:

    at under full employment it means for the given size govt taxes are too high. don’t blame the imports!

    Reply

    beowulf Reply:

    Well, don’t blame the imports but we should recognize them as a demand drain that must be sterilized (to use Fedspeak) with lower taxes. But I take your point, for an economy at under full employment, the same response would be warranted (cut taxes!) whether trade is in deficit, balanced or in surplus.

    Reply

    Tom Hickey Reply:

    Agree about taxes, if we were running iaw functional finance wrt sectoral balances. But under present political circumstances in the US, cutting taxes means reducing expenditure proportionately (deficit-neutral) iaw pay-go, which results in reduced social safety net since the military is not going to be cut during wartime. So we would be cutting taxes but not changing the deficit; therefore still exporting jobs. :(

    Reply

    Neil Wilson Reply:

    You can force co-ordination via the fallacy of composition once you understand that imports are a real benefit.

    What you do is exploit the hell out of the importers who are prepared to accept your currency, while at the same time discouraging exports other than those absolutely required to obtain needed imports that aren’t priced in your own currency.

    That gets you a huge benefit in real resources until the other guy wakes up an implements the same policy.

    Reply

  50. MamMoTh Says:

    Warren
    “unemployment is the evidence that there isn’t enough govt spending to satisfy the need to pay taxes and net save
    if tax cuts triggered higher savings desires then taxes are still too high”

    If we all agreed with you, then tax cuts should trigger higher
    savings desires, since by your own logic saving the totality of
    the tax cuts will trigger another tax cut by the government.
    Which we should save, and so on…

    Reply

    Peter D Reply:

    Other will probably have a better reply, but it is easy to spot a flaw in your logic. You save until you’re comfortable with your savings “for the rainy day” after which you start spending.

    Reply

    Tom Hickey Reply:

    This is the problem about not taxing away economic rent, most of which is saved. Savings are claims on real resources that can be exercised at any time. Transfer of financial wealth to the top amounts to transfer of real wealth in terms of claims. In addition, saving is a demand leakage. When saving results from extraction, the leakage is magnified.

    IMHO, for MMT to be credible from the Minskian vantage, it is essential to tax away economic rent.

    Reply

    Neil Wilson Reply:

    A claim is one thing. Exercising it is another.

    There are massive claims on the currency reserves of a country due to the number of bank deposits, yet bank runs are exceptionally rare events.

    There are massive potential claims on insurance polices yet insurance companies rarely go bust.

    It may very well be that you can sustain a system with massive financial wealth and very little actual real claims coming from it.

    Net private sector savings are the economic equivalent of methane clathrate – inert until triggered by events.

    WARREN MOSLER Reply:

    bank liquidity is unlimited

    Tom Hickey Reply:

    It’s the flow. Extraction takes funds out of flow and parks them in savings, driving up assets prices, which eventually prices the little people out of key markets like RE and puts entrepreneurship out of reach for them.

    Societies in which the upper echelon controls the bulk of wealth are plutocracies controlled by the investor class aka rentiers aka oligarchs while the working class has to poke sticks in the ground to grow beans.

    Neil Wilson Reply:

    Extraction takes funds out of flow and parks them in savings, driving up assets prices,

    Only if the government header tank isn’t topping the flows back up.

    Are you talking government capture here?

    Tom Hickey Reply:

    “Are you talking government capture here?”

    Exactly. As Michael Hudson observes, what is extracted goes into savings for the top of the town that has captured government and is in the process of cramming down social expenditure while increasing military spending to preserve and extend the empire.

    As Michael Hudson further observes, any of the surplus that is not taxed away and recycled to flow is extracted as economic rent and consigned to the top of the town since they have the franchise.

    That’s the plan. Keep taxes low or non-existent on economic rent low while taxing worker income, and keep military spending high while keeping social spending low. Does “small government, low taxes, strong military” sound familiar?

    And, as Bill Black points out, when economic rent is enough or fast enough, there is always control fraud to fall back on. And if everything blows up, well, just hold the contry hostage to your demands.

    It’s working pretty well, actually.

    beowulf Reply:

    Net private sector savings are the economic equivalent of methane clathrate – inert until triggered by events.

    Number 8 on the Global Risk threatdown, see “An Indicated Costed Plan for the Migation of Global Risk”.
    http://www.scribd.com/doc/14355677/An-Indicative-Costed-Plan-for-the-Mitigation-of-Global-Risks-01SEP06-Futures?secret_password=2gkc2y38h83dnoxhgv1i

    Any plan that comes with a $67 trillion (over decades) price is worth reading. :o)

    MamMoTh Reply:

    It’s not my logic but Warren’s (or MMT?) logic.
    If we ALL accept that unemployment because taxes are too high
    (or govt spending too low) and expect the gvot to lower them then the most sensible course of action from the private
    sector is to keep saving so the govt will need to cut taxes to 0. And unemployment will still be the same.

    Reply

    Neil Wilson Reply:

    You’re learning. In a minute you’ll realise that net private sector savings have precisely the same effect as excessive taxation – they leave real output unsold, which is an indicator to business that there is insufficient demand and they should contract production.

    And of course the private sector cannot save unless it has received an income in excess of taxation? Where did the money to pay the income come from?

    I always find it amusing that people want to play about on edge cases that would never happen in the real world.

    Peter D Reply:

    Or we could all be worried that our current savings are too low to afford a new car or a new iPad or whatever. Once we receive a tax rebate, we can be satisfied with our savings enough to decide to spend (which will send signals to businesses etc as Neil indicates).
    I don’t think there are a lot of people who are willing to postpone consumption indefinitely and game the system in the way you propose. Yes, there are misers but we cannot be ALL misers. Or even a majority of misers.

    WARREN MOSLER Reply:

    remember, most of the increase in savings is in pension funds and the like.
    from a personal level, savings is largely a matter of debt, where consumer debt expansion is a reduction in savings.

    MamMoTh Reply:

    Neil, I’m not learning. I am asking a very simple question.
    What happens if we know the govt will cut taxes as long we have not yet reached full employment? (since Warren says it means taxes are too high or govt spending too low)

    It’s a very simple game theoretic problem. If the private sector know the govt move will be to cut taxes, the it should save all the taxes, and push the govt to keep reducing taxes until 0.

    The fact that we don’t do it is because we don’t expect the govt to keep cutting taxes. That’s why my question is what if we ALL know it will. And I give you my answer, we should save them all. What for? Who cares, let’s get all the free money we can first. Or an entry in a spreadsheet as high as possible if you prefer.

    WARREN MOSLER Reply:

    if i knew the govt was going to cut taxes to 0 i’d spend what little liquidity i have left before it became worthless.

    however, expectations theory doesn’t apply here. individuals are compelled to save because they think that contributes to lower taxes.
    and even if they did, and taxes were cut that much, they know that at the point spending resumes funds will be taxed away if the spending is too large

    WARREN MOSLER Reply:

    “If the private sector knows the govt move will be to cut taxes, the it should save all the taxes, and push the govt to keep reducing taxes until 0.”

    why would this matter, unless taxes actually got to 0 and everyone refused to spend.

    in that case, which has a near 0 probability, govt can simply hire people directly.

    as i’ve written many times, if people desire to work for pay and not spend it on private sector goods and services, the output should be public goods and services.

    beowulf Reply:

    The fact that we don’t do it is because we don’t expect the govt to keep cutting taxes. That’s why my question is what if we ALL know it will. And I give you my answer, we should save them all.

    Smugness may warm you but it won’t feed you. People will still need to spend money to put food on the table, a roof over the head and clothes on the back.

    MamMoTh Reply:

    Beowulf
    “Smugness may warm you but it won’t feed you. People will still need to spend money to put food on the table, a roof over the head and clothes on the back.”

    I’m suggesting saving all the tax cuts, not cutting spending.
    The point is, if you follow Warren’s logic: the less you spend the extra income from the income, the more you earn from further tax cuts.

    Peter D Reply:

    MamMoTh, I don’t believe in your construct – people have needs and wants and they won’t postpone consumption indefinitely; businesses will earn more money from increasing output than from saving the tax breaks. It sounds like a twisted form of Riccardian equivalence: people depriving themselves of life’s goods in expectation of additional tax cuts? Even less plausible than the original Riccardian equivalence, seems to me.
    But even if we accept your construct as true, and EVERYBODY saves ALL the tax cuts then, while these tax cuts won’t help with unemployment, they won’t hurt either, since they definitely do not cause inflation (nobody spends, right?). In such perverse case I think the government can just start huge public works program and employ all the unemployed.

    WARREN MOSLER Reply:

    right. any tax cuts not spent means there is no reason to have them there

    taxes serve to reduce aggregate demand, etc.

    WARREN MOSLER Reply:

    right

    MamMoTh Reply:

    Peter, my construct is pure logic from the premise that govt will cut taxes as long as there is unemployment: the private sector should save them all until there are no more taxes.
    Of course the govt could always increase spending any time.
    Can you imagine that, a world with no taxes and high govt spending to employ the all the unemployed? We can make it true if Warren wins the presidential election in 2012.

    Peter D Reply:

    MamMoTh, I still fail to see how your logic deals with a person who wants to buy a widget today and get the opportunity to do so by getting a tax break. You’re saying the person will deprive himself of the widget today in order to get an additional tax break tomorrow. You may think it is pure logic and I think it is contradictory to basic human nature.
    And by the way if you treat spending as negative taxation, then your society of misers will continue to postpone consumption indefinitely, because after the government cuts the taxes to 0, they’ll expect it to continue into negative taxation territory. Is this the way you think the world works?
    Maybe I really misunderstand your argument, sorry.

    MamMoTh Reply:

    The logic deals with that person by making him realize
    that if he doesn’t buy the widget today, then he will be
    able to buy two tomorrow by getting another tax break.

    Of course I don’t think this is how the world works now.
    But we don’t live in a world where taxes will be cut
    as long as there is still unemployment – as a self-imposed
    rule – too right?

    So what I am saying is what will happen if we were leaving
    in such a world. Maybe we should work hard to get Warren
    elected president in 2012 to run the experiment.

    Peter D Reply:

    Even if we did “live in a world where taxes are cut
    as long as there is still unemployment”, I still believe your construct fails, because if we to believe in it, then people would NEVER buy anything beyond their most basic needs in anticipation of further funds coming from the government. This is not human nature. Human nature values today’s consumption over future at some point (there is of course an indifference level etc.) At some point the gratification of today’s consumption outweighs the potential of more consumption tomorrow.

    WARREN MOSLER Reply:

    right, if we all agree never to spend we can have all the dollars we want without creating inflation.

    :)

    Reply

  51. Dan F Says:

    Looks like someone is starting to gain a much better understanding of the monetary system. Although the Brazil story I don’t think is complete.

    http://www.thisamericanlife.org/radio-archives/episode/423/the-invention-of-money

    Free on iTunes podcast.

    Reply

  52. Peter D Says:

    MMTers like to say that no inflation (other than demand-pull) should occur when economy operates under capacity. How does MMT deal with stagflation? How are stagflations explained and what are the proposed remedies?
    Thanks!

    Reply

    Tom Hickey Reply:

    Peter D., stagflation is generally the result of supply side price increases due to shortage of real resources, e.g., in recent times, petroleum due to the ability of the oil cartel to increase price by affecting marginal supply.

    Therefore, the shortage has to be addressed at the source, e.g., through pressuring marginal suppliers, accessing alternative supply sources, innovation, conservation, substitution, or rationing. Moreover, the burden needs to be distributed by government action, so that some parties do not profit unduly from the situation while others are severely disadvantaged. Those disadvantaged include those that are affected by business contraction due to the supply crisis, losing either jobs or hours employed.

    In addition, rising prices of scarce resources encourages speculation and hoarding, which drive prices higher. Speculation and hoarding have to be addressed through government action.

    Injection such as would be appropriate to address demand side inflation is inappropriate to address supply side, since it is likely to drive already high prices higher and encourage a wage-price spiral.

    The world is facing just such a circumstance with climate change affecting food supplies and the prospect of peak oil looming. Engineers know that systems involving dangerous conditions or vital needs require that redundancy be built in. That’s why cars have emergency brakes in addition to the regular braking system. The global economy needs more redundancy wrt vital resources like food and energy, or there are going to be enormous social and political problems arising out of economic ones.

    There is evidence that rising food prices were a catalyst for the revolutions in North Africa, for example, and there is little doubt that rising oil prices played a catalytic role in the recent recession in the US. Presently, food and petroleum prices are rising, along with persistent unemployment in the US. It is entirely possible that stagflation will develop here if emerging countries bid up the price of scarce resources before the US recovers from this recession.

    I suspect that stagflation is likely to become a hot topic again for these reasons. The neoliberal solution is to raise interest rates and bust wages, but those just exacerbate unemployment without addressing the shortage. However, that will not deter neoliberals from pursuing this failed ideology. Austrians, of course, will call for returning to “sound money” and liquidating malinvestment. This is a killer combo. Best be ready with an alternative solution.

    Reply

    Peter D Reply:

    Tom, thanks a lot, but what about stagflations which are not a result of demand-pull inflations? Are those impossible, in MMT view? Have we seen one like this in history? Or, if they are, then what do we do?

    Reply

    Tom Hickey Reply:

    Peter D, I am not an economist and am not up on the historical data, but I don’t believe that there has been recent stagflation that doesn’t involve supply side. What happens is that supply side inflation occurs, there is pressure to increase wages to keep up, the Fed steps in with higher rates, resulting in recession, but key supply shortages continue to persist keeping prices high while people at the bottom get squeezed.

    WARREN MOSLER Reply:

    stagflations are from supply shocks and not excess demand.

    unemployment is evidence of a lack of aggregate demand

  53. rvm Says:

    In a private message board I was fighting with deficit terrorists.

    The point is that I don’t understand very well how the market for government bonds functions.

    I think that US government as monopoly issuer of USD sets the interest rates it pays to all bonds it issues, especially that we know very well it doesn’t need loans from private sector so it can spend, and it is only to drain reserves and maintain its targeted interest rate.

    A guy with handle “bond trader” on that forum insists that the market sets the interest for US government bonds.

    Could you please elaborate

    Thank you

    Reply

    Tom Hickey Reply:

    Interest rate is different from yield. Treasury sets the coupon rate and the fluctuating market price determines the yield at that rate. The government can set the coupon rate at whatever it chooses and let the market set the yield by adjusting the price of the bond accordingly. This is what the bond market does all the time. Yields change relative to price, but the coupon rate is fixed for the life of the bond.

    Bond Trading 101-How Bond Prices Fluctuate

    Bond Trading 201-How to Trade the Curve

    MMT- Market Discipline for Fiscal Imprudence; Term Structure of Interest

    Reply

    rvm Reply:

    Thank you, Tom!

    Reply

    Peter D Reply:

    Tom is right but just setting only the coupon would imply selling the bonds at discounts (if the market wants yield>coupon) or at a premium (if the market can take lower yield than coupon.) I think the government can also adjust the quantity of bonds to meet the demand exactly at the interest rate (coupon) it desires – so the bonds get sold at par.

    Reply

    Matt Franko Reply:

    RVM,

    Here’s a link to a calculator:

    http://www.zenwealth.com/BusinessFinanceOnline/BV/BondCalculator.html

    Also, with the QE2 now, I have to think there is some unique pricing dynamics going on between the govt and the Primary Dealers of US Treasuries currently.

    Here is another post at ZeroHedge (out of paradigm) about the latest QE2 purchases this AM: this time 3 year maturities that were just auctioned several weeks ago:

    http://www.zerohedge.com/article/friday-episode-criminal-reserves-flip-bond-accompanies-dollar-plunge

    This has to be far from a “free market” in operation…. Resp,

    Reply

    Peter D Reply:

    Matt, what is this Zerohedge link saying exactly? That some PDs got their hands greased, I guess?
    By the way, if FFR were at zero, we could really have debt monetization, right? Not that it matters for MMT.

    Reply

    Matt Franko Reply:

    Peter,
    I believe ZH thinks the PDs are buying at the auctions and the Fed is paying them more than they paid thus a quick profit but I dont think so. The prices the Fed pays under the QE2 are not released in a timely fashion so ZH is I believe conjecturing. And bond prices have generally been falling so PDs are probably selling at a discount to what they recently paid (I assume they hedge).

    Yes also ZH is claiming “monetization” due to the quick turn. I dont think the FFR may have anything to do with it, I believe monetization would be if the Fed bought directly from the Treasury, the Fed is not doing that they are going to Dealers albeit very quickly.

    Trying to analyze it within MMT paradigm. It looks to me that the QE2 operation is possibly/effectively the PDs and the Fed are “market making” and leading bond prices downward, ie raising interest rates assisted by monetarist speculators. Fed lowers it’s bid and the PDs lower their offers, etc… speculators sell, etc… down we go. PDs may not care if they are effectively hedged. Resp,

    WARREN MOSLER Reply:

    the govt. does allow market forces to set rates on US tsy secs.

    market forces express opinions of where the fed will be setting the ff rate over the years

    Reply

    rvm Reply:

    Why should US government allow market forces to set the rates?
    Can’t it just say take some interest I decided to give you or go away and take 0 interest on your reserves?

    Reply

    WARREN MOSLER Reply:

    yes, but it doesn’t understand that

    Vincent Cate Reply:

    @rvm, The Fed can decide that it will buy up any bonds that yield over 0.25% and put a floor on bond prices and a cap on yields. They seem to be doing this now. The problem is that they then can not at the same time limit the amount of money they make. If inflation is 5% and you can borrow money at 0.25% it is really easy to make money. You just borrow from the Fed and buy anything (canned Tuna, gold, oil, whatever). So they make have to make huge amounts of money. But all this buying/hoarding contributes to price inflation. So the longer the Fed tries to peg interest rates the higher inflation will probably go. Eventually they will decide that they need to do something about inflation and raise interest rates.

    WARREN MOSLER Reply:

    what do you do exactly right now to ‘make money’ borrowing at .25%. I have a bank that can do that and it’s not obvious to me.
    Gold is down from 1900 to 1650, and don’t know about canned tuna as an investment. seems hard to sell? and the cost of holding oil is pretty high- check out the front month rolls- which why the passive commodity funds have been frustrated. And buying houses hasn’t worked so well over the last 4 years either.

    Vincent Cate Reply:

    @rvm,

    Also, there are “long and variable delays” between when the new money is created and when the inflation hits. So it can look like we are fine and then boom, lots of inflation. Then when they raise interest rates it can take years to get the inflation under control. These are very painful years with high interest rates and high inflation rates. This will result in another recession.
    http://pair.offshore.ai/38yearcycle/#delay

    WARREN MOSLER Reply:

    tell me when we’ve ever had an inflation problem that wasn’t supported by saudi price hikes

  54. rvm Says:

    I have to read a lot about this bond market thing. :-)

    Guys, tell me please if I am wrong in my understanding so far.

    1. When US government initially sells bonds (all kind of terms – long term, short term), it solely sets the interest on that bond (coupon rate) – the interest the government will pay per year for the entire time till the bond matures and it doesn’t compete with any other bond issuers when determining that coupon (interest) rate?

    2. Bond market (supply and demand for that bond) sets the price of that same bond, so for instance when government sells bond with face value $100 and 5% coupon rate, it could be sold for more, less, or even $100, depending on the demand for it?

    Reply

    Matt Franko Reply:

    rvm,

    irt your #2, here’s a link to recent results where it looks like yes some issues in the end went for less than par (100) :

    http://www.treasurydirect.gov/RI/OFNtebnd

    Resp,

    Reply

    Tom Hickey Reply:

    1. Only government can determine quantity of securities offered and the interest rate.

    2. Buyers bid for bonds carrying a particular rate based on a variety of factors. Price, and therefore yield, are determined in the bond market. Yield fluctuates with price.

    Reply

    rvm Reply:

    Thank you both!

    Reply

    Jim Baird Reply:

    It’s important to differentiate here between what happens wit the market as currently constituted and what could happen with a government that understood MMT.

    Currently, the U.S. gov must sell treasuries to “fund” it’s operations, $-for-$. It sells mostly longer term (5 and 10 years) along with shrot term (3 moth t-bills) to do this.

    The Fed (under normal circumstances) sets the overnight rate by intervening in the FF market. Absent it’s intervention, the rate would drop to zero (as it has in the past few years). Since a set quantity of bonds are issued by the monopoly supplier, the market sets their price – but unlike normal bonds issued by currency users (which are priced by the market with an eye toward the creditworthiness of the borrower, since they can move their money someplace else), t bonds are priced mainly by the market’s estimates of where the Fed will set future rates (because dollar holders, collectively, cannot “take their money someplace else”).

    from 1941 to 1951, the Fed set short term rates at 3/8% and long term at 2.5%, by stepping in to buy or sell any quantity required to maintain that yield. So the govt could, of course, set rates all along the yield curve, but it does not currently.

    Reply

    rvm Reply:

    For the time till the maturity of the bond government will be paying regularly the set by itself coupon rate (interest) on the bond’s face value or bond’s current market value?

    Otherwise said, government doesn’t know how much interest in absolute value it will pay for its bond because market will dictate the price of the bond?

    Tom Hickey Reply:

    Rvm, the issuer of a bond sets face value (par value), maturity, and coupon rate and these do not change over the life of the security.

    Market price and yield fluctuate in the bond market based on comprehensive conditions affecting markets.

    This is true of all similar financial instruments that function as IOU’s, whether they be government bonds, corporate bonds, or mortgages sold on the mortgage market. The market value is based on the present value or “discounted” value, and it is influenced by other factors as well, e.g., likelihood of the IOU being honored on time in full.

    WARREN MOSLER Reply:

    the tsy holds an auction. the secs go to the bidder willing to take the lowest interest rate.
    the tsy then sets a coupon pretty close to the average winning bid.

    Reply

  55. rvm Says:

    Tom,

    So government sets the quantity of the bonds, interest (coupon) rate and it will know exactly the total amount it will pay in interest till maturity, and bond market can’t change this amount of interests?

    Reply

    Tom Hickey Reply:

    yes.

    When prices fluctuate in the bond market, market price shifts away from par value (although par value is still the amount paid at maturity), and the yield on the traded bond is then different from the coupon rate. For example, if inflation threatens, then the market price of bonds will fall and the yield will increase to reflect inflationary expectations. If deflation, then the opposite.

    Reply

    rvm Reply:

    Thank you.

    Reply

  56. Peter D Says:

    If there is a shortage of reserves in the banking system the Fed accommodates by opening the discount window. I guess this is a loan to the private sector (to the banking sector in particular) but it seems to me that this can become permanent?
    Another question: do these funds from the Fed count towards government spending? It seems to me that in the sectoral balances identity (G-T=S-I+M-X) they belong in G, but I am not sure the published deficit numbers include them.

    Reply

    Peter D Reply:

    Anybody?

    Reply

    Tom Hickey Reply:

    The cb manages the interbank settlement system in such a way as to ensure that sufficient reserves are always available for settlement at the overnight rate it targets.

    The discount window carries a penalty rate and is not used in general management of the system. The Fed did encourage using the discount window to manage liquidity problems at the time of the freeze up, but that is an unusual situation. In such a situation, the cb can lower the discount rate if it chooses.

    Reply

    Matt Franko Reply:

    Peter,
    Perhaps think of it as sort of: ‘the Fed runs that equation for us’, but the Fed doesnt participate in it. The Fed keeps track of the numbers that go into that equation the way I look at it, by maintaining the bank accounts of the real participants in the economy. I believe that loan is only made for regulatory purposes. ‘Reserves’ solely imo are a regulatory construct of accounting for banks and monetary policy.

    JKH said once to paraphrase: the only entities that should even talk about “reserves” are bankers (that would include both depository bankers and central bankers, and maybe only the compliance people at those banks).

    Even we shouldnt have to discuss them here if the morons in charge of the system were operating it correctly…. we shouldnt have to worry about these things called ‘reserves’, but rather focused on our own bank accounts and economic outcomes but here we are.

    We should be concerned about that equation you posted though, as that would be one data point for us to tell if our elected reps were doing their job. Resp,

    Reply

    Tom Hickey Reply:

    The key is the final settlement of all transactions except intrabank transfers takes place in bank reserves and cash. Cash settlement occurs on the spot. Transactions that involves banking (checks, credit cards) involve the exchange of reserves among banks in the FRS. The public never sees this.

    The Fed manages the FRS so that interbank transactions settle, while maintaining its target rate. This involves either controlling the quantity of reserves through open market operations (OMO) after excess reserves have been drained with tsy issuance, paying a support rate on reserves, or setting the overnight rate to zero.

    Peter D Reply:

    Thanks, Tom and Matt but I don’t think I understood this. The banks get money (reserves) from the Fed at the Fed’s discount rate. Do they ever have to pay it back or they can simply continue paying the discount rate and earn the spread between that and the rate they charge the borrower? Does this have any impact on sectoral balances? After all this is new money injected into the economy (although with strings attached, unlike regular government spending.) What if the discount rate was zero – wouldn’t it be exactly like government spending?

    Tom Hickey Reply:

    Peter, the reserves are borrowed. A bank going to the discount window has to put up collateral, ordinarily tsys, although during the liquidity crisis the Fed accepted other securities IIRC.

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

  57. Dan F Says:

    Any comments about this from Zero Hedge (and circulated around the web)?

    By Rocky Vega, Guest blogger / March 5, 2010

    Is annualized M1 money supply growing at three times the rate the Federal Reserve is reporting? This is a critical question recently explored by Zero Hedge, which believes the actual growth rate of US dollars “is approaching hyperinflationary levels.”

    Rocky is publisher of The Daily Reckoning (dailyreckoning.com). Previously, he was founding publisher of UrbanTurf and RFID Update, which he operated from Brazil, Chile, and Puerto Rico, and associate publisher of FierceFinance. He specialized in direct marketing at MBI, facilitated MIT Sloan School of Management programs, and has been featured on CBS.

    “For historical reasons unimportant to the point of this analysis, the Federal Reserve in the past has only created cash currency. However, the unprecedented changes it has engineered over the past two years have resulted in a vast amount of deposit currency being created by the Fed. Instead of purchasing paper from the banking system solely with cash currency – its traditional form of payment to ‘monetize’ assets by turning them into currency – the Federal Reserve since the start of the financial crisis has increasingly relied upon deposit currency to purchase paper.

    “Regardless how the Federal Reserve pays for the paper it purchases – cash currency or deposit currency – it is creating dollar currency and perforce expanding the money supply. But the traditional definition of M1 does not accurately capture this process when the Fed uses deposit currency to pay for its purchase. In fact, it is totally excluded. Because the Federal Reserve did not create deposit currency in the past, none of the Ms take it into account.

    “Consequently, the traditional definitions of the Ms are outdated because they do not capture the total quantity of dollars in circulation. Because M1 is underreported, so too is M2.

    “Unprecedented Deposit Currency Creation by the Fed

    “There has been an unprecedented amount of deposit currency created by the Fed over the past two years. This chart illustrates this point. It shows the quantity of demand and checkable deposits, i.e., the amount of deposit currency, at the Federal Reserve since December 2002.

    “From December 2002 until the collapse of Lehman Brothers in September 2008, the quantity of deposit currency created by the Fed averaged $11.8 billion, an amount that is relatively insignificant compared to total M1. Presently, it stands at a record high of $1,246.2 billion, which of course is highly significant.

    “More to the point, none of this deposit currency is captured in the traditional definition of the Ms. The quantity of dollar currency is therefore significantly underreported…”

    Reply

    Dan F Reply:

    This is a good understanding of the why and how:

    http://neweconomicperspectives.blogspot.com/2009/06/dont-fear-rise-in-feds-reserve-balances.html

    Reply

    Dan F Reply:

    This looks to be the program:

    http://www.frbservices.org/centralbank/term_deposit_facility.html

    Reply

    Dan F Reply:

    A paragraph from the Reserve Maintenance Manual:

    It read to me that a reserve is nothing more than retained savings deposits?

    “A reserve requirement is the amount determined by applying the reserve ratios specified in Regulation
    D to an institution’s reservable liabilities (comprised of net transaction accounts, nonpersonal
    time deposits, and Eurocurrency liabilities) during the relevant computation period. The institution
    must satisfy its reserve requirement in the form of vault cash or, if vault cash is insufficient to satisfy
    the requirement, in the form of a balance maintained either directly with a Reserve Bank or in a passthrough
    arrangement. The portion of the reserve requirement that is not satisfied by vault cash is
    called the reserve balance requirement. (See Chapter V, Calculation of Reserve Requirements.)
    Balances held to meet a reserve balance requirement are paid interest at a rate determined by the
    Board of Governors.”

    Reply

    Dan F Reply:

    And here is the FED graph on reserve balances:

    http://research.stlouisfed.org/fred2/series/WRESBAL?cid=123

    Reply

    WARREN MOSLER Reply:

    don’t care
    the fed doesn’t create net financial assets,
    except when it buys real goods and services

    Reply

  58. Dan F Says:

    So my question now does M2 include these new reserves because they are really just deposits?

    Reply

    Dan F Reply:

    So in conclusion;

    “Anyone who suggests that last week’s ballooning reserve deposits represent inflationary pressure or the Fed monetizing the deficit simply doesn’t know what they’re talking about. Banks are sitting on the reserves, not withdrawing them as cash. When markets settle down, the Fed can and will absorb those reserves back in with sterilizing sales of Treasury securities, just as it did in 2001 or after the more modest spike in August 2007. Providing new reserves aggressively is absolutely and unquestionably the way the Fed needs to respond to this kind of development.”

    http://www.econbrowser.com/archives/2008/10/balance_sheet_o.html

    Reply

    Dan F Reply:

    Can you not add a link from the Econbrowser? Every time I try it does not take the posting.

    Reply

  59. Peter D Says:

    Warren and others.
    What do you think of this assertion in in this post by Michael Hudson:

    The Fed and Congress have told China to revalue its currency, the renminbi, upward by 20 per cent. This would oblige the Chinese government and its central bank to absorb a loss of half a trillion dollars – over $500 billion – on the $2.6 trillion of foreign reserves it has built up. These reserves are not merely from exports, much less exports to the United States. They are capital flight by U.S. money managers, Wall Street arbitragers, international speculators and others seeking to buy up Chinese assets. And they are the result of U.S. military spending in its bases in Asia and elsewhere – dollars that recipient countries turn around and spend in China.
    If Dr. Hudson is right, then our trade deficit is not only the foreigners willing to exchange real output for $US, but $US dollars chasing Chinese assets, by which I guess he means financial assets?

    Reply

    WARREN MOSLER Reply:

    china only loses ‘value’ for it’s dollars if they buy fewer real goods and services, aka ‘inflation.’

    Reply

    Peter D Reply:

    OK, I just wonder if the point about their holdings of dollars being in large part as a result of “U.S. money managers, Wall Street arbitragers, international speculators and others seeking to buy up Chinese assets” is true.

    Reply

    WARREN MOSLER Reply:

    yes, foreign investment is a factor. but at least anecdotally it’s no longer as profitable as it was and companies like GE are moving production elsewhere

    ESM Reply:

    Investments in assets abroad do not increase our trade deficit. In fact, they either have to be balanced with a trade surplus or by investments back in US dollars (which could be passively holding on to the dollars that foreigners received in the sale of the assets). In China’s case, the investments by US entities end up for the most part as dollar reserves owned by the Chinese central bank.

    Peter D Reply:

    Thanks, Warren, ESM, would be interested in some hard numbers. Because seems to me if we continue to claim that CAD is a result of foreigners exchanging real output for $US, then this claim needs to be countered with more than just anecdotal evidence.
    ESM,
    “Investments in assets abroad do not increase our trade deficit”
    and
    “In China’s case, the investments by US entities end up for the most part as dollar reserves owned by the Chinese central bank.”
    I agree about trade deficit but I guess it has to contribute to the Current Account Deficit, right? And CAD is what enters the sectoral balances equation on the opposite side of government deficit? In which case this flight of capital from the US causes our deficit to grow?

  60. Peter D Says:

    Warren and others. Since now Fed is paying interest on reserves, debt monetization can occur, correct? In fact, QE is debt monetization? Now we can expect the Fed Funds Rate to fall to the support level because there are excess reserves in the system due to QE2. Correct?
    If so, what to make of the following:
    - Fed funds rate is at about 0.14 (http://www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm)
    - The interest on reserves is 0.25 (http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm)
    How come the FFR fell below the support?

    Reply

    Sergei Reply:

    Not everybody who has account at Fed has access to deposit facility. You can start with GSE.

    Reply

    Peter D Reply:

    So, you’re saying the FFR can fall below the support since not everybody trading reserves has access to support? This seems to be a point Warren should incorporate into his papers then. Because it looks like the Fed may not have total control over FFR, right?

    Reply

    WARREN MOSLER Reply:

    nothing they can’t deal with if they want to with ‘normal’ open market operations, term fed deposits, etc.

    WARREN MOSLER Reply:

    by definition that’s called ‘debt monetization’

    any reason to care?

    the ffr fell below the support rate because the fed doesn’t pay it to the agencies that have fed accounts, last i checked

    Reply

  61. Peter D Says:

    When economy is booming the tax receipts go up which is one of the automatic stabilizers that MMT highlights and which reduces the deficit. So, it is correct to say that horizontal money expansion could lead to increased taxes? In which case the government is not necessarily removing NFAs when it taxes?
    Suppose economic outlook improves and banks start lending. The loans are horizontal money but they make it into the economy and become somebody’s taxed income. If the credit expansion is big enough, then tax receipts could be greater than the govt spending and cause surpluses. Is there a flaw in this thinking?

    Reply

    Neil Wilson Reply:

    Wouldn’t the banks run out of reserves first and have to get an injection from the central bank (which is a vertical transaction)?

    Reply

    Peter D Reply:

    I guess it is a vertical injection of reserves, which is confusing to me, because it comes from the Fed and not from the Tsy and happens without any oversight, automatically. But it cannot be part of the deficit, right? In which case I am not even sure where this injection of reserves is accounted for. You could have great expansion of lending leading to great expansion of reserves, but these reserves are not NFAs?

    Reply

    MamMoTh Reply:

    Loaned reserves are not a NFA, are they?
    I’d say they are an asset with a corresponding liability to banks.

    Reply

    WARREN MOSLER Reply:

    i say you are right
    :)

    paying taxes reduces (non govt) nfa
    govt spending increases (non gov) nfa
    fed loans don’t alter (non gov) nfa

    Peter D Reply:

    Thanks, Warren, MamMoTh, very helpful

    WARREN MOSLER Reply:

    When economy is booming the tax receipts go up which is one of the automatic stabilizers that MMT highlights and which reduces the deficit.
    YES, WHICH WORKS TO END THE EXPANSION

    So, it is correct to say that horizontal money expansion could lead to increased taxes?
    INCREASED TAX COLLECTIONS UNDER CURRENT INSTITUTIONAL ARRANGEMENTS

    In which case the government is not necessarily removing NFAs when it taxes?
    ALL TAXES STILL REMOVE NFA
    LOANS CREATE DEPOSITS. TAXES REMOVE THE DEPOSITS LEAVING THE LOANS
    Suppose economic outlook improves and banks start lending. The loans are horizontal money but they make it into the economy and become somebody’s taxed income. If the credit expansion is big enough, then tax receipts could be greater than the govt spending and cause surpluses. Is there a flaw in this thinking?

    THAT’S what happened in the late 1990′s, and the nfa draining surpluses worked to end the expansion and put us in the mess we are in today

    Reply

    Peter D Reply:

    WM: “INCREASED TAX COLLECTIONS UNDER CURRENT INSTITUTIONAL ARRANGEMENTS”

    Which institutional arrangement specifically have relevance here?

    WM: “ALL TAXES STILL REMOVE NFA
    LOANS CREATE DEPOSITS. TAXES REMOVE THE DEPOSITS LEAVING THE LOANS”

    Aha, that makes sense, I guess. So when a loan is created there is no new NFA. But when the deposits are taxed the NFAs are reduced. It is just that the NFAs don’t come from the government in this case. Would it be then correct to say that if the credit expansion is big enough then the govt could tax more NFAs than was originally injected via deficit spending over the years??

    WM: “THAT’S what happened in the late 1990’s, and the nfa draining surpluses worked to end the expansion and put us in the mess we are in today”

    Hm, so in this case the government needs to REDUCE taxes? And it should do it unless it sees inflation resulting from credit expansion, in which case it should increase taxes? What about asset bubbles?

    Reply

    WARREN MOSLER Reply:

    the graduated income tax

    yes, the govt can tax more than it spends from inception, if it lends the funds to pay the tax

    so when loans create deposits, and govt taxes away the deposits, it leaves the banking system ‘net borrowed’/overdrawn at the fed. and overdrafts in reserve accounts are functionally fed loans.

    so in that example the fed loans the balances that pay the taxes

    yes, for the given size govt, unemployment is the evidence we are over taxing

    what about ‘asset bubbles’, whatever they actually are?

    Peter D Reply:

    Thanks, Warren.

    I guess credit expansion can lead to asset bubbles. The easiest example is the housing bubble. I guess you’re saying taxing to remove NFAs during such bubbles is counterproductive. So, you have to deal with those by regulation, correct?

    Reply

    WARREN MOSLER Reply:

    they aren’t ‘problems’ if the economy is at full employment, and everyone’s happy with the composition of the output and the distribution of the output.

    personally, even at full employment I’d consider the financial sector at best a massive opportunity cost, for example.

    Tom Hickey Reply:

    Warren, to what extent to you see the financial sector involved in capital formation and necessary to it? They claim that they are the source of capital formation, hence, the lynchpin of a capitalistic system.

    WARREN MOSLER Reply:

    institutional structure has made the financial sector the lynchpin.

    i like to recount how in 1972 we had 200 million people and 2.6 million housing starts financed by of simple savings banks that serviced deposits and made home loans, and were a small fraction of GDP. I was a rookie in a savings bank loan dept making $140/wk, and playing golf at 4pm. The top dawgs were making maybe 20,000 a year and playing golf at 3pm. (note the income spread)

    A few years ago we had 300 million people and 2 million housing starts was an unsustainable bubble. And the financial company’s profits were maybe 30% of the s and p profits.

    see my proposals at this site to downsize the financial sector and get the brain power back to the real economy where it might actually serve public purpose

    Peter D Reply:

    WM: “they aren’t ‘problems’ if the economy is at full employment, and everyone’s happy with the composition of the output and the distribution of the output.”

    But this is like an unstable equilibrium. A small nudge, the bubble pops, the economy is heading for recession. You cannot ignore financial instability, can you?

    WARREN MOSLER Reply:

    depends on the instability. the sub prime thing was unstable fraud. that could have used a bit of modification.

    but even then, it the gov had made the right fiscal adjustment in aug 08 and unemployment had never gotten over 6%, real economy sales had held up, etc. there would have been a lot less concern about what would have been called ‘a good cleansing’ in the financial sector.

    nor would there have been a moral hazard issue, as lots of companies would have failed and new ones emerge to take their place.

    Craig Reply:

    what about systemic risk associated with leverage from derivatives?

    For example in an interview Charlie Munger said “Unlimited leverage comes automatically with an option exchange. Then the derivative trading made the option exchange look like a benign event. Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the “repo” system—one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome. The investment banks, to protect themselves, controlled, to some extent, the use of credit by customers that were hedge funds. But the internal hedge funds, owned by the investment banks, were subject to no effective credit control at all. very people who should have been preventing these asininities were instead allowing foolish departures from the corrective devices we’d put in the last time we had a big trouble—devices.”

    The underlying cause for the subprime crisis was bad loans but the immediate cause was credit derivatives. By the end of 2006, the subprime loan market was around $1.2 trillion (representing around 10% of the overall mortgage market). But thanks to CDOs, there were more than $5 trillion of risky investments created from all the risky subprime loans – at least subprimes had real assets as collateral.

    Like you said in the Reuters interview the crisis came about because the “equity in the market couldn’t support the credit structure.” Leverage in lending can be controlled by margin and capital requirements but what leverage inherent in derivatives? Warren, i would love to read a paper of your thoughts on the nebulous subject. Something that distills derivatives, leverage, and their controls down into laymen terms for someone like myself.

    WARREN MOSLER Reply:

    the sub prime problem was from people making 20,000 a year getting a 400,000 mtg via fraudulent appraisals and fraudulent income statements.

    people will aways gamble. the financial markets are casinos. i’ve suggested they be regulated by gaming law and gaming commissions. they don’t have all that much to do with the real economy. we had massive s and l fraud without derivatives, for example, and pretty good sized bubble when it burst. in fact, no one attributes the reagan boom to the s and l expansion phase which added maybe 1 trillion to total spending?

    So first my ‘ultra narrow’ banking proposals, and then we’ll see if the private sector needs gaming regulation to keep its gambling addiction under control

    ESM Reply:

    Craig,

    Credit default swaps (CDS) weren’t the problem at all. The CDS market functioned quite well through the entire financial crisis. In fact, it was the development of CDS for the subprime market that enabled the smart guys to short the market and pop the bubble. If the markets had developed earlier, the bubble might have been popped before it caused so much damage.

    Personally, I think CDS and other derivatives are very useful, and I think Warren Buffett and Charlie Munger are the financial equivalent of Luddites.

    I agree with Warren that much of what is done in the financial sector is worthless, but I disagree with him about the extent. My guess is that we could get the same benefit (which is real benefit by the way — liquid and complete markets is nothing to sneeze at) from perhaps only 25% of the resources currently devoted to the sector.

    Also, I disagree with Warren that the size of the financial sector is largely due to policy decisions of the government (“institutional structure” as he likes to say). I think it has more to do with human nature. There will always be rich people and pooled funds, and those entities will always want to pay people to manage their money for them, and they will always pay too much for that service because if a manager can truly get 2% better return than the average on $100MM, then it is worth paying him $1MM a year to do it.

    WARREN MOSLER Reply:

    So I say 90% of the financial sector is worthless, and you disagree saying it’s 75%.
    That’s close enough for me to say we agree! And if it’s 25% of the real resources, and compensation is a lot less, then the financial % could be 10% based on your 25%? Even more agreement!

    As for institutional structure, if we eliminated tsy secs and govt backed mbs and other secs, banned any bank use of secondary markets, got rid of the tax advantages for ‘savings’ schemes, and banned govt insured pension funds from equities and debt markets, seems there wouldn’t be a whole lot left for the managers to fight over?

  62. MamMoTh Says:

    WM:yes, for the given size govt, unemployment is the evidence we are over taxing

    Wouldn’t you say that the private sector getting increasingly leveraged is evidence of over taxing even if the economy is at or close to full employment?

    Reply

    WARREN MOSLER Reply:

    at full employment there is no lost actual output, no matter how you get there.

    Reply

  63. Peter D Says:

    Hi. I’m in an email exchange with a person who tries to prove that US bond issuance cannot be just an “interest rate operation”, as we MMTers claim. He brings the following empirical data in which the Fed expands its balance sheet well in excess of newly issued US Govt debt, while the FFR is increased (which would, to me, necessitate the Fed actually selling Tsys to drain reserves and allow the FFR to be bid up):

    I looked up another empirical example of the Fed expanding its BS more than the US Gov. increased borrowing since it could be argued that the Fed was holding non UST in its portfolio and I did not want to go through more hoops looking up data and theories during this time period. So I looked at a period when the BS should have been almost all UST securities (except for trivial amounts at the discount window). There is one time period of 6 Months from Jan. 13, 1999 to July 14, 1999 where the Fed’s BS expanded more than US Gov. Debt.

    The Data shows total US Gov. Debt of $ 5,618.3 Billion on Jan 13, 1999, and expanding to $ 5,624.3 on July 14, 1999; an increase of $ 6 Billion. The data available does not show the breakdown between debt held by public and intra-governmental debt, only the total is available. During this same period the money base went from $553.4 Billion to $ 571.5 Billion; an increase of $ 18.1 Billion. This is an increase of the money base over government debt of more than $ 12 Billion in 6 months.

    The Fed Funds target rate on Jan 13 was 4.75% and on July 14 it was 5%. The effective rate was 4.62% on Jan 13 and 4.99% on July 14. Now I would think that raising the fed funds rate raising 25 basis points (37 basis point effective ) should mean a reduction in the amount of UST that the Fed was buying. Indeed the amount of excess reserves in the system fell from $ 1.489 Billion in January to $ .964 Billion in July; a decrease of $ .525 Billion (This is monthly data which I guess was the daily average). However, also during this time the required reserves for banks fell from $ 45.262 Billion to $ 40.637 Billion, a difference of $ 4.625 Billion. This analysis would seem to show that while the Fed took out some half of billion of “excess” reserves but banks needed $ 4.6 Billion less reserves during this time.

    One can add up required reserves + excess reserves and come to see how much money was being “set aside” and not loaned out by the banks. This calculation was $ 46.75 Billion in January and fell to $ 41.60 Billion in July. This is a decrease of just over $ 5 Billion that banks have to have set aside.

    In the end the Fed expanded its BS by $18 Billion, the US Gov. debt increased by only $6 Billion (Wow, would that not be nice now days!), and the banks had to have about $ 5 Billion less set aside. All of this occurred while the fed funds target rate increased!

    Money Base: research.stlouisfed.org/fred2/data/BASENS.txt
    Required Reserves: http://research.stlouisfed.org/fred2/data/REQRESNS.txt
    Excess Reserves: http://research.stlouisfed.org/fred2/data/EXCRESNS.txt
    Fed Funds Target Rate: http://research.stlouisfed.org/fred2/data/DFEDTAR.txt
    Effective Fed Funs Rage: research.stlouisfed.org/fred2/data/DFF.txt
    US Gov. Debt: http://www.treasurydirect.gov/NP/BPDLogin?application=np
    Discount Window Borrowings: http://research.stlouisfed.org/fred2/data/DISCBORR.txt

    Anybody knows the answer to this offhand?

    Reply

    WARREN MOSLER Reply:

    what’s the question?

    if the economy wants more cash, they take it out of their bank accounts which reduces reserves and, if in response to the fed funds rate, the fed adds reserves by buying securities.

    and today where the fed pays interest on reserves the fed can buy all the secs it wants and add all the reserves they want without ‘pushing down’ the fed funds rate

    Reply

    Peter D Reply:

    So, to be clear, I claimed the same. So the guy came up with an example from 1999 when there was no IOR, so, seems to me, the Fed purchases of Tsys should be to drain/add reserves to hte system so that overall you hit the target FFR.
    Now, if the Tsy issues $6bn new bonds, this should drain reserves from the system and drive the FFR up. And in the same period the Fed decides to raise FFR by 25bps. So, it might even sell some more of Tsys to drain even more reserves to achieve that, right? But instead, in the same period the Fed buys $18bn of Tsys (I assume that the monetary base Billion expansion from $553.4 Billion to $ 571.5 is achieved by buying Tsys – let me know if that is incorrect.)
    In short, the guy wants a proof that the act of issuing debt is indeed all about interest rate maintenance, as MMT claims and gives what he thinks is a counterexample. I know that logic dictates that MMT position is correct, but it would be nice to substantiate it with hard numbers.

    Reply

    Tom Hickey Reply:

    Peter D, are you familiar with Stephanie Kelton’s Yes, Deficit Spending Adds to Private Sector Assets Even With Bond Sales? Stephanie explains the details of the MMT claim that deficit spending increases nongovernment net financial assets through credit bank accounts, which is reflected in an increase in reserves. The $-4-$ issuance of tsys to offset the deficit draws down deposit accounts and thereby reserves. The net financial assets continue to be held by nongovernment in the form of the tsys. However, this is mediated through TT&L accounts. Fed and Treasury coordinate on this, so that the excess reserves are manageable by OMO in order to allow the Fed hit its target rate.

    Peter D Reply:

    Tom, I don’t see how this helps in the current case. Here the Fed adds $12bn of reserves in excess of Tsy issuance of $6bn (which drains reserves) – so, if anything, this should drive the FFR down. So, something else must be offsetting this effect and still cause the FFR to go up. How do TT&L accounts help explain this?

    Tom Hickey Reply:

    In practice, the Fed and Treasury coordinate their ops so that the Treasury can settle and the Fed can hit its target rates. They use various accounts for reserve management and the Fed employs OMO for fine tuning (without IOR). I don’t know about the specifics of the case you cite, but that is how it is actually done and why the Fed and Treasury are consolidated de facto.

    Peter D Reply:

    Right, I get that, but it would be nice to have some sort of verifiable answer. If we were talking about debt issuance being 6bn and Feb BS growing by 6.1bn, then this would be like a rounding error. Here were talking about 2X diff between growth in Tsy issuance and growth in Fed’s BS, which normally would drive FFR down, not up. Just some piece of the puzzle is missing.

    WARREN MOSLER Reply:

    why do you care?

    WARREN MOSLER Reply:

    there is no such thing as a ‘counter example’

    Peter D Reply:

    Oh, come on, Warren. If the purpose of all this thing is preaching to the choir, then yes, I shouldn’t care, as you say. But if we want to convince people then we should be able to give answers to specific examples like this one. Saying “there is no such thing as a ‘counter example’” is not an answer but a hand-waving.
    I am sure the answer exists but am not too well versed in the nitty gritty of all the balance sheet operations to identify it. Which is why I asked.

    WARREN MOSLER Reply:

    ok,

    just that as a matter of accounting when govt spends more than it taxes the combo of cash in circulation, reserves, and tsy secs outstanding increases by exactly that much. doesn’t seem like there’s anything to ‘prove’ unless the point is that the totals reported by govt don’t perfectly add up? That’s very likely, as they use ‘end sources’ for data. Just like all the reported trade deficits/surpluses in the world don’t add to exactly 0, by quite a wide margin last I checked. That doesn’t ‘prove’ that they aren’t equal to 0, for example

    Peter D Reply:

    Thanks, Warren. I see your point, but I think there is still a question of how come the Fed adds $12bn of reserves in excess of Tsy issuance of $6bn (which drains reserves)which should drive the FFR down, but FFR in this period goes up. Here the margin is not simply wide, but in the opposite direction of what I would assume should happen. In other words, if the Fed wants FFR to go up it needs to net-drain the reserves from the system, not net-add them.
    The only reason I can think of is that in the same period there was an additional reserve drain which could drive the FFR too high and needed to be offset with reserve add. Could that be taxation? April 15th is in the middle of the period… I wonder where I could look to verify that.
    Seems a useful exercise to me :)

    WARREN MOSLER Reply:

    technicals that change reserve totals are called ‘operating factors’ and include tsy balances at the fed, float, cash demands, etc. and probably account for that differential

    Ramanan Reply:

    Peter D,

    Fed’s balance sheet expanded by $18B and money base increased by $18.1B as per the person you communicated with. Makes perfect sense.

    If the private sector wants more cash, the Fed accommodates this.

    The government debt is irrelevant here! You have considered the increase in debt draining reserves but you have ignored reserve add due to the deficit.

    More importantly rates are changed not by open market operations but by “open mouth operations” :-)

    Its a big myth in the financial world that people start thinking that when the Fed wants to change rates, it starts doing more/less open market operations. The open market operations are just neutralization of reserve changes due to the fund movements in and out of the Treasury General Account and other accounts such as Foreign central bank accounts that the Fed keeps plus some errors in forecasting.

    A superb article here by Marc Lavoie – “Monetary Base Endogeneity And The New Features Of The Asset-Based Canadian And American Monetary Systems”
    http://www.economia.unam.mx/amhe/pdfs/conferencia_marc_lavoie_01.pdf


    … As shown above, to do so, they now need to simply announce a new higher target overnight rate. The actual overnight rate will gravitate toward this new anchor within the day of the announcement. No open-market operation and no change whatsoever in the supply of high-powered money are required.

    Goes into what I am trying to say. It seems the confusion is thinking of open market operations as required for changing the target by 50bps as opposed to neutralizing the effect of movement of the *Fed Funds Rate from the Fed Funds Target Rate*. So the confusion arising may be confusing the two.

    Back to the numbers …

    The excess reserves is fluctuating around $1B as far as I can see from the data provided … great!

    The trick to understand the open market operations is to not consider the debt issuance as “open market operations”.

    Reply

    Ramanan Reply:

    “So the confusion arising may be confusing the two.”

    Messed up sentence. The first is wrong. The second is right.

    Peter D Reply:

    Ramanan,

    If the private sector wants more cash, the Fed accommodates this.

    So, you’re saying that the Fed accommodated the horizontal money creation? Do I interpret you correctly? Because as far as I understand this is done via the discount window, isn’t it, in which case it would be possible to find some data about it? And would it be normal to issue 12bn of reserves via the discount window in 1999 (back then it was a lot of money, as Warren likes to say))?

    It seems the confusion is thinking of open market operations as required for changing the target by 50bps as opposed to neutralizing the effect of movement of the *Fed Funds Rate from the Fed Funds Target Rate*.

    But why would the FFR move away from the target if it is not for the changes in reserve levels? And this should be traceable, as far as I can see to:

    1) Effects of spending and debt issuance – which, you’re right may just cancel one another
    2) Effects of taxation – this is my hypo: that in this case there was a big reserve drain due to taxation (April 15!) and the Fed needed to add reserves back to prevent the FFR from going up too much. Is there a way to trace that?
    3) Effects of horizontal money creation where the banks in aggregate find themselves short of reserves. Again, is there a way to trace that?

    I appreciate your help!

    WARREN MOSLER Reply:

    yes, operating factors can move the ff rate off target.

    horizontally created liabliities are of the ‘loans create deposits (and reserves)’ type

    govt spending adds reserves, which can then be shifted by gov to tsy secs and cash as desired.

    but all three can be considered govt created ‘vertical’ liabilities

    Peter D Reply:

    Ramanan, reading your reply again I see that what you’re saying is that to move the FFR it is enough simply to announce the new target and it might not be necessary to defend it as the banks will voluntary gravitate towards it, correct? I’m reading the Lavoie paper, maybe I will understand it better.

    WARREN MOSLER Reply:

    when the fed kept the banking system’s reserves ‘net borrowed’ as they used to do, all they had to do to hike rates is hike the cost of the same number of reserves to the banks

    today, the fed is keeping the banks net long reserves (excess reserves) so to hike they can simply raise the rate they pay on reserves

    Tom Hickey Reply:

    MMT’ers have often said that all the Fed has to do is announce the FFR and the banks respond because they know that the Fed can deliver this. They also said regarding QE that if the Fed had announced price (targeted yield) instead of quantity (600B) the market would also have fallen in line because everyone knows that the Fed can deliver.

    Ramanan Reply:

    Peter D,

    As one moves forward in time, the private sector – households and the rest of the world needs more dollar notes. So the Fed purchases more Treasury securities in order to meet the demand.

    When the private sector demands notes, banks hand them out from their inventory and banks would demand more notes from the Fed. The Fed can of course force the banks to use the discount window to hand the currency notes but it doesn’t do it that way.


    The amount of currency demanded from the public, both in the United States and abroad, tends to grow over time, in part reflecting increases in nominal spending. Consequently, an increasing volume of reserve balances
    is drained from the depository system and must be replenished. The expansion of currency outstanding is the primary reason the Desk conducts outright purchases of securities. . . . The Desk conducts far more outright
    purchases than outright sales, primarily because it must offset the reserve drain resulting from the public’s increasing demand for currency.

    Edwards, C. 1997. Open market operations in the 1990s. http://www.federalreserve.gov/pubs/bulletin/1997/199711lead.pdf

    The second part of your comment is more complicated.

    However, that is not necessarily an issue. The Fed would respond by doing more OMOs so that the reserve drains are smoothened.

    So the Fed takes care of all drains by adding reserves through repos.

    Maybe you can try to find the amount of open market operations done by the Fed during that time to check a few things.

    Check some of the references by Fed authors I cite in the comments section here http://bilbo.economicoutlook.net/blog/?p=12414

    Yes, the Fed Funds will gravitate toward that rate with less effort from the Fed. This is because the markets know that if they don’t follow the Fed, the Fed will take action to steer the rates.

    In fact, recently Canada moved from the floor system to a corridor system. Floor because of QE. The overnight rate moved to the middle of the corridor even before the Bank of Canada removed the excess reserves!

    WARREN MOSLER Reply:

    to add to this, when the fed does repo, they announce what they are doing, and then later announce which banks got awarded the repo’s and at what interest rate, called the ‘stop’

    so they changed rates by changing the rate they paid on repos, which are functionally interest bearing deposits.

    (sound familiar- controlling rates by altering interest paid?)

  64. Dan F Says:

    Just wondering if people would share sites that they get their economic news from?

    I tried the WSJ, FT, and Bloomburg but was really dissatisfied with the content.

    What do you people read?

    TIA

    Dan

    Reply

  65. Steve Says:

    Warren, I have read your thoughts on money analogous to the football scoreboard. If this is true then why is any taxation necessary? Why do they need to collect any taxes. They can just print any money they need. Why can’t the Government just give everyone a million dollars? Everyone will be rich, no one will have to work! They can spend their time spending money. Furthermore why does the government care about counterfeiters? If more money is good for the economy and the government can print as much as they want with no adverse consequences then why would a counterfeiter printing money be a problem?

    With your football scoreboard analogy you imply that the scoreboard can never run out of points which is true but what if they just post points without regard to production or activity by the teams. Nothing is accomplished. If each team scores 1 touchdown but the score board keeps posting points even though no more points have been earned, no points have been created, just as no wealth has been created by printing more money therefore each unit of money represents a smaller fraction of the economy’s wealth, which is real not fictitious as is your printed money. Wealth is represented by real products that sustain life. In the most basic sense, food, clothing, shelter, etc. and in a more broad sense things that make life more pleasurable, entertainments, leisure activities, etc. The wealth of a society is not measured by its money supply but by the wealth it creates which can be consumed to sustain the life of its citizens.

    I believe that the fallacy of your argument is found in the phrase “not worth a continental” referring to Continental Dollars, the fiat money of the revolutionary era. If people don’t accept the fiat money then it has no value at all regardless of it’s scarcity or plentifulness. Would you please explain the logic of your philosophy? Money is merely a means to simplify barter transactions. NO money has any inherent value. Its value resides in its acceptance by people as a means of exchange. No faith in its value means it has no value regardless of whether that money is paper fiat currency or seashells or specie, like gold and silver. In a situation where a community is starving no money of any sort will have any value. Only food will have value. You can’t eat paper or specie! If i understand what you are stating clearly then Pre-WW II Germany should not have had economic problems because the the german government was printing plenty of marks!

    When football teams realize that the number of times they cross the goal line has no bearing on the points posted on the score board the game ceases to have meaning and they will stop playing. The same will hold true for printed money. The price of gold is merely the reflection of the current value of printed money. Gold is not more valuable, money is less valuable taking more of it to buy an ounce of gold. We are experiencing a specie bubble. When this bubble bursts no one owning gold will be able to sell it easily. Why would anyone buy gold if the price is dropping. Why not wait until it stops dropping? It’s not like you can go the grocery store and use it to directly buy food. You have to turn it back into currency first.

    Reply

    WARREN MOSLER Reply:

    Hi Steve,
    check out chapter 1 in ‘the 7 deadly innocent frauds’ at this website for your answer thanks!

    Reply

    save america Reply:

    Steve you say in a society of starving people, only food will have value. Since you can eat other people, they will also have value as food. A few days ago I watched a movie called “the bang bang club” about these pulitzer prize winning photographers who photographed the violence in africa in the mid 90′s, how cheap life had become. In one photo a living african girl was about to be eaten by a buzzard, the guy who took it and won the pulitzer killed himself later.

    Steve you say this “no wealth has been created by printing more money”

    I want you to expand on this meme, is more wealth created by creating more borg? Half of detroit can’t even read, how did that happen? Today national geographic was at the british embassy in DC talking about how do we feed 7 billion and growing borg with oil output not growing at rates like in the past.

    I like to use warren’s bowling alley and football game scenarios – they are very accurate – you are at a game, and the crowds keep swelling, uncontrollably, and while all you MMT guys are looking at the scoreboard to see who is winning the game, I can’t use the bathroom because the crowds have destroyed it, I can’t even get a beer because the crowds make the line intolerably long, or order a good hotdog, even if you could get one, it is a mass produced piece of heart stopping garbage that wasn’t cooked properly. Today in DC it didn’t matter who had money and wealth and who didn’t, everyone visiting the embassies had to suffer the same congestion and misery, one guy at the british embassy who I took for a james bond type told me they can’t even control it in the UK, and you would think a small island with easily enforcable borders could, but he said no. The military people from over there told me they aren’t getting the “increase” in benefits like they used too, just too many people.

    The problem is Steve, the folks running the bowling alley or the football stadium didn’t realize there is only so much space and resources in those places for people to consume and not be congested. You and other people are talking about the scoreboard, or the football team, but I am more worried about the crowds watching the game who no one thinks we should look at analytically but just let increase to whatever. What we haven’t decided to manage through decency and science, mother nature will manage for us in another way, like happened in Africa.

    Saddam didn’t grow up in a vacuum, that violence and evil and darkside came from growing up in violence and depravity, and I see that increasing, so instead of making more kind hearted warren’s mini me clones, this world is going to start making lots more saddam mini me darth vaders.

    Reply

  66. Peter D Says:

    Anybody care to comment on the claims in this WSJ article:
    http://online.wsj.com/article/SB10001424052702304066504576341211971664684.html?mod=googlenews_wsj
    (to get the full version, search for “The Return of Stagflation” in Google and click the first link). The guy claims that:

    There is a second, purely domestic avenue by which near-zero interest rates in U.S. interbank markets are constricting the economy. [...]

    Why should zero interest rates be causing a credit constraint? After all, conventional thinking has it that the lower the interest rate the better credit can expand. But this is only true when interest rates—particularly interbank interest rates—are comfortably above zero. Banks with good retail lending opportunities typically lend by opening credit lines to nonbank customers. But these credit lines are open-ended in the sense that the commercial borrower can choose when—and by how much—he will actually draw on his credit line. This creates uncertainty for the bank in not knowing what its future cash positions will be. An illiquid bank could be in trouble if its customers simultaneously decided to draw down their credit lines.

    If the retail bank has easy access to the wholesale interbank market, its liquidity is much improved. To cover unexpected liquidity shortfalls, it can borrow from banks with excess reserves with little or no credit checks. But if the prevailing interbank lending rate is close to zero (as it is now), then large banks with surplus reserves become loath to part with them for a derisory yield. And smaller banks, which collectively are the biggest lenders to SMEs, cannot easily bid for funds at an interest rate significantly above the prevailing interbank rate without inadvertently signaling that they might be in trouble.

    Is this a real channel? Seems bullshit to me, but I’d love to here from our banking gurus here.

    Reply

    Tom Hickey Reply:

    @Peter D,

    Looks like BS to me. Banks set the rate they lend at. The overnight rate influences the spread, but the banks are not holding back loans because of the spread. They set the spread based on risk. Prime rate is 3.25, which is about what it was in the Fifties.

    Reply

    Tom Hickey Reply:

    @Tom Hickey,

    I tried to post a chart but it didn’t show up. Here is the URL for a chart of historical prime.

    http://www.moneycafe.com/library/ratecharts/ratecharts1.gif

    Reply

    Peter D Reply:

    @Tom Hickey,

    Thanks, Tom. I guess the one point that this guy is making is that there are many small banks with no access to reserves from the Fed that have to go to the Fed Funds market, and then, supposing this is true, not being able to obtain the reserves because the big banks are wary of lending to small banks in danger of bankruptcy…
    The guy is a Stanford prof. Not that it means anything, as we know…
    Warren, wanna shoot him an email?

    Reply

    Scott Fullwiler Reply:

    @Peter D,

    I’m not completely up to date on the specifics, but it sounds like BS to me, too.

    First, he’s right that there is a good deal of decentralization, at least for small banks, in the wholesale market. But, that’s about the only thing that seems right.

    Think about a small bank. In normal times, they are the banks with the excess reserves that get loaned to the larger banks. So, they all have accounts at the larger banks for purposes of some wholesale payment settlement and lending to other banks (again, to offset some of the decentralization). If the small banks need reserves, it would be pretty easy for them to acquire them from these larger banks that now may be flush with reserves. It would seem at worst they could pay a small premium over the target rate. Small banks also have other avenues, like their district FHLB’s.

    Though, again, given that it’s what they do under normal circumstances, it’s not clear to me that the smaller banks aren’t already holding some of the huge system-wide excess position.

    But why do small banks need reserves overnight? Same reason as large banks–meet RR and guard against overnight overdrafts in payment settlement. Regarding the first, small banks often are already holding more in vault cash than they need for RR, and can use retail sweeps software if they need to get RR lower for some reason (almost all of them do already). Regarding the second, again, traditionally (pre-Lehman) they hold most of the buffer in the system, which is only a few $ billions (usually less than $2B), and lend to large banks (via correspondent accounts in many cases). These few $B are sufficient. So, post Lehman with $1T in reserves, it seems weird to suggest they don’t have enough, even if some are less interested in lending or reserves don’t circulate as in pre-Lehman times (which seems quite logical, though, again, small price premium could take care of that in most cases).

    The article also seems to not understand that banks don’t require prior reserves to make loans or settle a payment in real time. That’s obviously a mistake so fundamental that it’s hard to keep an argument on track even if the rest of the facts are right. If they do feel the need to at least confirm availability of borrowings in wholesale markets as they lend, this would again seem rather easy to do with a small price premium. As such, the only issue would be the cost of liabilities, which are at a historical low by any measure, while bank spreads are doing quite well.

    So, again, blaming this all on IOR, decentralization, etcc,. seems quite off the mark to me.

    Scott Fullwiler Reply:

    @Peter D,

    Tried to look at the article, but my account must have expired. To those that read it, is there any actual evidence provided–accounts by actual bankers (preferably liquidity managers) that they can’t get access to wholesale markets–in the article? From what I saw here and in the comments there, it seems based on on (flawed) theory. I could be wrong, though, on that score, but would still have trouble believing IOR and ZIRP could be keeping banks from lending.

    Peter D Reply:

    @Scott,

    I think you can get the full version by searching for “The Return of Stagflation” in Google and clicking the first link – this is how I got it.
    Now back to reading your reply :)

    Peter D Reply:

    @Scott,

    So, Scott, a couple of follow up q’s.
    1) What do you mean exactly by “decentralization”?
    2) Do small banks have reserve accounts at the Fed? Or do they hold their reserves in those accounts at the big banks you mentioned? (By “small banks” I presume one means something like a local bank, while “big banks” are BoA, Citi, JPM and such?)

    Thanks a lot!

    Scott Fullwiler Reply:

    @Peter D,

    Thanks. Will do. I really have a hard time believing that small banks can’t borrow at a small premium, at worst. And it appears the author muddled the issue considerably by referring to excess reserves, since that’s irrelevant to the point he’s trying to make. But I’ll have a look later.

    Scott Fullwiler Reply:

    @Peter D,

    1) What do you mean exactly by “decentralization”?

    We have about 6000 banks (7000?), as opposed to, say 20 or something like that in Canada. No other country even comes close.

    2) Do small banks have reserve accounts at the Fed?

    Yes, every bank does.

    “Or do they hold their reserves in those accounts at the big banks you mentioned?”

    No, you can’t hold reserves anywhere but a reserve account, by definition. What they do is “lend” their excess reserves by holding deposit accounts at larger banks. The larger banks can settle some payments for them (that is, transactions that can be settled on the larger bank’s balance sheet can be settled for the smaller bank via its deposit account at the larger bank) while the deposit by the smaller bank goes into the larger bank’s reserve account (that is, when the small bank deposits at the large bank, the large bank sees its reserve account increase (asset) and its deposits increase (liability–the small bank’s account).

    (By “small banks” I presume one means something like a local bank, while “big banks” are BoA, Citi, JPM and such?)

    Yes, community banks and the like.

    Peter D Reply:

    @Scott,

    Great, thanks or the explanations! I guess the last question is whether the Fed would open the discount window for a small bank? If it would, why would a small bank even presumably have a problem getting reserves, even if large banks refused to lend to them? Only because of the stigma of the discount window?

    Scott Fullwiler Reply:

    @Peter D,

    Yes, it would be discount window stigma, more from the Fed (though the push to get the Fed to disclose everything could create greater stigma fear). Warren reports from his bank that the Fed still gets a bit touchy when banks want to borrow for basic liquidity purposes, even during the crisis months. So, yet again, the correct solution is as Warren stated below in the copied/pasted proposals from Beowulf. ZIRP has nothing to do with it.

    beowulf Reply:

    @Tom Hickey,

    Right but the prime rate markup over Fed Fund rate was lower in the 50s (from late 50′s to late 80s, prime rate markup averaged 1.31%). Prime rate mark up has only metronome steady markup of 3.0% over FFR since 1991.
    http://www.interfluidity.com/posts/1160447599.shtml

    Reply

    Scott Fullwiler Reply:

    @beowulf,

    Fixed prime spread is because of the greater certainty about the Fed’s target rate. Marc Lavoie wrote about this in a paper on “monetary base endogeneity” that I think is at the epicoaltion site. So did Gordon Sellon in an article for the KC Fed’s review in 2000 or something like that.

    Peter D Reply:

    @beowulf,

    So, what’s the significance of Prime markup? Because the big banks would lend to the small bank I imagine at the FFR + maybe some small markup, not at Prime?

    Scott Fullwiler Reply:

    @beowulf,

    Like I said above, the issue would be a contraction in the small bank’s spread–they lend at prime but pay ffr+markup. But are small bank spreads lower? And even if the markup is higher than historical, is it because of ZIRP and IOR, or just changed behavior toward risk?1

    beowulf Reply:

    The important point is that 3.00% prime rate markup (prime rate is for most solid borrowers, additional risk adds points) has been a constant for the last 20 years, even as everything else– FFR, yield curves, inflation, unemployment, GDP– has waxed and waned. And yet for the 30 years prior to that (as the chart at the above link shows) it was a variable term that averaged at less than a 1.5% markup. If the markup still fluctuated but had doubled over time, perhaps it could be explained by changing economic conditions (remember, the fixed markup goes back to 1991, long before ZIRP and OIR). A more plausible scenario is price fixing, the Fed decided to make banking a little more profitable. In Lerner Monopoly Index terms (with FFR of 0.25%), a 1.5% prime rate markup is a a Lerner index of .86, a 3.0% markup is .92.
    http://en.wikipedia.org/wiki/Lerner_index

    Considering that the Lerner Index only goes to 1.0, that’s a crazy high markup and yet the banks aren’t picking up (nearly) free dollars by lending because the creditworthy borrowers aren’t there. The takeaway from this is that for years the Fed has done everything in its power (and then some arguably) to subsidize the banking sector and its not enough to get the economy moving. Ag demand and income inequality are the two imbalances that need to be fixed and those are fiscal issues. Monetary policy is, at best, band-aid (Rajan’s great phrase summing up the housing bubble, “let them eat credit”).

    Scott Fullwiler Reply:

    @Tom Hickey,

    At any rate, the questions I’ve raised here and below are what an article like this should answer. If not, then it’s not worth taking seriously.

    Reply

    Scott Fullwiler Reply:

    @Scott Fullwiler,

    That was a general statement, not necessarily directed at Tom.

    beowulf Reply:

    @Peter D,
    smaller banks, which collectively are the biggest lenders to SMEs, cannot easily bid for funds at an interest rate significantly above the prevailing interbank rate without inadvertently signaling that they might be in trouble…

    Sounds like a market failure to me. Warren had a post related to this issue–
    The Obama administration has been preaching the importance of fixing the small banks and getting them lending again. This will review what I see as the critical issue and how to fix it.
    First, the answer:
    1. The Fed should loan fed funds (unsecured) in unlimited quantities to all member banks.
    2. The regulators should then drop all requirements that a % of bank funding be ‘retail’ deposits…

    http://moslereconomics.com/2009/12/26/fixing-the-small-banks/

    Reply

    Scott Fullwiler Reply:

    @beowulf,

    That’s the correct solution if that problem still exists, since it rightly deals with the rate banks borrow at. My question is whether the problem still exists; back when Warren wrote that, premiums were very high; are they still? This does show that blaming everything on ZIRP and IOR (as the article appears to) is ridiculous, though.

    Reply

    Tom Hickey Reply:

    @Scott Fullwiler

    I find it hard to imagine that this would still exist. I had the same thought as Beo. It would be a market failure and I doubt that the Fed would permit an extended market failure when it is anxious for banks to lend. If this were the actual problem, the Fed would know about it and figure a way to provide liquidity. That’s their job after all.

    Scott Fullwiler Reply:

    @Tom Hickey ,

    Right, Tom (and Beowulf),

    There’s a reason they’ve wound down the various standing facilities.

  67. Ronald Gaspard Says:

    What is the “debt” limit. A limit on issuing bonds? (Which we don’t have to do.) Or a limit on the number showing in the Liability account on the spread sheet?

    Reply

    WARREN MOSLER Reply:

    the tsy can’t spend without first getting revenue from taxes and/or borrowing which it does via selling tsy secs.

    the debt limit is the limit the tsy is authorized to issue

    Reply

    Mario Reply:

    @WARREN MOSLER,

    Have you guys heard of Australian Economist Steven Keen?

    He knows of Minsky’s works and seems to be on the ball with MMT, though he doesn’t use MMT language. He’s written some books destroying neo-classicism called “Debunking Economics.”

    Here’s a worthy interview he just did with Max Keiser of all people, who does a wonderful job interviewing him to his good credit.

    I encourage you all to check it out. Towards the end Steve makes an interesting observation that in the Great Depression businesses were in deeper debt than they are today and so deflated prices more aggressively in the 30′s to drive revenues. Today it’s the consumer that is more heavily indebted and that is why businesses are not dropping prices as easily as in the 30′s and is also why the economy is doing better than some would think considering the huge levels of consumer debt. Very interesting and well worth a listen.

    http://www.debtdeflation.com/blogs/2011/07/10/on-the-edge-with-max-keiser/

    Reply

    WARREN MOSLER Reply:

    know him well, spoken many time. unfortunately he can’t quite stay in paradigm yet gets recognized by some as mmt who then point out his flaws which they claim show flaws in mmt.

    Neil Wilson Reply:

    @Mario,

    Steve is a good Post Keynesian and his neo-classical debunking is spot on, but I can’t understand where his Credit Accelerator theory comes from. It ends up double counting the liability part of a loan based on the idea (AFAICT) that there is somehow more ‘economic action’ on that half than the asset half.

    Moreover when I run his algorithms for the British economy I don’t see the effects he sees in the Australian and US economies. There doesn’t appear to be any correlation at all.

    I am looking forward to the update of his book that is coming out in September.

    If you haven’t read the debate between Bill Mitchell and Steve Keen on Bill’s blog, you should do:

    In the spirit of debate

    http://bilbo.economicoutlook.net/blog/?p=5194

    In the spirit of debate… my [Bill Mitchell] reply-Part 1

    http://bilbo.economicoutlook.net/blog/?p=5199

    In the spirit of debate… my reply Part 2

    http://bilbo.economicoutlook.net/blog/?p=5224

    In the spirit of debate … my reply Part 3

    http://bilbo.economicoutlook.net/blog/?p=5234

    Steve and others reply in the comments.

    WARREN MOSLER Reply:

    when i read it i agreed with bill

    Clonal Antibody Reply:

    @Mario,

    One of the critical concessions that Steve Keen makes when beginning the debate with Bil Mitchell is

    if there is a genuine recovery not involving rising private debt to GDP levels, then Chartalism is the only theory left standing. Neoclassical economics is dead.

    Keen is relying heavily on “private credit creation.” So, if the banking institutions were owned by the government, then I assume, that in his world, there would be no private credit creation, since all interest on bank created credit would be no different than taxation. Theoretically, the government can create all the money necessary for investment by spending it into the economy – thus no real necessity for private debt.

    WARREN MOSLER Reply:

    Mmt is left standing either way

    And I woulnt object to steve sitting down

  68. Mike P Says:

    Warren,

    Bund CDS are rising a bit today as are bund yields. Is the ECB ultimately backstopped by Germany or can it print euros on its own? This is obvously a big difference because I don’t believe even Germany can bail out all of the troubled economies in Europe. How do you see this playing out? If the ECB or EFSF will be able to print euros, I am much more confident this can end well.

    Reply

    WARREN MOSLER Reply:

    the ecb is the issuer of the currency that supports the euro member nations and their banks.

    they do have their little self imposed constraint, though. the ecb has a capital requirement for lending, and it gets capital from its members that it lends to.

    Reply

  69. Ronald Gaspard Says:

    Without Government spending and without a tax cut, what is driving the inflation rate up right now.

    Reply

    Unforgiven Reply:

    @Ronald Gaspard,

    Just to make sure we’re all on the same page, let us know where you’re seeing the inflation.

    Consider the ripple from rising oil prices; the recent drop will likely take a while to spread through the economy as well.

    Reply

  70. AWK Says:

    Warren,

    Very much enjoy your writings. I have some questions beginning with this quote from the 7 Deadly Innocent…:

    “Recall from the previous innocent frauds, the U.S. can
    ALWAYS support domestic output and sustain domestic full
    employment with fiscal policy (tax cuts and/or govt. spending),
    even when China, or any other nation, decides to send us real
    goods and services that displace our industries previously
    doing that work. All we have to do is keep American spending
    power high enough to be able to buy BOTH what foreigners
    want to sell us AND all the goods and services that we can
    produce ourselves at full employment levels.”

    Isn’t it just as important what we want to buy from other countries and not just what they want to sell us? Isn’t there some level of imbalance where tradeoffs have to be made between inflation and unemployment? Let me illustrate with an exaggerated example, as you often do effectively. Lets pretend that China and other countries want to dump most of the items Americans want to purchase at lower costs than Americans can produce. Hard up (and even well-off) Americans will generally buy the cheapest stuff they can, especially under hard times (assuming there is some major type of stimulus/tax reduction to get the US to full employment.) What if $0.50 of every dollar in stimulus goes to buy overseas goods? $0.70 of every dollar? $0.95 of every dollar? I have to believe there must be some sort of resistance curve in there someplace you neglected.

    Even the US itself is not homogeneous. If you gave various types of stimulus/tax breaks to the whole country I would expect that some regions would overheat, some would be stable, and some would continue to stagnate. While this is to be expected and is not a huge deal. I do wonder whether other pressures (like another oil shock) could create sufficient regional disparity to throw the system out of whack. We’re not as mobile a country anymore.

    Finally, what role does the place of the dollar as the world reserve currency play in your thinking? There probably isn’t going to be a challenge to this anytime soon but the winds of change are in the air. Let’s assume, for sake of argument, that the dollar ceases to be the reserve currency and then we elect President Mosler to implement his MMT approach to the economy under difficult times of high unemployment. But, for whatever reason, the rest of the world doesn’t trust you or MMT and doesn’t want to hold dollars or treasuries during your MMT “experiment”. What would happen to our ability to produce, compete, and maintain full employment if oil and other commodities not sufficiently produced in the US are no longer as affordable (assume the rest of the world is still mired in belief in the 7 frauds and believes your actions will debase the dollar) Won’t our need for oil force upon you constraints similar or analogous to being on the gold standard?

    Best regards,
    Andy

    Reply

    WARREN MOSLER Reply:

    ‘stimulus’ means tax cuts and/or spending increases.

    so even if every $ ‘goes overseas’ it just means we can cut taxes that much more and/or increase public spending that much more.

    and yes, the micro and regional matters a lot.

    if the world doesn’t want to ‘hold dollars’ then our imports must be paid for with export revenues.

    Reply

    Mario Reply:

    @WARREN MOSLER,

    “if the world doesn’t want to ‘hold dollars’ then our imports must be paid for with export revenues.”

    can you re-phrase this in some other way perhaps? Why do our imports need to be paid with export dollars? Why can’t they be paid with private sector investment dollars or government dollars as well?

    And when you say “hold dollars” are you referring to bond purchases? I thought when China for example buys our bonds it is after the trades are made, so it has nothing to do with us purchasing their exports. Am I missing something here?

    Reply

    WARREN MOSLER Reply:

    Yes

    If foreigners spend the dollars they get from selling us stuff on our goods and services trade is said to be balanced

  71. wwtk Says:

    I am trying to figure the operational accounting of Treasury issuing bonds, as it happens now under current laws. So it issues $1000 for the Fed to auction. Citi buys it. Now at the Fed, Citi’s checking is decreased by $1000 and their savings account is increased by $1000. Also at the Fed, is the treasury’s checking increased by $1000? Is this now the new money created vertically at the issuance of the bonds? Since it can’t be overdrawn at the fed, this has to happen before the Treasury can write checks, right?

    Reply

    WARREN MOSLER Reply:

    right.

    Reply

    Unforgiven Reply:

    @WARREN MOSLER,

    Page 102, 2nd paragraph of 7DIF:

    There is no economic school of thought that would
    suggest health care should be what’s called a “marginal
    cost of production” means that it is bad for the economy…

    Should be: …production” WHICH means… ?

    Reply

    WARREN MOSLER Reply:

    yes, thanks!

  72. Nanette Says:

    Warren – I’m not certain where to post this – so – Can you propose a mechanism to reduce the cost of COBRA medical insurance for employees who have been let go from employment due to corporate downsizing? With the emphasis on ObamaCare, et al, unemployment continues to rise, and those let go to unemployment can not afford COBRA.

    Reply

    rvm Reply:

    Nanette,

    In “7 Deadly Innocent Frauds of Economic Policy” page 101

    http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

    you can see Warren’s proposal for Universal Health Care system.

    Reply

    Nanette Reply:

    @rvm,

    Thanks Rvm. I see it now. Hadn’t read quite that far today.

    Well I will need this in 6 weeks – so let’s get busy! Thanks again – Nanette

    Reply

    Unforgiven Reply:

    @Nanette,

    In this economy, you have to be ready to roll your own. Keeping my fingers crossed for you in any case.

    What state do you hail from?

    WARREN MOSLER Reply:

    see my health care proposal under ‘proposals’ on this website, thanks!

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    “My proposal regarding health care is to give everyone over
    the age of 18 a bank account that has, perhaps, $5,000 in it,
    to be used for medical purposes.”

    And, if the economy is at full employment, then everyone over 18 would have to pay $5,000 in additional taxes, otherwise inflation.

    So, why not simply legislate that everyone must put their own $5,000 into such an account?

    Or, if you’re a Libertarian, legislate that they are able, but not required, to put $5,000 into such an account? Or any amount they want to put into it, if $5,000 is way too much or way too little for their anticipated medical expenses?

    The only macro difference is the “leakage” due to personal compliance efforts and government overhead in managing it all, and the bank fees (with the interest rate at 0%, banks must charge fees to cover the cost of holding your money in an account for you).

    If the government funds the accounts, the tax might be designed to redistribute income, and may be either progressive or regressive (e.g., regressive if you created a tax with terms like the current FICA terms). It would probably be better that whatever redistribution we might want to do via the tax system should be less fragmented, so as to be more visible, and more easily managed and adjusted.

    The problem with health care is that it is managed like a pre-paid expense rather than like insurance. If it were managed like car insurance we might legitimately require people to carry “liability” coverage, to provide for costs that they might incur but not be able to pay for, and which would be shifted onto others; but coverage for routine or minor costs should be optional, like the collision and comprehensive portion of car insurance. Different people might choose different deductibles or coverages, based on their health and financial situations. There is no need for government to require a millionaire to buy insurance for a $10,000 event; nor is there a need or legitimate moral basis for government to require a healthy 25-year-old of limited means to pay a lot of money to insure against the sorts of ills that befall many 65-year-olds.

    And the other problem with health care is that it is paid for with other people’s money. That’s how we got the $16 muffins.

    Reply

  73. Arn-Finn Says:

    Hi Warren!

    I found your webpage through pragcap.com.

    Where do I start?

    Well, I live in Sweden, one of the countries in Europe which has “balanced the budget” since the national financial crisis in the 1990s; A real estate bubble deflated and the biggest banks became insolvent, after that, twenty years of strict fiscal policies followed. During that period Sweden has experienced government “surpluses” a couple of times, and right now I can identify what you have mentioned in your book (I have also noticed an article about it over at pragcap.com) – the massive credit expansion on top of the surpluses. Households are more in debt than they ever have been in before. It seems to me that something bigger than the crisis in 1990s is growing and lurking in the behind. I wonder what is going on? I can not make heads or tails anymore what my country is trying to achieve? I notice that we have very high taxes, but still recurring centralisation of public services (health care, railway maintenance etc.), downsizing of police forces, fire department and so on. We are having all the hyper-modern malls (people have newer cars and go into debt to buy houses) but I can not even walk my own street at night because the risk of robbery.

    In what context should I try to look to see the rationality in the governments and central banks way to handle business?

    The ruling party in Sweden started a reform of its ideology about ten years ago, before that they where heavily inspired by the anglo-american tradition as we know it through Thatcher and Reagan (less public spending, lower taxes). Today the ruling pary state that they are a welfare-party and will always try to “balance the budget”.

    Why did they make that change?

    Best regards, Arn-Finn

    Reply

    WARREN MOSLER Reply:

    It worked politically for some group who then continued to exploit that trend for further political gain?

    :(

    Reply

    Arn-Finn Reply:

    @WARREN MOSLER,

    I really hope that is not the truth :(

    Reply

  74. Dan Furlano Says:

    Can someone talk about the Fed targeting NGDP?

    http://krugman.blogs.nytimes.com/

    Reply

  75. John O'Connell Says:

    I’m trying to see if I can figure out the proper size deficit for this year, or even for last year, in the US.

    I got BEA stats from their web site for 2010:

    Federal deficit: $1299.0B
    Private Savings: $592.8B
    Trade deficit: $500B

    As you can see, they don’t add up. Non-government savings is $1092.8, government deficit is $1299. They’re supposed to be equal, as I understand it. The discrepancy is $206.2B.

    Deos that matter, or is it just statistical error? Or did BEA count or report things incorrectly?

    Anyway, then, if unemployment was 9%, and we wanted a fiscal policy that would raise employment by, say 5 million people starting now and from now on, how much should the deficit be (annual rate) starting this month?

    First off, we have to have enough deficit to cover non-government savings, just to tread water (equilibrium). That’s $500B + $592B = $1092B.

    If the average wage is $50,000, the economy would need $250B of stimulus to hire 5 million more people, so $1092B + $250B = $1342B should do it, no? Assuming, of course, that non-government saving isn’t going to change very much from year to year, which may not be a great assumption, but there are also automatic stabilizers.

    Does it matter whether government simply hires 5 million people or if it cuts taxes by $250B, or if it increases transfer payments by $250B? I’m thinking if it directly hires people, that does the job right there, whereas if it injects the money into the economy by one of the other ways, some of it will be saved right off the bat and not go to increase aggregate demand.

    Oh, but then there is the multiplier effect. 5 million new workers are going to spend most of that $250B of their wages, and whoever sells them stuff is going to spend most of the proceeds, and so on. If everyone saves even 20% (private savings + increased imports), then $1T of consumption spending is added to GDP, and that should translate into lots more than 5 million jobs, maybe 10-15 million?

    What about lags? I can’t imagine that we could hire 5 million people in a day, assuming this were done by a tax cut. How long would it take for the $250B (annual) to result in 5 million jobs? Or 10 million or 15 million, depending on the multiplier? A month? A year? 4 years?

    Is there anything wrong with this math? In the past couple years we have done much larger “stimulus” programs with far less hiring. Did the money go to the wrong places (e.g., bank capital rather than consumer pockets)? Was the increased deficit more than offset by lower private sector income/spending, due to recession?

    Reply

    WARREN MOSLER Reply:

    It’s got lots of assumptions that won’t necessarily old up

    Reply

    John O'Connell Reply:

    @WARREN MOSLER,

    Well, that’s economics, isn’t it? Got any suggestions for better assumptions?

    Reply

    beowulf Reply:

    @John O’Connell,

    govt sector is more tha just “federal deficit”, don’t forget states, counties, cities, school boards and innummerable govt authorities with revenue bond power. State/local govt are usually required to have a balanced operating budget but usually run deficits in their capital budgets.

    Reply

    John O'Connell Reply:

    @beowulf,

    No, I mean “government” in the MMT sense, as the issuer of the currency. State and local governments are users of the currency, like you and me.

    Reply

    beowulf Reply:

    @John O’Connell,
    Be that as it may, you said “As you can see, they don’t add up” and I was simply explaining they didn’t add up because BEA’s was showing govt sector numbers ex state/local.

    State and local govts are currency users but can be counted as part of the currency issuing govt sector since Uncle Sam backstops them both financially (via $500B a year in revenue sharing) and operationally (Disaster relief is managed and funded through FEMA).

    WARREN MOSLER Reply:

    but they do tax, so not quite the same

    Matt Franko Reply:

    @John O’Connell, John, Reply to first part of your post here. I dont think that what you are comparing is actually the ‘sectoral balances’ equation. There is some nuance around there.

    Sectoral balance equation from Bill M: The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

    the hard part is apparently trying to measure (S – I); what I think is called the private balance. (I at one point thought this would be ‘bank credit’ but I was wrong) It is best just to think of this as the difference between the fiscal deficit minus the trade deficit. By this equation is how you find it. apparently we have some good data/cut and dry data on the fiscal deficit and net exports but (S – I) is trickier and apparently has never been technically measured with any accuracy.

    Resp,

    Reply

    John O'Connell Reply:

    @Matt Franko,

    BEA had an alternative measure, using FFA. That was higher. I’ll calculate it from the other two, then.

    Thanks.

    Reply

    John O'Connell Reply:

    @Matt Franko,

    These equations are only good for equilibrium, right? But we’re never in equilibrium. The economy is always either growing or shrinking, employment is changing, trade is changing, spending and taxing are changing. Could that account for part of the discrepancy?

    Anyway, I like the idea of using what we have a good measurement of, and calculating what can’t be measured well.

    Reply

    WARREN MOSLER Reply:

    they are ex poste

    Peter D Reply:

    @John O’Connell,

    See if this helps. I’ve done the exercise once:
    https://docs.google.com/spreadsheet/ccc?key=0Amy2PQkrCUXPdHdmcUlXNTJOaVR1R3I2RXU5RGhBRXc&hl=en_US#gid=0
    My discrepancy for 2010-II (last column) is about $70bn. And historically much less than that.

    Reply

    Sergei Reply:

    @John O’Connell,

    Private Savings: $592.8B

    Private or personal?!

    Reply

    John O'Connell Reply:

    @Sergei,

    “Personal Saving” is the label in BEA. I take it to mean “net non-government domestic savings”.

    Reply

    Sergei Reply:

    @John O’Connell,

    “Personal Saving” is the label in BEA. I take it to mean “net non-government domestic savings”.

    No, it is just one part of non-government domestic savings.

  76. John O'Connell Says:

    Next try: 2011 numbers, 2 quarters worth, less precise

    Federal Deficit: about $106B / month
    Trade deficit: about $47B / month
    Non-govt domestic savings: 106-47=$59B a month

    Average wage $4,000 a month ($48,000 annual)
    5 million jobs: 5 x 4 x 1000 x 1,000,000 = $20B a month

    Required deficit for 5 million more jobs $126B / mo

    Or, maybe less, if there is a multiplier. If there is, what is it?

    How does this math look to y’all? How about assumptions?

    OASDI is about $600B a year, $50B a month, so a 40% reduction would give us the $20B / month of additional deficit.

    If we did that, and it worked, how long would it take for the monthly employment data to react?

    Reply

    Matt Franko Reply:

    @John O’Connell, John I think it is better to look at this as a flow like you have here PER MONTH.

    This $59B/mo flow is probably the “breakeven” point where you have NO employment growth and no net household savings as we are exhibiting, all seems to be going to the external sector and the non-govt corporate sector. Ive thought before that these times (if you have to find anything good in these current events) are probably a good ‘laboratory’ and unique conditions to learn a lot about such ‘multipliers’ that occur. As no private credit is being created for all intents (a little lately) and it is all coming down to fiscal and trade deficit.

    Warren’s policy is to just eliminate FICA (Beowulf has those #s per month) as a start and see how it goes that would probably go a long way to increase employment to better levels. Perhaps eliminating FICA would result in a higher flow than you have modeled here but that is not a bad thing as outcomes were not even near the best leading up to the current debacle economy.

    Good mental exercise you have going here probably… Resp,

    Reply

  77. Butch Busselle Says:

    Is it not fair to say that once a government and a currency are established that money required to pay taxes comes solely from that government’s spending?

    Thank you for the work you do.

    Butch

    Reply

    John O'Connell Reply:

    @Butch Busselle,

    Perhaps, in the long run, but in any given finite period the government can run a budget surplus, and the excess of taxes over spending in that period comes from the accumulated savings of the non-government sector, from prior periods.

    And that might be from dissaving of the foreign sector just as well as from the domestic sector, i.e. a trade surplus.

    Reply

  78. jean-marie Says:

    I’ve got a question.
    If producers pay 100 to workers and they sell their products for 110 or banks loan 100 and want 110 back… how do I put this in the MMT framework. I mean in these cases they all want more back then they give out. How do I see this throught MMT glasses…
    thx already

    Reply

    WARREN MOSLER Reply:

    you already see it through mmt glasses.

    is there a further question about it?

    Reply

    jean-marie Reply:

    @WARREN MOSLER, Well, how can such a system work? Where does the not-created difference come from? It can not come from within the system,I guess.Shouldn’t the system get stuck.I mean: I cann’t buy their products and I cann’t sell all my products. Checkmate. The economic world should freeze right there but it keeps going on somehow.To make the bookkeeping balanced I would have to lend/borrow money without interest or produce and sell goods without profits. So confusing…

    Reply

    WARREN MOSLER Reply:

    the assumption is that all income is spent, including profits and interest income.

    the issue is when any income remains unspent. see ‘the 7 deadly innocent frauds’ on this website

    Neil Wilson Reply:

    @jean-marie,

    You are confusing a stock and a flow.

    When a bank lends $100 it is lending a stock of money. That can generate $100s or $1000s of turnover in any time period. Turnover is a flow.

    That turnover is then divided up between the workers, the capitalists and the banks according to their share, and then *they spend it all*.

    Once you understand that a $100 loan creates $1000s of turnover over the life of the loan, it becomes easy to see how everything pays for itself.

    jean-marie Reply:

    @jean-marie,
    @Neil,
    slowly does it… ;-) I’ve been chewing on what you said… If a bank lends 100 that generates at 10% 110 for the bank. How can that generate 1000 when the bank only put out the 100. I mean I could imagine that if the bank put out 1100 and you got 100 that somehow you as a good businessman could round up the other 1000(let’s say mob-style with the gun on the forehead of the others that got the rest of the money) So I’m still confused. Is ‘flow’ the ‘stock’ that goes from one owner to another or is it the process by with 100 gathers 1000 from …the others… the bank…or is it something else that I don’t get yet?

    Neil Wilson Reply:

    @jean-marie,

    If I buy a $100 machine with a bank loan, I can sell $100 of donuts this week, a $100 of donuts next week, and so on.

    I don’t need to borrow any more money to create the turnover.

    You might want to try lecture 8 and 9 from Steve Keen’s latest lecture series. There he builds a private circuit from scratch and shows how it works dynamically.

    http://www.youtube.com/playlist?list=PL0A21A329D01D0CFE

    Hugo Heden Reply:

    @jean-marie,

    First, a loan was extended, $100. This created a new deposit for the borrower, $100. Ok? Let’s say that’s the only deposit in the whole economy — the only money available.

    The borrower spends the money on a “back scratch” (say) from someone (i.e someone works hard to provide the borrower with some goods and services). Ok?

    The money starts circulating. Lots of goods and services are produced and sold. People work to obtain money.

    The borrower will be able to earn some back now and then. Ok?

    The first month, the borrower may (hopefully) be able to pay $1 interest to the bank. There is no guarantee — the borrower can default of course. But still, it is possible to pay it. Ok so far?

    The $1 interest first ends up in the banker’s own deposit account (or rather “share holder equity” then, but whatever.)

    The banker needs goods and services to survive though, so the money is spent back into circulation again.

    There is still $100 dollars “circulating”. Ok?

    The second month, roughly the same things happens. The borrower earns lots of money back (for goods and services). At the end of the month, he pays $1 interest to the banker. (It’s a payment for the service of extending the loan.)

    But the banker spends the dollar out into the economy again, on goods and services. So there will still be $100 circulating in the economy.

    After twelve months, the borrower pays the last $1 interest. The banker needs food and other goods and spends it into the economy again.

    By working hard the borrower can soon earn all those $100 dollars still circulating and repay the loan. The loan contract disappears, and the deposit too. (Perhaps a week late in this example — but still.)

    Nobody defaults etc, it all goes well. The key for this to work is that the banker re-spends the income (interest payments) into the economy. In fact — that everybody re-spends their income. If somebody holds on to funds there will be trouble for the borrower to repay the loan principal.

    jean-marie Reply:

    @jean-marie,
    @hugo OK. Thanks for the step-by-step.If you create 100 and you nobody saves part of it or “pulls it out of circulation” then the 100 can go on circulating. And like you explained somewhere else if the banks asks interest the system is also screwed or it should get ‘injected’ from outside the system.
    @neil so then ‘turnover’ is all the profit that that original 100 gets you? Off to look at that video…
    thx already all. Still nags me though my original example.

  79. jean-marie Says:

    @warren … been reading the 7 deadly sins.
    The department store page 18. If the assumption is that all income(including profit and interest) equals the total goods in the shop … does that not mean that the profit/interest is not a profit/interest?
    I see what you mean( I think) that all income would be enough for buying it all up.And that the issue starts when some income remains unspent. But is not profit/interest (by definition?) an extra above productioncost, above the goods in the departement?
    @niel … much to digest… but what is “turnover” ?

    Reply

    Neil Wilson Reply:

    @jean-marie,

    Turnover is the flow of sales and is expressed in $/unit of time.

    A loan is a stock and is express in $ only.

    Stocks are ‘turned’ over time to create economic activity.

    Reply

    WARREN MOSLER Reply:

    as far as ‘flows’ go, profit and interest are someone’s income, just like wages

    ‘above’ or not, it’s dollars paid to someone who can then spend them

    Reply

    jean-marie Reply:

    @WARREN MOSLER, what I understand..
    profit and interest are someone’s income,just like wages. OK, I understand.
    My not-understanding is in “‘above’ or not, it’s dollars paid to someone who …” If the consumer get’s paid the 100 for their work they cannot pay the 110 to the someone who. It confuses me still or is the abstraction I start with false? If the system is closed and there is someone in the system who wants more back than has been given out…how or where is he gonna get that. I mean that’s what I’ve been taught: you pay your workers 100, they give you 100 chairs and you sell all your chairs for a profit(which contains your income and whatever else you wanna ask as long as you can sell it)But from high up above… all those workers don’t have all the money to buy all the chairs. And then I don’t even start on compound interest, that one keeps going up. I cann’t seem to get my head around that arithmetic problem. Well I’ll read the rest of 7deadly. Maybe it’ll get cleared up….;-)

    Reply

    Neil Wilson Reply:

    @jean-marie,

    The bankers and the capitalists also buy the chairs with their share of the turnover.

    Bankers and capitalist consume too!

    Hugo Heden Reply:

    @jean-marie,

    You are right.

    In a closed system, the aggregate net hoarding must be zero. If there are some agents that manage to run a surplus, others must have run a deficit. Aggregate net profit is zero.

    So, if this private sector is to run a net surplus, there has to be financial assets injected from the outside. For instance from the government.

    Neil Wilson Reply:

    @Hugo,

    Be careful. It’s only when somebody says “I’m not going to spend everything I’ve received” that the *financial* problems start.

    You can still make a profit in a closed private circuit – from the surplus production arising from a fixed stock of capital. But it requires that everybody spend their financial income on real stuff.

    So selling chairs for $110 when they cost $100 to produce works just fine, because the capitalist gets $8 and the banker gets $2 – which they then spend on chairs.

    Hugo Heden Reply:

    @jean-marie,

    Yes, I should perhaps not use the words “profit” and “surplus” sloppily? I’ll modify what I wrote — is this better?

    In a closed system, the aggregate net hoarding (of financial assets) must be zero. If there are some agents that manage to run a (financial) net surplus, others must have run a (financial) deficit. Aggregate net profit financial surplus is zero.

    So, if this private sector is to run a (financial) net surplus, there has to be financial assets injected from the outside. For instance from the government.

    And, on the other hand — as Neil points out — if there is no net accumulation of financial assets (people spend all their income), then this problem does not arise. A constant “money supply” (of say $100) could drive the economy forever, with $-millions of worth of real goods being produced and sold.

    WARREN MOSLER Reply:

    pretty good, except the part about ‘money supply’ as with fiat currency at best it’s tough to define in a way that serves further purpose except net financial assets, maybe?

    jean-marie Reply:

    @jean-marie,

    In a closed system, the aggregate net hoarding (of financial assets) must be zero. If there are some agents that manage to run a (financial) net surplus, others must have run a (financial) deficit. Aggregate net profit financial surplus is zero.

    Let me see if I get this translated into my understanding.In this one closed system …if 1% can get their hands on the net surplus then the 99 have a deficit. Right? I mean it can slide. So if they all together want to run net surplus then it has to come from somewhere outside this closed system, from someone that wasn’t in the system. Okay? So… if ‘aggregate workers-pay’ is 100 and ‘aggregate selling price of productsproduced’ is 120 that extra 20 must come from someone else outside the system? Or the system cann’t get started? So then there is the question how the agents who get the ‘workers-pay’ and the agents who get the money from the ‘sold productsproduced’ are distributed. Are these agents totally seperated, do they overlap and if so by how much? Because if they are totally seperated that means that the input from outside the system goes fully to that group,right? So, if you’re poor you most likely can not save and the richer you are the more you can save… that would almost suggest that government would have to inject money because the rich are rich ;-) Do these things make sense or to put it another way: is this a way a legit way to use MMT to explain rich-poor divisions?

    Hugo Heden Reply:

    @jean-marie,

    Regarding rich-poor-divisions:

    Ok. Say that there is no new net financial assets injected from the outside the private sector. Also, say that some agents accumulate financial assets (they don’t spend all their income).

    The system can still “get started”! All that is needed is that other agents spend **more** than their income. They can do that by running down previously accumulated wealth, or increasing their debt levels, perhaps using real wealth as collateral – perhaps supported by increasing asset prices. Think American households and the housing bubble.

    This is not a healthy strategy though. The aggregate private sector balance sheet expands like a balloon from thin air. Eventually, debtors will be unable to service their debt using their income (which we assume remains constant). No more debt can be taken on.

    A better strategy is for the government to *accommodate* for the private net saving desires by injecting new net financial assets – deficit spending.

    WARREN MOSLER Reply:

    agreed.

    jean-marie Reply:

    @WARREN MOSLER, Another question after reading a bit more… If one needs a external injector(government)of ‘missing’ money to equal the balance would that not mean also that the government just has to put the money in there without asking more back? Because the moment that the government puts it in there through the banks and interest has to be paid to the bank(difference between ‘printing money and distributing it’ or ‘bonds in which the government has to pay extra interest’)… at that moment does not the government become part of the internal system and is not external anymore? Hope I make myself clear…

    Reply

    WARREN MOSLER Reply:

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

    jean-marie Reply:

    @jean-marie,
    OK. I’m reading up on that one. I wonder… Does anyone of you know if there is a neo-marxian translation done to MMT.I mean : to give a MMT technical explanation of the ideas in neo-marxian tradition. Both theories (and others) being non-mainstream…compared to a neo-liberal theory… I would be very interest in that ;-)

    WARREN MOSLER Reply:

    MMT is about value theory with the currency a public monopoly

  80. jean-marie Says:

    Another question…
    In the moneycreation-proces. What is the percentage of money that the government issues ( I guess it must be public funding because in private creation it is mostly always with interest) on with it does not have to pay interest? Is there any statistics on that … for USA or Europe?
    thx already

    Reply

    WARREN MOSLER Reply:

    the inherent reason for paying interest is to support the term structure of rates

    see ‘soft currency economics’ on this website

    Reply

  81. Sigurd Says:

    Why do I sense that it is useless to save money?

    Inflation+taxes eats away my savings every month.

    What can I do?

    What am I supposed to do?

    Reply

    WARREN MOSLER Reply:

    you could buy inflation indexed bonds
    you can also vote for people who support more realistic levels of social security payments so no one unduly suffers from not savings.

    Reply

  82. Surly Says:

    Hi there – am just reading “7…frauds”, thank you for making it available. I had a question about social security – specifically about your point that at a macro level, there is no real life difference between seniors having their SS money parked at the gov’t vs. using it to purchase stock (because those that they purchase stock from will have to then park this money at the gov’t in the form of bonds). I believe this logic holds in a zero-sum marketplace such as the futures market. But stocks are not zero-sum – in other words, seniors would not have to purchase their stock from existing sellers. Depending on the rules, new sellers could be created with the money via stock offerings, either initial or public. I may not be thinking this through properly but I’m curious to hear your explanation/correction. thanks in advance…

    Reply

    WARREN MOSLER Reply:

    this program doesn’t influence a company’s decision to invest or not to invest in real terms, as no aspect of aggregate demand is altered, nor does it influence the mode of finance any company might use.

    Reply

  83. Poomac Oracle Says:

    Is this China’s back door to circumventing dollar denominated trading in the near future?

    http://www.utsandiego.com/news/2011/may/17/new-hk-commodity-exchange-to-give-asia-bigger-role/

    Hong Kong’s new commodity exchange backed by China’s biggest bank and a Russian tycoon began trading Wednesday as the Asian city attempts to challenge established markets in Europe and the U.S.

    Exchange officials said that Asian countries, especially China and India, have been driving demand for global commodities and the new exchange is aimed at helping traders in the region have a bigger say in setting prices. Trading of gold and other major commodities has traditionally been dominated by exchanges in Chicago, New York and London.

    The only product available to trade so far on the Hong Kong Mercantile Exchange is a futures contract for one kilogram of gold with physical delivery in Hong Kong. Some 3,415 contracts worth $163.3 million were traded by late afternoon.

    Reply

    WARREN MOSLER Reply:

    doesn’t matter in any case
    just a numeraire

    Reply

    Vincent Cate Reply:

    @Poomac Oracle, The more the world demands dollars the more the US can supply (create and spend money) without inflation. If the world outside the US stops wanting US dollars and returns them to the US (by buying stuff from the US maybe) then prices in dollars will go way up.

    Reply

    WARREN MOSLER Reply:

    almost sounds like you have read the 7dif?

    Reply

  84. Vincent Cate Says:

    “tell me when we’ve ever had an inflation problem that wasn’t supported by saudi price hikes”

    That when we have inflation oil goes up, like everything else though maybe a bit sooner, does not mean it causes the inflation. Correlation does not prove causation.

    America had hyperinflation in the Revolutionary War and also in the Civil War and it had nothing to do with Saudi price hikes.

    Reply

  85. Vincent Cate Says:

    “what do you do exactly right now to ‘make money’ borrowing at .25%. I have a bank that can do that and it’s not obvious to me.”

    If the inflation is well above the interest rate then many people will be able to borrow and buy things and make a profit. It is not necessary for everyone to be able to do this for there to be a flood of new money that drives up prices.

    Reply

    WARREN MOSLER Reply:

    unfortunately ‘inflation’ is the likes of medical, apparel, hotel rooms, and owner equiv rent, none of which you an buy directly, and all of which can go up without anything you can invest in going up

    Reply

  86. Poomac Oracle Says:

    No government in the world has even a fraction of the money needed to bail out the derivatives market. The only solution is to declare all derivatives contracts null and void where NEITHER party can pay.

    No financial firm practicing due diligence would ever go into these kinds of contracts. They need to lose the entire bet, both sides. Then, maybe be penalized for fraud.

    Reply

    WARREN MOSLER Reply:

    read the 7 deadly innocent frauds on this website?

    Reply

  87. Richard Watterson Says:

    The following is an excerpt from a paper on the Bank of Canada website explaining how their central bank works:

    “With an increase in the amount of credit in the economy, there is an increase in the volume of transactions for goods and services, and thus an increase in the overall demand for money with which to make these transactions. Individual firms and households can satisfy their demand for money by making withdrawals from their accounts at commercial banks, often in the form of bank notes. But what do commercial banks do when they begin to run short of bank notes? They can buy them from the Bank of Canada by selling other assets—in particular, government securities. Thus, when the Bank of Canada increases the volume of bank notes in the economy, in response to the greater demand from commercial banks, it does so by purchasing government securities. Such a balance-sheet transaction for the Bank involves an increase in assets (government securities) and an increase in liabilities (newly issued bank notes).3

    Thus, we can see the connection between the Bank of Canada’s target for the overnight interest rate, the Bank’s balance sheet, and the amount of money circulating in the economy. Changes in the target overnight interest rate lead to changes in other market interest rates and, hence, to changes in the demand for credit, the demand for money, and the demand for bank notes. The Bank accommodates these changes in the demand for bank notes by conducting the required balance-sheet transactions. To some observers it may appear that the Bank can influence both interest rates and the amount of money independently. But this independence is illusory: the Bank’s policy decision to change the target overnight interest rate has a direct effect on the eventual change in the amount of money circulating in the economy. There is only one instrument for monetary policy.”

    I know you differ with the bank’s position on their ability to control inflation (they also state elsewhere in the paper that government collection of taxes “funds” spending). My question is not about inflation per se but where the banking system fits in with respect to the money supply. From your book it is clear that they extend credit and it is offset by the resulting deposits in the system as a result of that credit for no net gain in aggregate currency levels. So, what happens when a loan is in default or when there are a lot of loans in default across the system? Does the bank’s asset then becomes a liability and suck the net level of currency in the economy (money supply) down to compensate?

    I imagine that the banks extend credit and allow the productive capacity to increase as consumer’s use of credit stimulates demand and producers can use the proceeds of increased earnings as well as credit to increase productive capacity.

    Reply

    WARREN MOSLER Reply:

    depends on how you define ‘money supply’ but in any case bank losses lower a bank’s private equity capital

    Reply

    Richard Watterson Reply:

    @WARREN MOSLER, I guess what I refer to as ‘money supply’ is money that figures in the balance of productive output and the money available to purchase that output. A surplus is inflationary, a deficit is deflationary. I get this from your book unless I am mistaken; I do intend to read it again. Now that we know what money I am talking about, when a loan defaults and the bank’s private equity capital is reduced what happens to the aggregate money supply as defined above? What does widespread loan defaults do to the money available/productive capacity ratio? I suspect this is the same as destroying money (as taxes do) and thus will have a deflationary effect on the economy unless something is done (increase public spending/cut taxes) to counter it. My assertion which I am asking you to analyze, is that the widespread default in mortgages is deflationary in and of itself.

    Reply

    WARREN MOSLER Reply:

    sorry, can’t quite grasp exactly what that ‘money supply’ is in the real world as i see it. spending power maybe?

    as per my book, it’s about total spending. it’s either enough to keep everyone willing and able to work or something less than that.

    when a loan defaults and a bank’s capital is reduced probably nothing happens to total spending/aggregate demand?

    widespread defaults could cause banks to cut back on lending to people who want to borrow to spend, as has been the case since 2008 or so, which can keep unemployment high unless for any give size govt taxes are that much lower to make up for the ‘spending gap’

  88. Richard Watterson Says:

    Yes, you were able to overcome my lack of skill in explaining my meaning so what I meant to say by money supply is total spending. I am asking this question because I am trying to better understand banks and the horizontal flow of money, I will keep reading/re-reading. Thank you.

    On the PBS show ‘Frontline’ episode regarding the events leading up to the collapse of 2008 an interviewee, Sanyatjit Das identified as a derivatives trader made the following statement: “each time a bank makes a loan, regulations require them to set aside a certain amount of capital as reserves in case the loan defaults”. It appears from your book that indeed this is not the case and he is wrong. The banks are not reserve constrained when they make loans as they obtain the reserves in the fed funds market. The point being made during this segment of the show was that to avoid a costly sidelining of capital, banks created credit default swaps to ‘insure’ loans against default thus obviating their representation of such a contingent reserve requirement. If indeed reserves are not constraining to loan origination then his explanation is nonsense and the explanation they give for the original impetus for credit default swaps is nonsense and the public is left still with no understanding of what is going on. Is my analysis of this correct in your view?

    Reply

    Tom Hickey Reply:

    @Richard Watterson,

    You’re confusing bank reserves and a reserve against loss (loan loss reserves). Two different things entirely.

    Reply

    WARREN MOSLER Reply:

    right, the ‘reserves’ against loan loss are a ‘haircut’ to capital, not funds in fed accounts

    Reply

    Richard Watterson Reply:

    @WARREN MOSLER, Now that I am straightened out on that, does this mean that the ability to loan is limited by capital available for the aforementioned haircut? I’m sorry if I seem impossibly obtuse but my lack of previous education and/or mal-education in this is seriously hampering me.

    WARREN MOSLER Reply:

    yes, at any given time a bank’s expansion is limited by its capital. Not to say it can’t raise capital if it can earn an ‘attractive’ return on it.

  89. wdp_in_dallas Says:

    First, thanks for coming to see us Saturday. It was the highlight of my week.

    Second, any thought to getting “7 Deadly…” on the Kindle and/or and MP3 audible version. You could perhaps read it yourself.

    Reply

    WARREN MOSLER Reply:

    good idea and good to be there!

    Reply

  90. Marco Says:

    Good afternoon mr. Mosler.
    I’m very interested in MMT, i’m a fan and i watched your speech at Venice on you tube. I read the economic assay of the journalist Paolo Barnard (The Greatest Crime) written under your advice.
    I’d like to ask you a question. Some arrogant people say that also in America the creation of money doesn’t belong to the government but to the FED, which deliver money buying the debt titles on the secondary market. I know that’s absolutely wrong and also you, Stiglitz, Greenspan and Bernanke say that the government create the money in first instance.
    Is there any reference in USA laws that explain the mechanism of creation of money by the government ?
    Best regards,
    you are my favourite economist.

    Reply

    WARREN MOSLER Reply:

    remember, Congress is the boss of the Fed and the Tsy. They are both agents of Congress!

    Reply

    WARREN MOSLER Reply:

    and thanks!!!

    Reply

  91. Marco Says:

    Thank you mr. Mosler.
    I’m italian and i’m really worried about the situation of our economy. We are no longer owner of a sovereign currency but few people understand the euro’s disaster.
    Thank you very much for your speach at Rimini and Cagliari. I’ll watch it when it will uploaded on you tube. My father and I have payed for the Rimini’s congress but unfortunately we could not come.
    I hope that my country returns to be a great economy. Every country should have a sovereign currency used for the good of all citizens. I think that’s fundamental for our freedom and democracy. I’m very sorry for the victims of the hurricane in New York.
    Goodbye and sorry for bother you…

    Reply

    WARREN MOSLER Reply:

    thanks for your support and standing by to help as needed!

    Reply

  92. Cezary Wojcik Says:

    Hello Sir,
    Could you direct me to materials explaining in more detail the Full Employment Guarantee Program ? The idea is great but i have some concerns. e.g. whether or not FEG workers take away the private sector contracts ? If not, what kind of projects FEG’s can do better than private sector firms ?

    Kind regards
    Cezary

    Reply

    Adam (ak) Reply:

    @Cezary Wojcik,

    The basic idea is that the impact on private sector jobs should be minimal because workers would be hired at the minimal wage (but above the dole level). The program could be considered an extension to existing public works, possibly geared towards labour-intensive environmental remediation and improvements to public infrastructure. It is difficult for private sector firms to make profits on delivering public goods therefore there will be very little competition. Of course there is much more what can be done, depending on local conditions – such as providing services to elderly and disabled people etc.

    I would strongly recommend contacting prof Bill Mitchell (Charles Darwin University, Australia) to get more details of the Job Guarantee proposal. There are some posts in his blog explaining the proposal in more detail
    http://bilbo.economicoutlook.net/blog/

    The right person to contact in Europe would probably be prof Joan Muysken.
    http://www.merit.unu.edu/about/profile.php?id=41

    Reply

    Cezary Wojcik Reply:

    @Adam (ak),
    Adam,
    Thank you for references. I definitely need more clarity in JG field.

    Reply

    WARREN MOSLER Reply:

    start with ‘full employment and price stability’ on this website?

    Reply

    Cezary Wojcik Reply:

    @WARREN MOSLER,
    Thank you for recommendation. It is so counter-inuitive to understand that any contribution to a theory (body of knowledge) starts with understanding this piece of knowledge as good as its creator.

    Reply

    WARREN MOSLER Reply:

    Just keep in mind the currency itself functions as a (simple) public monopoly.
    ;)

    Also, is this you?
    “associate professor of economics at Warsaw School of Economics and Polish Academy of Sciences”

    Cezary Wojcik Reply:

    @Cezary Wojcik,
    No, that’s the other guy. I’m mechanical engineer MSc from Warsaw Technical University.

    WARREN MOSLER Reply:

    Even better!

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  94. RVMarkov Says:

    Is government debt in foreign currency of around 8% of the country’s GDP too much of a burden for the government operating in a modern monetary system? Any suggestions concerning such government’s economic and fiscal policy?

    Reply

    WARREN MOSLER Reply:

    the breaking point used to be something like 30%, with maybe 20% considered ‘high’ but it’s been a long time since I’ve looked

    Reply

    RVMarkov Reply:

    @WARREN MOSLER,
    So Bulgaria is good to go. :-)

    Reply

    WARREN MOSLER Reply:

    I was once at a meeting with their central bankers hearing how bad it was. I asked if they would consider selling the CB.
    They said they’d look into it…

  95. RyanVMarkov Says:

    Wow, what year was that, Warren?

    I think in all Bulgarian history the Bulgarian currency, the Lev, was always pegged to something, or was on fixed exchange rate. We have never had a real fiat currency with flexible exchange rate. I have to make some research. Maybe Pavlina would know better.

    Reply

    WARREN MOSLER Reply:

    Don’t remember the year. Pavlina was with me at the session

    Reply

  96. Ed Says:

    question: page 17 in 7dif
    “There is no numerical limit to how
    much money our government can spend, whenever it wants
    to spend. (This includes making interest payments, as well as
    Social Security and Medicare payments.”

    Isn’t there a law that has a “debt ceiling”? So if the trsy must issue a bond to the fed for deficit cash, in theory,wouldn’t this cause a self imposed limit on govt spending once debt ceiling is reached?

    Reply

    WARREN MOSLER Reply:

    yes, there can always be self imposed constraints of all sorts.
    like the fed closes at 3pm so the govt can only spend before that, etc.

    Reply

  97. RVMarkov Says:

    It’s clear that you can buy oil with any currency, that’s way is the Fx market for, but isn’t the fact that oil is priced in US dollars helping the value of the dollar on Fx market, hence the real terms of trade of USA? I mean when everybody is looking to buy the dollar to get the oil?

    Reply

    WARREN MOSLER Reply:

    it helps the dollar to the extent it causes people to desire to net save in dollars.
    not sure what extent that is.

    and note that the price of oil fluctuates continuously as expressed in any currency, including dollars. it’s not fixed to the dollar

    Reply

    RVMarkov Reply:

    @WARREN MOSLER,

    I understand, but historically oil prices are going up, aren’t they? So this also makes the dollar more desirable?

    Reply

    WARREN MOSLER Reply:

    it means the same dollar buys less oil so it’s less valuable in that sense

    RVMarkov Reply:

    @RVMarkov,

    It buys less oil, but it costs nothing for the federal government to create it, so it doesn’t really matter?
    While the rest of the world, especially the coil poor countries, gets the dollar only if it sells something to the US?

    WARREN MOSLER Reply:

    yes, the world’s desire to horde dollars is roughly our oil and as imports, so it’s not wrong to say we’re currently getting ‘free oil’

    but that’s not necessarily because oil is priced in dollars. it’s more because the rest of the world wants to net export to us

    RVMarkov Reply:

    @WARREN MOSLER,

    Thank you, Warren.

    Reply

    Ed Reply:

    @RVMarkov, oil is a beast unto itself in the whole monetary scheme. it would be a lot easier printing money and dispersing it around for use, except the first thing the banksters do when they hear avg folks might have some extra money in their pockets, is start going crazy in the futures markets bidding up the prices on oil contracts…with the low interst fed money…..:-)

    Ed Reply:

    @RVMarkov, oh, btw:
    “It buys less oil, but it costs nothing for the federal government to create it, so it doesn’t really matter?”

    I like the sound of this, but when dollars are “created” there is a corresponding govt debt created as well.

    Now if the govt debt doesn’t matter, then don’t create the debt in the first place, just print the money!(in a managed fashion of course)……:-)

  98. Cezary Wojcik Says:

    Some households and firms have savings accounts bearing interest as well hold T-bonds. This a goverment policy.

    Do you see a public purpose in paying interest on savings accounts in banks and US treasuries when aggregate demand in US economy is too low to fully utilize US economy production capacity ?

    Reply

  99. RAVMarkov Says:

    Warren, no more free Valance reports?;-)

    Reply

    WARREN MOSLER Reply:

    over to michael. no change I know of

    Reply

    RVMarkov Reply:

    @WARREN MOSLER,

    Don’t know Michael, but thank you!

    Reply

  100. Marco Cavedon Says:

    Hello mr Mosler. I’m spreading MMT in my contry (Italy).
    Can you tell me some references in law or regulations which describe the mechanisms of money creation in contry like USA, Japan or Italy ?
    Because when peole ask me more information, i’d like to be more accurate that i can.

    Reply

    WARREN MOSLER Reply:

    I believe Mr. Franko who responds to this page has been collecting those, so let’s see if he posts this for you.

    Reply

  101. RVMarkov Says:

    Bank A issues $100 loan to a person, which automatically creates deposit at bank A worth $100. Bank A is in balance – it has $100 in assets (the loan) and $100 liabilities (the deposit). At central bank level there are zero assets and liabilities concerning bank’s A transactions so far.

    Next, the person withdraws the $100 from his account at bank A in cash, buys Euros (in cash)and sends the Euros in a briefcase abroad to be buried somewhere in the ground. What happened on all levels?

    Reply

    WARREN MOSLER Reply:

    the bank gets the 100 euro cash from the ecb and the ecb debits the bank’s reserve account for 100 euro, even if that makes the balance negative, which then must be collateralized. and the loan may qualify as collateral.

    Reply

    RVMarkov Reply:

    @WARREN MOSLER,

    Thank you. I asked this question, because of what happened in Bulgaria in the years 1990-1996, right after the totalitarian regime fell.

    Before 1990 there weren’t any private BG banks. In the beginning of 1990 the first private commercial banks were created even before the establishment of the new banking law, which was accepted later that same year. That law gave full independence of Bulgarian central bank from the Bulgarian governments – mistake too. When the first Bulgarian private commercial banks were created, they used loans from the existing state banks, which loans were the private capital for these commercial banks?!?

    Then the many owners-bank executives gave a lot of bad credits to themselves or connected to them people, bought US dollars with them and left the country, bankrupting the banks and sending the BG lev to hell. The amount of these bad credits (actually criminal stealing) was 40% of Bulgarian GDP for 1995.

    In 1996-1997 the BG lev, which was fiat currency under flexible exchange rate, fell to 3000 leva for $1. The then Bulgarian government fell, people were burning buildings in the center of the capital Sofia and in 1997 the new Bulgarian currency board was introduced and still in Bulgaria today, fixing the BG lev to the euro 1.95 leva = 1 euro.

    Reply

    WARREN MOSLER Reply:

    good info, thanks!!!

  102. Ronald Gaspard Says:

    The “National Debt” is the acculturation of the annual deficits. Since it isn’t owed to anyone, I would carry it as a negative asset on the books.

    Bonds issued by the government are deposits; I would carry them on the books as liabilities.

    There is no reason for the two accounts to balance each other. Do they? Why?

    Reply

    WARREN MOSLER Reply:

    yes, because the tsy is required to issue and sell securities when it spends in excess of tax payments

    Reply

    Ronald Gaspard Reply:

    @WARREN MOSLER, But it is artificial.

    Thank you.

    Reply

  103. Richard Watterson Says:

    I admit I don’t understand bonds. I have read the 7 book. I understood everything except the bio part and the bond wheeling dealing. I think it is upbringing, when you grow up in a poor world you value real goods and think it is the same as money. But anyway.

    Under quant. easing the Fed buys treasury bonds from banks. Where do the banks get the bonds? Do they just get to sell government bonds willy nilly as they see fit? Don’t they first have to buy them from the treasury? Could I just go stand on a street corner and whisper to passers by, “psst, hey buddy; hows about I sell you an obligation my neighbor will have to pay off (only he don’t know about it).”

    Reply

    WARREN MOSLER Reply:

    yes, someone in the economy has to buy the bonds from the tsy before they can be resold them

    Reply

    Richard Watterson Reply:

    @WARREN MOSLER, Ok, so banks at some point buy tsy bonds. Fed comes along and buys them, why do the banks need this cash? Does it go to meet reserve requirement? Don’t the bonds that they just sold count toward their capital? Won’t the cash they just got also count toward capital? I guess I can’t see how the cash they get materially changes their situation except that now they have cash for arbitrage as some has pointed out. Ostensibly the fed bond buying is supposed to help unconstipate their lending, I just don’t see how, but maybe I am trying to make sense of the insensible. Is this what MMT dooms us to, no more blissfull ignorance?

    Reply

    Nihat Reply:

    no more blissfull ignorance?

    Yeah, kinda. I like the description.

    WARREN MOSLER Reply:

    right, banks don’t need the reserve balances. in fact, at the macro level they serve in many ways as a ‘bank tax’ imposed by the fed.

  104. Richard Watterson Says:

    @Richard Watterson, Well nevermind I guess. The dummy just found on the site “Quant. easing for dummies”. I have to say frustration is off the scale after watching “Meatheads, The Press” and chief meathead David Gregory go over the debt and calculating each households share. I was at my daughter’s house and asked her if she knew what her share of the national debt was. She had no idea. I said, “add up all your dollar possessions, THAT is your share. If they say they want to pay off the debt it means they want to take it”. Wealth transfer means middle class pays off their share and ends up penniless while the favored few keep their “share”. Every time I express this to someone they act like I am a raving idiot.

    Reply

    Nihat Reply:

    @Richard Watterson, yeah, I have the same feeling that when meatheads open their mouths about debt and paying it off, I hear “we’re going out of business.”

    Reply

  105. SMOB Says:

    Hi,

    Could you please share your comments on Bernard A. Lietaer Monetary Blind Spot (http://www.youtube.com/watch?v=OfMbYllbN6c&list=PL1765FDF80D086BB5). Though he says MMT (Modern Monetary Theory) is correct, he does share his view that he does not agree with it because all MMT does is change the person driving the car rather than address the systemic problem within the structure.

    Reply

    WARREN MOSLER Reply:

    mmt doesn’t say you can’t change systemic problems

    Reply

  106. Marco Cavedon Says:

    Hello Mr Mosler.
    I’ve read your last article about the Europe, USA and Japan.
    The eurozone’s deficits cannot be higher, because with this system the solvency is a real problem and also the help of the Mario Draghi’s program doesn’t solve any problem, because in any case is passive money.
    As Paolo Barnard correctly says the Euro is a criminal system created for the only benefits of the rentiers.
    What’s your opinion ?

    Reply

  107. SMOB Says:

    The productivity of the non-farm business sector in the US has been increasing since the 1980′s while the real hourly wage has been decreasing, why is that? Thank You

    Reply

    Tom Hickey Reply:

    @SMOB,

    If firm profits have been rising and not wages, then owners’ share is outpacing labor share, so it’s distributional.

    On the other hand, firms claim that worker compensation is the same. What has changed is the ratio of wages and benefits. As benefit costs, chiefly health, have risen, wages have been cut to compensate.

    Reply

  108. pebird Says:

    Why are comments on posts off?

    The Consulier was NOT one of the 50 worst cars. Not bad looking for 1980s.

    Reply

    Willie Lomax Reply:

    Pebird, Mosler’s bowling alley is getting too crowded, it is population control. I agree, I liked the Consulier, it was great in the 80′s.

    Reply

    Tom Hickey Reply:

    @pebird,

    My thought too.

    Reply

    pebird Reply:

    @pebird, Willie Lomax:

    It does get crowded when is a period of few posts, most of the time there are about 10 to 20 comments. Of course, I do not see the moderated comments, I imagine it is a pain to keep out the riff raff.

    But I like seeing the various opinions of those whom I have a passing acquaintance in the virtual world.

    Might we see a review of the Tesla by Mr. Mosler one day?

    Reply

    pebird Reply:

    @Willie Lomax, Sorry, wasn’t slamming Warren, just wanted to know if it was permanent or a temporary situation.

    Didn’t realize how many spam comments were hitting the site.

    Reply

  109. Marco Cavedon Says:

    What’s your opinion about sovereign dollar in every state of USA ?
    Does anybody propose this ?

    Reply

    Nihat Reply:

    @Marco Cavedon, you mean state’s issuing their own currencies? According to Cornell Law, the constitution empowers the federal government (the congress) to squash such experiments if it decides it doesn’t like them. State Banks’ doing good is talked about though; I think North Dakota comes up as an example.

    Reply

  110. WalidM Says:

    I am certainly enjoying the website output post the comments ban .
    However I am not sure if newcomers will appreciate it as much without direct interaction
    With Warren .

    Reply

    MamMoTh Reply:

    @WalidM,

    Let’s start Occupy Q&A!

    Reply

  111. Andrew Says:

    Why hasn’t the sequester and reduced federal deficit made an noticeable impact on GDP or job creation?

    Reply

    WARREN MOSLER Reply:

    it has
    for example, q1 gdp was revised down to only +1% annualized after a .4 q4

    Reply

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