Tag Archives: MMT

MODERN MONETARY THEORY, Basic Principles – Bill Mitchell.

Any economic system, short of slavery, requires productive resources to be transferred, through free will, taxation, from the non-government sector to the government sector in order to do the work of the latter.

The state, generally through its designated agent, the central bank, is the sole supplier of that which it demands for payment of taxes, it’s fiat currency. The taxpayers do not have the capacity to meet their legal tax obligations defined by the state without the state acting first, spending on goods and services from the non-government sector.

Tax liabilities (not tax payments) function to create sellers of goods and services in exchange for the required state tax credits, the latter which we refer to in common parlance as the state’s currency.

State spending therefore, is constrained by what is offered for sale in response to tax liabilities. Spending by such a government is not operationally constrained by revenues, rather it is constrained by the availability of goods and services to buy in the non-government sector.

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MMT BEDROCK

There can be no net savings of financial assets in the non-government sector without cumulative government deficit spending.

The government, as the currency monopolist, is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) and eliminate mass unemployment.

In accounting terms, the government’s deficit (surplus) is exactly equal at all times to the non-government sector’s surplus (deficit).

There is a tendency in the social media to use the term MMT as a slogan rather than relating to it as a coherent body of academic work in economic theory and practice that has been meticulously developed over more than 25 years.

This tendency manifests in claims that the essence of MMT is that the capacity of the government to fund programs is unlimited and so there is massive scope for all sorts of progressive policies to be introduced.

Basic Principle 1: The beginning of the MMT ‘money story’

Societies that use state money are very different to a barter-type system.

In a monetary society, the state is at the top of the monetary hierarchy. We cannot understand how such a system works unless we understand the functions of the state in this respect.

The MMT ‘money story’ begins with a state desiring to provision itself in order to fulfill the political charter for which it was elected by the people. That meaning applies to democratic systems where the politicians go to the people with a stated mission and the winner forms government.

However, the ’money story’ is not exclusive to democracies;

Any system, short of slavery, requires productive resources to be transferred, through free will, from the non-government sector to the government sector in order to do the work of the latter.

That insight is the beginning of our journey.

Further, the state (generally through its designated agent, the central bank) is the sole supplier of that which it demands for payment of taxes. The taxpayers do not have the capacity to meet their legal tax obligations defined by the state without the state acting first.

But the imposition of the tax liability is an important step in the ‘money story’ to understand. What it means is that the tax liabilities (not tax payments) function to create sellers of goods and services in exchange for the required state tax credits, the latter which we refer to in common parlance as the state’s currency.

So we can think of a currency as being a tax credit with the state.

This provides a further insight that is intrinsic to MMT.

The tax liabilities function to create what we define as unemployment, where people seek work in exchange for the state’s currency.

Thus taxation is a way that the government can elicit productive resources and final goods and services from the non-government sector that it needs to advance its political agenda. It is clear that the non-government sector has to get the currency before it can use it to pay its tax bills.

Where else could the non-government sector get the currency from to meet its legal liabilities to the government, if the latter did not purchase goods and services provided by the non-government sector or make transfers to that sector?

So the state can then provision itself by buying what is being offered for sale with it’s otherwise useless currency.

And thus we understand the basic operations involved.

The state, from inception, as the sole supplier of the funds needed to pay taxes or buy the debt issued by the state, must necessarily impose tax liabilities on the non-government sector before it can spend.

Given that the non-government sector requires fiat currency to pay its taxation liabilities, in the first instance, the imposition of taxes, without a concomitant injection of public spending, by design, creates unemployment (people seeking paid work) in the non-government sector.

The unemployed or idle non-government resources can then be utilised through government spending, which amounts to a transfer of real goods and services from the non-government sector to the government sector.

While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.

Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue.

Conceptualising the relationship between the government and non-government sectors in this way makes it clear that it is government spending that provides the paid work which eliminates the unemployment created by the taxes.

This understanding provides a further insight.

State spending therefore, is constrained by what is offered for sale in response to tax liabilities.

But, importantly, spending by such a government is not operationally constrained by revenues.

Note here that this conclusion does not apply to the 19 Member States of the Eurozone because they surrendered their currency sovereignty and use a foreign currency instead.

Basic Principle 2: The unemployment and Job Guarantee story

In a normal functioning economy, there will always be some unemployment as people move between jobs. Typically this state should be transitory and a low percentage of those willing and available for work. We call this an irreducible level of unemployment and it might be around 1 to 2 per cent, depending on the nation.

Unemployment in excess of that irreducible minimum is called mass unemployment.

And, bringing together the initial insights above we can conclude that unemployment is the evidence that state spending is insufficient to have hired all people that the state’s taxation has caused to become unemployed.

In the Post-World War 2 period where the so-called ‘Keynesian’ consensus operated, mass unemployment was referred to as ’demand-deficient’ unemployment, which described a situation where there is a shortage of jobs overall relative to the willing supply of labour resources (persons and hours) at the current wage levels.

The tag went beyond description though because it indicated that such unemployment arose because of a deficiency in aggregate spending.

Mass unemployment thus varies over the economic cycle, rising when aggregate spending falls below the level needed to fully employ the available workforce and falling when aggregate spending moves closer to the level needed to fully employ the available supply of labour.

This conception is fully consistent with the way MMT characterises mass unemployment. The difference is the emphasis MMT places on the role of government and the operations of the tax liabilities.

Thus, mass unemployment arises because, after the non-government sector has implemented its spending and saving decisions, the level of spending is insufficient to create sales and output commensurate with the provision of jobs necessary to absorb the willing and available supply of labour.

The MMT emphasis is that this jobs shortage arises because for a given state of tax liabilities, government spending is insufficient.

We thus understand that the remedy is to either to spend more into the Non-government sector (which may involve hiring the unemployed directly) and/or reducing the tax liabilities.

Warren Mosler would say that the government should do this until the unemployed transition back to the non-government sector.

His view is that, initially, the government should provision itself as desired to the ’right size’ as explained. And once the government is at it’s desired ‘right size’ the remaining unemployed can be transitioned back to the private sector.

I would express this a little differently by allowing the possibility that the Job Guarantee pool could be a permanent employment location for some workers if they so choose. Having a small fairly rigid buffer doesn’t reduce its price stability features.

I also understand that one could make a case to render these jobs permanent within the non-Job Guarantee part of the public sector, which then relates directly to Warren’s reference to the ‘right size’.

But the point is that the currency-issuing government always chooses the prevailing unemployment once the spending and saving decisions of the non-government sector are implemented.

In the current era, governments use the unemployed as a buffer stock to provide a price anchor for wages in the general economy.

In the ‘Keynesian’ full employment period, governments saw mass unemployment as a policy target to be kept as low as possible within inflation limits they believed existed.

But in the neoliberal era, governments use unemployment as a policy tool to discipline wage demands and soften sales (thus putting a discipline on firms who might concede wage demands).

The unemployed buffer stock approach (sometimes called the NAIRU approach) is the way in which inflation control is managed.

However, the longer people stay unemployed the higher is the skill loss and non-government employers tend to prefer to hire from those already working or who have been unemployed for only short periods of time.

In other words, the disciplining power of unemployment requires that the unemployed constitute a threat to those still in work so that they will moderate their wage demands.

However, over time, the threat from this unemployment pool starts to wane as the unemployed endure skill losses and firms introduce new technologies and processes.

In this case, the so-called NAIRU has to be pushed higher and higher by contractionary fiscal and monetary policy for the same degree of threat to be maintained.

There are also massive costs involved in both income loss and personal pathologies (social exclusion, psychological harm, et) that further compound the overall disadvantages of the unemployment buffer stock price anchor.

On any reasonable grounds, this approach to price stability is very costly and ultimately, unworkable in a modern economy. High and sustained levels of unemployment, ultimately, undermine the social and political stability of a nation, which creates unintended costs that go far beyond those noted above.

The MMT alternative is that the government introduces a Job Guarantee policy to establish an employed buffer stock which provides a superior price anchor than the current policy that uses unemployment as a buffer stock.

Warren sees the employed buffer stock as a means to promote the transition from unemployment to private sector employment.

I see that it can do that but may also be a permanent pool of workers who will never be able to gain private sector employment at current wages. My bias is not to privilege non-government employment over public employment.

But that doesn’t alter the fact that the Job Guarantee is an anti-inflation policy that further renders the positive externalities of higher paying jobs for anyone willing and able to work.

The Job Guarantee is a macroeconomic stability approach, which means it is much more than a simple public sector job creation policy.

As MMT has gained in popularity, there have been a number of different job guarantee proposals coming out of the woodwork, many of which claim to be derived from MMT.

Note the use of the lower case j and g in the previous paragraph.

However, there is only one Job Guarantee in MMT.

The Job Guarantee within MMT is a technical construct designed to replace the mainstream Phillips curve (the tradeoff between unemployment and inflation).

The Job Guarantee is a superior buffer stock mechanism to mass unemployment for maintaining price stability.

And this means, that even if one didn’t hold the philosophical or moral commitment to the ‘right to work’ they would still advocate a Job Guarantee (MMT style) in contradistinction to the NAIRU-approach which uses unemployment as the buffer stock price anchor.

They would have to agree that in efficiency terms, which relates to resource wastage etc, the employment buffer stock approach is superior to the current dominant alternative.

The Job Guarantee disciplines inflation because the government offers anyone a job at a fixed wage that is at the bottom of the wage structure.

In times of inflation pressures, the government can use fiscal policy to redistribute workers from the inflating sector to the fixed price Job Guarantee sector.

Clearly, it is desirable to keep the Job Guarantee buffer stock at a minimum.

And so fiscal policy adjustments can be implemented to keep the Job Guarantee pool at minimum required levels to achieve desired price stability.

Basic Principle 3: The Public Debt story

In trying to understand, the issuance of public debt, we note that funds spent by the State into the non-government sector (for goods and services) is either lost to the economy when taxes are paid, or remains in the economy as savings until used to pay taxes.

That is just a matter of accounting. The ‘savings‘ are stored as financial assets in various forms.

As a matter of accounting between the sectors, a government fiscal deficit (spending that isn’t matched by taxes) adds net financial assets (adding to non government savings) available to the non-government sector and a fiscal surplus has the opposite effect.

The last point requires further explanation as it is crucial to understanding the basis of MMT.

Given the current bias toward (unnecessarily) matching fiscal deficits (spending greater than tax withdrawals) we say that what is commonly termed the ‘public debt’ is really just the accounting record of the savings, the funds spent by the state that have not yet been used to pay taxes.

In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.

The government, as the currency monopolist, is the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) and eliminate mass unemployment.

In accounting terms, the government’s deficit (surplus) is exactly equal at all times the non-government sector’s surplus (deficit).

All this ties in with our previous discussion by allowing us to see the limits on government spending.

It is clear that government spending has to be sufficient to allow taxes to be paid.

In addition, net government spending is required to meet the private desire to save (accumulate net financial assets).

It is also clear that if the Government doesn’t spend enough to cover the taxes to be paid and the non-government sector’s desire to save overall, then the manifestation of this deficiency will be unemployment.

In MMT, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.

Further, fiscal deficits manifest in the non-government sector as actual cash balances in banks and credit balances in reserve accounts and securities (debt) accounts that are maintained by the central bank in the nation.

All commercial banks hold reserves at the central bank as part of the ‘clearing system’, so that all the transactions that occur on a daily basis can be validated and resolved.

The debt accounts record the outstanding government debt in various forms (short-term and long-term) that has been issued to match the fiscal deficits.

If you think about the process through which net government spending initially create an increase in net financial assets in the non-govemment sector you will appreciate that spending effectively involves the government crediting bank accounts in the non-government sector and taxing involves the government marking down bank account balances.

A fiscal deficit means there is a net accretion in these accounts. Initially, after all the transactions are made between government and non-government and within the non-government sector, that net accretion shows up as increases in the banks’ reserve accounts at the central bank.

Interest may or may not be paid on those balances.

If the deficit is matched dollar-for-dollar with debt issuance then the government would debit (mark down) the balances in the reserve accounts (of the banks that were party to the debt purchases directly or through their clients) and credit (mark up) another ‘account’ which we can call ‘outstanding public debt’.

In other words, the debt issuance effectively just results in funds in reserve accounts being transferred to funds in the ‘outstanding public debt’ account.

When specific debt items (bonds) mature (that is, reaches the time that the government has to pay back the principal), a reverse operation would occur.

The ‘outstanding public debt’ account would be debited (marked down) and bank reserves would be credited (marked up).

And if the central bank was to pay market rate of interest on reserve balances (as many are currently doing) then there is functionally no difference between the impact of leaving funds in the reserve accounts as opposed to issuing debt and transferring the funds to the ‘outstanding debt account’.

This also means that traditional open market operations, where the central bank buys and sells public debt to the non-government sector in order to drain or add reserves such that there is an appropriate balance that allows it to maintain its current interest rate target is unnecessary.

Some further points

First, the debt issuance does not fund the net public spending. It just gives the non-government sector an alternative financial asset in which to store its overall saving.

The net spending would occur without the debt being issued.

Second, the funds used by the non-government second to purchase the debt came from past fiscal deficits that had not been taxed away.

Third, if the government was concerned about the interest rate (yield) it was paying on the debt it issues, then the central bank” can always control that yield through appropriate purchases of that debt itself, which influence the price of the assets in the market and thus the yields.

This changes the interest paid by government from the market yield of the debt purchased to the rate paid by the central bank on reserve balances.

Fourth, the central bank can always purchase any debt that the private sector chooses not to purchase via the primary auctions. There may be legislative or regulative rules that apply here but they are creatures of the government anyway.

The last two observations mean that there is never a reason for government bond yields to rise above a level that the government considers to be acceptable.

Which means that a currency issuing government (which is the consolidation of the Treasury and central bank) can always assume the role of its own largest lender and borrow as much as it likes from itself (subject to laws it itself makes etc).

Fifth, governments always have the option of issuing only short-term debt anyway.

There is a distinction between the interest the government pays and the yields on longer term government bonds, as the government can elect to not sell long-term bonds if it doesn’t want to pay those rates. But it might want long-term bond yields to be lower for other reasons, such as the cost to private borrowers for home mortgages.

But even in that instance, the government can use the banking system to fund those at any rate it elects.

Basic Principle 4: The Price Level story

We define ‘inflation’ as a continuous increase in the price level. A once-off rise in prices in not considered to be an inflationary episode.

In MMT, given the currency is a state monopoly, the state becomes the ‘price setter’ because the price level is necessarily a function of the prices paid by government when it spends or the collateral demanded when it lends.

This ties in with the Job Guarantee as a macroeconomic stabilisation framework within MMT. As the government is offering jobs at a fixed price to anyone with a zero bid for their services in the ‘market’, that spending becomes a price anchor.

A continuous increase in the price level will not be the case unless the state keeps bidding for goods and services in the market at the continuously higher prices.

All spending in the economy carries an inflation risk if it tries to compete on a continuous basis for real resources that are currently fully utilised.

We need to understand that a once-off increase in government (or non-government) spending will typically not generate an inflationary episode.

The price level might rise as mark-ups are applied to the higher costs but such an impact is finite.

Typically, there are spare resources available for purchase, and, as such, the inflation risk is low.

But history tells us that this is not necessarily the case. There are well-documented examples where unemployment has been high and there is a concomitantly high inflation rate. Venezuela and Turkey are current examples. The stagflation that beset the West after the OPEC oil price rises in the 1970s is another example.

We understand those examples, within MMT, by realising that, ultimately, the inflation continues because the government paying more for the same ‘basket’ of goods and services, through various means such as indexation policies.

But it should be understood that the ultimate constraint on government spending is not financial but real, the actual resources that are available for sale.

Principle 5: The fiscal sustainability and fiscal space story

In the mainstream macroeconomics, the concept of fiscal sustainability and fiscal space is defined in financial terms.

For example, the IMF defines fiscal space in this way:

“the room in a government’s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability, making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt”

MMT rejects these notions outright.

You cannot define fiscal space or sustainability by some given deficit size relative to GDP or some threshold level of public debt to GDP or any other self-referencing ‘financial’ ratio.

The concept of fiscal sustainability cannot be meaningfully defined in terms of any notion of public solvency. A sovereign government is always solvent (unless it chooses for political reasons not to be!).

The concept of fiscal sustainability will not include any notion of financing imperatives that a sovereign government faces nor invoke the fallacious analogy between a household and the government.

The concept of fiscal sustainability will not include any notion of foreign ‘financing’ limits or worries about foreign ownership of a sovereign government’s debt.

We have learned that:

– a sovereign government is not revenue-constrained, which means that fiscal space cannot be defined in financial terms, the capacity of the sovereign government to mobilise resources depends only on the real resources available to the nation.

But, saying a government can always credit bank accounts and add to bank reserves whenever it sees fit doesn’t mean it should be spending without regard to what the spending is aimed at achieving.

The concept of fiscal sustainability is more appropriately defined in terms of societal goals such as well-being.

For example, fiscal sustainability is directly related to the extent to which labour resources are utilised in the economy.

The goal is to sustain full employment, which is the base case in an efficient economy that seeks to avoid resource wastage.

Once the government assumes its responsibility to achieve and sustain full employment there are specific requirements imposed on its spending:

1. A macroeconomy is in a steady-state (that is, at rest or in equilibrium) when the sum of the spending injections equal the sum of the spending leakages. Whenever this relationship is disturbed (for example, by a change in the level of injections, however sourced), national income adjusts and brings the income-sensitive spending leakages into line with the new level of injections. At that point the system is at rest again.

It should be understood though that the system is in constant flux and equilibrium defined in this way is being continually disturbed. The resulting income changes work to bring the injections and leakages back into balance.

2. The injections come from export spending, investment spending (capital formation) and government spending.

3. The leakages are household saving, taxation and import spending.

4. For every ’agent’ that spends more than their income, another ‘agent’ necessarily spends less than their income.

Any government, corporation, resident or non-resident can run deficits (spending more than they earn). For example, those who spend more than their incomes include households borrowing to purchase houses, businesses borrowing to invest in new capital equipment, and governments that spend more than they extract in taxes. On the other side, households and businesses that save are running surpluses.

5. An economy at rest is not necessarily one that coincides with full employment or has all desired savings realised.

6. When an economy is ‘at rest’ and there is high unemployment there must be a spending gap and unmet saving desires given that mass unemployment is the result of deficient demand (in relation to the spending required to provide enough jobs overall).

7. If there is no dynamic which would lead to an increase in private (or non-government) spending then the only way the economy will increase its level of activity is if there is increased net government spending, this means that the injection via increasing government spending has to more than offset the increased drain (leakage) coming from taxation revenue.

8. To sustain full employment, the fiscal deficit has exactly offset the gap left by non-government leakages being greater than the injections.

If the fiscal deficit is not sufficient, then national income will fall and full employment will be lost. If the government tries to expand the fiscal deficit beyond the full employment limit, then nominal spending will outstrip the capacity of the economy to respond by increasing real output and while income will rise it will be all due to price effects (that is, inflation would occur).

In some cases, a fiscal surplus will be required to sustain full employment without inflation should the non-government injections outstrip the leakages (say if the export sector is particularly strong).

A government operating according to those rules is conducting a sustainable fiscal policy.

The fiscal balance that arises under those conditions is whatever it is.

There is nothing intrinsically good or bad about a fiscal deficit of 2 per cent of GDP, compared to a deficit of 10 per cent of GDP or a fiscal surplus of 3 per cent of GDP.

Assessing fiscal sustainability requires us to understand the context, which means we have to understand the saving and spending decisions of the non-government sector.

This also ties in with the MMT concept of fiscal space, which is about unmet savings desires as evidenced by the existence of mass unemployment.

In a modern monetary economy, fiscal space has nothing to do with what the current fiscal balance is or has been and what the current public debt ratio is or has been.

A sovereign government can purchase any idle resources that are for sale in its own currency, including all idle labour.

The available resources (goods and services) that are for sale in the currency of issue defines how much fiscal space the government has.

Such a government can never run out of funds in pursuing its goal to ensure all available resources are being productively deployed.

So a past deficit poses no particular constraints on what the government can do in the future, except to say that if the deficit has been properly calibrated to sustain full-employment then there will be less to do should the private sector contract.

Basic Principle 6: The currency sovereignty story

To finish the discussion we can now clarify the MMT meaning of currency sovereignty.

Some people seem to think that monetary sovereignty is about being able to buy everything a nation might need to be prosperous.

I note that Warren prefers not to use the term ‘sovereignty’ because in his view it leads to confusions such as the statement in the preceding sentence.

I prefer to use the designation however.

In common parlance, the term relates to the power of the government. But what I think MMT shows is that there is a sharp difference in the capacity of a government has ‘monetary sovereignty’ (defined below) and one that does not.

The Eurozone governments are ‘sovereign’ in the common parlance but not in the MMT parlance because they use a foreign currency.

That is why I prefer to use the term. However, Warren and I agree on the substance that follows.

In MMT, currency-issuing countries that do not borrow in foreign currencies or peg their currencies by any arrangement are sovereign in that currency.

Such a government, which in MMT represents the base case for conduction monetary and fiscal policy:

1. Spends and taxes in its own currency exclusively.

2. Its central bank sets policy interest rate. The preferred setting is at zero per cent.

4. The currency floats.

5. The Government does not borrow in any foreign currency.

Accordingly, that government can purchase anything that is available for sale in that currency including all idle labour.

As a result no productive resources ever need to be idle if they are looking to be used.

Of course, it does not mean that a country devoid of natural resources or dependent on imports for food and energy will generate prosperity just because its government can ensure all productive resources are working.

If no other nation desires the exports of that sort of country then it remains materially poor regardless of how ‘sustainable’ the government’s fiscal policy is.

Conclusion

This post hopefully will serves as a reference guide in one place to the basic principles of MMT as seen through the eyes of Warren and myself.

More MMT on TPPA = CRISIS

Modern Monetary Theory. Japan still to slip into the sea under its central bank debt burden – Bill Mitchell.

The Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT).

President Trump banned a CNN reporter only to find his position overturned by the judicial system. Well CNN is guilty of at least one thing, publishing misleading and alarmist economic reports about Japan. In a CNN Business article last week (November 13, 2018), Japan’s economy has a $5 trillion problem, readers were told that the Bank of Japan has no “dwindling options to juice growth if a new crisis hits” because “it’s now sitting on assets worth more than the country’s entire economy”.

The real story should have been that the Bank of Japan continues to demonstrate the categorical failure of mainstream macroeconomics and, conversely, ratify the core principles of Modern Monetary Theory (MMT).

That is what the Japanese experience since the early 1990s tells us. And all the stories about special cases; cultural peculiarities, closed markets, etc that the mainstream economists wheel out when another one of their predictions about how Japan is about to sink into the sea as a result of its public debt levels, or that interest rates are about to go through the roof because of the on-going and substantial fiscal deficits; or that inflation is about to accelerate because of the massive monetary injections; and more, are just smokescreens to divert our attention from the poverty of their analytical framework.

The Japanese 10-year bond trade is called the ‘widow maker’ because hedge funds who try to short it lose big. The Japanese monetary system is my real-time, non-linear economic laboratory which allows all the key macroeconomic propositions to play out live. And MMT is never very far off the mark. Try juxtaposing New Keynesian theory against Japan, total dissonance.

The same old

At some regular interval, which I guess I could work out if I cared, the media runs a story that goes like this.

First, there is a sensational headline, which usually has some massive monetary figure listed that is so large that it befuddles the reckoning of ordinary citizens (even me) who are used to dealing in 10s not trillions.

Of course, that is the intent. Evoke fear and alarm rather than understanding.

Then the story tells us that the Bank of Japan’s balance sheet has expanded by some massive amount. Okay.

Why is that a problem?

Well hints are provided about the dangers of ‘printing money’ (none ever substantiated), it is all nod-nod, wink-wink sort of stuff.

Then the reader is usually told that the central bank risks insolvency if the bonds go south.

The disconnect in the claims is never made obvious, if the central bank is out there ‘printing’ all this money how can it go broke.

The twain is never met here!

Perhaps the journalist or Op-Ed writer hasn’t twigged to this internal inconsistency.

After all, they are just pushing through an 800-1000 word template and all the usual points have to be made. Forget logic and consistency.

Then the reader is told that the strategy hasn’t worked anyway, inflation remains low and despite low interest rates, economic activity is hardly booming, yet the disconnect between that observation and some of the more salacious claims about hyperinflation etc is also never really made.

The observation that despite considerable efforts by the Bank of Japan to kickstart its inflation rate little progress has been made tells us that monetary policy is a relatively ineffective macroeconomic tool.

Which is counter what the mainstream New Keynesian consensus tells us.

That is the real story here that escapes the journalists and commentators.

Finally, the stories usually touch on the assertion that with so much bond buying and such an enlarged balance sheet, the Bank of Japan is not capable of defending the economy from the next crisis.

And the scaremongering is complete.

The reader isn’t allowed to think that maybe fiscal policy is the main game anyway and its capacity is not impeded by past deficits or enhanced by past surpluses.

In other words, the Japanese government has all the ‘fire power’ it ever needs to respond to a non-government sector spending collapse whether it come from domestic demand or via the export markets.

It can also respond to any natural or unnatural disaster.

And so the reader turns the pages and forgets about all this until some time later when the story is recycled by some other bored journalist who has nothing better to do on that particular day.

That was what was dished up in CNN Business’s latest offering cited in the Introduction.

We read gems like:

1. “An epic bond-buying spree by Japan’s central bank means it’s now sitting on assets worth more than the country’s entire economy.”

2. “following years of money printing aimed at jump starting the country’s stagnant economy”.

3. “The years of heavy stimulus have warped parts of Japan’s financial markets and left the central bank with dwindling options to juice growth if a new crisis hits. But the splurge is unlikely to end anytime soon.”

Note the language, “warped”, “juice”, “splurge”, all loaded to make out something is wrong.

4. “Kuroda has said the bank won’t consider ending the protracted stimulus effort until that goal is reached. Risky strategy. But that may be an impossible task, and continuing the stimulus program indefinitely carries significant risks.”

Which risks?

Come in spinner! Just in time. These type of articles all have to quote some doom merchant from the private sector.

So we get a quote from a person with a Masters degree who has been an accountant and worked for Credit Suisse:

“There are limits to how many assets the Bank of Japan can buy.”

Yes, the bank can only buy what is for sale.

And as long as the Japanese Finance Ministry keeps running fiscal deficits and does not change the unnecessary institutional arrangement of matching those deficits with bond issuance then there will be bonds to buy.

The actual concern here from the commentator is revealed next, the fact the central bank is keeping interest rates low is “making it too hard for commercial banks to make profits.”

So:

Negative interest rates have squeezed their margins, and the huge asset purchases have effectively killed regular trading in the once lucrative bond market.

Ah. The corporate welfare argument. They want public debt because it gives them a risk-free asset to make money from.

And, by way of finale, the restatement of the doom:

The Bank of Japan’s ultra-loose monetary policy also leaves it with little in the way of fire power to help prop up the economy in the event of another big crisis.”

So, Japan slips into the sea … eventually. Sorry Jimi.

Data update – Japan goes on in its merry way.

Defying mainstream macroeconomic predictions, that is …

. . . Bill Mitchell

SOFT CURRENCY ECONOMICS. MMT, The Final Analysis – Warren Mosler.

Modern Monetary Theory, MMT, in a Nutshell – Johnsville * MMT, a quick start guide * Modern Money Theory: Deadly Innocent Fraud #1. Government Must Tax To Spend. – Warren Mosler.

“It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?

Operationally, federal spending is not revenue constrained. All constraints are necessarily self imposed and political. And everyone in Fed operations knows it.

The foundation of MMT is its recognition of the importance of the government’s power to tax, thereby creating a demand for its money, and its monopoly power to print money.

MMT’s full potential and its massive monetary fire power were not locked and loaded until President Nixon took the U.S. off the gold standard on August 15, 1971.”

A rampaging mutant macroeconomic theory called Modern Monetary Theory, or MMT for short, is kicking keisters and smacking down conventional wisdom in economic circles these days. This is because an energized group of MMT economists, bloggers, and their loyal foot soldiers, lead by economists Warren Mosler, Bill Michell, and L. Randall Wray are swarming on the internet.

New MMT disciples are hatching out everywhere. They are like a school of fresh-faced paramedics surrounding a gasping heart attack victim. They seek to present their economic worldview as the definitive first aid for understanding and dealing with the critical issues of growth, unemployment, inflation, budget deficits, and national debt.

MMT is a reformulated blend of some older macroeconomic theories called Chartalism and Functional finance. But, it also adds a fresh dose of monetary accounting for intellectual muscle mass. Chartalism is a school of economic thought that was developed between 1901 and 1905 by German economist Georg F. Knapp with important contributions (1913-1914) from Alfred Mitchell-Innes. Functional finance is an extension of Chartalism, which was developed by economist Abba Lerner in the 1940’s.

However, Chartalism and Functional finance did not directly spawn this new mutant monetary theory. Rather, Modern Monetary Theory had a hot, steamy, Rummy induced, immaculate conception as its creator, Warren Mosler, has stated:

“The origin of MMT is ‘Soft Currency Economics‘ [1993] at http://www.moslereconomics.com which I wrote after spending an hour in the steam room with Don Rumsfeld at the Racquet Club in Chicago, who sent me to Art LajTer, who assigned Mark McNary to work with me to write it. The story is in ‘The 7 Deadly Innocent Frauds of Economic Policy’ [pg 98].

I had never read or even heard of Lerner, Knapp, Inness, Chartalism, and only knew Keynes by reading his quotes published by others. I ‘created’ what became know as ‘MMT’ entirely independently of prior economic thought. It came from my direct experience in actual monetary operations, much of which is also described in the book.

The main takeaways are simply that with the $US and our current monetary arrangements, federal taxes function to regulate demand, and federal borrowing functions to support interest rates, with neither functioning to raise revenue per se. In other words, operationally, federal spending is not revenue constrained. All constraints are necessarily self imposed and political. And everyone in Fed operations knows it.”

The name Modern Monetary Theory was reportedly coined (pun unintended) by Australian economist Bill Mitchell. Mitchell has an MMT blog that gives tough weekly tests in order to make sure that the faithful are paying attention and learning their MMT ABC’s. MMT is not easy to fully comprehend unless you spend some time studying it.

MMT is a broad combination of fiscal, monetary and accounting principles that describe an economy with a floating rate fiat currency administered by a sovereign government.

The foundation of MMT is its recognition of the importance of the government’s power to tax, thereby creating a demand for its money, and its monopoly power to print money.

MMT’s full potential and its massive monetary fire power were not locked and loaded until President Nixon took the U.S. off the gold standard on August 15, 1971.

There is really not that much “theory” in Modern Monetary Theory. MMT is more concerned with explaining the operational realities of modern fiat money. It is the financial X’s and 0’s, the ledger or playbook, of how a sovereign government’s fiscal policies and financial relationships drive an economy. It clarifies the options and outcomes that policy makers face when they are running a tax-driven money monopoly.

Proponents of MMT say that its greatest strength is that it is apolitical.

The lifeblood of MMT doctrine is a government’s fiscal policy (taxing and spending). Taxes are only needed to regulate consumer demand and control inflation, not for revenue. A sovereign government that issues its own floating rate fiat currency is not revenue constrained. In other words, taxes are not needed to fund the government. This point is graphically described by Warren Mosler as follows:

“What happens if you were to go to your local IRS office to pay your taxes with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room he’d take that hard-earned cash you just forked over and throw it in a shredder.

Yes, it gets thrown away [sic]. Destroyed!”

The 7 Deadly Frauds of Economic Policy, page 14, Warren Mosler

Gadzooks!

The delinking of tax revenue from the budget is a critical element that allows MMT to go off the “balanced budget” reservation.

In a fiat money world, a sovereign government’s budget should never be confused with a household budget, or a state budget. Households and U.S. states must live within their means and their budgets must ultimately be balanced. A sovereign government with its own fiat money can never go broke. There is no solvency risk and the United States, for example, will never run out of money.

The monopoly power to print money makes all the difference, as long as it is used wisely.

MMT also asserts that the federal government should net spend, again usually in deficit, to the point where it meets the aggregate savings desire of its population. This is because government budget deficits add to savings. This is a straightforward accounting identity in MMT, not a theory. Warren Mosler put it this way:

“So here’s how it really works, and it could not be simpler: Any $U.S. government deficit exactly EQUALS the total net increase in the holdings ($U.S. financial assets) of the rest of us businesses and households, residents and non-residents what is called the “non-government” sector. In other words, government deficits equal increased “monetary savings” for the rest of us, to the penny. Simply put, government deficits ADD to our savings (to the penny).”

The 7 Deadly Frauds of Economic Policy, page 42, Warren Mosler

Therefore, Treasury bonds, bills and notes are not needed to support fiscal policy (pay for government). The U.S. government bond market is just a relic of the pre-1971 gold standard days. Treasury securities are primarily used by the Fed to regulate interest rates. Mosler simply calls U.S. Treasury securities a “savings account” at the Federal Reserve.

In the U.S., MMTers see the contentious issue of a mounting national debt and continuing budget deficits as a pseudo-problem, or an “accounting mirage.” The quaint notion of the need for a balanced budget is another ancient relic from the old gold standard days, when the supply of money was actually limited. In fact, under MMT, running a federal budget surplus is usually a bad thing and will often lead to a recession.

Under MMT the real problems for a government to address are ensuring growth, reducing unemployment, and controlling inflation. Bill Mitchell noted that, “Full employment and price stability is at the heart of MMT.” A Job Guarantee (JG) model, which is central to MMT, is a key policy tool to help control both inflation and unemployment. Therefore, given the right level of government spending and taxes, combined with a Job Guarantee program; MMTers state emphatically that a nation can achieve full employment along with price stability.

As some background to understand Modern Monetary Theory it is helpful to know a little about its predecessors: Chartalism and Functional Finance.

German economist and statistician Georg Friedrich Knapp published The State Theory of Money in 1905. It was translated into English in 1924. He proposed that we think of money as tokens of the state, and wrote:

“Money is a creature of law. A theory of money must therefore deal with legal history… Perhaps the Latin word “Charta” can bear the sense of ticket or token, and we can form a new but intelligible adjective “Chartal.” Our means of payment have this token, or Chartalform. Among civilized peoples in our day, payments can only be made with pay-tickets or Chartal pieces.”

Alfred Mitchell-Innes only published two articles in the The Banking Law journal. However, MMT economist L. Randall Wray called them the ”best pair of articles on the nature of money written in the twentieth century”. The first, What is Money?, was published in May 1913, and the follow-up, Credit Theory of Money, in December 1914. Mitchell-Innes was published eight years after Knapp’s book, but there is no indication that he was familiar with the German’s work. In the 1913 article Mitchell-Innes wrote:

“One of the popular fallacies in connection with commerce is that in modern days a money-saving device has been introduced called credit and that, before this device was known, all, purchases were paid for in cash, in other words in coins. A careful investigation shows that the precise reverse is true…

Credit is the purchasing power so often mentioned in economic works as being one of the principal attributes of money, and, as I shall try to show, credit and credit alone is money. Credit and not gold or silver is the one property which all men seek, the acquisition of which is the aim and object of all commerce…

There is no question but that credit is far older than cash.”

L. Randall Wray, in his 1998 book, Understanding Modern Money, was the first to link the state money approach of Knapp with the credit money approach of Mitchell-Innes. Modern money is a state token that represents a debt or IOU. The book is an introduction to MMT.

Finally, to finish the historical tour, here is how Abba Lerner’s Functional finance is described by professor Wray:

“Functional Finance rejects completely the traditional doctrines of ‘sound finance’ and the principle of trying to balance the budget over a solar year or any other arbitrary period. In their place it prescribes: first, the adjustment of total spending (by everybody in the economy, including the government) in order to eliminate both unemployment and inflation, using government spending when total spending is too low and taxation when total spending is too high.”

Given its mixed history it is not surprising that MMT has been given different labels. Some economists refer to MMT as a “post-Keynesian” economic theory. L. Randall Wray has used the term “neo-Chartalist”. Warren Mosler stated, “MMT might be more accurately called pre-Keynesian.” Given that Georg Knapp’s work was cited by John Maynard Keynes, the use of “pre-Keynesian” does seem more appropriate than “post-Keynesian”.

But under any category, MMT has been considered fringe or heterodox economics by most mainstream economists. It therefore has been relegated to the equivalent of the economic minor leagues, somewhere below triple-A level. However, that perception is changing.

MMT is slowly seeping into the public policy debate. These days Warren Mosler and others with an MMT viewpoint are frequently being interviewed on business news channels. MMT articles are being published. Recently, Steve Liesman, CNBC’s senior economics reporter, used a Warren Mosler quote to make a point. Liesman said: “As Warren Mosler has said: ‘Because we think we may be the next Greece, we are turning ourselves into the next Japan .

MMT is not easy for many people, including trained economists, to understand. This is probably because of its heavy reliance on accounting principles (debts and credits). Some critics consider MMT nothing more than a twisted Ponzi scheme that is simply “printing prosperity.” Calling MMT a “printing prosperity” scheme, by the way, is the quickest way to send MMTers into spasms of outrage. MMT does not “print prosperty” according to its proponents. The MMT counter argument is:

“It is a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?”

Emotions run hot in the current economic environment, especially on the internet. In some cases the energetic online promoting of MMT has turned into passive aggressive hectoring, hazing, name calling, badgering, and belittling. So be warned, if you write some economic analysis online that disagrees with MMT doctrine you might find yourself attacked and stung by a swarm of MMTers. If you are an economic “expert” and you do not understand monetary basics you may also get mounted on an MMT wall of shame.

A heavyweight Keynesian economist, like Nobel Prize winner Paul Krugman, has felt the sting of MMT. But the quantity and quality of his criticism of MMT, so far, has been featherweight. He could not land a solid glove on the contender, Kid MMT. Krugman only proved that he does not understand MMT, so his criticism was weak (see MMT comments) and his follow-up even weaker. MMT economist James Galbraith did a succinct breakdown of Krugman’s major errors.

Another school of economics feeling the heat from MMT are the Austrians. Austrian economist Robert Murphy recently wrote an article critical of MMT, calling it an “Upside Down World”. MMTers lined up to disassemble and refute Murphy’s essay. Cullen Roach at the Pragmatic Capitalist blog shot back this broadside:

“We now live in a purely fiat world and not the gold standard model in which Mises and many of the great Austrian economists generated their finest work. Therein lies the weakness of the Austrian model. It is based on a monetary system that is no longer applicable to modern fiat monetary systems such as the one that the USA exists in.”

Does MMT really offer a path to prosperty? Or did the ancient Roman, Marcus Cicero (106BC-43BC), have it right when he said: “Endless money forms the sinews of war.”? The debate will only intensify. If you value those green, money-thing, government IOU tokens in your wallet then it pays to learn what all the commotion is about.

MMT, a quick start guide

Because of MMT’s growing popularity it might be helpful to present a quick start guide so beginners can get up to speed and understand some of its fundamental elements. As a starting point here are some basics of Modern Monetary Theory (MMT) compared to some other principles of money and economics that might be considered conventional wisdom or old school wisdom.

1. What is money?

Modern Monetary Theory: Money is a debt or IOU of the state.

“The history of money makes several important points. First, the monetary system did not start with some commodities used as media of exchange, evolving progressively toward precious metals, coins, paper money, and finally credits on books and computers. Credit came first and coins, late comers in the list of monetary instruments, are never pure assets but are always debt instruments IOUs that happen to be stamped on metal...

Monetary instruments are never commodities, rather they are always debts, IOUs, denominated in the socially recognized unit of account. Some of these monetary instruments circulate as “money things” among third parties, but even “money things” are always debts whether they happen to take a physical form such as a gold coin or green paper note.”

Money: An Alternate Story by Eric Lymoigne and L. Randall Wray

“Money is a creature of law”, and, because the state is “guardian of the law”, money is a creature of the state. As Keynes stated:

“The Age of Chartalist or State Money was reached when the State claimed the right to declare what thing should answer as money to the current money-of-account… (Keynes 1930)…”

Chartalism, Stage of Banking, and Liquidity Preference by Eric Tymoigne

John Maynard Keynes in his 1930 Treatise on Money, also stated: “Today all civilized money is, beyond the possibility of dispute, Chartalist.”

Old School Wisdom:

“Money is essentially a device for carrying on business transactions, a mere satellite of commodities, a servant of the processes in the world of goods.”

Joseph Schumpeter, Schumpeter on money, banking and finance… by A. Festre and E. Nasica

Conventional Wisdom:

“Money is any object or record, that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context.”

Wikipedia


2. Why is money needed?

MMT: Money is needed in order to pay taxes.

“Money is created by government spending (or by bank loans, which create deposits). Taxes serve to make us want that money we need it in order to pay taxes.”

The 7 Deadly Frauds of Economic Policy, Warren Mosler

“The inordinate focus of other economists on coins (and especially on government issued coins), market exchange and precious metals, then appears to be misplaced.

The key is debt, and specifically, the ability of the state to impose a tax debt on its subjects; once it has done this, it can choose the form in which subjects can ‘pay’ the tax. While governments could in theory require payment in the form of all the goods and services it requires, this would be quite cumbersome. Thus it becomes instead a debtor to obtain what it requires, and issues a token (hazelwood tally or coin) to indicated the amount of its indebtedness; it then accepts its own token in payment to retire tax liabilities.

Certainly its tokens can also be used as a medium of exchange (and means of debt settlement among private individuals), but this derives from its ability to impose taxes and its willingness to accept its tokens, and indeed is necessitated by imposition of the tax (if one has a tax liability but is not a creditor of the Crown, one must offer things for sale to obtain the Crown’s tokens).”

Money: An Alternate Story by Eric Iymoigne and L. Randall Wray

“Money, in the Chartalist view, derives from obligations (fines, fees, tribute, taxes) imposed by authority; this authority then “spends” by issuing physical representations of its own debts (tallies, notes) demanded by those who are obligated to pay “taxes” to the authority. Once one is indebted to the crown, one must obtain the means of payment accepted by the crown. One can go directly to the crown, offering goods or services to obtain the crown’s tallies, or one can turn to others who have obtained the crown’s tallies, by engaging in “market activity” or by becoming indebted to them. Indeed, “market activity” follows (and follows from) imposition of obligations to pay fees, fines, and taxes in money form.”

A Chartalist Critique of john Locke’s Theory of Property, Accumulation and Money… by Bell, Henry, and Wray

Conventional Wisdom:

Money is needed as a medium of exchange, a unit of account, and a store of value.

Old School Wisdom:

Money is needed because it could “excite the industry of mankind. ”

Thomas Hume, Hume, Money and Civilization… by C. George CajTettzis

Old School Tony Montoya, aka Scarface, Wisdom: money is needed for doing business, settling debts, and emergency situations…

Hector the Toad: So, you got the money? Tony Montana: Yep. You got the stuff? Hector the Toad: Sure I have the stuff. I don’t have it with me here right now. I have it close by.

Tony Montana: Oh… well I don’t have the money either. I have it close by too.

Hector the Toad: Where? Down in your car?

Tony Montana: [lying] Uh… no. Not in the car.

Hector the Toad: No?

Tony Montana: What about you? Where do you keep your stuff‘?

Hector the Toad: Not far.

Tony Montana: I ain’t getting the money unless I see the stuff first.

Hector the Toad: No, no. First the money, then the stuff.

Tony Montana: [after a long tense pause] Okay. You want me to come in, and we start over again?

Hector the Toad: [changing the subject] Where are you from, Tony?

Tony Montana: [getting angry and supicious] What the f **k difference does that make on where I ’m from?

Hector the Toad: Cona, Tony. I ’m just asking just so I know who I ’m doing business with.

Tony Montana: Well, you can know about me when you stop f **king around and start doing business with me, Hector! […]

Hector the Toad: You want to give me the cash, or do I kill your brother first, before I kill you?

Tony Montana: Why don’t you try sticking your head up your ass? See if it fits. […J

Frank Lopez: [pleading] Please Tony, don’t kill me. Please, give me one more chance. I give you $10 million. $10 million! All of it, you can have the whole $10 million. I give you $10 million. I give you all $10 million just to let me go. Come on, Tony, $10 million. It’s in a vault in Spain, we get on a plane and it’s all yours. That’s $10 million just to spare me.

Dialog from Scarface, the movie.

Note: The comment about the $10 million stashed in a Spanish vault highlights a small chink in MMT’s armor. If the taxing power of the sovereign state is sabotaged, or there is widespread tax evasion, then MMT falls apart.


3. Where does money come from?

MMT: The government just credits accounts.

Modern money comes from “nowhere.” Bill Mitchell

Conventional Wisdom: Money comes from the government printing currency and making it legal tender.


4. Government Spending: any limits?

MMT: government spending is not constrained.

“A sovereign government can always spend what it wants. The japanese government, with the highest debt ratio by far (190 per cent or so) has exactly the same capacity to spend as the Australian government which has a public debt ratio around 18 per cent (last time I looked). Both have an unlimited financial capacity to spend.

That is not the same thing as saying they should spend in an unlimited fashion. Clearly they should run deficits sufficiently to close the non-government spending gap. That should be the only fiscal rule they obey.” Bill Mitchell

Conventional Wisdom: government spending should be constrained.

“One option to ensure that we begin to get our fiscal house in order is a balanced budget amendment to the Constitution. I have no doubt that my Republican colleagues will overwhelmingly support this common sense measure and I urge Democrats to as well in order to get our fiscal house in order.”

House Majority Leader Eric Cantor (RVA), June 23th, 2010

5. What is Quantitative Easing?

MMT: It is an asset swap. It is not “printing money” and it is not a very good anti-recession strategy.

“Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system that is, crediting their reserve accounts… So quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell…

Invoking the “evil-sounding” printing money terminology to describe this practice is thus very misleading and probably deliberately so.

All transactions between the Government sector (Treasury and Central Bank) and the non-government sector involve the creation and destruction of net financial assets denominated in the currency of issue. Typically, when the Government buys something from the non-government sector they just credit a bank account somewhere that is, numbers denoting the size of the transaction appear electronically in the banking system.

It is inappropriate to call this process “printing money”. Commentators who use this nomenclature do so because they know it sounds bad! The orthodox (neoliberal) economics approach uses the “printing money” term as equivalent to “inflationary expansion”. If they understood how the modern monetary system actually worked they would never be so crass…

So I don’t think quantitative easing is a sensible anti-recession strategy. The fact that governments are using it now just reflects the Neoliberal bias towards monetary policy over fiscal policy…” Bill Mitchell

Conventional Wisdom: Quantitative Easing is “money printing”

James Grant, editor of Grant’s Interest Rate Observer, says Quantitative Easing is just Money Printing.


6. What is the view on personal debt?

MMT: personal debt is not dangerous.

“Americans today have too much personal debt. False. Private debt adds money to our economy. Though bankruptcies have increased lately, that is due more to the liberalization of bankruptcy laws, rather than to economics. Despite rising debt and bankruptcies, our economy has continued to grow. The evidence is that high private debt has had no negative effect on our economy as a whole, though it can be a problem for any individual.”

Free Money: Plan for Prosperity ©2005 (pg 154), by Rodger Malcolm Mitchell

.
Note: Rodger Mitchell is an MMT extremist. He calls his brand of MMT, “Monetary Sovereignty”. Not all of his views may be in sync with mainstream MMT doctrine.


Conventional Wisdom: too much debt is dangerous.

“The core of our economic problem is, instead, the debt, mainly mortgage debt that households ran up during the bubbleyears of the last decade. Now that the bubble has burst, that debt is acting as a persistent drag on the economy, preventing any real recovery in employment.” Paul Krugman

Old School Wisdom: debt is always dangerous.

“Neither a borrower, nor a lender be”

Polonius speaking in Hamlet, by William Shakespeare

7. What is the view on foreign trade?

MMT: Exporters please just take some more fiat money and everyone will be fat and happy!

“Think of all those cars japan sold to us for under $2,000 years ago. They’ve been holding those dollars in their savings accounts at the Fed (they own US. Treasury securities), and if they now would want to spend those dollars, they would probably have to pay in excess of $20,000 per car to buy cars from us. What can they do about the higher prices? Call the manager and complain? They’ve traded millions of perfectly good cars to us in exchange for credit balances on the Fed’s books that can buy only what we allow them to buy…

We are not dependent on China to buy our securities or in any way fund our spending. Here’s what’s really going on:

Domestic credit creation is funding foreign savings…

Assume you live in the US. and decide to buy a car made in China. You go to a US. bank, get accepted for a loan and spend the funds on the car. You exchanged the borrowed funds for the car, the Chinese car company has a deposit in the bank and the bank has a loan to you and a deposit belonging to the Chinese car company on their books. First, all parties are “happy.” You would rather have the car than the funds, or you would not have bought it, so you are happy. The Chinese car company would rather have the funds than the car, or they would not have sold it, so they are happy. The bank wants loans and deposits, or it wouldn’t have made the loan, so it’s happy.

There is no “imbalance.” Everyone is sitting fat and happy…”

Warren Mosler, The 7 Deadly Frauds of Economic Policy

Old School Wisdom: Trade arrangements will break down if a currency is debased.

“Sorry paleface, Chief say your wampum is no good. We want steel knives and firewater for our beaver pelts.” American Indian reaction after Dutch colonists debase wampum in the 1600’s


See also:

Modern Money Theory: Deadly Innocent Fraud #1. Government Must Tax To Spend. – Warren Mosler

MODERN MONETARY THEORY. Australian inflation data defies mainstream macro predictions, again – Bill Mitchell.

Even though inflation has been benign now for some quarters, the market economists, banks, still think it is about to accelerate and the RBA will be hiking interest rates.

But the reality is quite the opposite.

One of the on-going myths that mainstream (New Keynesian) economists propagate is that monetary policy (adjusting of interest rates) is an effective way to manage the economic cycle. They claim that central banks can effectively manipulate total spending by adjusting the cost of borrowing to increase output and push up the inflation rate. The empirical experience does not accord with those assertions.

Central bankers around the world have been demonstrating how weak monetary policy is in trying to stimulate demand. They have been massively building up their balance sheets through QE to push their inflation rates up without much success.

Further, it has been claimed that a sustained period of low interest rates would be inflationary. Well, again the empirical evidence doesn’t support that claim. The evidence supports the Modern Monetary Theory (MMT) preference for fiscal policy over monetary policy.

. . . Professor Bill Mitchell

Why should someone who is anti-austerity care about debt – Simon Wren-Lewis.

For a country that can create its own currency there is never any necessity to default.

Most of the posts I have written about austerity have been aimed at countering the idea that in a recession you need to bring down government deficits and therefore debt. But what if you accept all that (you are anti-austerity). Why should you care about debt at all? Why do we have fiscal rules based on deficits? Why not spend what the government needs to spend, and not worry that this resulted in a larger budget deficit?

The story often given is that the markets will impose some limit on what the government will be able to borrow, because if debt gets ‘too high’ in relation to GDP markets will start demanding a higher return. You can see why that argument is problematic by asking why interest rates on government debt would need to be higher. The most obvious reason is default risk. But for a country that can create its own currency there is never any necessity to default.

Being anti-austerity does not mean we can forget about debt completely, as long as we are using interest rates rather than fiscal policy to control demand.

. . . Mainly Macro

Modern Monetary Theory. IMF continues to tread the ridiculous path – Bill Mitchell.

Last week, the IMF released its so-called Fiscal Monitor October 2018.

Apparently the British government, which issues its own currency, has ‘shareholders’ who care about its Profit and Loss statement and the flow implications of the latter for the Balance Sheet of the Government.

Anyone who knows anything quickly realises this is a ruse. There is no meaningful application of the ‘finances’ pertaining to a private corporation to the ‘finances’ of a currency-issuing government.

A currency-issuing government’s ‘balance sheet’ provides no help in our understanding of what spending capacities such a government has.

A currency-issuing government can always service any liabilities that are denominated in its own currency.

. . . Professor Bill Mitchell’s blog

The ‘fountain pen of money’ – Bryan Gould. 

Steven Joyce, NZ Minister of Finance, has recommended the formal establishment of a committee to help the Governor of the Reserve Bank decide on where to take interest rates, thereby following the example of other central banks around the world.

Also Grant Robertson, Labour’s shadow Finance Minister, has made a similar recommendation concerning a Monetary Policy Committee to help the Governor, but has also followed another overseas example by supporting an extension of the Governor’s remit, so that he would, in addition to restraining inflation, be required to take account of the desirability of full employment.

Most people believe, and it is a belief assiduously promoted by the banks themselves, that the banks act as intermediaries between those wishing to save and those wishing to borrow, usually on mortgage.

In this view, the banks are benefactors, bringing together those with money to spare and to deposit with them, and those who wish to borrow, often for house purchase.

The banks make their money, so it is said, by charging a higher rate of interest to the borrowers than they pay to the depositors, the equivalent of a small fee for the administrative costs of bringing the parties together.

But this benign view of their operations is inaccurate and misleading. The banks do not lend you on mortgage money deposited with them by someone else.

They lend you money that they themselves create out of nothing, through the stroke of a pen or, today, a computer entry.

The banks make their money, in other words, by charging interest on money that they themselves create. Not surprisingly, they are keen to lend as much as possible.

But the consequences of this bizarre scenario go much further. It is the willingness, not to say keenness, of the banks to lend on mortgage that provides the virtually limitless purchasing power that is constantly bidding up the prices of homes in Auckland and, now, elsewhere.

It is the banks that are fuelling the housing unaffordability crisis, a crisis that is leaving families homeless and widening the gap between rich and poor.

So far, the government has washed its hands of this aspect of the crisis.

It is content to leave the crucial decisions on monetary policy to the Reserve Bank.  That way, it can disclaim responsibility and leave the Governor, himself a banker, to carry the can.

Leaving monetary policy (which is usually just a matter of setting interest rates) to the Reserve Bank is usually applauded as ensuring that it does not become a political football. But monetary policy should have a much greater role than simply restraining inflation and has a huge influence on so many aspects of our national life.

Why should the Government be able to hide behind the Governor of the Reserve Bank and duck responsibility for a policy of the greatest importance to so many Kiwis?  Why should ministers not be held to account in Parliament and to the country for failing to deliver outcomes they were elected to deliver?

It is no surprise a former Governor of the Reserve Bank should seek to defend the banking system from its critics. But in denying the accuracy of points I made in the Herald about how the banks operate, Don Brash accused me of “peddling nonsense”.

I made two basic points. First, I asserted the banks do not, as usually believed, simply act as intermediaries, bringing together savers (or depositors) and borrowers to their mutual benefit.

Secondly, I said the vast majority of new money in circulation is created by the banks “by the stroke of a pen”, and they then make their profits by charging interest on the money they create.

If this is “nonsense”, the “peddlers” include some very distinguished economists.

In my original piece, I referred to a Bank of England research paper, published in the bank’s first Quarterly Bulletin 2014, which describes in detail the process by which banks create money.

“One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. That ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money. Rather than banks lending out deposits that are placed with them, the act of lending creates deposits – the reverse of the sequence typically described in textbooks.

Bank deposits make up the vast majority – 97 per cent of the amount of money currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.

Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money – the so-called ‘money multiplier’ approach, but that is not an accurate description of how money is created in reality.

Banks first decide how much to lend depending on the profitable lending opportunities available to them – which will, crucially, depend on the interest rate set. It is these lending decisions that determine how many bank deposits are created by the banking system.

The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Central Bank.

Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.”

Commercial banks create money, in other words, by placing loans [or credits] into the bank accounts of borrowers. They then charge interest on, and demand security for and repayment of, those loans.

They have no capacity to create money in any other way or for any other purpose [though the central bank can pursue “quantitative easing” to increase the money supply if it thinks that is needed].

Is it wise to entrust such wide-ranging powers – so significant in their impact on the whole economy – to the banks, and then to arrange that the only person able to regulate that impact was himself a banker – the Governor of the Reserve Bank.

Bryan Gould


Modern Money Theory: Deadly Innocent Fraud #7: It’s a bad thing that higher deficits today mean higher taxes tomorrow. – Warren Mosler. 

Fact: I agree – the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!!

Why does government tax? Not to get money, but instead to take away our spending power if it thinks we have too much spending power and it’s causing inflation.

Why are we running higher deficits today? Because the “department store”has a lot of unsold goods and services in it, unemployment is high and output is lower than capacity. The government is buying what it wants and we don’t have enough after-tax spending power to buy what’s left over. So we cut taxes and maybe increase government spending to increase spending power and help clear the shelves of unsold goods and services.

And why would we ever increase taxes? Not for the government to get money to spend – we know it doesn’t work that way. We would increase taxes only when our spending power is too high, and unemployment has gotten very low, and the shelves have gone empty due to our excess spending power, and our available spending power is causing unwanted inflation.

So the statement “Higher deficits today mean higher taxes tomorrow” in fact is saying, “Higher deficits today, when unemployment is high, will cause unemployment to go down to the point we need to raise taxes to cool down a booming economy.” Agreed!

Modern Money Theory: Deadly Innocent Fraud #6: ​We need savings to provide the funds for investment. – Warren Mosler. 

Fact: Investment adds to savings.

This innocent fraud undermines our entire economy, as it diverts real resources away from the real sectors to the financial sector, with results in real investment being directed in a manner totally divorced from public purpose. It might be draining over 20% annually from useful output and employment – a staggering statistic, unmatched in human history. And it directly leads the type of financial crisis we’ve been going through.

“The paradox of thrift”

(The paradox of thrift (or paradox of saving) is a paradox of economics. The paradox states that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving. The paradox is, narrowly speaking, that total saving may fall because of individuals’ attempts to increase their saving, and, broadly speaking, that increase in saving may be harmful to an economy.

Both the narrow and broad claims are paradoxical within the assumption underlying the fallacy of composition, namely that what is true of the parts must be true of the whole. The narrow claim transparently contradicts this assumption, and the broad one does so by implication, because while individual thrift is generally averred to be good for the economy, the paradox of thrift holds that collective thrift may be bad for the economy. Wikipedia)

– In our economy, spending must equal all income, including profits, for the output of the economy to get sold.

– If anyone attempts to save by spending less than his income, at least one other person must make up for that by spending more than his own income, or else the output of the economy won’t get sold.

– Unsold output means excess inventories, and the low sales means production and employment cuts, and thus less total income. And that shortfall of income is equal to the amount not spent by the person trying to save.

Think of it as the person who’s trying to save (by not spending his income) losing his job, and then not getting any income, because his employer can’t sell all the output.

So the paradox is, “decisions to save by not spending income result in less income and no new net savings.” Likewise, decisions to spend more than one’s income by going into debt cause incomes to rise and can drive real investment and savings.

“Savings is the accounting record of investment.” Professor Basil Moore

Unfortunately, Congress, the media and mainstream economists get this all wrong, and somehow conclude that we need more savings so that there will be funding for investment. What seems to make perfect sense at the micro level is again totally wrong at the macro level. Just as loans create deposits in the banking system, it is investment that creates savings.

So what do our leaders do in their infinite wisdom when investment falls, usually, because of low spending? They invariably decide “we need more savings so there will be more money for investment.”(And I’ve never heard a single objection from any mainstream economist.) To accomplish this Congress uses the tax structure to create tax-advantaged savings incentives, such as pension funds, IRA’s and all sorts of tax-advantaged institutions that accumulate reserves on a tax deferred basis. Predictably, all that these incentives do is remove aggregate demand (spending power). They function to keep us from spending our money to buy our output, which slows the economy and introduces the need for private sector credit expansion and public sector deficit spending just to get us back to even.

In fact it’s the Congressionally-engineered tax incentives to reduce our spending (called “demand leakages”) that cut deeply into our spending power, meaning that the government needs to run higher deficits to keep us at full employment. Ironically, it’s the same Congressmen pushing the taxadvantaged savings programs, thinking we need more savings to have money for investment, that are categorically opposed to federal deficit spending.

And, of course, it gets even worse! The massive pools of funds (created by this deadly innocent fraud #6, that savings are needed for investment) also need to be managed for the further purpose of compounding the monetary savings for the beneficiaries of the future. The problem is that, in addition to requiring higher federal deficits, the trillions of dollars compounding in these funds are the support base of the dreaded financial sector. They employ thousands of pension fund managers whipping around vast sums of dollars, which are largely subject to government regulation. For the most part, that means investing in publicly-traded stocks, rated bonds and some diversification to other strategies such as hedge funds and passive commodity strategies. And, feeding on these “bloated whales,” are the inevitable sharks – the thousands of financial professionals in the brokerage, banking and financial management industries who owe their existence to this 6th deadly innocent fraud.

Modern Money Theory: Deadly Innocent Fraud #3: Federal Government budget deficits take away savings – Warren Mosler. 

Fact: Federal Government budget deficits ADD to savings.

Government deficits equal increased “monetary savings” for the rest of us, to the penny.

Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting. For example, if the government deficit last year was $ 1 trillion, it means that the net increase in savings of financial assets for everyone else combined was exactly, to the penny, $ 1 trillion. (For those who took some economics courses, you might remember that net savings of financial assets is held as some combination of actual cash, Treasury securities and member bank deposits at the Federal Reserve.)

This is Economics 101 and first year money banking. It is beyond dispute. It’s an accounting identity. Yet it’s misrepresented continuously, and at the highest levels of political authority. They are just plain wrong.

When the government account goes down, some other account goes up, by exactly the same amount.

Deficit spending doesn’t just shift financial assets (U.S. dollars and Treasury securities) outside of the government. Instead, deficit spending directly adds exactly that amount of savings of financial assets to the non-government sector. And likewise, a federal budget surplus directly subtracts exactly that much from our savings. And the media and politicians and even top economists all have it BACKWARDS!

The last six periods of surplus in the more than two hundred-year US history have been followed by the only six depressions in our history.

And after the sub-prime debt-driven bubble burst, we again fell apart due to a deficit that was and remains far too small for the circumstances. For the current level of government spending, we are being over-taxed and we don’t have enough after-tax income to buy what’s for sale in that big department store called the economy.

When the January 2009 savings report was released, and the press noted that the rise in savings to 5% of GDP was the highest since 1995, they failed to note the current budget deficit passed 5% of GDP, which also happens to be the highest it’s been since 1995.

The only source of “net $U.S. monetary savings”(financial assets) for the non-government sectors combined (both residents and non-residents) is U.S. government deficit spending.

But watch how the very people who want us to save more, at the same time want to “balance the budget” by taking away our savings, either through spending cuts or tax increases. They are all talking out of both sides of their mouths. They are part of the problem, not part of the solution. And they are at the very highest levels.

The government deficit equals the savings of financial assets of the other sectors combined .

So now we know: – Federal deficits are not the “awful things” that the mainstream believes them to be. Yes, deficits do matter. Excess spending can cause inflation. But the government isn’t going to go broke. – Federal deficits won’t burden our children. – Federal deficits don’t just shift funds from one person to another. – Federal deficits add to our savings.

The right-sized deficit is the one that gets us to where we want to be with regards to output and employment, as well as the size of government we want, no matter how large or how small a deficit that might be.

Modern Money Theory: Deadly Innocent Fraud #2: With government deficits, we are leaving our debt burden to our children. – Warren Mosler. 

Fact: Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.

Professional economists call this the “intergenerational” debt issue. It is thought that if the federal government deficit spends, it is somehow leaving the real burden of today’s expenditures to be paid for by future generations.

The idea of our children being somehow necessarily deprived of real goods and services in the future because of what’s called the national debt is nothing less than ridiculous.

Nor is the financing of deficit spending anything of any consequence. When government spends, it just changes numbers up in our bank accounts.

The entire $13 trillion national debt is nothing more than the economy’s total holdings of savings accounts at the Fed. And what happens when the Treasury securities come due, and that “debt” has to be paid back?

Yes, you guessed it, the Fed merely shifts the dollar balances from the savings accounts (Treasury securities) at the Fed to the appropriate checking accounts at the Fed (reserve accounts).

Nor is this anything new. It’s been done exactly like this for a very long time, and no one seems to understand how simple it is and that it never will be a problem.

When I look at today’s economy, it’s screaming at me that the problem is that people don’t have enough money to spend. It’s not telling me they have too much spending power and are overspending.

When we operate at less than our potential – at less than full employment – then we are depriving our children of the real goods and services we could be producing on their behalf. Likewise, when we cut back on our support of higher education, we are depriving our children of the knowledge they’ll need to be the very best they can be in their future. So also, when we cut back on basic research and space exploration, we are depriving our children of all the fruits of that labor that instead we are transferring to the unemployment lines.

A U.S. Treasury security is nothing more than a fancy name for a savings account at the Fed. The buyer gives the Fed money, and gets it back later with interest. That’s what a savings account is – you give a bank money and you get it back later with interest.

It’s all a tragic misunderstanding.

China knows we don’t need them for “financing our deficits” and is playing us for fools. Today, that includes Geithner, Clinton, Obama, Summers and the rest of the administration. It also includes Congress and the media.

Paying off the entire U.S. national debt is but a matter of subtracting the value of the maturing securities from one account at the Fed, and adding that value to another account at the Fed. These transfers are non-events for the real economy and not the source of dire stress presumed by mainstream economists, politicians, businesspeople, and the media.

The deadly innocent fraud of leaving the national debt to our children continues to drive policy, and keeps us from optimizing output and employment. The lost output and depreciated human capital is the real price we and our children are paying now that diminishes both the present and the future. We make do with less than what we can produce and sustain high levels of unemployment (along with all the associated crime, family problems and medical issues) while our children are deprived of the real investments that would have been made on their behalf if we knew how to keep our human resources fully employed and productive.

Modern Money Theory –  Part 3. Spending by the Issuer of Domestic Currency, the Government. Taxes Drive Money –  L Randall Wray.

A key distinguishing characteristic of MMT is its view on how government really spends.

The government of the nation issues a currency (usually consisting of metal coins and paper notes of various denominations) denominated in its money of account.

The sovereign government alone has the power to determine which money of account it will recognize for official accounts (it might choose to accept a foreign currency for some payments, but that is the sovereign’s prerogative).

Further, modern sovereign governments alone are invested with the power to issue the currency denominated in its money of account.

The sovereign government imposes tax liabilities (as well as fines and fees) in its money of account, and decides how these liabilities can be paid, that is, it decides what it will accept in payment so that taxpayers can fulfill their obligations.

Finally, the sovereign government also decides how it will make its own payments. 

Most modern sovereign governments make payments in their own currency and require tax payments in the same currency.

Ultimately, it is because anyone with tax obligations can use currency to eliminate these liabilities that government currency is in demand, and thus can be used in purchases or in payment of private obligations.

Neither reserves of precious metals (or foreign currencies) nor legal tender laws are necessary to ensure acceptance of the government’s currency.

It is the tax liability (or other obligatory payments) that stands behind the curtain.

Tax obligations to government are met by presenting the government’s own IOUs to the tax collector.

Taxes Drive Money

L Randall Wray

From his book: Modern Money Theory, a primer on Macroeconomics for Sovereign Montary Systems. 

Modern Money Theory: Deadly Innocent Fraud #1. Government Must Tax To Spend. – Warren Mosler. 

Fraud #1: Government Must Tax To Spend.

Many economists value complexity for its own sake. A glance at any modern economics journal confirms this. A truly incomprehensible argument can bring a lot of prestige! The problem, though, is that when an argument appears incomprehensible, that often means the person making it doesn’t understand it either.

Money is created by government spending (or by bank loans, which create deposits). Taxes serve to make us want that money – we need it in order to pay the taxes. And they help regulate total spending, so that we don’t have more total spending than we have goods available at current prices – something that would force up prices and cause inflation. But taxes aren’t needed in advance of spending – and could hardly be, since before the government spends there is no money to tax.

Nor is the public debt a burden on the future. How could it be? Everything produced in the future will be consumed in the future. How much will be produced depends on how productive the economy is at that time. This has nothing to do with the public debt today; a higher public debt today does not reduce future production – and if it motivates wise use of resources today, it may increase. 

Fiscal policy is what economists call tax cuts and spending increases, and spending in general. 

Whenever there are severe economic slumps, politicians need results – in the form of more jobs – to stay in office. First they watch as the Federal Reserve cuts interest rates, waiting patiently for the low rates to somehow “kick in.” Unfortunately, interest rates never to seem to “kick in.” Then, as rising unemployment threatens the re-election of members of Congress and the President, the politicians turn to Keynesian policies of tax cuts and spending increases.

Galbraith’s Keynesian views lost out to the monetarists when the “Great Inflation”of the 1970s sent shock waves through the American psyche.

Public policy turned to the Federal Reserve and its manipulation of interest rates as the most effective way to deal with what was coined “stagflation”- the combination of a stagnant economy and high inflation.

Deadly Innocent Fraud #1:

The federal government must raise funds through taxation or borrowing in order to spend.

In other words, government spending is limited by its ability to tax or borrow. Fact: Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

We all know how data entry works, but somehow this has gotten turned upside down and backwards by our politicians, media, and, most all, the prominent mainstream economists.

Just keep this in mind as a starting point:

The federal government doesn’t ever “have” or “not have” any dollars.

Question:

If the government doesn’t tax because it needs the money to spend, why tax at all? 

Answer:

The federal government taxes to regulate what economists call “aggregate demand” which is a fancy word for “spending power.” In short, that means that if the economy is “too hot,” then raising taxes will cool it down, and if it’s “too cold,” likewise, cutting taxes will warm it up. Taxes aren’t about getting money to spend, they are about regulating our spending power to make sure we don’t have too much and cause inflation, or too little which causes unemployment and recessions.

The dollars we need to pay taxes must, directly or indirectly, from the inception of the currency, come from government spending. 

So while our politicians truly believe the government needs to take our dollars, either by taxing or borrowing, for them to be able to spend, the truth is: We need the federal government’s spending to get the funds we need to pay our taxes.

Yes, there can be and there are “self-imposed”constraints on spending put there by Congress, but that’s an entirely different matter. These include debt-ceiling rules, Treasury-overdraft rules, and restrictions of the Fed buying securities from the Treasury. They are all imposed by a Congress that does not have a working knowledge of the monetary system. And, with our current monetary arrangements, all of those self imposed constraints are counterproductive.

The fact that government spending is in no case operationally constrained by revenues means there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

This, however, does NOT mean that the government can spend all it wants without consequence. Over-spending can drive up prices and fuel inflation.

Governments, using their own currency, can spend what they want, when they want, just like the football stadium can put points on the board at will.

The consequences of overspending might be inflation or a falling currency, but never bounced checks. The fact is: government deficits can never cause a government to miss any size of payment. There is no solvency issue. There is no such thing as running out of money when spending is just changing numbers upwards in bank accounts at its own Federal Reserve Bank.

Taxes create an ongoing need in the economy to get dollars, and therefore an ongoing need for people to sell their goods and services and labor to get dollars. With tax liabilities in place, the government can buy things with its otherwise-worthless dollars, because someone needs the dollars to pay taxes.

Keep in mind that the public purpose behind government doing all this is to provide a public infrastructure. This includes the military, the legal system, the legislature and the executive branch of government, etc. So there is quite a bit that even the most conservative voters would have the government do.

In fact, a budget deficit of perhaps 5% of our gross domestic product might turn out to be the norm, which in today’s economy is about $750 billion annually. However, that number by itself is of no particular economic consequence, and could be a lot higher or a lot lower, depending on the circumstances. What matters is: The purpose of taxes is to balance the economy and make sure it’s not too hot nor too cold. And federal government spending is set at this right amount, given the size and scope of government we want.

If the government simply tried to buy what it wanted to buy and didn’t take away any of our spending power, there would be no taxes – it would be “too much money chasing too few goods,”with the result being inflation. In fact, with no taxes, nothing would even be offered for sale in exchange for the government money in the first place.

To prevent the government’s spending from causing that kind of inflation, the government must take away some of our spending power by taxing us, not to actually pay for anything, but so that their spending won’t cause inflation: to regulate the economy, and not to get money for Congress to spend.

But as long as government continues to believe this first of the seven deadly innocent frauds, that they need to get money from taxing or borrowing in order to spend, they will continue to support policies that constrain output and employment and prevent us from achieving what are otherwise readily-available economic outcomes.

Fort Knox is a Myth. 

Modern Money Theory – Part 2. Government budget deficits are largely Non-Discretionary: The case of the Great Recession of 2007 – L Randall Wray.

The sum of deficits and surpluses across the three sectors (domestic private, government, and foreign) must be zero. 

While household income largely determines spending at the individual level,

At the level of the economy as a whole spending (demand) determines income.(Reversing that causation.) 

Individual households can certainly decide to spend less in order to save more. But if all households were to try to spend less, this would reduce aggregate consumption and national income. Firms would reduce output, thus would lay off workers, cut the wage bill, and thereby lower household income.

This is Keynes’s well-known “paradox of thrift”: Trying to save more by cutting aggregate consumption will not increase saving.

The national conversation, in the United States, the United Kingdom, and Europe presumes that government budget deficits are discretionary. If only the government were to try hard enough, it could slash its deficit.

In the aftermath of the Great Recession of 2008, many government budgets moved sharply to large deficits.

While observers attributed this to various fiscal stimulus packages (including bailouts of the auto industry and Wall Street in the United States, and bank bailouts in Ireland), The largest portion of the increase in the deficit after 2008 in most countries came from automatic stabilizers and not from discretionary spending.

The automatic stabilizer – and not the bailouts or stimulus – is the main reason why the economy did not go into a freefall as it had in the Great Depression of the 1930s. As the economy slowed, the budget automatically went into a deficit, putting a floor on aggregate demand.

With counter-cyclical spending and pro-cyclical taxes, the government’s budget acts as a powerful automatic stabilizer: deficits increase sharply in a downturn.

Slow growth has been the major cause of the rapidly growing budget deficit, and the slow growth, in turn, is due to a high propensity to save by the retrenching household sector.

Given loss of jobs, and stagnant or falling incomes for most Americans, the likelihood that the household propensity to spend will reverse course soon seems unlikely.

Summary if the main points.

1: The three balances must balance to zero.

(Domestic private + Government + Foreign.) 

This implies it is impossible to change one of the balances without having a change in at least one other.

2: At the aggregate level, spending determines income.

A sector can spend more than its income, but that means another spends less.

3: Government Income is Non-discretionary. 

While we can take government spending as more-or-less discretionary, government tax revenue depends largely on economic performance. Tax receipt growth is highly variable, moving procyclically (growing rapidly in boom and collapsing in slump). Government can always decide to spend more (although it is politically constrained), and it can always decide to raise tax rates (again, given political constraints), but it cannot decide what its tax revenue will be because we apply a tax rate to variables like income and wealth that are outside government control. And that means the budgetary outcome – whether surplus, balanced, or deficit – is not really discretionary.

4: Foreign Income is Non-Discretionary.

Turning to the foreign sector, exports are largely outside control of a nation (we say they are “exogenous” or “autonomous to domestic income”). They depend on lots of factors, including growth in the rest of the world, exchange rates, trade policy, and relative prices and wages (efforts to increase exports will likely lead to responses abroad). It is true that domestic economic outcomes can influence exports – but impacts of policy on exports are loose (as discussed, slower growth by a large importer like the United States can slow global growth). On the other hand, imports depend largely on domestic income (plus exchange rates, relative wages and prices, and trade policy; again, if the United States tried to reduce imports this would almost certainly lead to responses by trading partners that are pursuing trade-led growth). Imports are largely pro-cyclical, too. Again, the current account outcome – whether deficit, surplus, or balanced – is also largely nondiscretionary.

(Hans: Private Sector positive Income is made possible at the aggregate level by government spending. 

Government Deficit/Surplus + Foreign Deficit /Surplus Private Income/Surplus must equal 0.

Therefore: The Government in setting spending and tax policies influences Private Sector Income and thereby demand in the economy. 

Contrary to what Neoliberal economic theory proclaims it is the Government which ‘makes the market’ by way of it’s spending, tax and interest rate policies, thereby influencing the Private Sector Income level and it’s spending capacity. Without government there is no Market.

The best domestic policy is to pursue full employment and price stability – not to target arbitrary government deficit or debt limits, which are mostly nondiscretionary anyway.

What is discretionary?

Domestic spending – by households, firms, and government – is largely discretionary. And spending largely determines our income.

L Randall Wray

From his book: Modern Money Theory, a primer on Macroeconomics for Sovereign Montary Systems. 

MMT – Modern Money Theory. Why Government Surpluses are NOT a good thing. 

Bill English announced a $1.83 billion government surplus 

That’s $1.83 billion of potentially productive capital that Billy has pulled out of the economy. This is NOT a good thing. Why?

Modern Money Theory

We are no longer on the Gold standard. Now the value of our economy is determined by currency speculation. Our Government IS our currency, it controls it, it creates it and it demands tax payments in it, thus making sure people will only accept dollars as payment.

“The last time the United States was debt free was 1835.” – Rand Paul, US Republican Senator
“The U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.” – Paul Krugman, New York Times


The Math
Govt.Debt/Surplus + Private Debt/Surplus + Foreign Debt/Surplus = The Economy
This is a zero sum game, there is only one pie, the Economy, the only variable is how it’s carved up.
Somebody’s profit is ALWAYS someone else’s debt. This is not a moral statement, just 0+0+0=ZERO


Now here’s the clincher, keep in mind the bollocks we get from the clowns we have elected to represent our interests.
If the government runs a surplus the Economy suffers: either 1 + -1 + 0 = 0 or 1 + 0 + -1 = 0
Either way either we are privately in debt or in debt to the world. 
Or both: 2 + -1 + -1 = 0

Modern Monetary Theory and Practice

The Global Financial Crisis demonstrated beyond any doubt the poverty of the mainstream, free-market economic approach that is almost universally taught in university courses around the world.

The failure of the system to self-regulate exemplified what Marx, Keynes, Kalecki and other heterodox economists have known for a long time – that the Capitalist system is inherently unstable and requires strong government oversight.

The mainstream approach is inherently misleading and erroneous.

Modern Monetary Theory is a way of doing economics that incorporates a clear understanding of the way our present-day monetary system actually works – it emphasizes the frequently misunderstood dynamics of our so-called “fiat-money” economy. Most people are unnerved by the thought that money isn’t “backed” by anything anymore – backed by gold, for example. They’re afraid that this makes money a less reliable store of value. And, of course, it is perfectly true that a poorly managed monetary system, or one which is experiencing something like an oil-price shock, can also experience inflation. But people today simply don’t realize how much bigger a problem the opposite condition can be. Under the gold standard, and largely because of the gold standard, the capitalist world endured eight different deflationary slumps severe enough to be called “depressions.” Since the gold standard was abolished, there have been none – and, as we shall see, this is anything but coincidental.

The great virtue of modern, fiat money is that it can be managed flexibly enough to prevent *both* deflation and also any truly damaging level of inflation – that is, a situation where prices are rising faster than wages, or where both are rising so fast they distort a country’s internal or external markets. Without going into the details prematurely, there are technical reasons why a little bit of inflation is useful and normal. It discourages people from hoarding money and encourages healthy levels of consumption and investment. It promotes growth – provided that a country’s fiscal and monetary authorities manage it properly.

The trick is for the government to spend enough to ensure full employment, but not so much, or in such a way, as to cause shortages or bottlenecks in the real economy. These shortages and bottlenecks are the actual cause of most episodes of excessive inflation. If the mere existence of fiat monetary systems caused runaway inflation, the low, stable rates of consumer-price inflation we have seen over the past thirty-plus years would be pretty difficult to explain.

The essential insight of Modern Monetary Theory (or “MMT”) is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never “run out of money.” This doesn’t mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be.

Virtually all economic commentary and punditry today, whether in America, Europe or most other places, is based on ideas about the monetary system which are not merely confused – they are starkly and comprehensively counter-factual. This has led to a public discourse about things like budget deficits and Treasury debt which has become, without exaggeration, utterly detached from reality. Time and time again, these pundits declaim that hyperinflation is imminent, that interest rates are on the verge of an uncontrollable upward spike, and that the jig will be up for sure just as soon as the next T-bond auction fails. But even though, time after time, it is the pundits’ prognostications which fail, no one seems to take any notice. This must change. A reality-based economics is needed to make these things make sense again, and Modern Monetary Theory is here to put everyone on notice that a quite different jig is the one that’s really up.

The gold standard was finally and completely abolished over the course of a two-year period which started in 1971, when Richard Nixon ended the convertibility of the dollar for gold and devalued U.S. currency for the first time since the end of World War II. In 1973, the U.S. stopped trying to peg the dollar to any currency or commodity, instead allowing its value to be set on a freely-floating international currency market. The monetary system we inaugurated then is the one we still have now.

It is not the same as the one which has been adopted by most of Europe – and this very prominent source of confusion about the role of money in the world today will receive close scrutiny at the proper point. But first, we need to carefully unpack the implications of taking both gold and any sort of “peg” out of the monetary equation in the first place. In 1971, gold-linked money became fiat-money – not for the first time, of course, but for the first time in a long time. And it wasn’t just any currency. It was, by far, the world’s most important currency, economically. It was also the world’s reserve currency – the good-as-gold and backed-by-gold currency which the entire non-communist world used to settle transactions between various countries’ central banks. And yet, what everyone, and especially every American was told at the time was that it really wouldn’t make much difference.

The political emphasis, at the time, was entirely on the importance of making sure that no one panicked. The officials of the Nixon administration acted like cops who had just roped off a fresh crime scene: “Just move right along, folks,” they kept intoning. “Nuthin’ to see here. Nuthin’, to see.” All of the experts and pundits said essentially the same thing – this was just a necessary technical adjustment that was only about complicated international banking rules. It wouldn’t affect domestic-economy transactions at all, or matter to anyone’s individual economic life. And so it didn’t – at least, not right away or in any way that got linked back to the event in later years. The world moved on, and Nixon’s action was mainly just remembered as a typical, high-handed Nixonian move – one which at least carried along with it the virtue of having pissed off Charles De Gaulle.

But what had really happened was epoch-making and paradigm-shattering. It was also, for the rest of the 1970s, polymorphously destabilizing. Because no one had a plan for, or knew, what all of this was going to mean for the reserve currency status of the U.S. dollar. Certainly not Richard Nixon, who was by then embroiled in the early stages of the Watergate scandal. But no one else was in charge of this either. In the moment, other countries and their central banks followed Washington’s line. They wanted to forestall any kind of panic too. But, inevitably, as the real consequences of the new monetary regime kicked in, and as unforeseen and unintended knock-on effects began to be felt, this changed.

The world had a choice to make after the closing of the gold window, but even though it was a very important choice, with very high-stakes outcomes attached to it, there was no international mechanism for making it – it just had to emerge from the chaos. Either the U.S. dollar was going to continue to be the world’s reserve currency or it wasn’t. If it wasn’t, the related but separate question of what to use instead would come to the fore. But, as things unfolded, no other choice could be imposed on the only economic powerhouse-nation, so all the other little nations eventually just had to work out ways to adjust to the new status quo.

Even after Euro-dollar chaos, oil market chaos, inflationary chaos, a ferocious multi-national property crash and a severe, double-dip American recession, the dollar continued to be the reserve currency. And it still wasn’t going to be either backed by gold or exchangeable at any fixed rate for anything else. But while the implications of this were enormous, almost no one understood them at the time, or ever, subsequently, figured them out. For the 1970s was the period during which Keynesianism was decertified as the reigning economic philosophy of the capitalist world – replaced by something which, at least initially, purported to have internalized and improved upon it. This too was a choice that wasn’t so much made as stumbled into. The chaotic, crisis-wracked world we now live in is the one which subsequent versions of this then-new economic perspective have helped to create.

Conventional, so-called “neo-classical” economics pays little or no attention to monetary dynamics, treating money as just a “veil” over the activity of utility-maximizing individual “agents”. And, as hard as this is for non-economists to believe, the models which these ‘mainstream’ economists make do not even try to account for money, banking or debt. This is one big reason why virtually all members of the economics profession failed to see the housing bubble and were then blind-sided by both the 2008 financial collapse and the grinding, on-going Eurozone crisis which has followed in its wake. And the current group-think among ‘mainstream’ economists is yet another case where failure is no obstacle to continued funding – or continued failure. The absence of any sort of professional, intellectual or academic accountability will be a theme here.

The public policy reversal that began with Margaret Thatcher and Ronald Reagan promised that the deregulation of capitalism would lead to greater shared prosperity for everyone. Today, even though the falsehood of this claim is brutally obvious, the same economic nostrums and stupidities that were used to justify it in the first place continue to be trotted out and paid homage to by a class of financial-media personalities who equate making a lot of money with understanding money. It does not seem to occur to them that financial criminals and practitioners of bank-fraud can get rich through sociopathy alone.

What needs to be said is this: Keynesian economics worked before, and the improved version – now generally called “post-Keynesian” – will work again, to deliver what the market-fundamentalism of the past three decades has patently and persistently failed to deliver *anywhere in the world*. Namely – a prosperity which is shared by everyone. The principal purpose of Modern Monetary Theory is to explain, in detail, why this this worked in the past and how it can be made to work again.

Here’s how: start with a 100% payroll tax cut for both workers and employers – one that will only expire (if it does at all) when we have achieved full employment. This will not de-fund Social Security. And yes, we’ll come back to this point and cover it in great detail in due course. But first, stop and think back on the effect which federal revenue-sharing had on the economy in 2009 and 2010. If you’re thinking there were fewer teachers, nurses, policemen and fire-fighters getting laid off, you are correct. If you’re thinking that more roads, dams, bridges and sewer systems were getting repaired, you’re right again. But if you think that adding 800 million dollars to the deficit over two years is a guaranteed way to generate hyper-inflation, double-digit interest rates and bond-auction failures, leading ultimately to a frenzied worldwide rush to dump dollar-denominated financial assets, well, now would be a good time to ask yourself why you believe this.

One more point – one more plank in this three-point program to restore fiscal and monetary sanity: let’s give everyone who wants to work and is able to work some *work to do*. A currency-issuing government can purchase anything that is for sale in its own currency, including the labor of every last unemployed person who is still looking for a job. So, a key policy recommendation of Modern Monetary Theory is the idea of a “Job Guarantee”. The federal government should take the initiative and organize a transitional-job program for people who just can’t find work in the private sector – as it currently exists in real-world America today. Because the smug one-liner that starts and ends with: “Government can’t create jobs – only the private sector can create jobs!” is about the un-funniest joke on the planet right now.

The government creates millions of jobs already. Isn’t soldiering a job? Isn’t flying the President around in Air Force One a job? What about all the doctors and nurses down at the V.A. hospital, and the day-care workers on military bases? They certainly all appear to be employed. When you go into a convenience store to buy some – uh – local-and-organic Brussels sprouts, say, how closely does the clerk examine the bills and coins you tender? Did any clerk or cashier ever squint or turn your five-dollar bill sideways and back and ask, “Hmm.. are you sure this money came from work that was performed in the private sector?” No. They didn’t. Because the money governments pay to public employees is exactly the same money everyone else gets paid in.

A guaranteed transition-job would need to be different from the familiar examples cited above in certain ways. It would be important to make sure that such a program always hired “from the bottom”, not from the top. That’s an important way of making sure that such programs don’t create real-resource bottlenecks by competing with the private sector for highly skilled or specialized labor. Hence, a transition-program job would more closely resemble an entry-level job at a defense plant. Such a job only exists because of Pentagon orders for fighter planes or helmets or dog food for the K-9 units. There is no sort of ambiguity about where the stuff is going or how it is being paid for. And when the people who mow the lawn or sweep the parking lot get paid, they know, without having to think about it, that their wages will spend exactly the same way down at the grocery store as everyone else’s.

Defence spending is actually quite a good analog to the idea of a transitional-job program – one that would provide work to any and every person who wanted it. The only time the American economy ever achieved an extended, years-long period with zero unemployment, low, well-controlled inflation rates and with no significant financial aftershock at the end was the World War II era – broadly defined to include the Lend-Lease buildup of 1940 and 1941. This solution to the problem of mass unemployment worked in the 1940s and it would work today. In the 1940s, of course,the jobs were almost all war-related. But, economically, this makes no difference.

The connection between war and economic prosperity has been noticed before. It led some 19th Century thinkers (and also Jimmy Carter) to wonder whether there could be a “moral equivalent of war”. Well, there can be – by way of the Job Guarantee. The biggest pre-condition has been met, because one result of most wars has been that they forced the combatant countries off the gold standard. Now, all countries have left it. What matters next is whether there are enough real resources available to produce goods and services that are equal in value to the government’s job-guarantee spending. If these resources are available – if they are not already being used to produce something else – then the increased demand that results from the payment of job-guarantee wages will not be inflationary, regardless of what they go to produce.

Money is 100% fungible. Whether the job-guarantee program makes fighter planes or wind turbines makes no economic difference – the workers employed by it will spend their wages on the same things other workers buy. What matters, economically, is whether there are sufficient real resources and labor available to produce these goods and services in line with the increased demand for them. If there are, no additional government intervention is necessary in order to mobilize them. The same private-profit motivation which induces a company to produce one widget can be relied upon to induce the production of another one.

Most popular misconceptions about job-guarantee work as inefficient “make-work” ignore these private-sector dynamics. It is simply assumed that if the publicly-funded workers don’t personally contribute to making shoes or soap, their wages will result in “more money chasing the same goods” – and that this will automatically cause inflation. This is an obvious fallacy which has been empirically falsified many, many times, but most people continue to treat it as an article of economic faith. So, one of MMT’s most pressing tasks today is to make the case that we can, indeed, end mass unemployment without undermining price stability.

There are many other economic problems and challenges in the world today. Modern Monetary Theory is not a panacea for them. Even if its insights and policy recommendations become widely known, and even if they are someday fully implemented, societies will still face challenges such as inequality, regulatory capture and predatory financial behavior, including the kind of predatory mortgage lending that led to the worldwide crash in 2008. In order to understand these additional economic problems and dangers, we need to look at economics in a larger context, and correctly situate Modern Monetary Theory within this wider frame.

Modern Monetary Theory is based on earlier work which also focused on the relationship between the state and its money – ideas which come under the generic designation of “Chartalism”. MMT also remains firmly within the Keynesian tradition of macroeconomnic theorizing, and recognizes an extensive interconnectedness with other economists whose work is categorized as “post-Keynesian”. Some of MMT’s other notable academic progenitors include Hyman Minsky, Abba Lerner and, more recently, the English economist Wynne Godley, whose emphasis on achieving consistency in the analysis of economic stocks and flows presaged the emphasis which MMT-orbit economists put on it today.

The label “Modern Monetary Theory” is not particularly apt. It became attached to its advocates through the informal agency of Internet comment-threading, not because anyone considered it either very useful or very descriptive. In other words, it “just stuck”. In fact, the identity of the first person to use the “MMT” label is lost to online history. So, to be clear, MMT is only modern in the broad sense in which virtually everything that got started in the Western world in the 19th Century is called “modern”. It is not exclusively monetary either – it has quite a bit to say about fiscal policy as well. And it was not, initially, theoretical – it started as a body of quite empirical observations about the dynamics of the monetary system and the many ways they are being misunderstood these days.

A primer on MMT – L Randall Wray

Modern Monetary Theory and Practice: An Introductory Text