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Otherwise Good WaPo Article on Modern Monetary Theory Marred by Undeserved Praise of Roosevelt Institute

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In the “wonders never cease” category, the Washington Post, which is normally firmly in the camp of orthodox economic thinking and budget hawkery, ran a very well researched and complementary article by Dylan Matthews on Modern Monetary Theory. This may be a sign of MMT moving out of being regarded in policy circles as fringe (some might say lunatic fringe) to a useful part of an economist’s toolkit.

Matthews tries to be scrupulous in giving credit where credit is due, in both how much effort it has taken for the idea to obtain some legitimacy and who its major proponents are. The article starts with Jamie Galbraith presenting the MMT view of debt reduction, which sees it an economic dampener, more than a decade ago at the White, and was greeted with derision from the large audience. It traces its roots to John Maynard Keynes’ Treatise on Money and accurately recounts (in very short form) how Paul Samuelson and John Hicks tried to graft Keynes on to classical economics, while MMT comes out of the “post Keynesian” tradition.

It would be nice if the piece had more space to be empirical (for instance, it gives the opponents’ case, such as the Peterson Institute’s Joe Gagnon arguing that QE increases bank reserves and ought to lead to a lot more lending. Erm, Paul Krugman has pointed out repeatedly that in the Great Depression, the Fed did increase the monetary base (bank reserves) but money supply shrank. And we’ve seen now how banks are sitting on bank reserves. But this is about as positive a treatment as you are likely to see of a new economics idea in a mainstream media outlet.

Given that the piece did a good job of naming most of the major thinkers and writers on MMT (Marshall Auerback, and Rob Parenteau, creator of the term, “austerian,” were not mentioned, sadly), and also gave a nice shout out to Naked Capitalism as one of the blogs showcasing MMT writers, I feel a bit churlish criticizing the article. But one misconstruction stands out. It mentions the Roosevelt Institute’s New Deal 2.0 blog as another MMT friendly venue, when that is not longer the case, and for reasons that do not reflect well on the Roosevelt Institute.

Certain members of the professional staff at the Roosevelt Institute who are Obama/Democratic party loyalists were hostile to the discussion of MMT on New Deal 2.0, which was then edited by Lynn Parramore. Parramore featured MMT posts from Auerback and Randy Wray, both Roosevelt Institute fellows, as well as Warren Mosler and others who were not affiliated with the institute. Auerback, who was also writing at Naked Capitalism, told me he was getting pushback from Roosevelt Institute for his posts on MMT and the general need for more deficit spending. The antagonism intensified after the Roosevelt Institute took funds from the Peterson Foundation, which as we discussed at length (see here, here, and here) has an aggressive, long-standing campaign to use deficit fear-mongering as a way to justify slashing social programs, in particular Social Security and Medicare.

Auerback’s fellowship at Roosevelt ended last year and the excuse given was budgetary. That does not pass the smell test, given that his stipend was the smallest of all the fellows and no one else was cut from the roster. Parramore left Roosevelt Institute last fall and there have been no MMT related posts since her departure.

I have no doubt the Roosevelt Institute will use this article in fundraising, when the role of officialdom was the reverse of what a reader would infer: it set out to quash discussion of MMT rather than promote it. But since the Roosevelt Institute’s conduct was shameless even after it was outed for selling out FDR’s name on the cheap to a billionaire keen to dismantle his legacy, this incident should come as no surprise.

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59 comments

    1. Yves Smith Post author

      Yes, fixed, someone else noticed too. For ECONNED, I had a copy editor and two separate proofreaders (and nominally an editor too, but she only read about half the chapters and I ignored what she told me on the ones I read).

    2. charles sereno

      I spent twice as much time searching for the complimentary/complementary fiasco as I did reading the article, without success. Oops! Was “article” incorrect?

  1. Tim

    How can MMT be fringe when everybody’s doing it (Central Bank Quantative Easing)? Maybe I misunderstand what “True MMT” really is.

    1. Nathan Tankus

      You certainly misunderstand. quantitative easing has nothing to do with MMT and has been artfully criticized by MMT writers for pushing money out of long term treasury bonds (because of the purchasing) and into commodities, generating a commodity price boom.

      1. Tim

        Thank you for your response. However if central bank money printing is not MMT then what is it precisely? I’m eager to learn.

  2. Hugh

    The Establishment is always willing to take credit for ideas that it has tried to stifle and subvert.

    Our financial overlords and the politicians they own have used MMT ideas for years when it comes to trillion dollar tax cuts for the rich, trillion dollar wars, and multi-trillion dollar bailouts for banksters. It is only when it comes to us of the 99% and our needs that gold standard thinking prevails and we are told sadly, and often scoldingly, by the elites who rule, and loot, us that the money is not there.

    1. Marley

      Exactly. This is one aspect of the current political status quo that pisses the f*** out of me… no problem whatsoever creating trillions in reserves to prop up Banking/Investment sector balance sheets, but we “can’t afford” universal healthcare or we can’t pay back the SS Trust Fund etc.

      F***ers…

  3. Eric L

    “QE increases bank reserves and ought to lead to a lot more lending.”

    Umm… 15 years ago it would have… but why would anyone expect that to work now?

    I’m not entirely convinced one way or the other on MMT, but if you guys can get it through people’s skulls that the ability of the Fed to stimulate the economy (or even to create inflation or NGDP target) depends on the ability of Wall Street to find people who can take on more debt, and there are in fact limits to that, and it should be damn well obvious to anyone that we’re there, maybe we can get out of this naive longing for solutions that worked just fine in the 80s and 90s to keep working.

  4. Gary Rondeau

    What is missing for me is a good demonstrable model. I’ve been reading Steve Keen recently, and I have to applaud his rigor and desire to actually generate a model that shows basic behavior.
    The hyperinflation question seems legitimate. on the other hand, modest inflation has the desired effect of flattening the class divide. Do the MMT folks just swap a giant private debt load with a public one? May be that’s OK, but show me why.
    (my take on Keen here: http://squashpractice.wordpress.com/2012/02/16/keenian-economics/)

    1. Bev

      http://www.monetary.org/how-the-economists-facilitated-the-crisis-and-how-hr-6550-solves-it/2011/06

      How the Economists Facilitated the Crisis and How HR 6550* Solves it

      (now HR 2990)

      snip

      Economist Jamie Galbraith in testimony to the Senate Crime subcommittee on May 4th, 2010:

      “I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis.”

      With rare exceptions, those in control of the World’s monetary/economic agenda and the theories supporting it have helped bring the world to its knees. Shouldn’t they (and their theories) be held accountable? The challenge will be for “youngsters” like yourselves, to bring your chosen profession to its senses.

      False “monetary” beliefs (some call them theories) have misdirected public policy decisions for decades, with devastating effect! Errors of Concept, methodology and factual errors led to disastrous outcomes for our nation and have the potential to gradually take America down into an unprecedented abyss of lawlessness and deprivation. Consider the present insane calls for austerity. Economists have allowed the idea to prevail that a government has to be run the way a shopkeepers runs his store. These times call for greater care and some heroism among economists; and cowardice is no longer tolerable among those who do understand.

      Which particular monetary errors? Most importantly, economists have not understood or appreciated the difference between money and credit. That using credit for money is dangerous, harmful and unnecessary. Can’t they read Knapp’s “State Theory of Money, available in English since the early 1920s, to understand credit is just one type of money system, and not a good one at that? Even Minsky who pointed out that such a fractional reserve system always collapses, regarded that as a problem inherent in “Capitalism, and didn’t consider eradicating it but merely called for government providing jobs when the credit structure was in collapse. A solution that one of AMIs researchers said was like “trimming poison ivy!”

      Many economists have falsely concluded that “all money is debt,” and while most money in our particular mis structured system is debt, this attitude ignores the possibility and necessity to define a better system based on government money, not private debt. This failure to understand the concept of government money as opposed to private credit, has had immense and deadly repercussions. The Great Henry Simons summed it up in one magnificent sentence in the 1930s:

      “The mistake … lies in fearing money and trusting debt.”

      Henry Simons, (Economic Policy for a Free Society, 1930s, P.199)

      This fundamental error has allowed the most egregious banking and money system to dominate our society for a century. It has caused immense damage:

      For example: The privatization of our monetary system, with control over public policy being in unelected hands, for whoever controls the money system, over time will control the nation.

      And look what they have done with that power:

      * They’ve given special privilege to create money to some, and disadvantage to others; which has led to an obscene concentration of wealth and a corresponding poverty! This has encouraged lawlessness and corruption among the privileged; pushing them to diseased excess for acquisition, and ignoring those among us in great need.

      * They’ve turned economics into a primitive religion, and worshipped the “market” as a god, despite all evidence to the contrary. A primary tool they use is to denigrate and ignore evidence. “Anecdotal” was the description Greenspan used for real evidence that challenges their theories. A fundamental sin of poor methodology.

      * They have placed an unnecessary ball and chain on the leg of every producer by having the money supply itself bear an unnecessary interest cost to society.

      * They’ve foisted a “fractional reserve” system on us prone to periodic collapse. Credit will collapse during a crisis. Money does not collapse. Credit will collapse during a crisis. Money does not collapse. Money does not collapse.

      In our present system most of what we use for money – more accurately purchasing media – comes into existence as an interest bearing debt, when banks make loans. In that sense, most money in our fractional reserve system – is debt. But economists can’t seem to grasp that those rules can and must be changed. Afraid to confront their paymasters, who are benefitting from the injustice, they can’t conceive of practical ways we can use real government issued money for money instead of substituting private debt for it. They ignore previous attempts such as the Chicago Plan of the 1930s; and smear prior periods when such real money was used successfully.

      Errors of methodology regarding money include refusal to examine the facts and a tendency to ignore history where the monetary facts are found. This leads to the silliest errors of fact regarding monetary history including:

      * Being unaware of the colonial periods’ excellent experience with government money.

      * The Continental Currency – they are generally unaware they were destroyed by Brit counterfeiting.

      * The Greenbacks – which is mistakenly characterized as worthless paper money, ignoring that they ultimately exchanged one for one with gold.

      * The French Assignats – where they have again ignored Brit counterfeiting and enshrined the propaganda book written by a banking heir as unbiased fact (White’s Fiat Money in France)!

      * The German Hyperinflation is not recognized as occurring under a privately owned and privately controlled Reichsbank!

      * Regarding the FED as part of the government!

      * The Free banking Schools misidentify the Free banking period because New York’s “Free Banking Law” gave better results. But despite its title it imposed much stronger requirements and regulations and was the opposite of free banking!

      Jamie Galbraith ended his testimony to the Senate’s Crime Subcommittee with this warning: “But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

      In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work, or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.”

      James K. Galbraith to the Subcommittee on Crime, Senate Judiciary Committee, May 4, 2010.

      snip

      Our malformed money and banking system is at the bottom of these travesties and therefore must face fundamental reform. But that requires your help. How can this be done?

      Enter The Congress’ Best Economist- Congressman Dennis Kucinich

      On December 17, 2010, Congressman Dennis Kucinich introduced the National Emergency Employment Defense Act (“NEED,” HR 6550*) [now HR 2990] which contains all the monetary reform provisions of The American Monetary Act- see the brochure at http://www.monetary.org. It is much more than regulation; it fundamentally reforms our private CREDIT/DEBT system now wrecking our nation and harming all humanity, and replaces it with a government MONEY system.

      The Act achieves reform with 3 basic provisions. All three are necessary; doing one or two of them wouldn’t work and could cause more damage.

      In brief:

      First the Federal Reserve gets incorporated into the U.S. Treasury where all new money is created by our government – what people think happens now.

      Second, It ends the fractional reserve system. Banks no longer have the accounting privilege of creating our money supply. All their previously issued credit is converted into U.S. Money through an elegant and gentle accounting change. The banks are held accountable for this conversion and from that point operate the way people think they do now – as intermediaries between depositors and borrowers.

      Third, new money is introduced by the government spending it into circulation for infrastructure, starting with the $2.2 trillion the engineers tell us is needed to properly maintain our infrastructure over the next 5 years. Infrastructure will include the necessary human infrastructure of health care and education.

      Banks are encouraged to continue lending as profit making companies, but are no longer allowed to create our money supply through their loan making activity.

      Thus, The NEED Act nationalizes the money system, not the banking system. Banking is absolutely not a proper function of government, but providing the nation’s money supply is a key function of government. No one else can do it properly. Talk of nationalizing the banking business really acts like a poison pill to block real reform. Same for talk of the states going into the banking business keeping the fractional reserve system in place, and allowing the banks to continue creating what we use for money! That would reform nothing and actually endorses the fractional reserve system! It is a farcical diversion, misleading some good people away from real monetary reform at the only time reform is possible – during a crisis. All serious Monetary reformers understand that banks can not be allowed to create our money supply.

      Despite prejudice against government, most people are surprised to learn that history shows government has a far superior record in controlling the money system than private controllers have. And yes that includes the continental currency, the Greenbacks and even the German Hyperinflation; which by the way took place under a completely privatized German central bank, with all governmental influence removed! These facts, though not taught in your econ classes, are discussed at length in my book The Lost Science of Money available here. ( by Stephen A. Zarlenga, http://old.monetary.org/lostscienceofmoney.html )

      snip

      Perhaps you will consider Prof. Kaoru Yamaguchi’s Systems Dynamics study of the American Monetary Act? He examined it with the most advanced computer systemology and found that:

      It pays off the national debt

      It provides the funds for infrastructure (solving the unemployment problem)

      It does this without causing inflation. You can read his results at http://www.monetary.org

      snip

      Sincerely,

      Stephen Zarlenga
      Ami

      1. jake chase

        Zarlenga’s book is $70. Clearly, the guy understands money. IMHO there has never been a book worth $70. You can get all his alleged info from Ellen Brown for under $20.

        1. Bev

          Quoting Zarlenga just above your post:

          “Talk of nationalizing the banking business really acts like a poison pill to block real reform. Same for talk of the states going into the banking business keeping the fractional reserve system in place, and allowing the banks to continue creating what we use for money! That would reform nothing and actually endorses the fractional reserve system! It is a farcical diversion, misleading some good people away from real monetary reform at the only time reform is possible – during a crisis. All serious Monetary reformers understand that banks can not be allowed to create our money supply.”

          Ellen Brown’s State Banks would keep Debt Money in place.

          …………….

          Coffee with Joe
          http://www.economicstability.org/coffee-with-joe

          To paraphrase, once Dennis Kucinich’s NEED Act HR 2990 is passed, any state banks’ Debt Money Creation can be easily dealt with by transferring that capacity to the national level, leaving the state banks in place, but taking the money creation away.

          ……

          The following is also free:

          http://www.monetary.org/demonstrations

          Email this Webpage to all of your Contacts and Print the Following:

          (1) A half page Flyer announcing the HR 2990
          which should be handed to everyone at a demonstration.

          (2) A full page flyer describing HR 2990,
          a hard-hitting piece that should be handed to the same people at a demonstration.

          (3) The Need for Monetary Reform,
          a one page (double-sided) sheet for those who want to know more. It’s exactly 800 words and you can reprint it easily, even get it into newspapers.

          (4) A fact sheet on HR 2990
          describing what the bill does to stabilize America’s financial situation, including the creation of 7 million of jobs.

          (5) Our 32 page booklet,
          which includes some history, our answers to the 20 most frequently asked questions, the American Monetary Act, and much more. Copy and photocopy the one attached, or get preprinted ones from us at 10 copies for $30.

          (6) HR 2990

          (7) Follow The Dick Distelhorst Plan to Advocate for Monetary Reform!

          Dear Friends of the American Monetary Institute,

          We now face a major opportunity its important to respond to. Across the country thousands of Americans, young and old, are demonstrating around the Federal Reserve Banks of Chicago, and Boston; Wall Street in NY and ever more places, linked to below.

          snip

          What do the Occupiers want? Mainly Economic Justice!

          To get economic justice, you must have monetary justice and the AMI has been working at gaining monetary justice since 1996. We have made progress. Our research results, The Lost Science of Money by Stephen Zarlenga demonstrate that decades of research and centuries of experience shows that three things are absolutely needed:

          The present form of the Federal Reserve System must be ended – it must become a part of our government – what people mistakenly think it is now! In the Treasury Department is best.

          The accounting privilege that banks now have to create what we use for money out of debt, must stop once and for all. What’s called fractional reserve banking must be decisively ended.

          The Congress must understand and be empowered to create new money and spend it into circulation as money, not debt. For example the $2.2 trillion dollars the Engineers tell us is needed for infrastructure over the next 5 years. As the system progresses, health care and education, and grants to the states are made.

          Now some good news: Congressman Dennis Kucinich (D Ohio. 10th Dist) on September 21st, introduced HR2990 which does those very things!!!! Congressman Conyers of Detroit co-sponsored it.

          We need to see that people realize there is a bill which achieves these goals, already in the Congress. That they can help by asking their representatives and Senators to support it. Also their school Boards, State reps and Senators, City Councils, newspaper editors, etc, etc, etc.

          We have materials which can help them do all that, available for the asking, but first they have to become aware of HR 2990, and there are five attachments, at the top of the page, which will help you make it clear to them.

          I’m suggesting you print these out, photocopy several hundred of them and head to the nearest demonstration! Stay at least a few hours. Let me know what happens. To find the nearest demonstration to your location, Google: “Occupy(insert your city here)” and check it out.

          Warm regards to you and good luck! Remember this is a non-partisan activity!

          Stephen Zarlenga
          AMI

          ……

          http://kucinich.house.gov/news/email/show.aspx?ID=X7EX6WS6JW7AZSDNJHSVS5UZXM



          Kucinich Proposes Landmark Jobs Plan



          Bill To Put 7 Million Americans Back to Work, Rebuild Infrastructure



          Washington D.C. (September 21, 2011) — As the nation struggles with long-term unemployment at rates not seen in generations and as infrastructure crumbles across the nation, Congressman Kucinich (D-OH) today introduced a dramatic new proposal to address our structural economic problems directly by creating over 7 million jobs.



          The National Emergency Employment Defense (NEED) Act of 2011 would allow the federal government to directly fund badly-needed infrastructure repairs and fund education systems nationwide by spending money into circulation without increasing the national debt or causing inflation. 


          snip

          “The ability to coin money is an inherent power under Article I, Section 8 of the United States Constitution. The NEED Act would control inflation because it will enable the government to invest in America by creating infrastructure, which is real wealth. Inflation is caused when new money is created without the creation of new wealth,” explained Kucinich. 



          The proposal would also establish fiscal integrity, reassert Congressional sovereignty and regain control of monetary policy from private banks.

          ……

          http://my.firedoglake.com/gammaglobalist/2011/10/08/representative-vows-to-occupycongress/

          By: Gamma Globalist

          The Occupy movement coincides fortuitously with bold financial legislation introduced earlier this year. HR 2990, the National Emergency Employment Defense (NEED) Act, proposes nationalizing the US central bank, the Federal Reserve. What this means for the dollar is that it will be un-privatized, changing from a debt-based currency to a debt-free one overnight. The monetary system is then geared to produce public wealth rather than bankster wealth.

          To anyone concerned about the national debt, austerity cuts, unemployment, or the extreme concentration of wealth and power among the elite, the NEED Act is what you have been waiting (and protesting) for.

          Don’t confuse this proposal with the specious calls to replace “fiat” money with gold (commodity) currency. The problem is not fiat but rather debt-based currency, controlled by and for banksters. The NEED Act does “end the Fed” as we know it, but achieves this the right way: with sovereign, debt-free Treasury notes. Gold currency, on the other hand, is an elitist scheme which would devastate the already reeling middle class.

          Under HR 2990, the dollar is to be issued by US Treasury as a public asset and spent into circulation for the public good. This will allow government to invest in large-scale projects without borrowing or adding to the national debt. Millions of unemployed can be put back to work rebuilding and expanding America’s infrastructure. Debt-free money could also clear the way for single payer health care – a reform which would save lives and money while boosting the economy.

          The author of HR 2990, Dennis Kucinich, has pledged his support for the Occupy movement and vows to OccupyCONGRESS:

          ……..

          Greenbacks.

          http://firedoglake.com/search/?cx=012863467380897931540%3Abacmcr9sohw&cof=FORID%3A11&ie=UTF-8&q=greenbacks&sa=Search&siteurl=firedoglake.com%2F&ref=

    2. Nathan Tankus

      Ummmm… There are plenty of Stock-flow-consistent mathematical economic models that are chartalist in nature. look for Godley’s 2006 textbook.

    3. Lidia

      I’m just a layperson with no background in finance or economics. I listened to Keen on a now-forget-which podcast, and when confronted with the whole “if I loan you $100 and you have to pay me back $105, where does the $5 come from?” question which seems really THE obvious flaw in our system, Keen seemed to sneer at the naivety of the questioner… saying it was FAR more complicated than that and that “you have to understand flows” (!!)

      My understanding is that the flow of energy from the sun is the only “flow” we can reliably count on, and that “flow” needs to be divided up by 250,000 additional people each day.

      I keep trying to read his articles, but they are so much based on equations and the details of inter-necine battles with other economists that I find it hard to catch the overall gist of what he is saying, although it appears to be that the problems of debt are what is stymying growth. IOW, he seems not to connect energy inputs with economics. I find this very strange that he seems to persist in this despite the company he sometimes keeps (Nicole Foss et al.)

      For example, Keen’s “Manifesto” says “[the] unwinding now is the primary cause of the sustained slump in economic growth.” and one of his tenets is to “[do] the minimum possible harm to aggregate demand” (!!)

      http://www.debtdeflation.com/blogs/manifesto/

      1. ozajh

        Lidia,

        I am not an economist (except for 2 semesters of Economic History about 35 years ago :) ), but I think what Keen keeps pushing is the theory that debts within the financial industry come first and the instruments (bonds, deposits, extra capital etc.) to cover those debts come second.

        The act of creating the initial debt (stemming from the desire of a{ny} customer to borrow) is therefore expansionary, and changes in net debt creation should be included in overall calculations. Derivatives (in the mathematical sense, NOT the financial sense) of the debt creation curve then become significant, and probably account for the equation-heaviness.

        (And I could, of course, be totally wrong.),

        1. jsn

          Kaleki’s and Levy’s profits equations, created independently but explaining the same thing, both show that increases in real wealth and money profits originate in borrowing and investment.

          It is complicated but here’s how I understand it (imperfectly):

          An entrepreneur has an insight into a productive process for an good or service and borrows money to invest in improvements to that process.

          With the borrowed money he purchases real property and machines to implement his insight and hires and trains people to operate the improved system he has created.

          When he spends the loan on this idea it has this interesting effect; the entrepreneur’s net worth is not decreased by the expenditure of the loaned funds, he has simply converted that wealth in form from money to real capital and labor (and the output of that labor which is inventory).

          The money spent in making this conversion between money and capital goods is a net add for the macro economy. Dividends on investments take a similar form.

          It is the netting up of aggregate investments in the system, where the investments succeed, that create all profits in the macro system out of which that 5% is re-directed back to the originator of the loan.

          1. Lidia

            This sort of mechanism would only seem to hold true for the brief period in which some product AB is deemed to be “worth” more in abstract monetary terms than the raw inputs A+B.

            How many places are there which would rather have farmland again than an empty strip mall + asphalt?

            How many high-value employees have been polled as saying they would take a pay cut if they could work fewer hours?

            Things that can be commoditized— especially commoditized in the short term at the expense of the long term—are given irrational value preference over things that cannot be commoditized in the short term.

            Just go to any garage sale or garbage dump and see what AB products people throw away each day… the same ones which were worth a premium over their components yesterday. It’s a nonsensical cycle driven by the abstract concept of interest.

      2. Jim

        SOrry, Keen is right on this one, and you do need to understand the circular flow in order to “get” the answer.

        In your question, you are assuming that your borrower and lender are all alone in the universe. But that never happens. What instead happens is that the interest paid to banks is thier income, which they in turn spend (on salaries, rents, etc.) which in turn gets spent out in the larger economy and makes it’s way back to the borrower. There really is no problem, because money is constantly being created and destroyed.

        1. F. Beard

          What instead happens is that the interest paid to banks is thier income, which they in turn spend (on salaries, rents, etc.) which in turn gets spent out in the larger economy and makes it’s way back to the borrower. Jim

          Your assumptions are that all the interest gets spent (false) and that all the spent interest is not lent out for more interest (also false) or hoarded (kept out of circulation).

          And all this confusion over usury is unnecessary in the first place – common stock is a money form that requires no usury and which shares wealth and power rather than concentrates them.

        2. Leverage

          This is only true as long as there is a nominal ‘growth’ (so credit and monetary mass increase in aggregate) to offset the system frictions.

          Nominal ‘growth’ (inflation) without real growth (population not sharing improvements of productivity) = diluting purchasing power, more poverty (except for the money hoarders, bankers & the 1%).

          Else desinflation first and deflation later which triggers again these frictions and the system becomes dysfunctional if it happens during a prolonged period.

          This system is addicted to growth of financial assets & of production/consumption. Funny enough Japan was only able to offset that abusing of external demand and using MMT principles to offset the deflationary effects by increasing net financial assets via deficit spending and issuing public debt securities (but the consumption part mainly came from outside).

          We will see what happens when this dynamic permeates the rest of the developed markets.

        3. Lidia

          “In your question, you are assuming that your borrower and lender are all alone in the universe. But that never happens. What instead happens is that the interest paid to banks is thier income, which they in turn spend (on salaries, rents, etc.) which in turn gets spent out in the larger economy and makes it’s way back to the borrower. There really is no problem, because money is constantly being created and destroyed.”

          Jim, I will take time to read everyone’s reponses more carefully, but I have to argue with you here. I am not assuming that the borrower and the lender are alone, but that the aggregate of borrowers and the aggregate of lenders are alone on the planet and in the effectively-useful universe.

          Real wealth must still *come from somewhere*. Even labor does not create wealth; it just extracts it or transforms it or pushes it around.

          Your cycle of interest being paid to banks which then spend it on X seems to me like an impossible perpetual motion machine, with no cost and no friction, no consumption of resources over time just to play the game much less make a “profit”.

          When people “make” money, that money is a claim on real resources which are not, and have never been, expanding in modern times.

          1. Steve Hamlin

            @Lidia: “Real wealth must still *come from somewhere*. Even labor does not create wealth; it just extracts it or transforms it or pushes it around.”…”When people “make” money, that money is a claim on real resources which are not, and have never been, expanding in modern times.”

            Labor absolutely creates wealth. In fact, Labor = Wealth is one of the main foundations of property rights and economic theory.

            Land = dirt. Land worked by a farmer = food. Ore = rocks. Ore, labored over and using products of the labor of others = tools, machinery & equipment. Interstellar spacetravel = rocks + human labor.

            Labor is civilization. Smart labor is human progress, and is why humans are not hunter/gatherers. Everything in the moden world, including virtually all wealth, is distilled and concentrated labor.

          2. Lidia

            @Steve Hamlin “Labor = Wealth is one of the main foundations of property rights and economic theory.”

            The fact that something is the basis of someone’s theory does not make it true. Economic theories don’t seem to be terribly useful or instructive to us these days, having led us down a destructive path and busted the economy.

            “Land = dirt. Land worked by a farmer = food.”

            Agriculture is relatively new to the human scheme. Food can come from places that don’t require excessive labor. Herding. The lilies of the field, etc. Modern farmers have turned healthy soil with its historical load of essential microorganisms into mere sterile dirt. Kind of the opposite procedure to that which you envision.

            “Ore = rocks. Ore, labored over and using products of the labor of others = tools, machinery & equipment.”

            Well, yeah, having some metal now and then is ok.

            “Interstellar spacetravel = rocks + human labor.”

            Interstellar spacetravel = rocks + human labor = pointless insanity.

            “Labor is civilization.”

            There was no human labor before civilization? Is “civilization” universally positive or not? What can we do to modify civilization to make it sustainable, or is that a contradiction in terms? A thought experiment.

            “Smart labor is human progress, and is why humans are not hunter/gatherers.”

            Hunter gatherers work fewer hours than humans in industrial societies to fulfill their basic needs: food, shelter, clothing, at a lower cost to their environment. They don’t enforce scarcity or require a certain percentage of people to go without food, care, or employment as a “feature” of a “civilized” system.

            “Everything in the moden world, including virtually all wealth, is distilled and concentrated labor.”

            Huh. Is it labor that fills your gas tank, then? Is your house or your street or your driveway made of solely labor?

            Are fruits and vegetables and meats made of mostly human labor? Really? There aren’t any other inputs?

            I don’t think you know what you are talking about. All the necessary inputs to pre-modern society are things you seem to take entirely for granted, as free: healthy soil, clean air, clean water, sunlight, the interaction or outright sacrifice of beneficial plants and animals. These things don’t count in your calculus? They’re just zero?

            And in our modern society, you have all of the above plus OIL (and other fossil fuels).

          3. Lidia

            “Smart labor is human progress”

            I just can’t let this go because of a personal episode: my sister complains each and every year about raking her leaves. She buys dozens of bags at the Home Depot (input: trees and all the crap that conspires to make a Home Depot). She has to spend gas to drive to the Home Depot to get the bags. Then she uses an electric leaf blower to corral the leaves. Then she puts the bagged leaves on the curb so that a giant truck, powered by god-knows-how-much-diesel can come, courtesy of her tax dollars, and take the leaves away. It used to be to a landfill (another cost) but they probably do compost them now.

            Now she doesn’t do this, but her other neighbors then pay a service to come and fertilize their lawns with chemicals, to try and get them to look perky in spite of the lack of organic matter in the soil (several hundred pounds of leaves having been removed each year).

            When I asked her why she just didn’t put the leaves in a compost pile on site anddistribute the compost on the lawn the next season, she said that having them carted away represented “civilization” (!!)

            To me it just represents mental illness, collective mental illness.

          4. Gary Rondeau

            To really get a feel for the circulatory nature of the economy, Keen’s models are pretty good! Here’s one of his pretty good beginning lectures on money that I think is convincing and will have you less worried about the sustainability of the extra $5…

            Part1:

            http://www.youtube.com/watch?v=parYlhj-nP0&list=FLM1ubsbE-tG9ru61mc3zX8A&index=15&feature=plpp_video

            Part2:

            http://www.youtube.com/watch?v=kObJk_xS4ZU&list=FLM1ubsbE-tG9ru61mc3zX8A&index=13&feature=plpp_video

    4. Gary Rondeau

      Bev, thanks for the reference to Yamaguchi. I’ll have to read it carefully. On first glance, it mentions that the current system allows banks to lend money into existence based upon requirements of government entities. One thing that Keen showed was that this is backward. What actually happens is banks lend as much as they can, and then adjust there “reserve requirements” after the fact. The generation of money is created by the demand for it.
      Seems like the real issue for any monetary system is how to keep those who have all the money from using that position of financial power from profiting personally.

      1. joebhed

        Yamaguchi’s model correctly identifies today’s system as one based on debt, rather than merely the multiplier function of a regulatory base.
        His solution correctly displaces the link between debt and money in such a way that the issuance of a national circulating media(money) is NOT tied to the issuance of a debt by the banking system.
        The endogenous money cover is a red-herring in the discussion of a scientifically-based monetary system.
        MMT postulates a debt-basis for money in Innes’ failed rationale that because debt is based on money accounting, that its corollary is also true – that money is and must be based on debt.
        Whether money is debt is a function of its issuance and management.
        That it becomes a debt when it is loaned, and that it is a debit in a bank’s balance sheet when it is deposited, has nothing to do with Yamaguchi’s work modeling the American Monetary Institute’s proposal, contained in H.R. 2990 by Congressman Kucinich.
        http://www.monetary.org/wp-content/uploads/2011/10/HR-2990.pdf

        MMT is a halfway measure that fails by its inability to meet the NEED for ending a debt-based money system, colloquially cloaked in the misnomer of fractional-reserve banking.
        For the Money System Common.

        1. Bev

          Dear Joe, Could you post the exact quote and link. I tried looking and did not find it. Thanks.

          Coffee with Joe
          http://www.economicstability.org/coffee-with-joe

          To paraphrase, once Dennis Kucinich’s NEED Act HR 2990 is passed, any state banks’ Debt Money Creation can be easily dealt with by transferring that capacity to the national level, leaving the state banks in place, but taking the money creation away.

          1. Bev

            Found it, and it was from another NC article on which you posted. The important point:

            “When its complete, even the state banks will have to switch over to a full-reserve based lending system. But no problem there.”

            from:
            http://www.nakedcapitalism.com/2011/01/state-banks-or-if-you-cant-regulate-tbtf-banks-why-not-compete-instead.html

            joebhed from http://www.economicstability.org/
            http://www.economicstability.org/joes-monetary-literacy-course

            says:
            January 25, 2011 at 3:34 pm

            Yves,
            Great that you’re talking about monetary alternatives – something outside the normal financialist’s scope of discussion.

            The best thing that can come of a well-thought out state banking proposal is the education of the state populous regarding things monetary and how the monetary powers are set up, and the potential for state benefits.

            The worst thing about any move to direct state banking is IF it removes from the same state population the proper understanding of the need for and potential for federal banking and monetary reform.

            Dennis Kucinich’s Bill, H.R. 6550, the National Emergency Employment Defense (NEED) Act of 2010, provides the superior fix to that almost un-fixable of our national financial systems, the private, debt-based money system of money creation using bank-credits and consumer-debts, known as fractional reserve banking.

            The Kucinich Bill – available here –

            http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf

            puts an end to the entire private fractional reserve
banking system, replacing it with one of government-issue of the nation’s circulating media, without issuing any debt.

            When its complete, even the state banks will have to switch over to a full-reserve based lending system. But no problem there.

      2. joebhed

        Gary
        At the AMI conference in 2010, Steve Keen reviewed Yamaguchi’s model(which he makes available for anyone to use) and pronounced it the most sophisticated he had ever seen.
        Yamaguchi later expanded his model and this this year presented it with fully “open-economy” functions, stating it now includes in both wage-labor and current-account feedback loops into his results.
        These results are simply that debt-based money leads us exactly right here, and by divorcing money from debt at issuance, full employment without inflation is possible.
        Yamaguchi’s model should be the standard that others compare with for comprehensive monetary macro-economic results.
        Thanks.

    5. Susan the other

      Does inflation as hyper-inflation exist anywhere on this planet without immediate destruction? No. It does not. Lemmings as the prime example. But notice that other life forms do not follow Lemming-suit. The have a mind of their own for survival that does not require energy squandering boom and bust existence.

  5. Marley

    I remember that fiasco last year, and this is a timely reminder for me to disable their feed. I have not read an iota from them since the Peterson debacle. Lot better (and more authentic) sources.

  6. Bev

    We have had Debt Free Public Money six times in our country’s history.

    Brave politicians like Washington, Lincoln and Kennedy among others took control of Debt Free Public Money away from banker’s Debt Money in the past. We must support and protect our politicians who do this again for us.

    http://www.monetary.org/

    September 21, 2011: Congressman Dennis Kucinich introduced an employment bill reforming our money system: The NEED Act proposes a historic money reform, containing all the monetary provisions of the American Monetary Act including ending “fractional reserve” banking.

    HR 2990:

    http://www.monetary.org/wp-content/uploads/2011/11/HR-2990.pdf

    …….

    Our current Debt Money is created by banker’s credit in loans to government, business and people that is extinguished from circulation once paid back. But, never created is the money to pay the interest. So, we can never get out of debt when our money is debt.

    http://moneyaswealth.blogspot.com/2009/04/bankruptcies-no-end-in-sight.html

    Bankruptcies – No End In Sight.

    Don’t you wonder what happens to the money that was borrowed and then spent into the economy, when a person goes bankrupt?

    The money is now “out” in the economy, right? It did not get paid back to the bank, right?

    That is the money, that the rest of the “customers” of this scam the banking system is running on the world, use to pay their interest. As you know, there is no mechanism in the system, to create money to pay interest, the way it is set up now.

    We should change that so that we have a system that works without requiring bankruptcies, fraud and money laundering – just to function.

  7. Rademaker

    The biggest flaws of the articles in my opinion:
    - no mention of Wynne Godley, Michael Hudson and Steve Keen in the article, quite possibly the most interesting three post-keynesians who all warned of 2008 well in advance. I may be mistaken but I’ve been told that without Wynne Godley MMT could not even have existed.
    - implication that post-keynesianism == MMT. There is also Monetary Circuit Theory (Steve Keen), which criticizes MMT.

    1. Bev

      http://www.monetary.org/

      The Lost Science of Money

      by Stephen A. Zarlenga

      ISBN 1-930748-03-5

      http://old.monetary.org/lostscienceofmoney.html

      review:

      From Prof. Michael Hudson

      “The history of money is critical to understanding the greatest problem the third millennium will face. Stephen Zarlenga’s Lost Science of Money provides the needed background for seeing the basic structural issues at work. One of the most valuable things that Zarlenga has done in the book, that is not understood by the Europeans and by most economists is to show how the Greenbacks functioned.”

      - Prof. Michael Hudson, University of Missouri, Kansas City; Director, Institute for the Study of Long Term Economic Trends; Author of Super Imperialism, and Debt and Economic Renewal in the Ancient Near East.
      Public Radio economics commentator.
      ………..

      Greenbacks.

    2. Deus-DJ

      Circuit theory does not contradict MMT, and in fact MMT accepts circuit theory and endogenous money. As to why Steve Keen doesn’t like MMT, his own students don’t really know why. In a comment to one of his students, its apparently the fact that he thinks there is some level of debt which will be detrimental to a country issuing their own currency, but he’s unclear on this. IE he’s just believing whatever he wants, which is fine, at least he has the endogenous money part right, as any good post-keynesian nowadays does.

      1. F. Beard

        its apparently the fact that he thinks there is some level of debt which will be detrimental to a country issuing their own currency, Deus-DJ

        Of course there is. Monetarily sovereign governments should not borrow in the first place. By doing so, they become the usury collecting (at least in real terms) agents of the rich and the banks at the expense of everyone else. How can parasites be good?

        Also, one can call fiat “debt” but what kind of “debt” is it that does not necessarily have to be repaid? In other words, if a government spends more than it taxes how can that “deficit” be called a “debt”?

        Steve Keen is right – too much government debt is bad because ANY debt of a monetarily sovereign country is bad. But to be more specific, parasitism is bound to become intolerable at some point.

        1. Tim

          Exactly right. People that say governments can’t default are idiots.

          While they are technically right, in practice governments are more likely to default than households since political leadership will never will run a surplus to pay off accumulated debt and ultimately must devalue the monetary instrument to make up for that shortcoming, an effective default over time.

          1. F. Beard

            since political leadership will never will run a surplus to pay off accumulated debt Tim

            Bonds of a monetarily sovereign nation are an interest paying form of fiat money. To pay them off would therefore just involve swapping them with new non-interest-paying fiat. Since our entire money supply was created as debt then running a surplus to payoff the national debt would transfer our entire money supply to debt holders. But a monetarily sovereign nation has no need to borrow in the first place!

            The National Debt is a scam invented in the case of the US by Alexander Hamilton to [paraphrase] “bind the interests of the rich to the success of the new Nation”. It should be paid off as it comes due with new fiat and the US Government should never borrow again.

          2. F. Beard

            In case you missed my point, I believe that monetarily sovereign governments SHOULD deficit spend. Where else is government money to come from?

  8. Min

    “Auerback’s fellowship at Roosevelt ended last year and the excuse given was budgetary.”

    See? Budgets are constrained, aren’t they?

  9. Brick

    I thought it was rather a puff piece which did not really explore the roots of MMT. As Cullen Roche who advocates MMR explains MMT has its roots in Knapp’s state theory of money, Lerner’s functional finance, Godley’s sectoral balances and Minsky’s Employer of Last Resort.
    The article does not cover the subtle differences between Godley’s sectoral balances (twin deficits) and Ruggles and Ruggles three balances. It does not explore Mises and Weber’s critiques and subtle differences in views with Knapp and why commodity money and inflation though currency changes can constrain things. Neither is money circuit theories (a subtle deviation from Knapp) explored as proposed by Rossi or whether it is banks or the state that is really in control of money which would lead to a subtly different policy. There is no exploration of the ideas of Heisohn and Steiger that money has its roots in property or Graziani who was more of a money circuitist in comparison to Lerner’s function finance. There is no discussion on other factors of production and how Employer of last resort schemes can or cannot create inflation through demand for employees managing the schemes.
    By not exploring some of the deviations and elaborations on ideas you might not understand the risks involved. That many of the root ideas are not well critiqued, expanded or the constraints explored due to the lack of broad work in this area, means I am unsure whether the concepts are fully formed and riskless. For me its a puff piece because it does not explore the differing views within the MMT community and thats without exploring the differences to more conventional economics.

  10. Schofield

    “Labor is civilization. Smart labor is human progress, and is why humans are not hunter/gatherers. Everything in the moden world, including virtually all wealth, is distilled and concentrated labor.”

    You can go a step further and say all living creatures including human beings rely for survival on capturing energy so money can be regarded as stored energy and for a society well-being depends upon the maximisation and good circulation of that “energy” relative to resource availability. Too much “energy” and the unit of measurement of that “energy” money loses value.

    1. Lidia

      … but money ISN’T stored energy… it’s merely an artificially inflated CLAIM on stored energy.

      Interest-based debt/money can never be statisfied by the inherent real wealth in the system BY DEFINITION. It is mathematically impossible.

      Our very predicament is based on too many claims chasing too little actual energy/resources.

      1. F. Beard

        Agreed. I for one am sick of the conflation of money with real capital. Money is an artificial construct and one that is currently ill-implemented.

  11. Rotter

    “My understanding is that the flow of energy from the sun is the only “flow” we can reliably count on, and that “flow” needs to be divided up by 250,000 additional people each day”

    Yes, and that flow is the energy that powers ALL life, and is the source of ALL other energy forces we harness. Not solar, or wind only, but also of course, fosil haydrocrabons which are merely chemically stored sunlight energy , from over a couple of hundred million years ago. The Suns total output is equal to apparoximately 3-5 watts per day, per sq (surface)meter, and it is FINITE. Like everything else except space time. Space time is useless to us basically, it is the province of Gods.

  12. Fiver

    Interesting post and discussion. Two questions:

    1) Does MMT have anything to say re limits to “growth”?

    2) Does MMT consider categories like “job” or “wage” and many others even necessary given how productive the base economy now is, and the fact that a very large number of us are essentially superfluous in terms of any real or imagined need for what we do?

  13. Schofield

    “Our very predicament is based on too many claims chasing too little actual energy/resources.”

    Is this meant to be your definition of inflation?

    And sure a deposit in a bank is a money claim but you can spend it to activate the expenditure of energy like somebody digging a hole in your yard for a pond.

    1. Lidia

      So what if I can “activate” a transaction?

      The important part is whether I can conclude it, iow, that my money token holds enough value from today to tomorrow to put real food in the hole-digger’s stomach.

      Our current money game don’t work like that.

  14. Joe Gagnon

    Sadly, that paragraph quoted me correctly and then went on to imply something that is opposite to my view. I have never believed that increasing bank reserves would increase bank lending. The point of QE is to lower bond yields and reduce mortgage rates, which it clearly has done.

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