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The Bears Explain Where Money Comes From

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I got an ugly reminder today of how some people are rabidly attached to the view that debt is the worst evil afflicting modern society (see what happens when you make it easy to get laid and make a boatload of mood altering drugs available with a prescription? The moralists focus their vitriol on the now shorter list of remaining vices).

A fellow panel member at an upcoming conference started running a series of right wing tropes: democracies inevitably led to unsustainable debt levels because the voters aren’t disciplined and responsible; if we don’t cut government spending, we’ll get hyperinflation (this after mentioning deflation-mired Japan as one of those irresponsible democracies); how the public isn’t willing to take pain (ahem, no mention of the pain the banksters, who are the reason debt levels blew out, need to be taking?). And it wasn’t simply that he held those views; it was when he got on this line of thinking, he became vehement and angry. And this panel is before an audience that isn’t economically savvy, which means they probably believe the MSM scaremongering on the deficit front and they’ll tend to think his bumper sticker comments are sensible because they are familiar. I’m not looking forward to this, needless to say.

And I got a reminder of how hard it is to dislodge frameworks that people have internalized via this video on money (hat tip New Economic Perspectives). As much as people who know MMT are sure to like it, I’m doubtful it would be persuasive to viewers who hadn’t had some exposure to those concepts. Indeed, there were points where the bear that was doing the explaining seemed almost annoyed and curt. I also question whether a dialogue is an effective way to present complex ideas like this. It may need to be describes tout ensemble, whether verbally or in writing, and then a conversation like this might follow.

Mind you, I think (and suspect you’ll agree) that this video is well done; I’m just not sure that anything in this format (the Bears in less than 10 minutes) could make any progress with someone who wasn’t on his way to being sold.

If the foregoing is correct, I may need to think about this upcoming conference differently. It may be a bridge way too far to try to turn audience views around; perhaps I need to set my aims lower and merely set out to establish that the austerian moralist prescription just doesn’t work.

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149 comments

  1. YankeeFrank

    You could pique their interest by posing it as a conspiracy theory. A sort of what if — what if there was a plot by the 1% to control governments by forcing them to sell bonds to wealthy interests, thereby forcing the govt to pay interest to powerful banks every time it wanted to do something for the general populace like build schools and energy plants… and take it from there. People love a good conspiracy theory, and if you pose it not as “the wealthy” who do it, but “the powerful”, it may get you farther with many. You could then point out how much debt we had after WWII and how it made NO difference, and how much debt Japan has now, and how its making NO difference. Then point out how this bloviator on the panel actually benefits materially from his fake anger, because I’m sure he does, and you may have a winner. I know it may not be your style, but everyone’s hating the Fed these days – you could point out how the Fed managed to find $13 trillion to backstop the banking system, and we can’t find $1 trillion to provide healthcare to the people. Those kinds of stats are helpful I think — ask yourself how Bill Clinton would do it if he wasn’t such a sellout fuckpants.

    1. Yalt

      “ask yourself how Bill Clinton would do it if he wasn’t such a sellout fuckpants”

      I’m reminded of Douglas Hofstadter’s “Contrafactus”, where he imagines a television that showed subjunctive instant replays, all the way from “what if he hadn’t stepped out of bounds?” to “what if they were playing baseball instead of football” to “what if addition weren’t commutative?”.

      There were many channels broadcasting in the subjunctive mode, but not even Hofstadter could have imagined a universe in which Bill Clinton wasn’t a sellout.

  2. Marley

    Sometimes I think MMT is in need of what I’d call a “shoehorn” proposition. Something to “widen” the mind in preparation for the (ostensibly) counter-intuitive assertions it makes – like “gov’t is NOT like a household” and “deficits are NOT (inherently) bad”. I’ve been meaning to coalesce some writings into somewhat of a concrete start, however I have not yet done so… but here is what I’ve thought:

    1. Seems to me that one needs to frame the “shoehorn” in terms of something everyone can understand; something that seems counter-intuitive. One of these things is flat earth “reality” versus round earth reality. I think the average person could be made to see that at the “micro” level, we all experience this “reality” of a flat earth when in FACT the earth is NOT flat. We use tools like spirit levels and observations like standing water to enforce and validate that micro “reality”, when we know the truth is really counter to what our senses tell us. It’s funny, because we all live comfortably with that dichotomy. And that’s what I think MMT’ers want: people to be (just as) comfortable with a dichotomy where gov’t finances can be understood to be something completely opposite from their personal finances.

    2. I’ve adopted Galileo’s work on helio-centricity as a “coda” (of sorts) to the shoehorn proposition. Before Galileo’s time, a lot of “science” was informed by biblical assumptions, much in the same way that “faith based”economics is based purely on ideological assertions as opposed to a) the observed reality (why no massive inflation in light of trillions added to the “money supply”?) and b) the way our banking actually works in a modern monetary system (gov’t spends money into existence; does not need private sector to fund operations; taxes don’t “pay” for anything etc). Galileo was right in teaching that the earth went around the sun and not the other way around. But the poor man had to recant his (correct) views to avoid being put to death! Getting people to understand that it is possible to believe something – fervently, passionately, unconditionally – that is absolutely wrong, is I believe, a good way to punctuate any initial argument geared towards accepting MMT.

    These are just two examples, but I am sure more can be found. I think it would help to point out things like that before delving into the core MMT argument. That way, the listeners upon whom one is trying to impress MMT ideas will be more amenable, since the case will already have been made that comfort with such (seemingly illogical) ideass is already part of their daily lives.

    Well Yves, I hope you don’t find it all “a bridge too far”… maybe not this time for the full MMonTy, perhaps, but hopefully another.

    Cheers,
    Marley

    1. Calgacus

      (ostensibly) counter-intuitive assertions

      We use tools like spirit levels and observations like standing water to enforce and validate that micro “reality”, when we know the truth is really counter to what our senses tell us

      Well, that’s the problem. The real thing is understand how MMT is totally intuitive, dude. The “ostensibly” is only because peoples’ minds have “been fuddled with nonsense for years & years” (Keynes). MMT writers have a way to go on this. It is mainstream that is counterintuitive. (& false, crazily false, pure garbage.) Macroeconomics isn’t built out of micro, it is the other way around. Money is always macro, by definition. So helio vs. geo centric is a limited analogy. MMT IS what our senses tell us, if we only are careful enough to listen.

      gov’t finances can be understood to be something completely opposite from their personal finances. Right. That doesn’t mean that they can’t be understood as a household, which the MMT academics say far too much, as “understanding government as a household” is precisely what a “credit theory” encompassing a “state theory” does. It’s just a “royal household” – which must do things completely opposite from an ordinary one. The accounting is everything.

      “deficits are NOT (inherently) bad”. How about the shoehorn question: Where the F do you think money comes from, you moron?

      Abba Lerner attributed the excellent sarcastic characterization “Immaculate Conception of Money” to the alternative mainstream theory to his friend Ernest van den Haag – eloquent comment in itself on how far right the we have gone, how much the mainstream has intellectually degenerated.

      I’m seriously troubled by the lack of arrogant and insulting behavior at the appropriate times on the part of MMT academics. They need a little less po-mo-ness groovy emergent complexity dynamics & a little more vicious derision, a little more – “You are an idiot, and I am not” at times. Successful intellectual revolutions almost always have a bit of this nastiness, and wrt mainstream economics it is entirely justified, even complimentary to call them idiots (the only alternatives are raving maniacs or serial-killer-level moral monsters). And really MMT is a counter-counterrevolution. We’ve been there already. In the 30s & 40s almost everybody got it almost, almost right.

      1. YouDon'tSay?

        “deficits are NOT (inherently) bad”. How about the shoehorn question: Where the F do you think money comes from, you moron?

        Seems to me that this is the crux of the problem and was one of the main features of establishing the Fed central banking system in the first place. Creating money as debt is exactly the problem on any number of levels, not the least of which is psychological. It certainly seems to have worked in any case. The answer is to abolish the Fed and free *our* money from the tyranny of a centralized banking cartel who now own everything, lock, stock, and barrel. Once people understand where the money comes from, the next logical question that should come to anyone’s mind is: Why? Why should we pay interest to some fat-ass bankers for the privilege of using *our own* money? Didn’t we elect a government to do that for us? Why indeed!

        1. Thorstein

          Moron: It comes from the ground, you dummy! If it’s gold and shiny, it’s money. The problem is that now our money is fiat money. Fiat money comes from the big, bad, government. It’s worthless in the first place, and when the government just prints more of it, it causes inflation.

          Yves(?): Gold is pretty much worthless, too. WTF can you do with gold (that can’t be done more economically)? It is much better to base the value of the dollar solely on the full faith and credit of the U.S. Government and its brave men and women in uniform, who are willing to give their lives to protect your freedom. Don’t you believe in them??? Whose side are you on??

          1. paul

            The biggest problem I see with discussions about “money” is that “money” is not a thing any more than the points on a scoreboard are a thing.

            Sometimes money is represented by a thing, such as currency or coins, but in reality money is an accounting of how much wealth one has as measured by the unit of account. Wealth, or at least the representation of it, is a number.

            Money itself doesn’t and can’t have any value any more than the markings on a tape measure give you anything of substance. The tape measure can only tell you how long your boat is or how wide your doorway is.

            Gold as “money” is about as counter-intuitive as anything I can think of. It is wealth (of some kind) but in no way a measure of wealth.

            If we were on the gold standard, how would the government “buy” gold? Exchange it for different gold or buy it with fiat currency, which seems absurd on it’s face? Trade some commodity for it? It makes no sense to anyone that has an understanding of math in the abstract sense. Remembering that 2+2=4 is not the same thing as understanding why.

            The biggest hurdle we have to overcome is that most people seem to think in semantic terms, not abstract. Any semantic description, however well crafted, can only be a cartoon or characiture of the real thing.

            Most arguments get caught up in semantic differences while obscuring the underlying realities.

          2. ForReal?

            Most arguments get caught up in semantic differences while obscuring the underlying realities.

            I totally agree. So shouldn’t the first step if we really wanted to speak truthfully and stop all of this politically convenient obfuscation be to simply stop referring to the Federal *debt* and *deficit* as such? How about something like the Total/Annual Federal Money Supply or something along those lines. Then the rubes might finally start to get a clue. That’s the MONEY SUPPLY moron! Do you REALLY want to shrink it when there’s already not enough to go around?

          3. redleg

            The gold standard is but an end-member of fiat. There is no difference between valuing currency at $1=1 gram gold, $1=$0.01 gram gold, and $1 = some floating amount of gold that approaches zero.
            Fixing a gold exchange rate makes the monetary system EASIER for a banking cartel to control, as they hold the bullion and finance mining.
            The problem is concentrated power. A gold standard makes this even easier than the messed up system that has already concentrated it to the point of de facto fascism. Decentralizing political power is the key to upsurping the status quo, and issuance of sovereign currency will certainly reduce the power of the Fed banking cartel.

        2. MRW

          “Creating money as debt is exactly the problem on any number of levels”

          Money IS debt. It’s an IOU token. The problem on many levels is that people aren’t educated. Read the damn dollar bill. The definition is right there.

          1. YouDon'tSay?

            Oh, you mean the Federal Reserve Note, which is of course issued by none other than the Federal Reserve Bank, a private banking cartel entity? It doesn’t have to be that way – MORON!

      2. lucky

        “It is mainstream that is counterintuitive. ”

        You’re saying that I’ve been struggling to make sense of, to understand something that doesn’t make sense after all?

        I’m not sure whether to be relieved or upset.

        1. paul

          “You’re saying that I’ve been struggling to make sense of, to understand something that doesn’t make sense after all?”

          At least now you know there was a reason you couldn’t make sense of it.

      3. JTFaraday

        “I’m seriously troubled by the lack of arrogant and insulting behavior at the appropriate times on the part of MMT academics. They need a little less po-mo-ness groovy emergent complexity dynamics & a little more vicious derision, a little more – “You are an idiot, and I am not” at times.”

        Are you kidding me? They do this all the time, which is why I don’t read them.

    2. Rob

      A good primer for a new paradigm is at economicstability.org
      The real world version of where this can go is HR2990 the NEED act.a bill brought forth by Dennis kucinich….the American monetary institute has a lot of good info and is a good place to start.te Chicago plan of the thirties,was a good idea.but Kucinich’s bill is the best alternative we have at this time.and it is something that can be done,here and now.if the populace were to catch on,and force a real debate….and in my opinion,MMT has some flaws, that Kucinich’s bill doesn’t include…..

    3. JTFaraday

      “Sometimes I think MMT is in need of what I’d call a “shoehorn” proposition. Something to “widen” the mind in preparation for the (ostensibly) counter-intuitive assertions it makes – like “gov’t is NOT like a household””

      There are certain things about MMT that are counterintuitive, but this is not one of them.

      1. Seems to me that one needs to frame the “shoehorn” in terms of something everyone can understand;

      All of this Home Economics baloney is the byproduct of oversimplification in the first place, talking down to the public. There are people with a vested interest in keeping it that way, but that person doesn’t have to be you.

      1. Rob

        Boiling down chartalism and MMT as home economics baloney is what is over simplification…you may not be reading anything from any heterodox economists,not because of their arrogance,but yours.these ideas are over a hundred years old.kenyes used chartalism in formulating his theories,in part…..the idea do a gov’t spending money into creation….these ideas are not trivial.only people’s ability to go there…is.

      2. Marley

        So you think that the widely held belief (especially by our political leaders including the president) that the government is like a household; that the government is spending constrained; that the government has to “tighten its belt” – you think that these commonly held beliefs are NOT intuitive to those that hold them? You subsequently do not think that MMT’s challenge to those beliefs does not constitute something counter-intuitive? Oh, ok…
        in·tu·i·tive/inˈt(y)o͞oitiv/
        Adjective:
        Using or based on what one feels to be true even without conscious reasoning; instinctive.

        1. Marley

          *Correction: You subsequently do not think that MMT’s challenge to those beliefs constitutes something counter-intuitive?

          TY

    4. steelhead23

      It isn’t just that from a life steeped in microeconomic reality that MMT seems counterintuitive, it is that acceptance leads to questions about both monetary and fiscal policy that can cause cognitive dissonance. For example, let us consider if both monetary and fiscal policy were centrally managed. In the current U.S. condition, MMT would suggest that the U.S. should be running an even larger fiscal deficit in order to reduce unemployment and perhaps prevent deflation. But, this would likely reduce the value of the dollar among global currencies (unless they all did the same thing), meaning imports, particularly oil, would increase in price. Energy drives the economy so we could find ourselves chasing our tail (death spiral). Also, I am very uncomfortable with the notion that the government funds deficits via borrowing, subjecting itself to interest rates only weakly within its control – interest rates that could turn usurious in the blink of an eye. Instead of borrowing money to cover deficits, the government should simply print the money into existence and suffer/benefit in the form of inflation.

      Finally, until the People remove the financial oligarchs from control of federal monetary policy (i.e. kill the Fed) there is virtually zero potential for MMT to prevail.

  3. skippy

    1.5 planets…

    http://ingienous.com/?page_id=3876

    I was once asked, “As a money manager, what keeps you up at night?” At the time I had no good answer, but gave the question quite a bit of thought. Generally, market movements and volatility don’t bother me in the least (we implement a low volatility strategy). Instead, what keeps me up at nights is the likelihood of a major change in population growth rates.

    For the better part of human history the global population has remained tame. Archeologists believe that the human population got as low 1000 people before extinction was real possibility. Slowly, our species clawed back and remained under 100,000 people for thousands of years, until the advent of farming. Within 30,000 years of the birth of farming small cities started to spring up. Indeed the earliest city found, Mureybet (modern-day Syria), dates back to 8000 BC with a population of 500. Rome, during the life of Christ, was the world’s largest City with a population of 1,000,000. Today, the largest city is Tokyo with a population exceeding 30,000,000.

    Currently, the human population is growing at about 1.3% per year with a doubling time of 54 years. At this rate the global population will grow to 12 billion people by 2054 and 24 billion people by 2108. By 2780, the world density would be such that one person would inhabit every square meter of earth. By 4400, the mass of people would be greater than the mass of earth (see video). There is no doubt that human population growth rates will change well within 780 years. Paul Ehrilich wrote that the optimal size of the planet is roughly 1.5 to 2 billion people. Others have estimated the carrying capacity of the earth to be closer to 3 billion people. By any calculation, we are well beyond the sustainable carrying capacity for the planet and we are still adding new people to the planet in an exponential fashion.

    http://www.outsider-trading.com/the-monster-under-my-bed-part-1/

    skippy… There is more than enough for all… its just not getting around properly… why[?]… because… some are better than others. BTW who would give this MMT power to this mob in office… this global cartel… really…

    1. YouDon'tSay?

      Excellent points! And what has been the greatest enabler of all time? Western style global capitalism, based on the massive extraction of a totally unique, one time good only energy source: fossil petro fuels. Funny how the planet’s feedback loops are always one step ahead of us though, ain’t it? I guess the only question remaining at this point is: Are our capitalist masters aware of all this and planning for they and theirs accordingly; i.e., are we the sheeple being led knowingly to our slaughter as they plan for the impending collapse? Or, are they blissfully unaware (or alternatively, techno snobbish and actually believe that any problem can be simply engineered away?) as well, and just flat out prefer to live high on the hog while the pig’s still fat? We will see soon enough…

    2. MRW

      You’re not bringing up that discredited Paul Ehrlich are you? Every prediction he’s written has been proven wrong.

      Right now, today, we could put the entire population of the earth inside Texas on a one sq. metre per person scale.

      Texas’ size is 695,619,006,674 sq metres.

      That’s not even one on top of another in apartment buildings or communities.

      That’s one state inside the United States. The US is smaller than Canada. Canada is way smaller than Russia (in fact, the width of Russia equals the distance from Seattle to Tehran).

      1. skippy

        Google satellite the island of Hispaniola, its probably the best black and white image of what, not to do, and what works best in the long run.

        skippy… Hugh sums it up nicely at the bottom of this thread.

  4. Daniel de Paris

    Sometimes I think MMT is in need of what I’d call a “shoehorn” proposition. Something to “widen” the mind in preparation for the (ostensibly) counter-intuitive assertions it makes – like “gov’t is NOT like a household” and “deficits are NOT (inherently) bad”.

    +1 on this.

    The MMT certainly need to expand on this.

    MMT is less than obvious. Except for household with one (or more) massive mortgate and a significant share of its own mothercountry public debt. Even more so for people living outside the comfortable USD currency realm.

  5. LAS

    This is certainly a good clip. It gets a little more “head hurting” toward the end (“Thinking is hard; that’s why we rarely do it”).

    I apologize for being pessimistic this morning. “Confessions of an Economic Hit Man” expressed something … that populations who are not intimidated by ideas, concepts, legal agreements and propaganda, are subject to progressively more violent means of getting them to conform. That is, then, that the problem is actually less about perfect understanding than over-turning a force. The problem is how to effect a revolution by raising courage among a wide enough swath of people.

    Maybe one day the little bears will get around to explaining that.

    1. MontanaMaven

      I agree that this video was pretty good until the last part where the one bear did a lot of talking so it turns into a monologue. The makers of the film should keep it in dialogue form as much as possible. But it’s pretty good.

    1. john

      …also, something about what happens when gov’t debt is used to pay for an unnecessary overseas war and maybe that’s one reason we don’t get to enjoy the fruits of the deficit spending.

      1. MontanaMaven

        Yes, where and how the government spends the money is very important. It should be on physical and human (education, health) infrastructure and not on non productive things like bombs. Like the early colonies did with their own currencies or notes. They lent money to build roads and bridges. The interest was put back into the local kitty to be lent again for more stuff used in the commons. During the War for Independence (wasn’t really a revolution like France), we printed Continentals to pay for food, clothing, rifles, tents, etc. Worked well until the Brits counterfeited them. Paine said the Continental was what really won the war. Lincoln used Greenbacks to pay for his war. Rich history. It’s what is called the American system versus the British system of borrowing money from private bankers. I would recommend “The Lost Science of Money” by Stephen Zarlenga.

        1. Rob

          Yes,the American monetary institute and stephen zarlenge has plenty of good information about money creation.The AMI has a different take than does MMT people,and in my opinion a better worked out plan too.this was the impetus behind dennis Kucinich’s NEED act,HR 2990.people here are talking ,what if….blah blah blah…..the history of money is in zarlangas book…as well as others…the Chicago plan from the thirties was the beginning of what we must do now.people have been screaming what must happen for decades, and they were right…the little known kettle pond institute did a primer on this at….economicstability.org…

    2. YouDon'tSay?

      Google “money as debt” and watch the videos. They were up on YouTube last time I checked. They spell it out pretty clearly.

      1. YouDon'tSay?

        Although they almost certainly will make your head hurt the first time you watch them. Thinking – in this case unlearning crap we’ve been taught since we were just wee little tykes – is indeed hard.

  6. markb

    Ok, new here… what’s going on with this video, which is completely inaccurate and backwards… government does not print money, it borrows money… banks create money. I can’t tell from the comments, is Yves panning this video or saying it’s going to be hard to convince people with a short video of bears talking?

      1. F. Beard

        Co-existing government and private money supplies (cf. Matthew 22:16-22 – “Render to Caesar …” ) is the ideal solution and should please everyone worth pleasing.

      2. Rob

        Who should create money?the US treasury ,of course.(in the US),as was enshrined in the constitution.the federal reserve was only created as a result of the 16 th amendment to the constitution….before that money creation was also problematic,banks and other private entities,states,mines,etc.created money.these include the first two “banks of the united states”,which were banks held mostly by British concerns….the British may have lost when we won our revolution,but that never stopped them….even our current federal reserve is partially owned by prominent English banking families that’s we’re owners in the first two US banks..In the early days the value of money depended on where you were and whose American money you had…..and that was even true during the gold standard.for not all gold is equal….purity varied.
        Now we have money creation out of the hands of the US gov’t,and in the domain of the federal reserve.the selling of treasury bonds is how the gov’t gets its spending money,partially…but it creates no money…not since the greenbacks of Lincoln,although Kennedy was trying…
        The creation of money falls under the category of the money system,after the creation,that money supply would be just as it is today,except for a restriction of fractional reserve banking.that has to stop..that too is money creation today, money is being created as debts,in the sense all these non governmental players are issuing debts in all forms from bonds,to derivatives,tofractional reserve standards….this is all creating money from nothing, and owing more than was created….. At which time there will be more debt created to pay the current debt and new ,greater debt will be issued… This is the fraud…there is no even equation.not as long as interest is added to the current debt level.the debt will always be greater..so
        The kucinich bill,HR2990,has a debt replacement scenario outlined,so that we can spend money into the system that is actually US currency,that will replace the federal reserve notes we all have now.the current owners of our national debt can be paid off as those debts become due, and we no longer have to create a debt payable to private companies who have profits and discounts,that the rest of the capitalist system doesn’t.

    1. paul

      “government does not print money, it borrows money”

      Really? from whom? Where did they get it?

      FYI, banks create CREDIT, not net money. Banks take zero and split it into an asset and a liability and create a loan. When the asset is used to buy something, spending is positive. When the loan is repaid, spending is negative. Interest makes the net flow negative.

      The economy is dependent on NET FLOWS. Forgetting about liabilities is the greatest sin committed in economics.

      1. markb

        Look, I’ll make this simple. The treasury prints up a bond. The primary dealers buy the bond. The FED buys from the primary dealers to inject money into the system. In this way the government borrows money from the capital machine. Only when the FED buys and KEEPS the bond is new money created out of thin air. That’s called monetizing the debt.

        Again, simple. The bank creates new money whenever they make a loan. In a normal economy(Ex QE) that’s how new money is created. Then the bank gets to collect interest on the money it’s just created. Pretty sweet deal, right. When you take out a 30 year mortage the bank gets to collect a portion of your labor every month on money it created. It’s good to be a bank.

        You’re confusing money with credit. Sure it’s credit when the bank creates it, but then it’s money when the seller is paid.

        MMt is nonsense.There is no facility for the government to create money except QE.

        It basic really. The facts are: governments borrow money, banks create money. That’s not even the most interesting part, it’s the consequences of the above which is so fascinating. I’ll leave that to you.

        1. F. Beard

          Sure it’s credit when the bank creates it, but then it’s money when the seller is paid. markb

          Not necessarily, unless the seller is paid with physical cash.

          1. markb

            Oh do cumon. Credit spends just like cash; haven’t you ever used a credit card?

            From now on I’ll sign off with:

            Governments borrow, banks create!!!

          2. paul

            “Oh do cumon. Credit spends just like cash; haven’t you ever used a credit card?”

            Oh give us a break!

            Credit spends like cash, and the matching liabilities spend like negative cash. When you spend cash you aren’t left with liabilities that subtract from income (and spending) when repaid.

            You need to go back to 5th grade arithmetic for a refresher course.

        2. paul

          “Look, I’ll make this simple. The treasury prints up a bond. The primary dealers buy the bond. The FED buys from the primary dealers to inject money into the system. In this way the government borrows money from the capital machine.

          So much stupid in so little space. Concentrated stupid.

          Treasury sells bond to primary dealer, that uses reserves SUPPLIED BY THE FED as an agent for the Federal government. The bond is generally held by the public in the non-government. There have been exceptions, to the tune of about $5 Trillion to date.

          The reserves used to buy the bonds become cash when spent into the economy. It has no offsetting liability taht needs to be paid back, because the government created the reserves out of thin air. It’s a phantom liability. There is no possibility of default, since the government can hold infinite liabilities in it’s own currency.

          At the same time the operation just added net financial assets to the non-government. How could that be? How can you borrow money from your right pocket, put it in your left pocket and have your financial assets increase?

          Faith and begorrah, magic. Or, maybe just a convoluted transaction devised to put interest in the pockets of rich people for the privilege of issuing the people’s own currency, and making it look like a loan to boot. We’re suckers if we put up with it, but the government can afford it as long as there are numbers in the universe. First things first is my philosophy. People can’t even do simple arithmetic. “Let’s get to work”. h/t Gov Rick Scott of Florida.

          I hope you are pretty old, I would hate to think young people were as as inept at arithmetic as you are. Depressing.

          1. F. Beard

            Treasury sells bond to primary dealer, that uses reserves SUPPLIED BY THE FED as an agent for the Federal government. paul

            Yes! The Federal Government spends FIRST (creating new reserves) and then drains those reserves (to control the interbank lending rate) later by selling sovereign debt.

          2. markb

            Paul,

            you are one confused sumbitch. You use a lot words to say nothin’ I had to read those comments a couple o’ times to realize you haven’t a clue about how money works.

            Ever hear of 16 trillon dollar debt…

            Aw what’s the use. You’ve made up your mind. And you’re not even ashamed enough to display your ignorance for all to see. There’s little hope we’re going to turn this around when dumb asses like yourself are unashamed to reveal their dumbass-ness for all to see.

      2. Rob

        To say banks create credit and not money is sidestepping the issue.credit may well be for a moment,just a blip on a screen,an account in a ledger,but all banks trade those account balances back and forth….without transferring actual cash.even checks these days are not actually moved anymore,just facsimiles .the distinction between cash and credit is tenuous and temporary…..in aggregate,the banks create money.because eventually all the little banks pay their debts to the bigger banks with credits, the credits are used by the fed banks as reserves, the treasury is given its limits by the reserves on the books at the federal reserve banks….sure there is daily bookkeeping that at sometimes is in one column, and at others in another column…. But the simple point is the federal reserve gets to make money from nothing… Then those credits it has,it lends out(fractional reserve rules) it requires real money in repayment(something it created before and has been blessed by consumption)’and returned to the pot…..it seems to me money is akin to the water cycle on earth…it goes around and around,changing forms,manifesting itself,and disappearing,and re- appearing…..
        But money creation is a fairly specific part of that cycle.right now,it is done by certain players….. And the idea of an alternative way f doing it would put that power in the hands of the treasury.so that the benefits could belong to the population of the united states, and not an amorphous banking cartel, that skews markets ,perverts business incentives, and generally screws everyone else in this country.

    2. maude

      You are in fact mostly correct, the government doesn’t ‘print’ money, it presses a key on a computer to create money.

      Please google Modern Money Theory, fiat currency.

      1. markb

        As above, MMt is nonsense. It’s a completely false notion… probably dreamed up by banksters to confuse the easily confused.

        1. MRW

          @markb,

          Really? Then why don’t you don what I did, call up the nearest Federal Reserve and ask them questions.

          Barring that, try these sources:
          Auerbach, Robert D.,
          Money, Banking, and Financial Markets, 2nd Ed., MacMillian, 1985.

          Berstein, Peter L.,
          A Primer on Money, Banking, and Gold, Vintage Books, 1965.

          Board of Govenors of the Federal Reserve System,
          The Federal Reserve System: Purposes and Functions, 7th Ed.
          (The Board 1984).

          Bryant, Ralph C.,
          “Controlling Money”,
          The Brookings Institution, 1983.

          Cosimano, Thomas F. and John B. Van Huyck,
          “Dynamic Monetary Control and Interest Rate Stabilization”,
          Journal of Monetary Economics 23, 1989, pp. 53-63.

          Dillard, Dudley,
          The Economics of John Maynard Keynes,
          The Theory of a Monetary Economy,
          (New York: Prentice-Hall, 1948).

          Feige, Edgar L., Robert McGee,
          “Money Supply Control and Lagged Reserve Accounting”,
          Journal of Money, Credit, and Banking,
          Vol. 9 (November 1977), pp. 536-551.

          Feinman, Joshua N.,
          “Reserve Requirements: History, Current Practice, and Potential Reform”,
          Federal Reserve Bulletin, June 1993, pp. 569-589.

          Feinman, Joshua N.,
          “Estimating the Open Market Desk’s Daily Reaction Fraction”,
          Journal of Money, Credit, and Banking, Vol 25, No 2 (May 1993).

          Henning, Charles N., Pigott, William, Scott, Robert Haney,
          Financial Markets and the Economy, 4th Ed., Prentice-Hall, 1984.

          Knodell, Jane,
          “Open Market Operations: Evolution and Significance”,
          Journal of Economic Issues, (June 1987), pp. 691-699.

          Laurent, Robert D.,
          “Lagged Reserve Accounting and the Fed’s New Operating Procedure”,
          Economic Perspectives, Federal Reserve Bank of Chicago,
          Midyear 1982, pp. 32-44.

          Manypenny, Gerald D. and Bermudez, Michael L.,
          “The Federal Reserve Banks as Fiscal Agents and
          Depositories of the United States”,
          Federal Reserve Bulletin, October, 1992.

          Mayer, Thomas, Duesenberry, James S., Aliber, Robert Z.,
          Money, Banking, and the Economy,
          2nd Ed., W.W. Norton & Company, 1984.

          McDonough, William, et al,
          “Desk Activity for the Open Market Account”,
          Federal Reserve Bank of New York,
          Quarterly Review, Spring 1992-93, pp. 109-114.

          Meulendyke, Ann-Marie,
          “Reserve Requirements and the Discount Window in Recent Decades”,
          Federal Reserve Bank of New York, Quarterly Review, Vol. 17 (Autumn 1992).

          Meyer, Lawerence H., Editor,
          “Improving Money Stock Control”,
          Center for the Study of American Business,
          (Boston: Kluwer-Nijhoff Publishing, 1983).

          Mishkin, Frederic S.,
          The Economics of Money, Banking, and Financial Markets,
          3rd Ed., Harper Collins, 1992.

          Pierce, David A.,
          “Money Supply Control: Reserves as the Instrument Under Lagged Accounting”,
          The Journal of Finance, Vol. XXXI, No. 3 (June 1976) pp. 845-852.

          Rosenbaum, Mary Susan,
          “Contemporaneous Reserve Accounting: The New System
          and Its Implications for Monetary Policy”,
          Economic Review, Federal Reserve Bank of Atlanta
          (April 1984), pp. 46-57.

          Roth, Howard L.,
          “Federal Reserve Open Market Techniques”,
          Economic Review, Federal Reserve Bank of Kansas City (March 1986).

          Timberlake, Richard H.,
          “Institutional Evolution of Federal Reserve Hegemony”,
          Cato Journal, Vol. 5, No. 3 (Winter 1986).

          1. markb

            Nice long list – means nothing.

            Tell me the mechanism the government uses to ‘print money’

            Ya’ can’t, because they don’t(absent QE of course)

            you are an example of the easily confused.

          2. F. Beard

            Tell me the mechanism the government uses to ‘print money’ markb

            Spending. The Federal Government spends new reserves into existence. It later drains those reserves by selling bonds to control the inter-bank lending rate.

            And what business does the Federal Government have controlling the the inter-bank lending rate? Properly none, I’m sure we both agree.

          3. Bert_S

            Tell me the mechanism the government uses to ‘print money’ markb

            Stock market crashes. M1 went to $12 trillion in 2008.

        2. tiebie66

          But MMT is quite interesting! What caught my ear in the video was the remark that states were constrained in spending because they couldn’t create money. This seems like a strong argument for secession. Like Greece needs to leave the EZ, states need to leave the union. Then they are no longer constrained monetarily or fiscally. But this would leave counties then constrained. Thus, counties too need to secede from states. But this would leave cities and municipalities constrained, and of course, they should secede from counties. Finally, households should secede from municipalities and cities. Then the household balance sheet would be a sovereign balance sheet. All the world’s financial troubles would be solved provided there are output gaps and thus no inflation pressures.

          1. joebhed

            Actually, it is a better reason for sharing in the money-creation powers than in secession.
            The Kucinich Bill includes a provision that 25 percent of all new money creation goes directly as a grant to the states.
            The states determine on a 25 percent power-sharing basis where 25 percent of the new money will go.
            It’s called democratizing and decentralizing the national economy.
            Which is really kind of revolutionary.
            It’s not something MMT ever thought of.

            For the Money System Common

    3. MRW

      @MarkB,

      Ok, new here… what’s going on with this video, which is completely inaccurate and backwards… government does not print money, it borrows money… banks create money.

      Actually, wrong. You’re wrong. The US federal government is the only entity worldwide that can legally create US money. What it grants to the Fed and banks is a series of laws enacted by Congress that permit certain credit-creating activities (Loans create deposits, not the other way around). The federal government runs the mint and printing press. It’s in the Constitution, and the “coins” issue in the Constitution was settled by the Supreme Court Legal Tender cases in the 1870s. The Supreme Court determined that it didn’t matter whether it was a die-press or a printing press, as long as the government seal was on the currency and that currency was required for payment of taxes, then it was legal tender.

      You need to read this:
      http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

      1. joebhed

        The Constitution DOES empower the Congress to create the nation’s money.
        But there is nothing to stop THAT Congress from immediately handing over the money power to private banks – and I mean immediate.
        We the people of the US were 6 Million in debt before we coined the first nickel.
        That the delegation of Congressional authority to the private Fed corporation is legal or not has never been decided.
        But the former Chair of the House Banking and Currency Committee called it Treason.
        Suffice to say it is done and can be undone.
        And suffice to say that since it has been done, the government only creates coins as “money”.
        The banks create all of the money.
        Yes we print the currency Bills and sell them to the private Fed banks for the cost of printing.
        They are then paper.
        They become ‘money’ by the actions of the bankers.

        For the Money System Common.

  7. Tony Arko

    At one point in time there was no currency backed by the US yet there was money in our country. It came from other countries and it was backed by something in those other countries. They use the word money but they should try this little video with the word currency instead. Money is an object or record that is used to trade for goods or services. Currency is just one form of money. If I decide that US currency is not a form of money I will accept, then it is not money to me. It is just linen and die with pictures on it. The refusal to accept currency is what will create the great reset. And that will occur when the people realize the value of the currency becomes increasing worthless and other forms of money are more stable. Let the bears explain Weimar Republic.

  8. uhf

    In my humble opinion, this video is a mess, wrapped in a mess, wound around a mess. These issues, unfortunately, cannot be understood without understanding that money is a kind of information, that informational things exist according to particular principles different than those that govern physical things. Informational things (words in a language, pictures of distant glaxies, the rules for playing jotto) come into being without getting “taken” away from other things. Money is not made / created / from or by the “government” any more fundamentally than from any other source or event. Money comes into being in transactions, most of them styled as “lending,” but the essence of money creation is the making of a negotiable representation of value.

    What the video completely doesn’t get, and MMT mostly doesn’t get, is that the quality of the representation, its accuracy as a depiction, matters. Matters, over time, a lot.

    1. ForReal?

      I think you’re over thinking it. Money itself is really NOT all that complex, it’s all the psychological baggage we carry around about it that makes it seem so. And rest assured, the banking cartel has and continues to do their damnedest to ensure that it remains shrouded in psychological mystery. What do you think lies at the root of all the current hubbub about the Federal Debt and everybody “owing” someone something? Does anyone honestly think that *anyone* actually intends to “pay it off,” or that they even actually comprehend what paying it off would mean? And if we don’t pay it off, but merely stabilize it, what would a “reasonable” debt figure even be and why? How would we get there and how would we maintain it once we did? Does the fact that no one even asks these questions, never mind actually tries to intelligently answer them, not send out a tiny clue that it’s all a bunch of hooey being played for maximum political effect on “we the sheeple?” It should.

      1. joebhed

        Money is obviously and of course complex.
        If you read Wray’s books he is always frank about the “stylized” construct that MMT represents.
        This is because money is merely a legal, social construct.
        Money is what we the sovereign people and our government say it is.
        If money were not complex, we wouldn’t have this dialogue, which has barely touched the surface.
        I suggest you add a read of Soddy’s “The Role of Money” to your knowledge base.

        For the Money System Common.

    2. Frank

      I agree, that is a horrible movie. Confusing. And I believe inaccurate.
      It is amazing to me that there are so many different points of view about our money even from the smart people on this blogs. Think of the average American who doesn’t care, has a lower IQ, and doesn’t have the time to try to understand this. This is remarkable.

      If anyone has seen a “picture”, a good one, of how the process works could you please post a link.

  9. Gloeschi

    Could someone post their best website link for each theory? Could we agree at least on this: something is only of value to humans if it is rare. I wouldn’t be able to sell you air, since air is abundant (but I might be able to sell concealed air, or nitrogen). Gold is (mostly) of value because it is rare (and expensive to extract). It helps it looks nice and is chemically inert, which is conductive to its use as store of value.
    Put to an extreme: if dog poo was rare, it would be valuable.

    1. MontanaMaven

      What is valuable is what directly nurtures humans and the planet. So if dog poo can be turned into fertilizer or energy, then it is far more valuable than a chunk of shiny metal.

    2. F. Beard

      You should be able to use anything you want for private debts (if mutually acceptable) but inexpensive fiat is the ONLY ethical money form for government debts.

    3. alex

      “if dog poo was rare, it would be valuable”

      The Fed is way ahead of you. They’ve already bought a lot of that, though for some reason they prefer to call it mortgage backed securities.

      1. Bert_S

        The dog poo is buried in the back yard, but then they messed things up so bad investors can’t even re-posses that.

      2. YouDon'tSay?

        If dog poo were legal tender for settling tax obligations, the streets would all be cleaner and the IRS offices would stink to high heaven.

    4. maude

      Money would have no intrinsic value on its own, it only is a store of value. Gold is a commodity that retains its value irregardless of if it is used as a currency. What gives paper currency its value is when a government requires payment of taxes and other debts owed to it in its own currency.

  10. DP

    Yves, with regard to your regular references about “scaremongering” on the deficit, anybody who doesn’t think the U.S. deficit and debt situation is a major problem is innumerate, ideologically blinded, or both.

    1. paul

      “anybody who doesn’t think the U.S. deficit and debt situation is a major problem is innumerate”

      This comment is another iteration towards innumeracy…

    2. ForReal?

      Correction:

      …anybody who doesn’t think thinks the U.S. deficit and debt situation is a major problem is innumerate, ideologically blinded, or both.

    3. Mel

      It looks that way, because lately the money that’s incarnate in “The Debt” is being used for completely useless things. If that money were applied to things like food, housing, intellectual pusuits like entertainment, … it would all seem very different.

      Prior to 1970 people were paid wages, and they used the money for food, etc. That faded away after 1970, but The Debt filled in the gap and met those needs.

      It was only around 2008 when everybody noticed “Whoa! They can never pay all that back!” (With no wages, no money of their own, there was no way they could.) From then on The Debt was devoted only to reliable projects: creating more money. A huge tail-chase.

      1. YouDon'tSay?

        And who, pray tell, hoovered up all that new money? “Welfare queens?” Of a sort, but not the ones you’re probably thinking of.

    4. Yves Smith Post author

      No, you are dead wrong on this one. Go look at Latvia, Ireland, and Greece. Debt to GDP has gotten WORSE as a result of cutting government spending in an effort to reduce debt levels. You shrink the economy making the situation worse (oh and creating misery like higher unemployment on top of that).

      The Federal government is not like a household, business, or a state government. It prints its own currency. It can therefore never go bankrupt. It can generate too much inflation, but with so much slack in the economy and labor having no bargaining power, we are a long way from that being a problem.

      The economy consists of households, businesses, the government, and exports/imports. Just forget about the export/import sector for the sake of simplicity. Households almost always net savers in aggregate. Businesses in theory are net borrowers (to invest in new projects) but they have not been acting like proper capitalists in the US since 2003. They’ve net saved even in the last expansion. This has been true all over the world (net savings of businesses even in the expansion) in advanced economies and even many developing economies ex China. Business net saving has increased in the post crisis period.

      When the household sector saves and the business sector saves, you need government to accommodate them and net spend, as in run deficits, or the economy contracts, which makes debt to GDP worse. This is accounting. This is based on the same principles as double entry bookkeeping.

      So yes, the Federal deficit IN THESE CIRCUMSTANCES is not a problem. And yes, you have been conned.

      1. markb

        No Yves, the government does not ‘print it’s own money.’ It should, but at present it borrows it’s own money…only “printing” when Ben monetizes the debt.

        1. paul

          markb: You haven’t been paying attention. NO NET MONEY enters the economy through the Fed. This is only possible through the Treasury. Only the treasury is allowed by law to do fiscal. The Fed is prohibited by law to do fiscal but for very rare exceptions.

          1. markb

            Paul, what the hell are you on about?

            What do you think QE does?

            It prints money (there, answered that for ya’)

            That’s because, the FED buys government debt that would normally (absent QE) be bought by the capital machine. The primary dealers get a big fat + in their account at the FED just as if a private party bought the bond.

            Seriously, where are you people getting your info?

          2. F. Beard

            that would normally (absent QE) be bought by the capital machine. markb

            Yes, with bank reserves. But the banks are not reserve constrained anyway when it comes to lending so purchasing power in the private sector is not reduced by selling sovereign debt to the private sector.

            If we had 100% reserve lending and no central bank then sovereign debt sales would reduce private sector purchasing power and it could be said that the monetary sovereign was borrowing.

          3. paul

            markb, Sept 21, 2012 @ 5:56 PM

            How does money “printed” through QE get into the hands of agents in the non-government?

  11. EDL

    Yves … what’s passed over here is the interests at stake. Banks do create a form of money when they issue debt, as is mentioned briefly and then ignored in the video. (I know technically it is not money, because it must be paid back with interest, but in the short term it acts like money in allowing people to purchase goods and services). Even though it makes no sense for a sustainable system, banks imagine that they can be the sole source of spending power in the economy through the exponential rise in debt issuance. This allows them to enslave the population as debt serfs, and earn their rents as income … lavishing much of it on their top employees. Certainly, our memories are not so short that we can’t remember Geithner’s job numero uno upon entry into treasury to get the securitization of debt back up and running as before the crash. Banks do not like that the government issues money into the economy and then claws back parts of it in taxes … as Michael Hudson has repeatedly pointed out, taxes compete with rent incomes from interests … thus the endless quest to lower taxes and free up money for debt service payments.

    Naturally, if money isn’t created and spent into the system by the gov’t, then we would have deflation as debt service drained the economy of money in the system … but most people simply can’t understand this dynamic. Indeed, economists do not factor debt into their models … they imagine a world where income and expenditures for goods and services are a zero sum. In their world there are no rentiers that have set up a toll both on real-estate, higher education and other large purchases (how convenient).

    So, people see government deficits and freak out, since they understand, indeed are MADE to misunderstand such a simple system so completely.

    As a last though, liberal MMTers must engage in political economic analyses or their cause is lost. It is not enough to try and justify government deficits in isolation of other monetary dynamics and powerful interests in the economy (i.e., debt issuance by PRIVATE rentiers, aka banks). What is at stake is totalitarian serfdom (to private financial interests — how ironic for the libertarians) or democracy. I will take the latter, please.

  12. Lambert Strether

    The first few minutes are a brilliant demonstration of the virtues of the Socratic method.

    The last minutes are also a demonstration, but of the failure of the lecture format.

    So it’s too bad the entire movie isn’t like the first few minutes, where anybody can follow the logic, and there’s no loggorhea from a bear who gets testy when not understood.

    1. paul

      The original version is as you describe, I suppose I should post it also. This version was revised to “cover more bases” so to speak.

      I agree with the comments that the video targets those already somewhat in paradigm, but it is also useful in generating discussion among those that reject the ideas outright. The original version took only 15 minutes to write an was prompted by a discussion I had with a friend the day before. He is a smart guy that taught science and math but was caught up in the fantasies of conventional wisdom.

      It’s not lost on me that successful arguments must begin at a lower level than even the original video. It may be prudent to target the young and just wait for the rest of the ignorance to die off. Unfortunately for me, I’m not young.

      1. Montanamaven

        My rancher husband watched more of it than I thought he would. He knows nothing about MMT, the fed. Etc. I think you are on to something because he was intrigued and willing to watch it again. But he like I lost interest when the lecture began.

        1. paul

          As I wrote downthread, the original is dialog all the way through and I will eventually post it.

          Kind of funny, the revised version came about due to criticisms of the over-simplicity of the original.

          Still, as Yves says, the message must be even simpler. Talking points hammered on over and over and over.

          Just have to come up with some.

  13. petridish

    I’m not exactly sure what concept you’re trying to illustrate here, but it seems that discussions like these get into the weeds pretty quickly. I didn’t get much out of this video.

    It seems any discussion of the national debt should start with a simple question. Let’s say I want to buy something for $100 and I have two ways to pay for it. I can use my perfectly legal printing press to print a $100 bill, hand it over and get my item and be done with it. Or, I can borrow $100 from someone else and pay them back $100 plus interest later. This course makes the item cost more and gives the lender control over me in the future. Why would I borrow the money?

    At the risk of being labelled a simpleton, I would say that all of the complexities and convolutions of any monetary theory stem from the inability to explain and justify this one inexplicable and ultimately self-destructive action.

    1. F. Beard

      If you’re a simpleton then so was Abraham Lincoln (Greenbacks) and Thomas Jefferson (the following):

      “If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.” from http://quotes.liberty-tree.ca/quote_blog/Thomas.Edison.Quote.6991

      1. maude

        Excellent! Do you have a blog or twitter handle that I could follow? I am compiling MMT supporters/analysts and working on bringing it to a wider audience. Your explanations are always very understandable.

        1. F. Beard

          Thanks. But no blog or Twitter handle. I mostly comment here but also less frequently at “The Telegraph”, Bill Mitchell’s site (billy-blog) and occasionally at “New Economic Perspectives”. I also harass Mish Shedlock at his site occasionally under “frlbane”.

          Good luck with spreading the MMT message; it is at least 1/3 of the total solution. Steve Keen’s universal bailout (“A Modern Debt Jubilee”) and genuine private money alternatives are the other 2/3, imo.

  14. F. Beard

    I got an ugly reminder today of how some people are rabidly attached to the view that debt is the worst evil afflicting modern society … Yves Smith

    1) Deficit spending by the monetary sovereign is GOOD because that’s where government money comes from. However,

    2) Deficit spending by the monetary sovereign does NOT require borrowing. Noted MMTer Professor Bill Mitchell calls borrowing by the monetary sovereign “corporate welfare.”

    3) Excessive private debt is the cause of this Depression.

    4) Common stock as a private money form requires no borrowing or usury since it is spent, not lent into existence. Nor does it require fractional reserves, a lender of last resort or government deposit insurance. Nor does it require shiny metals.

    Let’s please keep deficit spending by the monetary sovereign (GOOD) separate from borrowing by the monetary sovereign (NOT GOOD). The former does NOT require the latter. This Depression is dragging on because of that (deliberate?) confusion.

  15. indio007

    In order for paper money to be printed the FED must deposit acceptable collateral with the US Treasurer via a Federal Reserve agent (whatever that is).

    “The collateral security thus offered shall be notes, drafts, bills of exchange, or acceptances acquired under section 10A, 10B, 13, or 13A of this Act, or bills of exchange endorsed by a member bank of any Federal Reserve district and purchased under the provisions of section 14 of this Act, or bankers’ acceptances purchased under the provisions of said section 14, or gold certificates, or Special Drawing Right certificates, or any obligations which are direct obligations of, or are fully guaranteed as to principal and interest by, the United States or any agency thereof, or assets that Federal Reserve banks may purchase or hold under section 14 of this Act or any other asset of a Federal reserve bank. In no event shall such collateral security be less than the amount of Federal Reserve notes applied for.”

    It would appear there are NO RESTRICTIONS on acceptable collateral.
    But look what was snuck into the Check 21 Act @ (117 STAT. 1193)

    (d) TECHNICAL AMENDMENT.—The second undesignated paragraph
    of section 16 of the Federal Reserve Act (12 U.S.C. 412)
    is amended—
    (1) in the third sentence, by inserting ‘‘or any other asset
    of a Federal reserve bank’’ before the period at the end; and
    (2) in the last sentence, by inserting ‘‘, or are otherwise
    held by or on behalf of,’’ after ‘‘in the vaults of ’’.

    Take note of —–”OR ANY OTHER ASSET!”

    ANY ASSET CORPOREAL OR INCORPOREAL MAY BE USED AS COLLATERAL FOR THE ISSUANCE OF NEW NOTES.

    FRN’s can be imagined into existence.

      1. Bert_S

        I’ve alway thought Ben would get around to buying shopping malls. But he seems really keen on the stock market too.

  16. TC

    All you need do on this panel is explain how the shadow banking system effectively created the illusion of growth and prosperity using a derivatives-ladened financial infrastructure whose dual effect was to bring down interest rates while ramping up demand for debt securities of every sort. Per Treasury debt, these were valued for their dynamic hedging functionality. With rates falling during the rise of the shadow banking system in the Greenspan era, it was a virtual no brainer for any and every institution (including the U.S. Treasury) to endlessly pile on more debt. The parabolic increase of core debt securities (including that issued by the U.S. Treasury) could not have occurred without the doomed-to-collapse (as occurred in ’08) machinations of the shadow banking system. Thus, spending was not the problem leading to today’s threatened insolvency of the U.S. Treasury. Rather, it was out-of-control credit creation facilitated through the shadow banking system whose oversight was resisted every step of the way through endless assurances that, its self-regulation was a matter of self-interest (as the likes of Greenspan were wont to claim, how ever this now being to his deep regret). Since ’08 the increased quantity of core debt securities injected into the banking system has served the sole purpose of forestalling collapse of debt amassed prior to the shadow banking system’s seizure, period. We have an “S” problem, but it’s not “spending,” rather it is “swindle.”

    1. Bert_S

      And MMT makes a kleptocracy, US Imperialism, disfunctional and unfair economy, all sustainable forever.

      What’s not to like?

      1. F. Beard

        MMT is only 1/3 of the solution – genuine private currency alternatives would abolish the “stealth inflation tax” so the empire would be harder to finance.

        1. Bert_S

          I think the Empire Morlocks already have that worked out for themselves. They are stockpiling gold (knowing the Eloi will work for shiny things) and French wine in Geneva. When they sense the endgame is nearing, they will hop in the Learjet and head for the mountaintop – enjoying a nice Beaujolais while watching the world slowly end.

          Sounds a little “bearish”…I know.

          1. Bert_S

            Sure, if they all bring their “red buttons” and launch codes along. What better time for nuclear disarmament?

            Then you just have Fox News and CNN tell the Eloi that missile silos have been discovered, and Eloi scientists believe they are the 9th Wonder of the World, left behind by some ancient civilization.

            But depending on the size of the new Morlock civilization, I think they may develop a two tier currency system – using pretty gold coins between themselves, and either glass beads, cockle shells or tally sticks for external trade with the Eloi.

          2. Bert_S

            But I’m pretty sure the Morlocks will have learned their lesson and not re-introduce shadow banking to Morlock society, because then someone will have to have some cartoon Bears explain where shadow banking, repos, CDS and re-hypothocation money comes from. Why would anyone want to be that masochistic?

            Especially when they get so mixed up already between cash, credit, debt, long and short term government debt, rolling over these instruments, whether base money is the National Debt,convertability to other assets, savers/pension funds and evil bankers/rich people.

  17. ep3

    “democracies inevitably led to unsustainable debt levels because the voters aren’t disciplined and responsible”

    yves, it’s kind of scary that we are hearing this more and more. is this another push to move us away from democracy into one of those so much better political systems, like fascism, dictatorships, etc.?
    Also, notice the connection between a political system and an economic system, just in your statement. Neither are directly related, are they?

    1. JEHR

      From what I understand, the economy is basically a financialized one; the financial system is a bigger part of the economy than the manufacturing system. The financial system (banks) now seems to run the government by promoting deregulation, by lobbying politicians, by paying huge campaign contributions and by serving their requisite terms in the government (as Treasury Secretary, for example). The economy and political systems are most certainly related via the banking cartel.

    2. ForReal?

      Whether or not the voters are actually responsible, it’s their elected representatives who actually do their fiscal bidding, so let’s assign blame where it truly belongs for a change. All this talk about the voters this, and the voters that. Does anyone honestly think that wars of foreign imperialist aggression would actually win an up or down vote, especially if a great equalizer like the draft were to be implemented again? Anyone actually seen that mythical “peace dividend” we were all promised back when the USSR (remember them?) folded their tent? And what of Al Qaeda, that great existential threat to life, liberty, and the pursuit of shopping bargains? Anyone actually believe that all that money we’ve spent over the last 11 years is what has kept them at bay?

  18. Schofield

    The Fed under Ben Bernanke’s direction actively engaged in cornering the market in dog poo ( Toxic Mortgage Bonds ) raised an unexpected laugh from me at the utterly ludicrous Neo-Liberal venality and stupidity the nation is expected to look up to and respect.

  19. Susan the other

    Yves, speaking from experience: when I first started reading NC I didn’t even know what MMT stood for. I also didn’t know the answer to the Bear’s question, Where does money come from. I think it’s a good clip. Show it to your audience if you can. And then take some question. The most important concept for me was understanding that our money was being doled out to us by banks who charged us interest. It is just totally outrageous. You are the best person to play it by ear and just take their questions. If we take control of our money we can spend it on projects of high social and environmental value and not on debt servicing.

  20. Tim

    MMT can’t delievery any better than any other solution when the governmental apparatus is corrupt and disfunctional.

    1. paul

      “MMT can’t delievery any better than any other solution when the governmental apparatus is corrupt and disfunctional.”

      MMT is at it’s core an acknowledgement of the system and mathematical relationships underlying our monetary economic system as it exists in the real world.

      To disagree with MMT principles is to disagree with the fundamental relationships exhibited by systems in the real world that have never been observed to behave otherwise.

      As far as corruption, every (human) system will have it, it must be managed at a tolerable level. We have abdicated our responsibilities here, been too busy consuming on private credit to pay attention.

  21. JeremyGrimm

    I recall use of the Monopoly game as a useful metaphor for explaining the economy (I think Krugman used this metaphor). The government is the Monopoly bank. The Monopoly game provides a useful but clearly arbitrary platform where you can play with various changes in the rules. Most people remember changing the rules in various games as children just to play with the process of the game itself. Macro economics is more analogous to a special version of the Monopoly game than like a household finances. Another metaphor used in a book (I haven’t read) related the economy to a Garden.

  22. casino implosion

    Not impressed with this video at all. There’s a desperate need for clear, layman level explanation of MMT. “Nice try” is all this one gets.

    The underlying “tone” of this video is the same thing I get from the writings of Randall Wray–an exasperation with the blockheaded regular folk who Just Don’t Get It.

    Someone needs to fund a professional PR/propaganda operation to spread the word of MMT to the masses.

  23. markb

    After reading thru the comments I see I’ve stumbled upon an MMT site. Look folks, MMT is total nonsense. How simple must I make this; do you not know that the government sells bonds all the time. What do you think that is??? The govenment wouldn’t paying interest on money it creates, it pays interest on money it borrows. The bank doesn’t pay interest on money it creates, you, the borrower do. (By the way, the bank creates the principle but not the interest. Where are you, the borrower, supposed to get the interest?)

    I’m seriously bummed that a site with the reputation of this one can be so wrong about the creation of money.

    1. F. Beard

      The govenment wouldn’t paying interest on money it creates, markb

      But it does!

      “The US government issues its own currency and, in intrinsic terms, never needs to fund its own spending in US dollars. The issuing of public debt is an entirely voluntary act by the US government and provides the bond markets with “corporate welfare”. Just imagine what the uproar would be from the bond markets and investment banks if the US government announced it was cutting off this source of corporate welfare.

      It happened in 2001 in Australia when the Australian government had virtually caused the official bond markets to dry up when it used the surpluses it was running to run down outstanding debt. The Sydney Futures Exchange led the charge and demanded that the Government continue issuing debt, which gave the game way – if debt-issuance was to fund net government spending (deficits) then why would they be issuing debt when they were running surpluses?

      Answer: it was patently obvious that the outstanding debt was private wealth and its risk-free nature allowed the private investment institutions to price other risky assets and maintain a safe haven when uncertainty rose (by holding bonds).” from http://bilbo.economicoutlook.n… [emphais added]

      1. paul

        The key word here is GOVERNMENT. The government pays the interest TO the non-government, not the other way around. Since the government creates money out of thin air, and in addition has control over the interest rate it pays, the net effect on the non-government is creation of net financial assets.

        The problem as I see it is…bonds are already savings, ie funds not likely to be spent. Ever, in any substantial amount. So paying interest on bonds is another perk given to those that neither need nor deserve it, and it does nothing to stimulate spending.

        At the micro level some saving is necessary. At the macro level saving is an economy-killer.

        1. MRW

          The government pays the interest TO the non-government, not the other way around.

          Which is another form of currency creation.

          1. joebhed

            To issue debt is the opposite of creating money.
            It is creating debt.
            To pay interest ‘could’ be a way to create money… but not for the Treasury, which MUST first collect that money in taxes before it can pay the interest.
            Because that IS the way the system works.

            For the Money System Common.

          1. paul

            Ok genius,

            Explain to us luddites where the national debt comes from.

            Explain to us the definition of a deficit and where the funds come from.

            Explain to us where the interest comes from and accrues on bonds held by the public.

            Explain how QE “money printing” gets into the hands of agents in the non-government.

      2. Garyj

        Dude, the Sydney futures exchange main money spinner was the 3 & 10 yr bond contract that was cash settled, hence the volumes of contract trading bore no resemblance to the amount of government debt on issue. Fact. They couldn’t care less, however they were owned by at the time by……drumroll…… banks who used the sfe as there lobby entity. Scratch below the surface dude you may actually learn something if you stop commenting and start thinking.

    2. F. Beard

      How simple must I make this; do you not know that the government sells bonds all the time. What do you think that is??? markb

      It’s money creation except the money (sovereign debt) pays interest OR it’s an asset swap of sovereign debt for non-interest (until recently) paying bank reserves.

      1. markb

        Genius, no paul , though you may think so, it’s up to you. I’ve expained everything in the few post I’ve made here. Just to put a fine point on it, it’s so simple that your brand of genius has obviously rejected it. You’ve been brainwashed, happens to all of us at least once. Frankly, it’s not the fact of debt money that’s the most interesting… it’s the consequences. think about that.

        1. paul

          Most of your arguments defy the laws of arithmetic and of simple logic. The only thing you have accomplished today is confusing readers that aren’t familiar with the concepts.

          Fortunately, none of the ideas taken alone are complex, The complexity arises in connecting the logical chain to form the complete system. Starting off with a complex definition of the problem makes a solution nearly impossible.

          Start with no money and expand the system from there by borrowing. The only source is funds created from thin air by the government. In the US all money is backed by the full faith and credit of the federal government. Banks in the Federal Reserve System issue net zero dollars into the economy as credit, and are (should be) liable for the payment liabilities. Unfortunately the government has chosen to wipe the banks noses when they gambled on and made bad loans.

          There’s no other source. It is the monopoly issuer.

          1. F. Beard

            Banks in the Federal Reserve System issue net zero dollars into the economy as credit, and are (should be) liable for the payment liabilities. paul

            The banking system as a whole creates liabilities that need not be redeemed. In fact, it would be impossible to redeem all bank liabilities since the banks don’t have nearly the reserves necessary to do so. Thus the MMT claim that banks do not create net money is false.

          2. paul

            F. Beard @ September 21 2012 @ 7:21 am

            “The banking system as a whole creates liabilities that need not be redeemed. In fact, it would be impossible to redeem all bank liabilities since the banks don’t have nearly the reserves necessary to do so.”

            Don’t know where you got this idea. There will always be enough reserves in the interbank settlement system and banks are fully liable for the credit they create.

            There is currently about $54 Trillion in credit outstanding in the US, $13 Trillion of it in home mortgages. There’s only about $5 Trillion in cash and another $11 Trillion in bonds held by the public.

            If liabilities go unsatisfied by more than their assets the bank is insolvent and will be dissolved if it is bad enough (except when the government decides to bail them out and “buy” their bad assets at face value).

            At any rate credit adds no net dollars to the non-government (obvious, asset=liability, diff=0), creates only the principal, so as the liabilities accrue from the interest it follows that over time credit produces negative net financial assets in the non-government.

            I don’t expect you to take my word for it so go ask Warren Mosler or Prof. Wray.

          3. F. Beard

            Don’t know where you got this idea. paul

            Imagine:

            1) A risk-free fiat storage and transaction service was established by the Federal Government and all citizens were allowed to open accounts there.
            2) That the Fed was forbidden from creating or lending new reserves.
            3) That Federal Deposit insurance was canceled some time later.

            What would happen? What would probably happen is that many (most?) depositors would transfer their deposits to the new risk-free facility causing an enormous reserve drain on the banks – a drain the banks could not meet.

            Thus it is obvious that the banking system as a whole creates liabilities that it is not able to redeem. Thus the banking system as a whole creates net money – assets without a corresponding liability.

  24. markb

    WORDS. CONFUSE. And a lot of words, confuse a lot. The above 3 paragraphs have no meaning, they mean nothing. If you would only THINK…

    but perhaps I’m asking too much of people already convinced of a thing… however wrong that thing may be.

    By the way, the issue of debt money is at the heart of the problems facing the US today. It will not be resolved by any means other than a complete rejection of the whole bank created money idea. I agree that governments should spend money into the economy, without debt, but that would upset the worldwide illusion that the banksters have created in order to enrich themselves. It will not be a simple thing to do.

    1. F. Beard

      I agree that the monetary sovereign should simply spend new government money into circulation. I also think all government privileges for the banks should be abolished.

        1. paul

          No one has claimed it wouldn’t be better (maybe) to print money directly without issuing bonds. I can think of reasons why it might not be. Don’t wish to get into that here.

          That is not how the system is presently implemented, by law or otherwise.

          MMT acknowledges how the system in place functions, and by what math/system relationships it is constrained (sectoral balances identity, closed system of financial assets within itself).

          These two simple (and incontrovertible) constraints put the lie to most neoclassical economic theory (dogma).

          As far as money creation, it may as well be a black box, because as far as an observer in the non-government is concerned, the only events that can occur are one of three possibilities:

          1. Balanced budget, no net financial assets (dollars in the US) are added to the non-government (NG). Nothing changes.
          2. Deficit, net financial assets are added to the level of funds already existing in the NG.
          3. Surplus, net financial assets are subtracted form the level of funds already existing in the NG.

          Pretty simple.

    2. F. Beard

      The question is, imo, whether borrowing by the monetary sovereign reduces the money supply (unless the debt is sold to the central bank). The MMT folks say no; that the banks are just swapping one risk-free asset (bank reserves) for another (sovereign debt). Moreover, the MMT folks say that bank lending is not reserve-constrained anyway since the central bank will lend out reserves as necessary.

      1. paul

        F. Beard,

        The only money supply that matters to you and me is the level of funds in the pool available for spending, Further, there must be a willingness to spend.

        “Printing” $10 Trillion and shooting it into outer space may increase the money supply but so what? The most important factor is who has the money.

        Other measures of the money supply are pretty much irrelevant, and at any rate can’t be controlled by the Fed. The (credit) money supply expands or contracts with demand for credit. The supply of net financial assets is constrained only by Congress’ willingness to spend.

        When the Fed artificailly increases the level of reserves there is no transfer mechanism to force those funds into the hands of borrowers.

        You can’t force the fish further out by loosening the drag unless it wants to go there.

        1. F. Beard

          When the Fed artificailly increases the level of reserves there is no transfer mechanism to force those funds into the hands of borrowers. paul

          Which is why the new reserves should have been given to the entire population (e.g. Steve Keen’s “A Modern Debt Jubilee”) to “trickle up”.

          1. paul

            Reserves only become net money when spent through the Treasury.

            Any debt jubilee is nothing more than after-the-fact deficit spending, the liabilities are transferred to the government side of the ledger. The government can afford any level of liabilities in it’s own currency.

            The problem is political. Moral hazard ya know. It’s become clear that moral hazard only applies to we little people, the rich not so much.

            The bigger problem is convincing the greater population that consumption via credit is bad for and should be avoided.

            One, it’s unsustainable and can’t work long-term without accompanying deficit spending, at an appropriate level. Because of saving desires the funds necessary to satisfy the liabilities are removed from the economy eventually creating mass default.

            Two, buying stuff on credit is equivalent to lowering your income, and thus buying power. Just. Say. No. Pay cash,or don’t buy it.

            This goes at the macro level. Obviously at the micro level some folks can afford to borrow. Doesn’t make it a good idea.

            Business borrowing is a different story. Most businesses earn a profit, so their borrowing costs are recouped.

            This leads to another dynamic where the net flow of funds is ALWAYS towards profits and away from the spending pool. This too is ubnsustainable without confiscatory taxation of extreme excess of wealth accumulation or massive deficit spending.

            Then you add in the trade deficit and…

          2. F. Beard

            Any debt jubilee is nothing more than after-the-fact deficit spending, … paul

            Keen’s plan is not to forgive debt but to hand out new reserves equally to the entire population (including non-debtors) so that debt can be PAID.

          3. F. Beard

            Just. Say. No. Pay cash,or don’t buy it. paul

            It’s not that simple since those who don’t borrow from the counterfeiting cartel are likely to be priced out of the market by those who do borrow.

        2. Rob

          What’s you are talking about is the term”velocity of money”.this is the “voltage”,”pressure”,at which money is changing hands and is considered the metric to determine the frequency that money is making the rounds among the people.It is just a description of the fact money changes hands. it is separate from the creation of money in practice.

    3. YouDon'tSay?

      By the way, the issue of debt money is at the heart of the problems facing the US today. It will not be resolved by any means other than a complete rejection of the whole bank created money idea. I agree that governments should spend money into the economy, without debt, but that would upset the worldwide illusion that the banksters have created in order to enrich themselves. It will not be a simple thing to do.

      Bingo! We have a winner!

  25. JB

    @markb

    You write “I agree that govt. should spend money into the economy without debt “. Congratulations – you may soon be counted among MMT believers.

  26. Hugh

    I would just point out that when the rich and the elites they own want trillions for tax cuts for themselves, or their wars, or money to blow on their bubbles, or bailouts when the bubbles burst, well, the money is always there, and it doesn’t cause inflation.

    I would also point out that it all about what kind of a society we want for all of us. Do we want a society of billionaire lords and debt-indentured serfs, a two-tiered justice system, and endless wars? Or do we want a fair and just society with the basics of a decent life: a stable job at a living wage, good healthcare, housing, education, and retirements available to all? We have the resources for all of these things, but we cannot afford them and a class of rich, unproductive wealth extracting rentiers. A society which caters to the greed of a few or one which serves the hopes and dreams of the many, you choose.

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