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Chris Mayer: How Fiat Money Works

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Dave here. I like the brutal simplicity of this rendering of MMT, and it’s ideology-agnostic character. Sometimes I think trying to explain this to people resembles getting the hypothetical subject’s in Plato’s cave allegory to look at the real figures outside instead of the shadow forms on the wall.

Chris Mayer is the editor and founder of Capital & Crisis, a financial newsletter published by Agora Financial. Chris, a former banker, comes to MMT from the Austrian camp. (He used to write for the Mises Institute). “I read Mosler’s books on a plane and the proverbial light bulb went on,” he writes. “Since then I’ve read Wray’s books and various MMT papers, all of which forced a major change in my thinking. But I’m convinced MMT is the right approach.”

This piece appeared in the February 2014 issue of Capital & Crisis, published on January 7. Cross-posted at New Economic Perspectives.

Warren Mosler tells a good story that shows how our economy works at its most basic level.

Imagine parents create coupons they use to pay their kids for doing chores around the house. They “tax” the kids 10 coupons per week. If the kids don’t have 10 coupons, the parents punish them. “This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties,” Mosler writes.

So now our household has its own currency. This is much like the U.S. government, which issues dollars, a fiat currency. (Meaning Uncle Sam doesn’t have to give you something else for it. Say, like a certain weight in gold.) If you think through this simple analogy, all kinds of interesting insights emerge.

For example, do the parents have to get coupons from their kids before they can pay them to do any chores? Obviously not. In fact, the parents have to spend their coupons first by paying their children to do chores before they can collect the tax. “How else can the children get the coupons they owe to the parents?” Mosler writes.

“Likewise,” he continues, “in the real economy, the federal government, just like this household with its own coupons, doesn’t have to get the dollars it spends from taxing or borrowing or anywhere else to be able to spend them.”

The government creates dollars. It doesn’t even have to print them. The vast majority of spending is simply done by adding electronic dollars to bank accounts. Therefore, the U.S. government can’t go bankrupt. It pays all its bills in U.S. dollars, of which it is the sole issuer.

This sounds really obvious, but it is amazing how many people — even very smart people — forget this simple fact. They get hysterical about the fiscal deficit or the national debt. (This is not to say there aren’t bad consequences from issuing too many coupons, or from government spending in general.) The only way the U.S. government can default is if it chooses to do so.

Going back to Mosler’s example, let’s ask another question: How can the kids “save” coupons in excess of the weekly tax? Well, they can only do that if the parents spend more than they tax. There is no other way to hoard coupons. In the real economy, the same is true. The private sector can save dollars only if the government spends more than it taxes. Spending pours fiat money into an economy; tax payments drain it away.

Another question: Do the parents have fewer coupons if they spend more than they tax? No. The parents make the coupons. They don’t even need physical coupons. They can simply track them on a piece of paper or in a spreadsheet. Likewise, the U.S. government doesn’t have any fewer dollars after running deficits. It can’t run out. (There are real-world restraints on how much government spends.) To borrow from another Mosler analogy, the U.S. government can no more run out of dollars than a scorekeeper can run out of points.

You don’t have to like this. (I don’t.) It’s merely a description of how a fiat currency system works. That’s the world we live in. Too many people tackle economic questions ideologically. I can be as guilty of this as anyone. My own view of the state is that it is, at best, bumbling and incompetent and wasteful. At worst, it is an evil force on society. (My sympathies lie with those old American radicals, such as Lysander Spooner [1808–87]. If you don’t know who he is, look him up. He was a great American. I have his six-volume collected works here on my bookshelf.)

Nonetheless, after much reading and thought, I agree with Mosler: The state’s ability to enforce tax liabilities, fines and fees drives the demand for money. Or as Mosler says, “Taxes drive money.” This is a view of money called “chartalism” and it is one I subscribe to. It has been around a long time. And it forms one of the building blocks of a school of thought Mosler helped to found, called Modern Monetary Theory (MMT).

It’s hard to talk about MMT with people, because they are often quick to draw hasty cartoonish conclusions about what MMT is or represents. (I have to admit, I choked on MMT a bit at first, too.) Over the last several months, I’ve read a handful of books and perhaps a dozen academic papers on MMT. So I believe I can speak by the card.

On one level, MMT is simply a description of how a fiat currency system works. On another level, there are policy prescriptions that flow from this understanding. My only advice on the latter is this: Don’t let your politics deter you from making sense of MMT. (MMT itself is politically agnostic.)

I’d recommend both of Mosler’s books. Start with The 7 Deadly Innocent Frauds of Economic Policy. It’s a short book, just over 100 pages and written in plain English. Mosler has a gift for making complex things simpler. If you try to think through the issues in an honest way, you’ll come away with some “Ah-a!” moments.

Then you can move on to Soft Currency Economics. Believe me, these books will challenge your long-held views on money. (Always a good thing, in my mind. What’s the point of only reading things you know you’ll agree with? Challenge yourself… or ossify.) If you want more, pick up Randall Wray’s primer Modern Money Theory.

Mosler himself is an interesting character. Unlike most economists, he is no armchair theorist. Mosler made a lot of money in markets. And in markets, you get paid to be right, which is where all too many economists fail.

Warren Mosler is, like me, a former banker. He began his career in banking in 1973, working to collect on bad loans. After a year of that, he became a lender. And I can tell you: This is great training for an investor. As Mosler recounts, he had ongoing discussions with his boss about the “logic of banking” and the “theory of lending.” As every lender learns, you want to make loans where the odds are heavily in your favor so that profits easily make up for small (but expected) losses. Investing is not much different.

Anyway, Mosler was a good banker with a head for the odds and the payoffs. Eventually, he would move on to manage the bank’s $10 million investment portfolio. He came up with a bunch of good, if unconventional, ideas. He made the bank a lot of money pursuing no-risk trades. Mosler had a knack for smoking out mispricing in the market for things like bonds and CDs.

He went on to join the Wall Street broker Bache & Co., followed by Bankers Trust and then the investment-banking firm of William Blair & Co. in Chicago. (In his books, he recounts his adventures at these places.) He made each firm a bunch of money with his “free lunch” trades, just as he did in his banking days.

In 1982, he co-founded his own fund, Illinois Income Investors (III). Over the next 15 years, III would rack up a remarkable record with only one losing month — and that was a 0.1% loss due to a timing issue that reversed the next month. Managed Account Reports ranked III No. 1 in the world through 1997, when Mosler left the firm.

One great story Mosler tells in both books is how he cleaned up on another free lunch in lira-denominated bonds in the early ’90s. This was before the euro and back when there was worry over a default by Italy’s government. Italy’s national debt was 110% of GDP and interest rates were high on its bonds.

But Mosler knew that it was the sole issuer of lira. Italy could not default unless it wanted to. Mosler actually met with senior officials in Rome to let them in on the “secret.” Long story short, Italy didn’t default. Mosler’s fund made over $100 million.

For an investor, macroeconomics has limited uses most of the time. Mosler’s career shows this can be otherwise. But then again, you have to study economics that actually describe the real world. And Mosler’s economics, or MMT, does that rather well.

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218 comments

  1. H. Alexander Ivey

    Some personal thoughts on MMT (and apologies for my formating, still learning this system)

    Some key assumption in MMT and where I disagree with them:

    Assumes “fiat currency” is exchangeable for something of value, like gold.
    Reality: words can be defined as you like, but “fiat currency” usually means dollar bills and coins. There is no need to assume an exchange for gold, yen, or rubles.

    Assumes there is only one type of money, money.
    Reality: there are two forms of money, money as dollar bills and coins (fiat currency or fiat money) and money as a credit to or from a government backed agent (a bank).

    Assumes only the Federal Government issues money, that is the Federal Government is the only source of money.
    Reality: Both the government and government designated agents (banks) can issue money. The government issues fiat (bills and coins) and credit money, the banks issue credit-money (loans or debt).

    Assumes the amount of physical money in an economy drives economic growth.
    Reality: The rate of growth of credit (debt) and the velocity of money exchange drives the growth of an economy.

    Political Points often made with MMTers

    Assumes: taxes remove money from the private sector
    Reality: taxes shift money around and between the private and public sectors, money is not “removed” or destroyed unless it is burnt, melted down, or, HEAVENS ABOVE!!!!, forgiven.

    Assumes: The government is, at best, a necessary evil, or usually, just flat out evil – yet they never say why.
    Reality: The government is absolutely needed, it is the standard setter for the money (sets up the rules), it is the enforcer of its standards (regulates its rules). The market can not exist without a government.

    Assumes: money moves throughout an economy, but without a clear explanation as to why it moves. This assumption is a clear improvement over classical economic theory, which is probably why MMTers are given a hearing from those who see the failure of classical economic theory regarding money.
    Reality: money moves, it has a “pressure” (high concentrations, low concentrations within an economy, it has a rate of growth and contraction. It moves due to actions of the major players in an economic, to wit: consumers, producers, the government, and the government money agents – the banks.

    1. Ben Johannson

      Sir, every assumption you’ve written here is falsely ascribed to MMT. Some of them a little off the mark, some the exact opposite.

      1. from Mexico

        So why don’t you come down off your pedantic high-horse and enlighten us?

        A little humility and the ability to do a bit of self-examination might serve the MMT faithful well.

        1. uncle joe

          self-examination?
          hey, we do anecdotes at MMT, also fables, stylizing and shoehorning of partial truths into fantastic constructs like combining public purpose, a(n exogenous) sovereign monopoly issuer of the national currency, with private gain, the (endogenous) private creation and issuing of our money as debt. No problem.
          Like Austrians, this is partially managed through ‘accounting identities and partially through new ‘definitions’. The government is the monopoly issuer of the currency, because ‘currency’ is defined as the money form that is issued by private bankers (bank credit).
          Not too much self-examination going on there.

        2. Adam1

          I’m not a MMT scholar, but I believe I have a firm enough grasp to respond…

          Assumes “fiat currency” is exchangeable for something of value, like gold.
          MMT: I don’t know where this came from but a fiat currency is a form of credit money issued by an authority by “fiat”. When a government issues fiat money by decree it is issuing an IOU that is redeemable for a promise to cancel out a tax obligation. This obligation, enforced by laws and fines, drives the demand for the currency. A fiat currency MAY be exchangeable for other things if the issuing authority chooses, but it is not a requirement. When an issuing authority does choose to make its fiat currency exchangeable for something else it is no longer fully sovereign in that currency and now carries a financial default risk.

          Assumes there is only one type of money, money.
          MMT: Describes the system as it works. MMT is aware that the banking system can create money by creating deposits when it extends loans. That said, bank created liabilities cannot be used to buy government securities or pay taxes without first being converted into government money. This is just an operational fact of reserves accounting – when you write a check from your bank account the government does not want your deposited money; it wants the bank reserve balances which will be used to clear and settle the transaction between your bank and the Treasuries FED account.

          Assumes only the Federal Government issues money, that is the Federal Government is the only source of money.
          MMT: anyone can issue an IOU (money) the problem is getting it broadly accepted. MMT says that because people accept bank deposits (checks, credit cards, ACHs, etc…) as money that banks can then create money by creating deposits. Likewise because a government can enforce its taxes people will use its money. Both forms of money co-exist at the same time.

          Assumes the amount of physical money in an economy drives economic growth.
          MMT: says the causation you’ve described is backwards. The amount of money does not drive economic activity. The amount of economic activity drives the amount of money in circulation.

          Political Points often made with MMTers

          Assumes: taxes remove money from the private sector
          MMT-Reality: MMT is stock flow accounting consistent. Your description of reality is not. If you looked only at monetary assets denominated in a single non-convertible currency you will find that total monetary equity within the system is always ZERO. You also need to account for 2 entries as per the rules of double entry accounting. For example, if the government creates $100 and gives it to you, it will effectively enter $100 liability on its books and $100 Negative Asset (same as negative equity). You will enter $100 asset and $100 positive equity. The system nets equity of zero however the non-government has $100 in “money” and $100 in positive equity. When the government taxes and reverses the transaction, net system equity remains zero, but there is no longer any money in the system nor any money held by the non-government. Here is a stock-flow consistent accounting model of monetary flows… http://econviz.org/macroeconomic-balance-sheet-visualizer/
          Assumes: The government is, at best, a necessary evil, or usually, just flat out evil – yet they never say why.
          I don’t have any idea where this came from.

          Assumes: money moves throughout an economy, but without a clear explanation as to why it moves. MMT: A bit over simplified but again, economic activity drives the money circuit(s) within the rules and bounds of accounting.

          1. from Mexico

            H. ALEXANDER IVEY said: Assumes “fiat currency” is exchangeable for something of value, like gold.

            ADAM1 said: A fiat currency MAY be exchangeable for other things if the issuing authority chooses, but it is not a requirement.

            If what you say is true, then why does MMT articulate concern over the price of “things of value” which money can be exchanged for? “The key then,” L. Randall Wray writes in Understanding Modern Money, “is to ensure that government spending is at just the right level so that neither inflationary nor deflationary forces are induced.” Clearly money is intended to be exchanged for things of value.

            H. ALEXANDER IVEY said: Assumes there is only one type of money, money.
            ADAM1 said: Describes the system as it works. MMT is aware that the banking system can create money by creating deposits when it extends loans.

            Does it “describe the system as it works”? If we look at the empirical realities of the past few decades, almost all the money that has been created has been what MMT calls “bank money.” There has been almost no increase of public debt, relative to GDP:

            http://www.marketoracle.co.uk/images/2010/Jun/us-debt-18-1.gif

            I believe what Ivey was going off of was J.D. Alt’s post yesterday (http://www.nakedcapitalism.com/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html ) Alt went on exhaustively about what Wray calls “fiat money.” But there was almost no mention of what Wray calls “bank money.” This is, at best, a distortion, a sort of disappearing act of the overwhelming importance which “bank money” plays in the overall scheme of things. Why do you believe it is that MMT apologists downplay the importance of “bank money,” almost to the point that it becomes invisible?

            H. ALEXANDER IVEY said: Assumes the amount of physical money in an economy drives economic growth.

            ADAM1 said: says the causation you’ve described is backwards. The amount of money does not drive economic activity. The amount of economic activity drives the amount of money in circulation.

            Your claim is fairly easily demonstrated to be only partially true. The book to read is John Kenneth Galbraith’s Money: Whence It Came, Where It Went. He demonstrates that sometimes increasing the money supply increases economic activity. Sometimes it doesn’t. There are more factors involved than just the amount of money.

            As to the converse, the amount of economic activity driving the amount of money in circulation, that doesn’t always happen either. A good example of this was when Paul Volcker set out to limit the supply of reserves supplied through the open-market operations beginning in the late 1970s. (http://www.cnbc.com/id/46970524 ) As this graph shows, he achieved success in restraining the growth of some components of the monetary aggregates:

            http://dollardaze.org/blog/posts/00578/TotalMoneySupply.png

            And by 1982 Volcker had thrown the economy into a recession:

            http://www.investingthesis.com/wp-content/uploads/2010/01/gdp-growth-rates-for-canada-and-the-united-states.jpg

            1. Adam1

              Mexico said: “Clearly money is intended to be exchanged for things of value. “
              I would agree completely. I got hung up on the gold part. A fiat currency MAY be “convertible” or fixed to other items by choice of the issuer but in doing so the issuer then creates a fiscal default risk for itself.

              Mexico said: “Why do you believe it is that MMT apologists downplay the importance of “bank money,” almost to the point that it becomes invisible?”
              I think it has less to do with being downplayed than in its ability to create net financial assets. Several hundred years of data shows the domestic private sector has a preference to NET save financial assets. It can’t do it on its own by a fact of accounting; when the private sector creates money with the banking system the financial liabilities and financial assets still net to zero. Some other sector of the economy must have a deficit for the private sector to have a surplus (net save). In the US the foreign sector is a net saver making the government sector the only other player capable of delivering a deficit to support the private sectors desire to have a surplus. Oh and by the way as a currency issuer it is capable of sustaining that desire.

              Mexico said: “Your claim is fairly easily demonstrated to be only partially true. “
              My response might have been thin and a proper response would have discussed the difference between fiscal policy and monetary policy as well as bank lending and FED overdrafts but that would take an entire post or more to explain. Overall the monetary system is extremely elastic in its ability to respond to the various monetary influencing agents. Some agents can directly create money and economic activity while others can only influence economic activity.
              As for Volker, you do realize his policy was a failure. His expectations were to control inflation by controlling monetary aggregates. Your chart only shows that he influenced liquidity preferences and not the necessary monetary aggregates to prove he could control inflation. Inflation was tamed by destroying demand with sky high interest rates which could have been done under normal targeting of the FFR. Volker was eventually forced to abandon his policy and resume FFR targeting.

              1. from Mexico

                Adam1 said:

                “As for Volker, you do realize his policy was a failure. His expectations were to control inflation by controlling monetary aggregates. Your chart only shows that he influenced liquidity preferences and not the necessary monetary aggregates to prove he could control inflation. Inflation was tamed by destroying demand with sky high interest rates which could have been done under normal targeting of the FFR. Volker was eventually forced to abandon his policy and resume FFR targeting.”

                This is the kind of thing that just drives me nuts about MMT. “If the facts happen to run counter to people’s deeply ingrained prejudices or interests or emotional committments,” Daniel Yankelovich writes in Coming to Public Judgment, “then so much the worse for the facts.”

                But since the adherents of MMT make such a big deal about MMT’s flawless descriptive prowess, one expects them to perform to a higher standard. But they always disappoint. They’re just as bad as anyone else when it comes to distorting reality, making up whatever facts are necessary to fit their deeply held ideology.

                As Jeffrey Snider writes in “The Fed is Opaque Because It’s Flying Blind,” Arthur Burns ended the Fed’s five-year tradition in 1976. Previous Fed regimes had released full and unedited written transcripts after a five-year waiting period. “[T]his is a good story about Federal Reserve tendencies toward total secrecy,” says Snider.

                On October 6, 1979, the Federal Reserve publicly announced that it would begin targeting bank reserves rather than the federal funds rate in order to curb inflation. However, sometime during the 1980′s the Fed reversed this policy. As Snider explains: “Sometime during the 1980′s, the Federal Reserve changed its means of operation from targeting reserve or ‘money supply’ levels to the federal funds rate; but nobody (even today) knows for sure when that happened or the specific rationale.” But somehow the MMT folks claim to “know.”

                During Senate hearings on the Fed in the early 1990′s, some edited Fed transcripts were released. What was revealed was that the FOMC knew in 1982 that the policy of “outwardly and publicly targeting money supply” was a “charade.” “Fed officials had come to understand, in the context of monetary targeting,” Snider writes, “that there was equivalence to levels of open market activity and changes in fund rates.” Changes in borrowing activity were equivalent in every way to changing federal funds rates.

                But MMT holds to the fiction that the difference between targeting interest rates and targeting money supply somehow makes some huge difference, completely ignoring the Fed’s “disingenuous stance of monetary directives,” as Snider puts it.

                And have you ever seen the fairytale Mosler invented about how Jimmy Carter’s deregulation of natural gas in 1978 triggered “a massive increase in supply, with our electric utilities shifting from oil to nat gas, and OPEC desperately cutting production by maybe 15 million barrels/day,” and “after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation.”
                http://moslereconomics.com/2013/04/10/my-story-of-the-thatcher-era/

                It’s embarrassing the way Mosler just makes up whatever “facts” are necessary to fit his ideology. As Joseph Huber points out, the “banking-school type of thinking…tends to deny or belittle the power or importance of money.” So according to MMT ideology, it is not possible to admit that Vockler with his manipulation of money caused a global recession, and depression in several Latin American countries. This global recession devastated oil demand, and this was what caused the price of oil to break. It wasn’t the fictional account invented by Mosler.

                1. Dan Kervick

                  I find it very hard to figure out what you are actually complaining about or criticizing here.

                    1. from Mexico

                      But here’s a little clue.

                      Mosler writes that “Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas.”

                      This is total fiction, invented completely out of whole cloth.

                      Here’s a graph of US natural gas supply, and one can see that from 1972 to 1986 US natural gas production was in constant decline, and there was never any “massive increase in supply” as Mosler claims:

                      http://upload.wikimedia.org/wikipedia/en/3/3c/UsNaturalGasProductionAndPrices.png

                      I don’t how to make it any clearer than that.

                    2. Ben Johannson

                      Your chart supports Mosler’s argument. Natural gas prior to 1978 was sold at excessively low prices primarily for inefficient boiler-produced heat. Carter’s Energy Act deregulated the controls suppressing price and creating large-scale waste at the same time it incentivized natural gas use for electrical generation. The result was a large fall in oil use as gas displaced it in power generation.

                      That the quantity of natural production fell during this period is irrelevant to how its use was distributed.

                    3. Ben Johannson

                      You aren’t getting it. No one said the quantity consumed by the electrical sector increase. I said natural gas deregulation resulted in displacement of oil. Think about it.

                    4. from Mexico

                      Nice try at an ad hoc rescue, Ben, but Mosler’s claim was that Jimmy Carter’s deregulation of natural gas in 1978 triggered “a massive increase in supply.”

                      Obviously that “massive increase in supply” never happened. He just made it up.

              2. from Mexico

                And after reading Snider, it looks to me like Volcker’s and the FOMC’s policies were a complete success. They achieved exactly what they set out to achieve, which was to cut off the money supply to the working man, while at the same time opening the spigots of wholesale money to the people who matter.

        3. PJAMES

          H. Alexander Ivey said:

          “[MMT] Assumes “fiat currency” is exchangeable for something of value, like gold. Reality: words can be defined as you like, but “fiat currency” usually means dollar bills and coins. There is no need to assume an exchange for gold, yen, or rubles.”

          Answer: MMT does not assume fiat currency is convertible into gold or foreign currency. However you can use fiat currency to buy gold or foreign currency.

          “Assumes there is only one type of money, money. Reality: there are two forms of money, money as dollar bills and coins (fiat currency or fiat money) and money as a credit to or from a government backed agent (a bank).”

          Answer: MMT does not assume there is only one type of “money”. Bank credit (and the fact that bank loans create deposits), is often discussed by MMT. Sometimes money issued by the state is referred to as “vertical money”, and private credit is referred to as “horizontal money”.

          “Assumes only the Federal Government issues money, that is the Federal Government is the only source of money. Reality: Both the government and government designated agents (banks) can issue money. The government issues fiat (bills and coins) and credit money, the banks issue credit-money (loans or debt).”

          Answer: MMT explains clearly that banks create credit as a form of “money”. In some papers Wray refers to bank credit as a “money-thing” rather than as “money” however).

          “Assumes the amount of physical money in an economy drives economic growth. Reality: The rate of growth of credit (debt) and the velocity of money exchange drives the growth of an economy.”

          Answer: MMT does not assume the amount of physical money in the economy drives economic growth.

          “Assumes: taxes remove money from the private sector. Reality: taxes shift money around and between the private and public sectors, money is not “removed” or destroyed unless it is burnt, melted down, or, HEAVENS ABOVE!!!!, forgiven.”

          Answer: Taxes do remove money from the private sector. Taxes debit private sector accounts, so there is less money in the private sector.

          Further explanation: If money is simply a credit or debt, then that credit or debt is extinguished/destroyed when it is returned to the issuer. The government issues money as a credit/debt, so when that money is returned to the government through taxes it is effectively destroyed. In practice it is usually recorded as an asset on the Treasury’s books and a liability on the Fed’s books, but these are simply different parts of the government.

          “Assumes: The government is, at best, a necessary evil, or usually, just flat out evil – yet they never say why. Reality: The government is absolutely needed, it is the standard setter for the money (sets up the rules), it is the enforcer of its standards (regulates its rules). The market can not exist without a government.”

          Answer: MMT does not assume government is, at best, a necessary evil or flat out evil. MMTers tend to see government as a necessary and inherent part of society which can potentially be used for good.

          “Assumes: money moves throughout an economy, but without a clear explanation as to why it moves. This assumption is a clear improvement over classical economic theory, which is probably why MMTers are given a hearing from those who see the failure of classical economic theory regarding money. Reality: money moves, it has a “pressure” (high concentrations, low concentrations within an economy, it has a rate of growth and contraction. It moves due to actions of the major players in an economic, to wit: consumers, producers, the government, and the government money agents – the banks.”

          Answer: MMT does talk about how and why money “moves”, i.e. how and why it is created, spent, saved, transferred etc.

          Suggestion: Try to read some MMT before making up criticisms of MMT.

    2. from Mexico

      @ H. Alexander Ivey

      It’s extremely important to distinguish between what MMT says and what it does.

      Joseph Huber elaborates further on some of the points you raise. You and he are on the same page on many issues. He avers that with MMT, “Fractional reserve banking on the whole is seen as efficient and benign.” He then goes on to warn that

      “Pure resources must not be abused. Just because modern money can freely be created, there must be some arrangement for making sure that there is neither too much nor too little money and that additions to the money supply keep within certain limits set by economic productivity and potential growth. Money and capital markets, contrary to what they are supposed according to efficient market hypotheses, perpetually fail to achieve the task, because there are no effective limits to banks’ deliberate creation of money on account, or intermittently, their deliberate extinction of credit and bank money.

      “Without openly denying this, MMT is nonetheless contemptuous of monetary quantity theory and the notion of sound finances. MMT cultivates laxness about deficits and debt. MMT does not question why the concept of ‘functional finance’ turned out to be quite dysfunctional in practice. Mosler’s original MMT manifesto was titled Soft Currency Economics. Presumably this wasn’t by mistake. However, any economic paradigm with enough common sense to it will surely place much value on sound finances, private and public alike. NCT does so; and this is one of the reasons for aiming at overcoming the present system of fractional reserve banking, because this system clearly has proved to be a historical basket case of unsound finances and soft currency economy indeed.

      [....]

      “To banking-school scholars [i.e., MMT], inflation was a crucial aspect. In practice, though, bankers tend to be somewhat hypocritical in this respect. Towards the outside world they routinely speak out in favour of stable currencies, stable prices etc. In practice they not only don’t care about it, but in fact they tend to fuel inflation and asset inflation by creating multiple credit leverage. This expands their balance sheet. It increases the nominal value of various bank assets, it raises interest rates and possibly interest margins, and it decreases banks’ liabilities as much as those of any other debtor. Too much additional money at a time surely creates consumer or asset inflation. But the banks that create the additions derive from this an obviously irresistible first-user advantage. So, if inflation is not extremely runaway, banks luckily live with it, or to put it pointedly, they actually bank on it.

      [....]

      “MMT’s positioning within the field of ‘currency versus banking’ is more complicated and actually contradictory…. MMT declares itself to be a theory of sovereign currency, building upon a state theory of money. So, at first glance, it looks rather like another currency-school type of theory. It then, however, builds upon a special version of the real-bills doctrine and treats the near-free creation of private bank money in the present system of fractional reserve as an indispensable centrepiece of a nation’s sovereigncurrency system—an unexpected combination, suitable for creating political confusion.”

      http://static.squarespace.com/static/51ab60bee4b0361e5f3ed7fb/t/51ee76bfe4b0cc8c8b66ed72/1374582463955/MMT%20and%20NCT.pdf

      1. bob

        Pedantic?
        “MMT cultivates laxness about deficits and debt. MMT does not question why the concept of ‘functional finance’”
        MMT does not have agency. MMT is, as indicated by the name, a THEORY.
        A Tory by any other name….laxness.

        How does Newtons theory of gravity question the apple?

        1. Ben Johannson

          It then, however, builds upon a special version of the real-bills doctrine and treats the near-free creation of private bank money in the present system of fractional reserve as an indispensable centrepiece of a nation’s sovereign currency system—an unexpected combination, suitable for creating political confusion.

          There’s no criticism here other than, “I don’t like hearing how things actually work.”

      2. Dan Kervick

        Just because modern money can freely be created, there must be some arrangement for making sure that there is neither too much nor too little money and that additions to the money supply keep within certain limits set by economic productivity and potential growth.

        This is certainly true. But it is a problem inherent in any monetary system, and a problem that has been present in a more general way in every modern financialized economy. There is always a great deal of uncertainty, confusion, misinformation and complexity in any sophisticated economy. There will never be a magic algorithm or mechanism that can automatically adjust monetary quantities to make sure they are “just right.” There is no algorithm that can determine which real economy investment projects are going to succeed and generate a lot of real economic value with products and services in high demand, and which are going to go bust, either because they miscalculated what was feasible, misjudged the desires of others or failed to anticipate dramatic changes in public tastes or needs. Price volatility is a hazard no matter who issues the money. And financial fragility is a hazard in any system in which credit instruments a large role, which will probably continue to be the case in our society no matter what the monetary base consists in and no matter who issues it.

        1. from Mexico

          You seem to be defending the status quo.

          The rhetorical strategy you are employing is called “making the perfect the enemy of the good.”

          It is an aphorism or proverb meaning that insisting on perfection often results in no improvement at all.

          1. from Mexico

            It is also called the “perfectionist fallacy”: assuming that the only option on the table is perfect success, then rejecting anything that will not work perfectly.

          2. Dan Kervick

            I’m not defending the status quo. I’m just skeptical of monetarism: the theory that economic health and financial stability depends on the regulation of the money supply. There are all kinds of financial products and credit relationships out there, all kinds of financial innovation and churn, and it can’t be controlled with some money supply knob. If you want to assure financial stability you need more hands-on regulation of credit and finance. And the government will have to be heavily involved and more paternalistic than a lot of people seem to want.

            Capitalism is inherently unstable and prone to bubbles, flim-flam and collapse, and it has been since the beginning of capitalism, under all sorts of monetary regimes. There is no one core element of the system – the “money” – that is the key to everything else. Capitalists are ceaselessly ingenious and creative in the kinds of financial structure and relations they create and modify, and so to keep them from blowing everything up from time to time you need to regulate the whole thing.

            1. F. Beard

              Capitalism is inherently unstable and prone to bubbles, flim-flam and collapse, and it has been since the beginning of capitalism, Dan K

              It’s credit creation that causes booms and bust and therefore government should in no way subsidize credit creation as it now does, massively so.

            2. from Mexico

              You say you are “skeptical of monetarism”?

              Phew! You can say that again!

              In his 1965 review of Friedman and Schwartz’s Monetary History, the late Yale economist and Nobel laureate James Tobin gently chided the authors for going too far. “Consider the following three propositions,” he wrote. “Money does not matter. It does too matter. Money is all that matters. It is all too easy to slip from the second proposition to the third.” And he added that “in their zeal and exuberance” Friedman and his followers had too often done just that.

              http://www.nybooks.com/articles/archives/2007/feb/15/who-was-milton-friedman/?pagination=false

              To Tobin’s observation I would add that it is also all to easy to slip from the second proposition to the first. And MMT, in its zeal and exuberance, has too often done just that.

              1. Dan Kervick

                That’s wrong, I think. NEP just ran a whole series of pieces by some of Randall Wray’s graduate students, and a common thread running though each of them is that we live in a “monetary production economy” where money is not just a neutral veil over non-monetary transactions, but a crucial technology that is involved in every aspect of the economy.

                My argument is with the idea that you can regulate and optimize a capitalist system by controlling (or seeking to control) the money supply. For example, there is a proposal out there, popular among some, called the “Chicago Plan”, which is an update of a 100% reserve banking plan developed in the early 30′s as a response to the Great Depression. In my view, this plan mainly addresses problems that we know longer really have, and that were dealt with by the FDIC system, and fails to address a whole bunch of new problems we do have. I think they err in diagnosing the source of financial instability as “too much money”.

                In my view the source of financial instability is always pretty much the same thing. It’s not “too much money”, but a combination of “too many promises that can’t be kept, and whose value can’t be assessed” and “too much lying and cheating.” I guess I would also add, “too much deprivation, desperation and inequality which induces those people to make promises that can’t be kept and makes them easy marks for others to cheat them out of what little they have.”

                1. from Mexico

                  No Dan.

                  MMT is what is wrong and Huber’s critique of MMT stands. It is right on the mark.

                  If we take your comments as a guage, the purpose of MMT is to generate a bunch of BS arguments and do just as iittle as possible to disturb the status quo as is possible.

                  You are a great rhetoritician, but your comments are completely lacking in substance. They are pure air.

                  1. PJAMES

                    “the purpose of MMT is to generate a bunch of BS arguments and do just as iittle as possible to disturb the status quo as is possible.”

                    Well that’s obviously not the case, so you’ve clearly misunderstood something.

                    Full-reserve banking advocates often get angry at MMT because MMT doesn’t condemn fractional reserve banking outright. I assume you are a full-reserve banking advocate.

                    MMTers do advocate large-scale reform of the banking and financial sector, and are opposed to how things operate at present. Please read some of the articles in these links to get more info on the MMT proposals for reforming the banking and financial sector:

                    http://neweconomicperspectives.org/mmt-scholarship

                    (look under Minsky, Money Manager Capitalism, Banking/Finance, and Central Banking)

                    also:

                    http://mmtinformationservice.blogspot.co.uk/

                  2. PJAMES

                    “the purpose of MMT is to generate a bunch of BS arguments and do just as iittle as possible to disturb the status quo as is possible.”

                    Well that’s obviously not the case, so you’ve clearly misunderstood something.

                    Full-reserve banking advocates often get angry at MMT because MMT doesn’t condemn fractional reserve banking outright. I assume you are a full-reserve banking advocate.

                    MMTers do advocate large-scale reform of the banking and financial sector, and are opposed to how things operate at present. Please read some of the articles in these links for info on MMT proposals for reforming the banking and financial sector:

                    http://neweconomicperspectives.org/mmt-scholarship

                    (look under Minsky, Money Manager Capitalism, Banking/Finance, and Central Banking)

                    also:

                    http://mmtinformationservice.blogspot.co.uk/

                2. JTFaraday

                  “NEP just ran a whole series of pieces by some of Randall Wray’s graduate students, and a common thread running though each of them is that… money is… a crucial technology that is involved in every aspect of the economy.”

                  Grad students demonstrate that bears sh*t in the woods. Film at 11.

    3. Nell

      I will deal with a few of your mistaken assumptions (you really should read the theory from the source Mosler, Wray, Mitchell)
      ‘Assumes “fiat currency” is exchangeable for something of value, like gold.’
      No – that was the case when we were on the gold-standard – decades ago. MMT assumes a fiat currency on a floating exchange rate ( a dollar can only be exchanged for another dollar). You can use fiat currency to buy gold or food, or clothes, of course.

      ‘Assumes there is only one type of money, money.
      Reality: there are two forms of money, money as dollar bills and coins (fiat currency or fiat money) and money as a credit to or from a government backed agent (a bank).’
      No – it explains government money (fiat) and credit money. See Wray’s chapter on balance sheet of banks, monetary creation by banks, and interbank settlements. (See also work by Scott Fullwiler on bank credit creation process). The emphasis in blogs is often on government money – unlike say Keen who focuses on endogenous money creation.

      “Assumes only the Federal Government issues money, that is the Federal Government is the only source of money.
      Reality: Both the government and government designated agents (banks) can issue money. The government issues fiat (bills and coins) and credit money, the banks issue credit-money (loans or debt).” See above

      “Assumes the amount of physical money in an economy drives economic growth.
      Reality: The rate of growth of credit (debt) and the velocity of money exchange drives the growth of an economy.”
      Now this one is really a bit silly – if you read the article above it states quite clearly ‘The government creates dollars. It doesn’t even have to print them. The vast majority of spending is simply done by adding electronic dollars to bank accounts.’ Also MMT theorists are well aware of credit growth and the velocity of money exchange. It is featured in MMT books, publications and blogs. I learnt about it from MMT websites as well as through Keen’s work. The horizontal money (government) and vertical money (credit creation) are obviously not incompatible processes and one needs to understand both to have full understanding of our modern monetary system.
      It is always a good idea to familiarize yourself fully with a theory before offering critiques. MMT is not a panacea, but it does offer the possibility of new approaches to organizing our economic resources. New approaches that allow us to put society before economy without necessitating wholesale revolution.

      1. from Mexico

        Nell said:

        “MMT is not a panacea, but it does offer the possibility of new approaches to organizing our economic resources. New approaches that allow us to put society before economy without necessitating wholesale revolution.”

        But MMT nevertheless does attempt to bill itself as being considerably more revolutionary than what it really is. That, at least, is Joseph Huber’s charge. What we find is banker-school theory masquerading in currency-school drag.

        And according to Huber, it should come as no surprise that the author of this post, Chris Mayer, “comes to MMT from the Austrian camp”:

        “A prominent figure of banking-school teachings of the recent past was Fr. v. Hayek, who called for radical denationalisation of money, also known as free banking.15 Fama’s Efficient Market Hypothesis (EMH) can also be seen as a typical banking-school approach to money and finance of the recent past.16 In this, financial markets were seen as near-perfect information processing machines which relentlessly absorb and price in any relevant information. This is similar to the all-superior swarm intelligence which Hayek ascribed to markets (contrasting this to unknowing central planners and dull bureaucrats).

        For sure, markets in good order are a mechanism of self-organisation and mutual readjustment. Many modern markets, though, are oligopolistic and corporatist power structures, and this certainly applies to contemporary big banking and finance. Apart from this, markets can fail, just as governments and the citizenry can—not normally, but often enough to create crises. For example, markets’ judgement on risk and opportunity is often subject to serious mistakes. Markets normally do not foresee major events. Markets often follow rumours and vague moods, hypes and follies. They often rationalise afterwards what they are doing, rather than having had solid reasons for doing it. Markets quite often exaggerate over long periods of time and readjust only with great delay, when all of a sudden they go into breakneck reverse—as was the case with euro area bonds at untenably low interest rates and ever higher levels of government debt over many years up until 2010, as banks suddenly had to confront their own vulnerabilities, which they had swept aside for many years. This is typical of market behaviour in many cases, and it is obsessional rather than rational and efficient.

        To conclude, the decisive difference between currency and banking teachings is not about a gold standard. It is about the question of who ought to be entitled to the prerogative of issuing and controlling a nation’s money supply: whether the banking industry on a basis of private contracts (banking position) or a state authority, or a state-controlled institutional arrangement based upon public law (currency position); including the question of whether money is seen as a common good and a sovereign state’s monetary prerogative of constitutional necessity, or whether money is seen as a private commodity under private control.

        [....]

        The monetary system is constitutive of the entire economy and comes with important consequences for state and society at large. Money governs finance, as finance governs the economy. This is certainly no linear causation. It entails feedback interdependencies. These, however, unfold around the systemic hierarchy of money, finance and the economy.14 Who controls the issuance of money and the main pathways of money flows is in possession of the most powerful instrument of societal control besides lawbased command powers backed by force.

        The banking-school type of thinking, by contrast, tends to deny or belittle the power and importance of money. To bankers, the power of banks has always been a non-issue.”

        http://static.squarespace.com/static/51ab60bee4b0361e5f3ed7fb/t/51ee76bfe4b0cc8c8b66ed72/1374582463955/MMT%20and%20NCT.pdf

        1. Nell

          I don’t see a lack of compatibility between Huber’s ecological modernization theory and MMT. Surely MMT points the way towards using money for public purpose and you can’t get much more ‘public purpose’ than safe guarding the environment. I guess you are coming from the same perspective as Positive Money in the UK (there was a link to New Economic Foundations on Huber’s webpage). I don’t have a problem with curbing bank’s credit creation process, nor do I have a problem with debt-free money creation (although I am uncomfortable with a bunch of unaccountable men making the decisions about how much money gets created – too much like the Troika for my taste). I also don’t see that debt-free money is incompatible with MMT. MMTers point out regularly that government spending via debt creation is a tradition based on the gold-standard, not a necessity. However, I do think that there are some pretty hefty problems with Huber and NEF’s (amongst others) proposition. There are very few societies that have not had a credit based monetary system (see Graeber’s work). So the question arises whether it will produce a stable system over the long term. And I don’t see how this proposition is compatible with capitalism, which means reforming the monetary system would require a revolution on a global scale (Is this realistic within the foreseeable future?). I have thought though, that taking on board the MMT perspective, is a step towards the dissolution of capitalism, and perhaps it might even pave the way to a transition to debt-free money creation?

          1. susan the other

            But won’t money always be a disbursement of social obligation? Or a form of debt. I would say benign debt wherein we all agree to share the risks. In some sense a quadrillion dollars worth of nominal derivatives spread the risk to returns for private enterprise – the end game of which dilutes returns to almost nothing if it is played out over time. When this activity is unregulated it throws all other aspects of an economy into a tailspin because it will need a government bail out when panic hits. It seems to me that we look for an ideal money system that is the least disruptive form of money so our economy is functional and equitable – nobody takes advantage of anybody in an ideal world. We are not there yet. When we get there capitalism will not be the same animal it is today.

          2. Dan Kervick

            A key element in Warren Mosler’s recent thinking is what I guess you could call the functional interchangeability of dollars (non-maturing, non-interest bearing) and government securities (maturing, interest-bearing). Also, since the fed now pays interest on reserves, then central-bank issued dollars sitting in reserve accounts do in fact earn interest, which further diminishes the difference between them. In his view these different instruments are just two different kinds of money. So to people who say, “We should permit the Treasury to issue money, not just the Fed,” he would say, “They already do.”

            1. from Mexico

              Why does everything always have to be made so complex and confusing?

              If what Mosler says is true, then why not just let the Treasury issue the money and be done with it, thus eliminating all the unnecessary complexity and confusion?

              1. FlimFlamMan

                Many MMT academics and proponents propose exactly that. They don’t support the smkoe and mirrors; they want them removed.

                1. from Mexico

                  Does Mosler advocate that?

                  Your argument has two rhetorical falacies: appeal to annonymous authority and unfalsifiability.

                  1. FlimFlamMan

                    I don’t know whether Mosler supports it or not, but he is not the beginning and end of MMT. Had you not noticed that other people are involved? One of the other originators, Bill Mitchell, does advocate for it.

                    1. from Mexico

                      Well can you name some of these “other people” who advocate that the Treasury issue the money?

                    2. Calgacus

                      Basically all the MMT thinkers support this, and they all say it all the time. Find one who says different. But the point is that it just doesn’t matter. Thinking that bonds and currency are magically different is cuckoo. The lower the interest rate, the less different. Issue bonds, issue money, who cares? They’re just 2 kinds of gubmint paper. They’re the same frigging thing. And everybody used to understand this. MMT is just the “New Economics” of the 40s, and was ancient then. E.g. Mosler points out that the first report of the US council of economic advisers advised permanent low interest rates, in all conditions.

                    3. FlimFlamMan

                      @from Mexico

                      “Well can you name some of these “other people” who advocate that the Treasury issue the money?”

                      I already named one of the other founders of MMT, right there in the comment you replied to. Given that there are only about 5 people who might be considered founders, that’s 20%. Maybe it’s 7 and 14%.

                      Why are you so hung-up on Mosler?

                2. F. Beard

                  Wrong! Most MMT leaders support central banking and government-backed credit creation because they believe in endogenous money creation, so long as it is non-ethical.

                  Ethical endogenous money creation, such as the use of common stock as private money, they scoff at.

              2. Dan Kervick

                I would be happy to do that, but remember the context. Many of these arguments have taken place during a time when Mosler and other people were just trying to get the government to expand its deficit and spend more, and to stop wringing their hands about “fixing the debt” and burdening our grandchildren. They were arguing against people who were saying we were headed for insolvency and hyperinflation! Fiscal expansion and stimulus was something for which there was a reasonable amount of mainstream support – although the fiscal expansionists were in the minority and facing the opposition of the leadership of both parties. You make the political heavy lifting job ten times harder if you say, “But first, we have to change the whole monetary system, end the independence of the central bank, give the Treasury new dollar-issuing powers, etc. That is something that clearly has almost no establishment support, and would be dead on arrival with the current Congress and current administration. It’s a perfectly valid long-term project for a movement or advocacy group, but it wasn’t something that was going to happen on a time frame appropriate to the here-and-now crisis of the Great Recession.

                1. from Mexico

                  So MMT boasts of being sure truth, but now you’re telling me all it is is political expediency?

        2. Tiercelet

          FM, I’ve been reading your comments (as much as I can wade through) over the last couple days, and while I see you have several nits to pick with MMT, I really don’t understand what your general point is.

          Can you summarize, in like 150 words, what exactly your views on this are? Do you just object to fractional reserve banking, or what? I’m not necessarily a hostile audience, I just get lost in a sea of words and I’m not seeing what your central objection is. (And I don’t undertake to get you to change your mind about anything, either–I just want to understand.)

          1. from Mexico

            I advocate fundamental and radical reform of the monetary system.

            Monetary policy should be crafted in an open democratic process by elected, not appointed, policymakers who can be held accountable “from below” by the people, as Cornel West put it.

              1. from Mexico

                Are you not following this thread, and the comments of the MMT faithful?

                They’ve pretty much covered the field when it comes to arguments about why a radical and fundamental reform of the monetary system is either not needed or not possible.

              2. rob

                I don’t see anything yo are against in the current economic/monetary/capitalistic/fascist system. Saying things like”we have always had these problems….” there are just ideas out there….”.. You haven’t said anything.The issue of what the Kucinich bill would address, in the control of monetary creation is to hopefully change the “who”, in who gets to se the money. Right now, the fed and its quantitative easing is rewarding and enabling the same cast of characters who are enabled by the federal reserve act to gamble with their financial innovations,and leveraging on what is likely to be crap. The bottom line against MMT priority seems to be them saying they are accurately/dispassionately just “describing” the fiat money system we already have, But the key seems to be them saying “the government” i.e. “the monetary sovereign”, issues our money…
                But that isn’t really true. The federal reserve issue our money. And those people get to give each other jobs and saturate the federal apprattus, and favor those who believe in their conquest of the world and come down like a load of bricks on everyone else.
                The simple fact that our money is created by the federal reserve , after a convoluted process that is gaurenteed by the federal reserve act, these entire financial industries are a manifestation of the original sin of the federal reserve act that gaurentees them a ‘cut” in perpetuity…. for the money we supposedly are the reason for its value. The “health”, of our nation is what the US dollars relies on. This system is killing American and her people. The system must die.
                The obvious alternative is to replace it with a system that works just as we have all been accustomed to in our little world, without the cream being removed first for “them”.
                In my reading of the Kucinich bill, 100% reserves sounds just like true conservative thought.
                In the beginning….money is made by the treasury, and spent on things that the country needs to put people to work in a sustainable fashion the people can begin to iron out….. then…
                If industrious wealthy people want to they can take their money, pool it… and se their noggin and intuition, and invest and so on…. and capitalism can flourish.Everyone has skin in the game…
                Unlike today where some people get money for nothing and use it to skew the political system, bludgeon the fourth estate,drive p the cost of living for everyone, in their rampant lust for speculative profits,spend money on boondoggles,from which they collect a “fee”.. and on and on.
                This system sucks. And it must die… or we will suffer for our collective inaction.
                Why people don’t get we can at least “create” the money ourselves, and we don’t need a financial priestly cast to do it for us;I can’t comprehend.

            1. Tiercelet

              Okay. What do you mean by “fundamental and radical reform of the monetary system” — like a return to specie-backed convertibility, or full-reserve banking, or state issuance of vouchers for specific goods a la WWII rationing, or pegging the dollar to kilowatt-hours of electricity…? Where do you want to see money come from?

              Would you consider it democratic and accountable if the money supply were set entirely by the spending and taxation balance from Congressional budgets (with deficits funded by seignorage, not borrowing)?

              I would love to have policymakers accountable from below as Dr. West advocates, but I fear American political processes are so corrupt at this point that may never be a sure thing again. But that’s neither here nor there.

              1. rob

                Actually, to answer your question, Read “the need act” National emergency employment act, 112th congress, HR 2990, sponsored bill by dennis Kucinich.
                The idea of “radically reforming the monetary system… aka “the Chicago plan” of the thirties… This is an idea that has been thought for a long time.The greenback,the whole idea of public money as opposed to “bank money”.These are specific ideas that have historical contexts.Not just Some vague notion.

                1. Tiercelet

                  So, “Abolish fractional reserve banking (and all horizontal money/non-gov’t money creation) and fund the government by seignorage.” Thank you.

                  (I think we’d have a much more productive discussion if we could just say things like this directly rather than have all the general impassioned yelling back and forth about what belief system does whatnot…)

      2. PJAMES

        from Mexico said:

        “MMT’s positioning within the field of ‘currency versus banking’ is more complicated and actually contradictory…. MMT declares itself to be a theory of sovereign currency, building upon a state theory of money. So, at first glance, it looks rather like another currency-school type of theory. It then, however, builds upon a special version of the real-bills doctrine and treats the near-free creation of private bank money in the present system of fractional reserve as an indispensable centrepiece of a nation’s sovereign currency system—an unexpected combination, suitable for creating political confusion.”

        MMT explains how the system basically works. To put it simply: the government issues state money and private sector organizations like banks issue forms of credit money which can be redeemed for state money. This is known as a hierarchy of monetary liabilities.

        Banks are often seen by MMTers as being licenced agents of the state, which should therefore be properly regulated and limited in what they can and can’t do. MMTers are usually against 100%-reserve banking proposals for practical reasons, not ideological ones.

        See some of the links on this page for more information about MMT views on the banking system and ideas for financial/banking reform. Note that the different MMT economists have different views on the subject:

        http://mmtinformationservice.blogspot.co.uk/

        1. Dan Kervick

          Yes, commercial banks in the US, though profit-making institutions, are subscribing parts of a single, highly centralized banking system. That system is governed at the top by political appointees. The dollars the individual commercial banks issue are in effect derivative instruments redeemable on demand into the dollars issued by the central bank.

          1. from Mexico

            PJAMES said: Banks are often seen by MMTers as being licenced agents of the state, which should therefore be properly regulated and limited in what they can and can’t do. MMTers are usually against 100%-reserve banking proposals for practical reasons, not ideological ones.

            DAN KERVICK said: Yes, commercial banks in the US, though profit-making institutions, are subscribing parts of a single, highly centralized banking system. That system is governed at the top by political appointees.

            Man, did Huber ever get you guys pegged right.

            As he observed:

            “MMT does not recognise a need for monetary reform. Central bank and government together, it is asumed, exert effective control over banks’ creation of credit and deposits. Fractional reserve banking on the whole is seen as efficient and benign.”

            1. Ben Johannson

              You are being very silly. Dan’s comment was a statement of how the process works, not advocacy of it; apparently you have real trouble understanding the difference, given you’ve made this error time and time again.

            2. PJAMES

              from Mexico,

              “MMT does not recognise a need for monetary reform. Central bank and government together, it is asumed, exert effective control over banks’ creation of credit and deposits. Fractional reserve banking on the whole is seen as efficient and benign.”

              MMTers do see a need for large scale financial and banking reform, so your comment is incorrect.

                1. PJAMES

                  Note that the MMT economists have some different views on what to do about the banks. Bill Mitchell is in favour of nationalization, for example, but the others aren’t.

            3. JTFaraday

              “Man, did Huber ever get you guys pegged right.”

              Yeah but this, paired with Kervick’s entirely fallacious contention above at 6:35 that there was “no constituency” for financial reform** in the wake of the 2008 crisis, is the kicker:

              “The dollars the individual commercial banks issue are in effect derivative instruments redeemable on demand into the dollars issued by the central bank.”

              That’s a nicely convenient feature of the status quo, and when endemic fraud means the status quo has devolved into something one can reasonably call counterfeit money creation, of a globally destabilizing nature no less, then it’s well past time for fundamental reform of all our banking related institutions and practices.

              ** There was indeed a constituency for fundamental reform, and even a “bipartisan” constituency of left/ progressives and right/ libertarians, as symbolized by the Federal Reserve Transparency Act introduced by Ron Paul and Bernie Sanders.

              Now I’ll grant you that said Bill remains mostly a symbol– because it’s clear that this is one political train that is definitely not supposed to leave the station.

              So, what did they do? They played the sides against each other on the subject of the deficit and austerity, centered on the social welfare state. Now we fight about the social welfare state like it has anything to do with—indeed, as if it were the cause of– the crisis of 2008.

              If you can’t F-that—and a lot of people can’t because they’re too busy fueling the distraction machine– then you’re nowhere.

              Although it is worth noting that this low brow distraction was much more effective than the one initially chosen by the bush leaguers in the academic crank blogosphere. I refer here, of course, to those trolls who were out in full force, shooting at the “gold bugs” and “Austrians” they projected into every critical comment.

              All false starts in the latest round of culture wars aside, I’m guessing “End the Fed!” is a little more threatening than “Full servitude now!”

              (At the end of the day, my yacht still needs washing and I’m sure as hell not going to do it).

  2. benp

    Sometimes I think trying to explain this to people resembles getting the hypothetical subject’s in Plato’s cave allegory to look at the real figures outside instead of the shadow forms on the wall.

    *nods*

    speaking as a typical lefty who thought he was fairly up on basic economics, learning about MMT over the last year has felt like a protracted reenactment of Chazz Palminteri dropping his coffee cup in The Usual Suspects. “The debt is Keyser Soze!”. My jaw is still more or less on the floor.

    Meanwhile, attempting to explain this to friends and family mostly results in tilted heads, labrador style. “But don’t we owe all that money to China?”..

    What continues to blow my fucking mind is the intellectual compartmentalization, throughout history, that was apparently necessary to the scale of ignorance we’re dealing with today. I’m having trouble adding that bit up, the Iron Law of Institutions not withstanding.

    “The mind is repelled” indeed.

  3. JGordon

    Oh hey David. That was a good call pushing Bernanke to implement QE3/4 back in the day when “liberals” wanted to give Obama every leg up they thought they could over Romney. Thanks to your strident agitating for more QE, which Bernanke eagerly gave into, the economy is really booming these days. So I trust your opinion a lot when it comes to this monetary stuff.

    But I did have one minor problem with the above post you generously provided for us. Although it wasn’t so much of a problem as it was some admiration for the way the author chose to frame this. I felt compelled to comment on it immediately: “Imagine parents create coupons they use to pay their kids for doing chores around the house…”

    Yes exactly! Great paragraph! Any person or entity can create her own scrip, call it money, and suggest that economic transactions be conducted in it. The author did a splendid job there illustrating that point, with the parents creating their own household currency and forcing their kids to pay taxes in it–because it shows that there is nothing inherently magical about a government entity or any other entity issuing a currency. As the author demonstrates by way of this example, literally anyone can issue currency and no intrinsic value in said currency exists aside from the value that other human beings choose to assign to it.

    There are plenty of real life examples of just this sort of thing happening in fact, which I am certain that the author is both aware of and in favor of, as Ben Bernanke and the SEC are, that people use everyday instead of the official state currency.

    Anyway I particularly like the above example of the parents issuing their own currency, because it hits close to home. Nothing was said about the personal qualities of those parents, but luckily I have a lot of experience with being “raised” by parents (and paying taxes lately!) so I’d like expound upon that a bit: let’s imagine that said parents are crackhead wastrel drug addicts (as mine were/are though admittedly the one in prison is fairly clean at the moment) who shoplift razors/Tide to purchase drugs, gambled away a substantial inheritance at a casino over a period of one month and is now drowning in debt, and beat their kids every day (while they were still small I mean–at some point it stops being a beating and starts being a fist fight).

    Now, how much value would/should the kids assign to the currency that said parents issue them–keeping in mind of course that said parent will beat the living crap out of them with a very nasty belt if they don’t pay their allowance taxes? The answer of course is that the kids will assign lots of value to the currency and to their obligation to pay taxes in it. Because if they don’t they’ll get the crap beaten out of them. The strong rule the weak after all.

    The strong use their might to rule and exploit the weak, and that is right; and it’s also what allows monetary theories like MMT to keep up the facade of workability; those that choose not to partake of the system are ostracized, murdered or imprisoned–as they must be for the system to function at all. Might makes right. And with the abundant threat of gratuitous violence always at the ready, it would seem that the well-armed issuers of fiat currencies having nothing to worry about, despite the incessant threat of smaller currency issuers coming along and taking their business. As the renowned “Nobel” prize winning economist so eloquently stated recently, the USD is valuable because it has an enormous military backing it up. Dmitry Orlov talks about the constructive use of violence in his writings, and this obviously is a point that Dmitry and the MMTers can agree upon.

    But all that still does not take into account the new political and environmental realities facing us. I believe that the MMT view of the world is static and can’t tolerate changing conditions. More specifically, I don’t believe that MMT is an ideology that we should be trying to rope ourselves into in a world where real industrial/environmental/social/cultural wealth is in secular decline. Any kind of a monetary system using an interest component does some rather bizarre and unwholesome things when conditions necessitate negative real economic growth rather than positive.

    If someone could address how MMT accommodates shrinking economies and the ongoing degrowth, deindustrialization (funny that according to this spell checker dictionary those words don’t even exist int he English language yet) phase of civilization that we entered into back in 2007, I may be open to changing my mind here. But as it is now, MMT seems like one of those dead ideologies that hang around like a stale fart in the air, long after its time has gone.

    Or, if people decide not to reform MMT, at least make it easy for those of us find the economic system that MMT sits on to be

    1. from Mexico

      @ JGordon

      As you well know, you and I disagree on many things. I’m not as convinced as you that we live “in a world where real industrial/environmental/social/cultural wealth is in secular decline.” But nevertheless, I must hand it to you, you knocked the ball out of the ballpark with this comment.

      I especially liked the following passage from your comment, and believe it well worth repeating:

      “Now, how much value would/should the kids assign to the currency that said parents issue them–keeping in mind of course that said parent will beat the living crap out of them with a very nasty belt if they don’t pay their allowance taxes? The answer of course is that the kids will assign lots of value to the currency and to their obligation to pay taxes in it. Because if they don’t they’ll get the crap beaten out of them. The strong rule the weak after all.

      “The strong use their might to rule and exploit the weak, and that is right; and it’s also what allows monetary theories like MMT to keep up the facade of workability; those that choose not to partake of the system are ostracized, murdered or imprisoned–as they must be for the system to function at all. Might makes right. And with the abundant threat of gratuitous violence always at the ready, it would seem that the well-armed issuers of fiat currencies having nothing to worry about, despite the incessant threat of smaller currency issuers coming along and taking their business. As the renowned “Nobel” prize winning economist so eloquently stated recently, the USD is valuable because it has an enormous military backing it up. Dmitry Orlov talks about the constructive use of violence in his writings, and this obviously is a point that Dmitry and the MMTers can agree upon.”

      1. Malmo

        I don’t have a problem with most of MMT’s descriptive parts of present monetary reality anymore than I have a problem with our Park Chairman describing the dilapidated nature of our park’s dreadful and illogical play equipment. It is what it is. Describing the park’s wretched equipment isn’t enough though, as a complete overhaul is in order. In fact after further study it has been decided the park equipment itself must be removed in place of natural landscaping for optimal function of said space. The same can be said for monetary critics who desire a radical change to the very system MMTers rightly describe. Thus to the critic of the monetary system it is the monetary system that is the problem in the first instance and no matter how much lipstick MMTers put on the pig makes no real difference in the long pull. Claiming agnosticism regarding the present system is simply a cop-out and isn’t acceptable. Period.

        Again, if the MMTer takes the strictly positivist approach in explaining the monetary system as it is, then fine. However, it’s when MMTers go beyond what the monetary system is, and then leap to advocating what it should be used for in its present form (the present form IS the problem), that is where many part company, including myself. Agnosticism is no refuge either, although some would like you to believe this feigned impartiality is a virtue rather than a vice which blinds (in other words the system as presently constituted operationally speaking is just fine with MMters a priori). And anyway this so called agnosticism is ultimately meaningless in that it only applies to operational reality at present, not prescriptive policy in light thereof. There can be no latter policy absent the antecedent former operational monetary reality they describe (one piggybacks on the other) , so their agnosticism is, shall we say, suspect.
        The critics of the present monetary system here at NC such as Hugh, from Mexico, JT Faraday, et al see endemic the corruption and disequilibrium which has been catalyzed in part by the very monetary system MMters are supposedly agnostic to. So what if Prof Wray or Mosler have the descriptive parts right? That obviously doesn’t make the system a good and just system by itself. Can it be used for ultimate good in its present form? I have serious doubts that it can or ever will be used to that end. Other very reasonable and thoughtful people feel the same way. What I’d like to hear from even one MMTer is the need to eradicate class society (make it the sine qua non of MMT prescriptive policy), because it is here where the rubber meets the road in everyday existence. A JG will not do that. Tying one’s well being to a job will do just the opposite in fact. If it be incrementalism that you pine for then say it. However, what’s the ultimate living arrangement goal? Is the common good derived through wage laboring 10 hours a day for 50 years ? That’s the gift MMT will bestow upon the masses? What’s radical or earth shaking and shackle removing about that? No thanks.

        1. Dan Kervick

          I personally have argued for some fairly specific proposals for changing both the monetary system and the fiscal system. But I think the orientation of most MMTers is toward the basic preoccupations of the Keynesian tradition in economics – especially as represented by the Post Keynesian school that has tried to recover and preserve the original Keynes: The chief preoccupation is how to combat and prevent cyclical unemployment and economic stagnation. So what they would like people to focus on is that we don’t need to reinvent the monetary wheel to accomplish those immediate tasks. We just need to run larger deficits.

          My own view, though, is that the monetary system is somewhat overrated in a lot of the blogospheric discussion of issues in political economy, and in many cases reflects the grossest kinds of “money illusion”: the inability to distinguish fundamental issues about property, real wealth, power, institutional control, social organization and inequality from relatively superficial issues about the media of exchange that happen to be used for transacting all of this business.

          1. Malmo

            I don’t consider you unreasonable at all, Dan. I realize you’ve given much thought and taken explicit stands that haven’t necessarily kowtowed to various other MMTers, and I don’t believe you possess an agnostic view of the present monetary system in that, as you articulated above, the systemic problems we face run far deeper than the operational realities of the monetary system (i will concede that point, yet still maintain reservations about the present system monetary). You’ve also criticized the JG or some aspects thereof, desiring a more comprehensive articulated plan (wages, working conditions, etc) that other economists practically ignore. I actually agree with you much more than disagree, and I don’t think you are one of the strident MMT advocates. What really gets my goat, however, and this doesn’t apply to you, is whenever someone from left ,such as myself, criticizes the JG, I’d appreciate not labeling me/them as crazy, demented, sadistic, heartless, etc. That’s dirty pool.

            1. Dan Kervick

              Thanks Malmo.

              I guess one problem I continually butt heads with people on are issues related to work. I am always very dubious about proposals that look like “free lunch” economics. To put my social philosophy as crudely as possible: I think we should all do about the same amount of work, and in return we should all get about the same amount of stuff. I suppose that makes me something like a communist.

              It makes me furious that there are people in our society who have to work their butts off for peanuts, while others can punch a few keystrokes on their computer twice a day, or have a weekly power lunch, even do absolutely nothing, and draw down fortunes.

              1. Malmo

                “I think we should all do about the same amount of work, and in return we should all get about the same amount of stuff. I suppose that makes me something like a communist.”

                If work we must, then I couldn’t agree more.

    2. Thorstein

      I have a lot of sympathy for the suffering Mr. Gordon alludes to, but the domination of the strong over the weak is independent of whether money is fiat or shiny metal. Such domination can also be independent of the size of the state or the economy. Pre-teen bullies will attempt to extort Oreos from the lunch boxes of the weak, even within polities as small as the nuclear family. From the observation that some parents beat their children, it does not follow that all parents beat their children, nor that parents in large families tend to beat their children more than in small. The great service of MMT is its exposé of the false logic that has and continues to abet the efforts of the wealthy to steal wealth from the poor.

      Degrowth is desirable, but not in all sectors equally. Across the world, we especially need degrowth in the military, police, and FIRE sectors. That would leave room for growth in other sectors, like the “social” and the “cultural”.

      1. washunate

        “…but the domination of the strong over the weak is independent of whether money is fiat or shiny metal. Such domination can also be independent of the size of the state or the economy…”

        And that’s why I argue monetary policy is basically irrelevant.

        MMT claims to solve problems that have little to do with the monetary system [note, this is where I differ from other critics who would argue that fractional reserve banking is inherently problematic - I would contend that the profit motive is a sufficient mechanism for restraining private conversion of credit into currency in a political environment where rule of law means something. Bailouts, not fractional reserve banking, are the problem].

      2. susan the other

        How we do degrowth is a political question. MMT is an accounting mechanism which makes the most sense but it is not a political panacea. And we all know Politics is Us. We are responsible for the direction of our country. Even in a world of military dictatorships, stone-age repression and foolish greed. I agree totally that we need growth in social and cultural sectors of society, but also in environmental clean up and public transportation, a modernized and decentralized energy grid and a completely new and localized agriculture. Etc. And I think almost everyone on the planet agrees. Right now, however, the only entities capable of mitigating Fukushima are the militaries of the industrialized world. And Fukushima is only one of many big problems we face. We’ve really got a lot on our plate no matter how we account for it.

        1. Dan Kervick

          Yes. For some reason the MMTers catch a lot of grief because their aims are fairly practical. It’s like if you go into your car mechanic and learn that, because he understands better than other mechanics how your car actually works, he has come up with a better and cheaper way of fixing your car. Do you chew him out because he has not invented a new organic flying machine that runs on sunlight and raindrops.

          Part of the problem is that MMT consists at its heart of a handful of professional economists. But it is surrounded by a much larger group of devotees, fanboys, blogospheric fellow-travelers and economic hobbyists. Some of them seem to be captivated by what they imagine is MMT’s discovery of a magic money machine which is a kind of Star Trek replicator for the spontaneous generation of wealth from nothing, and therefore a solution to all social problem.

          Social Security is a good example. The really important public policy issues confronting any society regarding retirement systems have to do with such questions as: What proportion of the population is retired, or will be retired at such and such a time in the future? What proportion of the population will be working? How productive will those workers be? What social mechanisms should be used for distributing a share of the worker’s output to those who are not working? How fair are these mechanisms? How can and should a society adjust its practices for distributing this output in response to changes in demographics and productivity over time? How far in advance must those changes be made?

          1. F. Beard

            What social mechanisms should be used for distributing a share of the worker’s output … Danny K

            There ya go, Dan, shamelessly using the word “share” while supporting a form of money creation that STEALS from the weakest and most vulnerable .

            But good ole Dan will just steal it right back and distribute it justly, eh? Will we be required to get a “666″ before we can live in your new order?

              1. F. Beard

                No Dan, I won’t stop because the truth is on my side, not yours.

                You’re just too dumb and arrogant to know when you’ve lost an argument.

                Like a trampled spring and a polluted well Is a righteous man who gives way before the wicked. Proverbs 25:26

                1. PJAMES

                  Dan doesn’t support a form of money creation that steals from the weakest and most vulnerable so there’s clearly something going wrong inside your head.

                  1. F. Beard

                    Danny is a defender of government-backed credit creation and the poor are generally not considered so-called creditworthy.

                    And he has no excuse. Danny should know by now that shares in Equity, common stock, is an ethical form of endogenous money and thus there is no need for government-backed banks.

                    1. PJAMES

                      “Danny is a defender of government-backed credit creation and the poor are generally not considered so-called creditworthy.”

                      That doesn’t mean Dan “supports a form of money creation that steals from the weakest and most vulnerable”.

                      “Danny should know by now that shares in Equity, common stock, is an ethical form of endogenous money and thus there is no need for government-backed banks.”

                      There’s no need for a central bank because you believe that stock can be used as money? What a silly argument.

                    2. F. Beard

                      I can defend that “silly” argument all day long.

                      Dan, otoh, can use words like “equitable”, “share”, “democratic”, and “common good” and never realize that common stock as private money is based on all of the above. Blind much?

                      As for a central bank, the monetary sovereign has absolutely no need of one and the so-called “private” banks should NOT have one since it allows them to steal via unethical credit creation.

                    3. skippy

                      “Blind much” – Berado

                      Coming from a guy that uses a mythology from 10,000 years ago and has been politicized every step of the way, to validate some of the most egregious atrocity’s humanity has ever seen, this has to be the hardest Cog Dis burn the Universe has witnessed.

                      skippy… take the government back and ship all the necons, fundies and libertarians to their Holy Lands or Somalia – problem fixed.

                    4. Dan Kervick

                      So if you own and trade equity shares in general electric, you are participating in a system that is equitable and based on “sharing”?

  4. from Mexico

    This is nothing more than another rendition of the same story Warren Mosler told over the holiday season about the British imperialists.

    In that version, the British levied taxes upon the natives they had conquered. In order to get the money to pay the taxes, the natives had to work for the British to earn money, which the British just printed up out of thin air. If the natives didn’t work for the British to earn the money to pay their taxes, then the British would burn the natives’ houses down. Here’s the link:

    http://moslereconomics.com/2013/12/22/mosler-barnard-tour-2013/

    So the whole money thing, as posited by Mosler, is little more than a roundabout way of extracting what in former imperial regimes would have been called “tribute.” It is a form of social control, but done with a measure of stealth, and full of wiles. Or as Robert Heilbroner put it in Behind the Veil of Economics: “For I have gradually come to see the market system as one in which the same underlying processes that assure discipline and order as those of older societies continue to exert their force, although in a manner that escapes our recognition.”

    So riddle me this: In the “ideology-agnostic” world of MMT, why should the U.S. government treat its adult citizens with the same paternalism that parents do children? Do we not ostensibly live in a democracy where the people are supposed to rule those who govern them, where we do not rely on the command-obedience relationship that exists between parents and children in a household setting, or between conqueror and conquered in the imperial setting?

    Why should some people have to work for the money to pay taxes, as is the case with MMT’s job guarantee proposal, while others who perform no socially useful function are allowed to merely collect rents to fend off the tax collector?

    Or better yet, why do the bankers (as Mayer acknowledges, he and Mosler are both former bankers, and Mosler an extremely successful one at that) get to create money out of thin air with the stroke of a keyboard, and others have to work for what piddling measure of money they get?

    Chris Mayer acknowledges that “You don’t have to like this. (I don’t.) It’s merely a description of how a fiat currency system works. That’s the world we live in.” But what specific policy recommendations does MMT propose to remedy these unjust and unfair practices in our society? Or are Mayer and Mosler cut out of the same cloth as the early 19th-century classical economists, described here by Robert Heilbroner in The Worldly Philosophers:

    ”They lived in a world that was not only harsh and cruel but that rationalized its cruelty under the guise of economic law…. Harsh as such a sentiment might have sounded, it did ring with a kind of logic. It was the world that was cruel, not the people in it. For the world was run by economic laws, and economic laws were nothing with which one could or should trifle; they were simply there, and to rail about whatever injustices might be tossed up as an unfortunate consequence of their working was as foolish as to lament the ebb and flow of the tides….

    “One might not necessarily like the result, but it was apparent that this result was the natural outcome of society’s dynamics: there was no personal ill-will involved nor any personal manipulation. Economic laws were like the laws of gravitation, and it seemed as nonsensical to challenge one as the other.”

    The following statement from Mayer is troubling, because it indicates he is indeed cut from the same “ideology-agnostic” cloth as Adam Smith, Malthus, and Ricardo (Yes, the classical economists made the same pretensions to value-free scientific objectivity that MMT economists do.):

    ”On one level, MMT is simply a description of how a fiat currency system works. On another level, there are policy prescriptions that flow from this understanding. My only advice on the latter is this: Don’t let your politics deter you from making sense of MMT. (MMT itself is politically agnostic.)”

    1. GRP

      The banks are part of the government. If the government is the sole issuer of the currency and banks also issue the same currency, by definition they have to be part of the government. Of course, there is nothing necessary in MMT about the banks being allowed to operate on fractional reserves or having privileged access to government created money, but that is how it is today.

      It is possible to create to fiat money system with no modern banking. Pure depository institutions can be created that offer their services for a periodic fee. These institutions offer very simple services, like accepting deposits, allowing withdrawals and transfers between account holders of two different accounts within the same institution or between two such institutions. They cannot lend or borrow. Their entire deposists are guaranteed by the government without any limits. Banks on the other hand can only lend or borrow state money, not accept deposits and withdrawals of state money. Banks should be required to have accounts with depository institutions and their accounts credited with their borrowings and debited with their loans. So the only state money the banks will have to lend is what they can borrow from others. Loans to banks have no state guarantees and if a bank goes under because its borrowers have gone under, the lenders take the hit. Loans to banks, like any loans, have a maturity period and banks may have to rollover debt. Under this system, if the government believes the economy has a potential for growth requiring more money in the system, it either spends the money by simply creating it over and above its revenue from various sources or simply creates it and pays as interest to the deposits in the depository institutions.

      Banks can even be allowed to create their own money, but should be prohibited from pretending to issue state money i.e., an account holder at a bank cannot issue a check denominated in state money that is accepted at a depository. Those accepting bank liabilities as payment do so at their own risk.

      1. from Mexico

        The “banks are part of the government,” as in the private banks?

        These are the kinds of internal contradictions MMT creates for itself with its too-strict adherence to Platonic philosophical realism. Yesterday J.D. Alt drew two little boxes, one labled the federal government (FG) and the other the private sector (PS). Everything in the domestic economy must fit within one of these two boxes. Alt goes on to explain that

        “The sovereign government issues U.S. Dollars in the FG pot and then spends those Dollars through it’s own SPENDING spigot into the PS pot! Entrepreneurs in the Private Sector then use the Dollars the FG has issued and spent—leveraging them with bank loans and creative financing—to launch business ventures that generate private sector jobs and wages.”
        http://www.nakedcapitalism.com/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html

        Now you are telling us just the opposite, that the banks “are part of the government.”

        But as crazy as it sounds, I actully agree with you on some level. As JGordon notes above, the private banks would disappear in a New York minute if it weren’t for the government’s instruments of violence backing them up. So the private banks are really kind of like a public-private partnership.

        1. GRP

          Yes, you are right. Banks are effectively part of the government, even if they are privately owned as long as they have the power to create state money and MMT claims the government is the sole issuer of the currency. All MMTers consider the Central Bank of a monetary sovereign like the Federal Reserve in the US to be part of the government despite the fact that the different Federal Reserve Banks are privately owned. Since taxes can be paid using bank money (cheques drawn on chartered banks), bank money is accepted at par by the state making it state money making banks effectively part of the government.

          1. FlimFlamMan

            Banks do not issue currency, they issue credit/debt denominated in a particular currency. Both government issued currency and bank issued credit are regarded as money, including by MMTers.

            Taxes cannot be paid using bank money. If you initiate the payment of a tax obligation by sending a bank cheque, the payment will be settled by the elimination of reserves.

            1. GRP

              Yes, you can pay all your obligations, including taxes, using bank money as long as the bank is not bankrupt. Your bank may or may not have its reserves depleted depending on whether the one taking your cheque deposits into an account with the same bank or not. Even if the total reserves outflow (taxes or deposits into another bank) from a bank exceeds its reserves, it can still borrow reserves (that no non-bank can do) from other banks or the Central Bank (which can create as much reserves as needed). So, yes, banks create state money.

              1. F. Beard

                So, yes, banks create state money. GRP

                And that’s outrageous!

                Borrowing short to lend long is inherently uncertain and should always remain so since it is tantamount to counterfeiting although in practice it would be impossible to eliminate altogether. However, that’s no excuse to subsidize it. Rather, the practitioners should be zealously, enthusiastically liquidated when they miscalculate as a warning to others.

              2. Dan Kervick

                When you pay a tax using your bank deposit balance, the bank in turn has to pay the government, and it pays the government by returning to the government some of the dollars that the government itself issued. That’s why the government accepts drafts on bank deposits in payment of taxes. The only thing the bank “creates” when it credits a positive balance to your bank account is a liability for itself. If you banked at some local rogue bank that was in the habit of issuing its own “fiat” currency in the form of mere numerical balances in accounts that were not contractual derivatives of US government issued dollars, then the US government would never accept checks drawn on these balances in payment of tax obligations. You and some friends might be perfectly happy to exchange these point balances among yourselves in exchange for goods and services, but the government won’t join you. And since the government won’t accept those points, its unlikely that you will be able to find many other people who will accept them either.

                1. F. Beard

                  The only thing the bank “creates” when it credits a positive balance to your bank account is a liability for itself. Danny K

                  The liabilities for the banking system as a whole are nearly entirely VIRTUAL, not real, since the banks have a default, government-insured monopoly on the risk-free storage of and transaction with fiat.

                  So you accounting, Dan, is specious and meant to obfuscate?

                  I ask again: Are you getting paid for your defense of banking?

                    1. F. Beard

                      I said “The liabilities for the banking system as a whole are nearly entirely VIRTUAL,

                      How about addressing what I actually say instead of creating straw-man arguments?

                    2. skippy

                      @berado – as a whole are nearly entirely “VIRTUAL”

                      Skippy – Help can’t get up off the floor – the pain is deliciously absurd – ex nihilo man gripes about Virtual stuff~~~~

                    3. Dan Kervick

                      I did address it. You are wrong. These liabilities are actual debts, not “virtual” debts. I presented evidence: businesses don’t fail because of virtual debts they only owe in some virtual reality. You just don’t want to hear that because it interferes with your theories.

                      The banks don’t have a monopoly on the production of government fiat currency. They don’t produce fiat currency – they have to acquire it from the government. They acquire it by borrowing and lending.

                      And whatever kind of “cartel” the banks are part of, it doesn’t save them from going bust if they run their businesses into the ground.

                2. GRP

                  The government, by accepting the liabilities of a chartered bank at par for taxes, has equated bank money with state money while knowing all the time that the total bank liabilities are far in excess of its reserves.

                  The number of people happily exchanging computer points (bitcoins) for goods and services is increasing even though no government as yet accepts these points for payment of taxes. But that is beside the point.

              3. FlimFlamMan

                You’ve missed the point. It is not the cheque that removes the tax obligation it is the elimination of reserves. The cheque merely begins the chain of processes.

                You could equally begin that chain by handing your accountant a barrel of Scandinavian rotten fish (apparently it’s delicious), and telling them to sell it and pay the taxes with the cash received. That doesn’t mean you can pay taxes with rotten fish.

                The difference between ‘paying taxes with a cheque’ and buying a TV from the shop with a cheque is that in the tax case reserves are eliminated, whereas in the second, while they may or may not be ‘moved’, the total will not change as a result of the transaction.

                So when you buy a TV your financial obligation to the shop can be met by the bank money itself, but when you pay taxes – an obligation to the government – you can only do so using financial instruments created by the government sector, which in the case of the cheque will be reserves.

              4. PJAMES

                GRP said:

                “Yes, you can pay all your obligations, including taxes, using bank money as long as the bank is not bankrupt. Your bank may or may not have its reserves depleted depending on whether the one taking your cheque deposits into an account with the same bank or not.”

                No. When you pay taxes, your bank debits your deposit account, and the Fed debits your bank’s reserve account. A tax payment mediated through a bank always results in a bank paying reserves to the Treasury. Banks do not create state currency. You are confused.

                1. F. Beard

                  The central bank creates fiat and it does so NOT for the general welfare but for the sake of the banks and the so-called creditworthy.

                  And YES, the banks DO create money because their liabilities as a whole are almost entirely virtual since they have a default, government-insured monopoly on the risk-free storage of fiat. Their assets, otoh, are very real indeed except during the busts, which they are responsible for.

                2. GRP

                  If I cash your cheque, that too reduces your bank’s reserves. Taxes are no different. However, your bank doesn’t have to go under simply because its reserves have fallen. It can borrow reserves from the Central Bank, effectively converting their credit to state money.

                  To state what I said earlier differently, the banking system creates state money.

                  1. PJAMES

                    GRP:

                    “If I cash your cheque, that too reduces your bank’s reserves. Taxes are no different.”

                    That’s true in the sense that in both cases the bank pays out reserves (currency).

                    “your bank doesn’t have to go under simply because its reserves have fallen.”

                    Correct.

                    “effectively converting their credit to state money.”

                    Incorrect. The ability to borrow does not change your credit into state money.

                    “the banking system creates state money.”

                    State money itself is issued by the state, either through the central bank or Treasury. Banks create their own deposits, which are bank debts. The state supports the banking system through the central bank, deposit insurance, and bailouts. This does not mean that banks create state money.

                    Please read some of the articles in these links to get an idea of the MMT views on how to reform the banking and financial sector:

                    http://neweconomicperspectives.org/mmt-scholarship

                    (look under Minsky, Money Manager Capitalism, Banking/Finance, and Central Banking)

                    also:

                    http://mmtinformationservice.blogspot.co.uk/

      2. uncle joe

        In which part of the government are the banks?
        Even in MMT’s construct, only the Fed Board, FOMC and Regional bank Presidents, in their role as ‘agents’ of the Board, fall under the governmental sector.
        The banks that issue all the nation’s money, and gain the seigniorage(profit) therefrom, are all part of the private sector.
        This “banks = governemnt” claim is another glaring result of there being no official version of MMT’s facts.
        It results from a bunch of well-intentioned shoe-horners, taking ‘parts’ of Mitchell-Innes, Knapp, Godley, Lerner and even, somehow, Minsky, to advance the idea of a transformation of our monetary understanding, all the while vehemently defending the status quo(private bank money).
        Thus, JPMorgan and Citi are part of our government?
        Yeah. Know which part?
        The ‘invisible hand’ in your pocket part.

        1. GRP

          I would say banks are part of the banking system which is part of the government i.e if you agree with the MMT concept that the government is the sole issuer of the nation’s currency in a country like the US.

          The government through the Central Bank lending of unlimited reserves (a privilege extended only to the banking system and no one else) allows the conversion of bank money freely into state money at par. Banks may go under for being insolvent (liabilities exceeding assets), but not for being illquid (lacking enough state money or reserves) because they can borrow from the Central Bank as much reserves as they need.

      3. PJAMES

        GRP said:

        “The banks are part of the government. If the government is the sole issuer of the currency and banks also issue the same currency, by definition they have to be part of the government.”

        No, banks are not “part of the government”.

        Banks do not issue state currency. They create deposits, which are bank debts.

        “Banks are effectively part of the government, even if they are privately owned as long as they have the power to create state money and MMT claims the government is the sole issuer of the currency.”

        Banks do not create state money. You have misunderstood.

        “All MMTers consider the Central Bank of a monetary sovereign like the Federal Reserve in the US to be part of the government despite the fact that the different Federal Reserve Banks are privately owned.”

        The Federal Reserve System is comprised of a central government agency, and 12 regional reserve banks which have an intermediate legal status, with some features of private corporations and some features of public federal agencies.

        “Since taxes can be paid using bank money (cheques drawn on chartered banks), bank money is accepted at par by the state making it state money making banks effectively part of the government.”

        You can pay your taxes by instructing your bank to pay the Treasury, but your bank then has to pay the Treasury with state money which your bank can not create. I repeat. Your bank can not create the money used to pay taxes to the Treasury. Bank deposits are not state money.

        1. GRP

          The details of how the bank discharges its obligations are unimportant as long as you can pay your taxes using bank liabilities. When you pay your taxes using a cheque drawn on a chartered bank does the government make accepting it contigent only upon your account with the bank having sufficient bank credit to cover it or also upon the bank having the requisite reserves to cover it?

          Yes, technically speaking banks don’t create state money. But they can borrow as much reserves as they need from the Central Bank to cover their reserve requirements to convert their credit into state money, a privilege extended to no one else.

          So effectively banks create state money. It sure has a cost, the cost of borrowing, but not very different from the cost to the state itself of printing currency notes or minting coins.

          1. PJAMES

            “they can borrow as much reserves as they need from the Central Bank to cover their reserve requirements to convert their credit into state money”

            The ability to borrow does not convert their credit into state money. If banks could create state money they would not need to borrow it from the state.

    2. Dan Kervick

      Yes, the paternalistic metaphors are off-putting. But you can tell the story in a different way that focuses on the rule of law in democratic society, and where the tax obligations enacted into law are very broadly supported, either in detail or in principle, with the coercive factor playing a role only among those people who are hostile to the society and its laws.

    3. Ben Johannson

      So riddle me this: In the “ideology-agnostic” world of MMT, why should the U.S. government treat its adult citizens with the same paternalism that parents do children? Do we not ostensibly live in a democracy where the people are supposed to rule those who govern them, where we do not rely on the command-obedience relationship that exists between parents and children in a household setting, or between conqueror and conquered in the imperial setting?

      Readers should note you actually write nothing that refutes Mosler’s narrative, meaning you implicity accept it as correct. Rather you immediately jump to the erroneous conclusion Mosler supports this sort of thing because he has the gall to talk about it.

  5. GRP

    Sure, a sovereign issuer of a currency doesn’t have to default on its obligations denominated in its currency. But it is a different matter altogether whether the currency will continue to hold value after a government goes on a currency issuing spree simply because it can and feels like it.

    Taxes don’t drive demand for currency. If they did, why would anyone accumulate currency well beyond their tax obligations? People accumulate currency because they believe it to be a store of value. If that faith is broken, few will want to hold it, even if they are forced to accept it for whatever reason. When no one wants to hold it, its value rapidly declines.

    Those who pretend sovreign issuers of currency don’t have money to spend are trying to preserve the value of the currency, not that they are unaware that the issuers of the currency are constrained in the volume of it.

    Perhaps Mosler and the like believe the world will keep exporting to the US as much as it wants as long as they keep issuing dollars and bonds. Those in charge are not so sure. Only one way to find out. Perhaps the US Government can increase the minimum hourly wage to US$ 100 and start a Job Guarantee program paying the same for self-care services (taking care of oneself) for every adult not otherwise employed.

    1. Nell

      Yours is not a critique of MMT but a critique of potential government policy (spending beyond available resources).

      1. GRP

        Taxes don’t drive demand for currency.

        That is very much a critique of MMT. MMT fails to explain why people accumulate currency in excess of their immediate tax obligations.

        However silly their explanation for the demand for currency, MMTers don’t stop there. They go right ahead and make policy recommendations from their “understanding” of where demand for currency comes from. I didn’t invent Job Gurantee as a policy recommendation, MMTers lie Mosler did and continue to do.

        1. FlimFlamMan

          Taxes are a primary driver of demand. Once that demand exists, and given that

          a) no individual knows exactly how much currency is needed to cover all taxes at any given time,

          b) each individual knows that others desire currency since they also have tax obligations, and

          c) it is better to find oneself with too much currency than too little,

          it is entirely natural for demand to exceed what is needed for paying taxes.

          So now you have a currency, which has value, and with an excess available for other transactions. Why wouldn’t people want it? That initial demand creates the conditions for further demand.

          1. GRP

            You must be kidding! Everyone knows their tax liabilities are less than 100% of their earnings (I am not including property taxes here). No one has a reason to accumulate currency beyond their maximum tax liability. In fact once a person or entity has accumulated enough currency to pay maximum tax liability due they would start discounting the currency, if they believed the only reason anyone would need the currency is to pay taxes.

            1. Dan Kervick

              No that doesn’t follow. The theory is that the existence of tax obligations payable in the currency helps create a general demand for the currency. The existence of that general demand gives individual people a reason to acquire the currency that goes beyond the need to discharge their own individual tax obligations. Similarly, its can be entirely rational for a blind person to acquire fine art pieces, even if they themselves can’t see the art and have no primary personal need for it, if there is market for those pieces.

              The taxes-drive-money theory is intended as an account of a diffuse macroeconomic state of affairs, not as an account of the motive informing each and every individual transaction.

              Personally, I think tax obligations are only one part of the story in explaining the demand for modern forms of money, not the who story. But I think your criticisms is a bit off the mark.

              1. F. Beard

                Personally, I think tax obligations are only one part of the story in explaining the demand for modern forms of money, … Danny K

                Ya think? What about the interest payments for the debt the government-backed credit cartel drives the population into? And leakages of that potential interest into domestic savings and abroad to buy net imports?

              2. GRP

                I agree that taxes can create a demand for a newly issued currency and have the potential to establish it as a unit of general account, but completely disagree with that as the sole and sufficient driver for a demand for currency. The lack of sufficiency for taxes as a driver for the demand for currency is what is established by the numerous instances of national currencies of losing their status as unit of account in commerce not involving the government.

                Unless a government prohibits the use of any unit of account for commerce other than the state currency and has the wherewithal to enforce such a prohibition, it still needs to retain popular faith in the value of its currency for it to cntinue to serve as a unit of account in commerce despite the fact that tax obligations are to be paid only in that currency.

                Most MMTers ignore that part and think the government is limited in its ability to spend only by what is currently available for sale in the currency. Something is available for sale in a currency doesn’t necessarily mean it will continue to be available in the currency regardless of how the volume of the currency changes.

            2. FlimFlamMan

              In addition to what Dan has said:

              It is true in most developed countries that a significant percentage of the tax people pay is deducted from their income at source, so they don’t have to separately acquire currency to pay a tax bill that will arrive later.

              It is also true though that this was not the case until recent decades, while taxes have existed for centuries. You’re ignoring the point about additional demand set in motion by the initial tax driven demand, and the fact that where we are now, economically and socially, is a function of where we have been, over generations.

            3. Calgacus

              You must be kidding! Everyone knows their tax liabilities are less than 100% of their earnings (I am not including property taxes here).

              The valid points you make are well understood. In the MM Primer IIRC. The point is, you cannot “not include property taxes” Pure income taxation alone is insufficient to drive initial demand for currency.

              Being the King of Mars, I just gave you a trillion Martian shmollars – taxed at my usual 99.99% rate. Doesn’t drive any demand for shmollars, as you argue. Pure income taxation is too “monetary”. Demand & value of money has to come ultimately from “fiscal”.

              However, if I levied a property tax in shmollars, or looked at your economic activity and measured it in shmollars – the way the IRS might look at barter transactions, you better cough up my shmollars. As others have commented, income taxes work fine to modulate demand for money that cannot have originated in taxation purely for money income.

              1. GRP

                I excluded property taxes only for the statement that tax liabilities cannot exceed earnings. Property taxes too are of a known value. If the person accumulates less state money than that in a period, (s)he stands to lose the property, but excess doesn’t fetch any benefits.

                I do not know of any instance where someone does not know and cannot know his/her tax liabilities and hence has to keep accumulating state money to pay these unknown and unknowable tax liabilities.

                1. Calgacus

                  Property taxes are in essence rents, payments for a lease, paid by the property “owner” to the truer owner, the state.
                  If the person accumulates less state money than that in a period, (s)he stands to lose the property, but excess doesn’t fetch any benefits. Accumulate less: the bad of loss of property is a strong impetus to err on the side of overaccumulation, not underaccumulation. Excess does fetch a benefit, in addition to this. The excess cash holder can now buy more property – from others, or for simplicity, from the state. And if it is real estate, (s)he now has a longterm need. for cash. That’s what taxation is: private sector payments, fees, prices paid to the state for benefits & goods directly provided to the payer by the state. As long as what the state is “selling” is desired, there will be demand for its debt, its coupons for payment.

                  You make very good points. But they have been addressed, understood and incorporated by great economists already. Keynes made your “knowledge” point. He pointed out that if everybody knew the future, knew how much money they would need, “what on earth would be the use for the stuff.” Money is a buffer stock / store of value against an uncertain future. That the future is not entirely uncertain is reflected by the fact of finance, of the fact that state money is high-powered, and most money is bank money “leveraging off” state money.
                  if you have a good job, a good, steady income, you can get a mortgage and don’t have to pay for your house out of pocket. One doesn’t just sit on the money, but “gets rid of it” for the house. But that there is a large demand for state money is a fact. As Mosler has said, it logically could be based all on one penny of state money whizzing around. But it isn’t. The US National Debt is in the trillions, because dollars=reserves=treasuries are in high demand, and there is no ultimate driver of this demand than payments to the state, mainly taxes. That is the way it has worked for millennia.

              2. GRP

                The glee with which the MMT supporters talk about threat of physical violence as the driver of demand for a currency is very instructive of the kind of society they like to build. It is also instructive of their opposition to other possible ways currencies may come into wide acceptance and the limitations to their approach.

                Frankly, I would love to see MMT gain popularity in the US and their recommendations implemented. There is no quicker way to destroy the world-wide faith in the US$. It is going to be a tad more difficult to thrash China into continuing to accept US$ for its exports, than it was Iraq.

                1. PJAMES

                  “The glee with which the MMT supporters talk about threat of physical violence as the driver of demand for a currency is very instructive of the kind of society they like to build.”

                  That is a very stupid statement.

                  MMTers don’t “talk with glee about threats of physical violence”. You need to stop lying and making things up.

                  1. GRP

                    Not to worry! I would love nothing more than MMT recommendations implemented in the US and it is a done deal anyway.

                    When the next financial meltdown happens, which is due anytime now, and banks are bailed in wiping out businesses’ deposit accounts and jobless rates start a steep climb, the only option left will be MMT recommendations including JG, financed probably the HVPCS route.

                    When the rest of the world starts dumping US$ like hot potatoes you can enjoy your hyperinflation!

                    Or perhaps the whole MMT businsess is about introducing a new currency in the US at that point and what is required for that currency to gain ground.

                    Anyway, I am done discussing MMT. It is a stupid idea that will quickly destroy the currency of any country that takes it seriously and implements the policy recommendations of its proponents. But the US doing it is exactly what the world needs now and I am glad the concept is gaining popularity in the US. Good luck to all MMTers :-)

                    1. skippy

                      @GPR – China seems to find plenty of markets for its MMT fiat, seems its more about how – you – play the game – than what you play it with.

                      skippy… some really need to step away from all the classical – neoclassical notions of money – store of wealth – paraxeology – homo economicus.

        2. F. Beard

          Actually, the private (and fraudulent) debt the government-backed counterfeiting cartel, the banking system, has driven the population into must be a large part of the demand for fiat, apart from the need to pay taxes.

          But the MMT folks generally give the banking cartel a pass, Heaven knows why.

          1. F. Beard

            Well, at least the interest required is since the banks don’t create the interest for their loans except as more debt.

        3. Maude

          Taxes do drive demand for currency as dollars are the only form accepted in payment of taxes. However, accumulating excess is logical for several reasons that you fail to mention;
          1. Having two currencies I need to earn – one to settle tax obligations, one to use for a payments within private sector, is what is silly
          2. Turns out, accumulating dollars in excess of your tax obligation gives you a universal and readily accepted medium of exchange

          1. GRP

            The number of instances where people lost faith in the local currency in which taxes are due and started using foreign currencies to price things in and put their savings in are too numerous to quote.

            1. Maude

              “Local Currency” Are we talking in the U.S.? In the recent past? Distant past?
              Feel free to name a few.

        4. PJAMES

          GRP said:

          “Taxes don’t drive demand for currency.”

          If someone owes taxes there is necessarily a need to acquire the currency with which those taxes can be paid.

          If you owe $100 in tax, 100 dollars of state currency has to be acquired with which to pay the tax. This is very basic logic and it is surprising that you don’t seem to get it.

          1. PJAMES

            GRP said:

            “MMT fails to explain why people accumulate currency in excess of their immediate tax obligations.”

            Another false statement by GRP. A tax obligation creates a simple need to acquire the currency with which the tax can be paid. The fact that there is a need to acquire the currency means that people can use the currency to pay one another. The fact that the currency can be used to pay people means that people have an incentive to accumulate the currency (or financial assets denominated in the currency) as savings. Etc.

            1. GRP

              There are companies that operate in many countries and hence have tax obligations in many currencies. However they don’t simply accumulate in all the currencies they have tax obligations in. They accumulate in the currency in whose value they have the greatest faith in. People acumulating monetary assets are exposed to the risk of the assets losing value. Unless the risk is perceived to be small enough to justify the accumulation in that form of asset, people won’t do that.

              1. PJAMES

                Your comment does not contradict the fact that taxation creates a need to acquire the currency and thus a demand for the currency.

    2. F. Beard

      Let’s eliminate all privileges for the banks and then ONLY the US Government could cause the over-issue of the US dollar.

      But ethical money creation is apparently inconceivable to this generation.

  6. QuarterBack

    Please correct me if I’m wrong, but my read on current economic history is that we are living on the battlefield of a rhetorical war for who (the public or private sectors) should control the money supply; and thereby control the lives and fortunes of those who depend upon it (oh, and if there is anyone out there who doesn’t depend on money please raise your hand).

    The private sector forces have done a spectacular job of convincing people that public spending and taxes do not follow the MMT model, but instead run like a family balance sheet, where public spending can only happen (without catastrophe) when it is paid for by taxes. The ultimate goal being to castrate the public sector from having any ability to affect changes in the supply, flow, or stockpiles of money without the approval of the masters of the private sector.

    The effect of such a private sector victory would be the death of public sovereignty. The private sector masters would certainly take some charge to do their best to build a utopian world of their vision, but this private sector would answer to none. Bank credit would stimulate expansion and exploitation where their vision of utopia would dictate. Interest rate manipulations would control the flow, and occasional bank write-offs would adjust supply.

    To be fair, the public sector is set on building its own vision of utopia as well, but its shape, pace, and measures of success are always answerable to the people. Admittedly often fickle and clumsy people, but the people nonetheless.

    All public sector spending, at the currency issuer level, is fiat spending. The only tie to taxes is the artificial metric relationships that the public sector uses to set levels of spending in various venues. All taxes are public sector tools to either direct flow away from undesired channels, or to reduce the supply to prevent oversupply. Tax laws are just the mechanism to attempt to be fair, and have public participation in the discussion for flow and volume control of money.

    Both the public and private sector, have a seat at the economic table for drawing out the plans for which utopian visions will be pursued. Disagreement and conflict is unavoidable, but if the public sector looses its seat at the table, the people will have no say in their destiny. History has shown that economies that have no public answerability eventually fail; in epic “for the history books” fashion. A pure private sector economy, as is capitalism, is fatally flawed because it does not answer to the people. Pure public sector economy, as is communism, is fatally flawed because it becomes too fickle, and dangerously inefficient. It’s not a trouble free model, but I believe that both public and private sector control of the money supply need to exist. We need to avoid a holy war to attempt to build a pure public or private model.

    1. from Mexico

      But why would one want to begin the contest, as MMT and Obama do when it comes to advocating the public sector’s interest, by ceding half the terriotry before the “disagreement and conflict” even begin?

      Haven’t we already learned what the outcome of that bargaining strategy is?

      1. Thorstein

        I agree that MMT should forthrightly advocate public banking and anti-usury laws, but don’t you think it a bit unfair to tar MMT with the Obama brush?

        1. from Mexico

          Does MMT not employ the same bargaining strategy Obama does, at least when it comes to advocating for the public sector?

          1. FlimFlamMan

            No, ‘it’ doesn’t.

            The MMT school is made up of several individual people who share an understanding of the economy, but may or may not share views on how to apply that understanding.

            Bill Mitchel, one of the parents of MMT, has advocated for public banking.

            1. F. Beard

              Public banking?

              When it comes to the creation of new purchasing power via government privilege, NO ONE is so-called creditworthy.

              1. skippy

                Credit worthy is not a Government problem but, that of wages, who is the driver of that agenda?

                skippy… the Austrian in you still lives methinks, it is founded on Christian dominionism after all.

  7. Jim Haygood

    ‘The vast majority of spending is simply done by adding electronic dollars to bank accounts.’

    No. Flat wrong. Let’s try some actual, you know, math … focusing on five pre-crisis years of 2002 through 2006. At the Federal Reserve’s site, you can look up the Fed’s historical balance sheets at the end of 2001 and 2006:

    http://federalreserve.gov/releases/h41/

    Using the line ‘Total factors supplying reserve funds,’ the Fed’s balance sheet expanded from $690 billion (end 2001) to $904 billion (end 2006), or about $43 billion annually.

    Meanwhile, federal spending over those five years averaged $2,318 billion. That is, new money creation (seigniorage via the Fed’s permanent open market operations) amounted to 1.85% of annual spending. The other 98% of spending was funded the ‘old-fashioned way,’ by taxes and borrowing.

    Really, who makes up this ridiculous crap?

    1. Adam1

      “The other 98% of spending was funded the ‘old-fashioned way,’ by taxes and borrowing. Really, who makes up this ridiculous crap?”

      This only proves that you don’t understand reserve accounting and Treasury activities. You can just as easily pull up a FED chart showing basically zero excess reserves in the banking system prior to QE. Yet only excess reserve balances can be used to purchase Treasuries at auction. Where did those reserves come from? The only place they can come from, the FED. The FED funds all deficit spending whether it’s done directly by giving the Treasury the reserves (not currently statutorily possible in the US) or indirectly by first giving them to the banks that then uses them to fund a Treasury auction. And the indirect route can’t be prevented without the FED giving up its target interest rate and inducing eventual instability into the interbank payment system (which it is chartered to promote stability in).

      1. uncle joe

        Sorry, bro.
        Anytime anyone needs to advance their monetary system understanding by resort to reserve accounting, the battle is lost.
        That the central bank provides the reserves needed to ‘balance’ bank transactions WITHIN the settlement(interbank payments) system has absolutely nothing to do with who creates the money, and how.
        The money is created by private banks making loans. and in order for the bank’s double-bookings to balance at settlement(payment) for those bank credits, the reserves are needed, and the Fed provides them. Big deal. Means nothing.
        In reality, there is no reason for reserves.
        Reserves are a throwback to the gold standard.
        The Kucinich proposal advances public money creation, issuance and regulation, with seigniorage benefits to we the people, where they belong, because it is OUR money system..
        https://www.govtrack.us/congress/bills/112/hr2990/text

        It eliminates reserves and it eliminates public borrowing.
        In a true government money-issuing system, there is no need for government borrowing.

        1. Ben Johannson

          Banks create trillions in deposits every day without issuing loans. You’re so incorrect you aren’t even wrong.

          1. F. Beard

            Banks create trillions in deposits every day without issuing loans. BJ

            You left out that they DESTROY the same amount of deposits if you’re merely talking about the ordinary spending of credit deposits.

          2. PJAMES

            ‘Reserves’ are just money, either in physical or electronic form. Banks hold reserves of currency in their vaults and reserve credits at the central bank.

            If you want to withdraw physical money from your bank, your bank takes some of its reserves out of its vault, gives them to you, and debits your account. If a bank needs to pay another bank, it uses the reserves it holds at the central bank.

            Reserves do not “mean nothing” because money does not “mean nothing”.

            You clearly have no real understanding of the monetary system.

      2. Jim Haygood

        ‘The FED funds all deficit spending.’

        Clever shifting of the ground, from all spending to ‘deficit spending.’ But it remains the case that deficits often vastly exceed the increase in the Fed’s balance sheet.

        During 2002-2006, federal deficits totaled $2.352 trillion. But as mentioned before, the Fed’s balance sheet expanded by only $214 billion over that period — less than 10 percent of the deficit spending total.

        How was the other 90 percent of deficit spending funded? Same as it ever was — by taxing and borrowing.

        1. FlimFlamMan

          Hmmmm, so, deficit spending is partly funded by tax, in your words?

          If it is ‘funded’ by tax, how is it a deficit?

        2. PJAMES

          Jim Haygood,

          you haven’t understood the point. Money is largely electronic credits on computers, right? When the government spends the Fed types numbers into its computer, and deletes some other numbers. Banks then have money in their reserve accounts. Banks type numbers into their computers and their customers then have money in their deposit accounts. Get it?

        3. Ben Johannson

          The Fed’s balance sheet doesn’t have to expand to fund deficit spending. The government’s reserve account (not the Fed’s balance sheet) is credited and a securities account is credited (also not on the Fed’s balance sheet.)

        4. Sammy Maudlin

          Hey Haygood: you might want to try that math thing you mentioned!

          “During 2002-2006, federal deficits totaled $2.352 trillion.”

          Nope. Federal deficits for those fiscal years totaled 1.5 trillion.

          Frequency: Annual, Fiscal Year
          observation_date FYFSD
          2002-09-30 -157,758
          2003-09-30 -377,585
          2004-09-30 -412,727
          2005-09-30 -318,346
          2006-09-30 -248,181
          ————–
          Total -1,514,597
          http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=FYFSD&s1range=10yrs

          If you are going to be a jerk to people, you better be right. I mean, really, who makes up this ridiculous crap? Amirite?!!

  8. BITFU

    I would recommend Douglas Adams’ Hitchhikers Guide as the best primer on MMT.

    There you will learn about the burgeoning field of SEP Economics.

    For the uninitiated, SEP is Somebody Else’s Problem and it’s a psychological effect where individuals/populations of individuals choose to dissociate themselves from an issue that may be in critical need of recognition.

    Within the novel Ford Prefect describes Somebody Else’s Problem as:

    An SEP is something we can’t see, or don’t see, or our brain doesn’t let us see, because we think that it’s somebody else’s problem…. The brain just edits it out, it’s like a blind spot. If you look at it directly you won’t see it unless you know precisely what it is. Your only hope is to catch it by surprise out of the corner of your eye.

    The narration then explains:

    The technology involved in making something properly invisible is so mind-bogglingly complex that 999,999,999 times out of a billion it’s simpler just to take the thing away and do without it……. The “Somebody Else’s Problem field” is much simpler, more effective, and “can be run for over a hundred years on a single torch battery.”

    This is because it relies on people’s natural predisposition not to see anything they don’t want to, weren’t expecting, or can’t explain.

    The book says that the SEP field is derived from Bistromathics–which is, of course, the intellectual foundation upon which MMT/SEP Economics rests.

    In particular, MMT comes from the concept of an imaginary number called a “recipriversexcluson” whose existence can only be defined as being anything other than itself. Modern science has been slow to investigate this further, though Professor John Wettlaufer (of Yale University) has apparently observed that it is very important for physicists working outside the mainstream “to have a genuine interest in learning about someone else’s problem.” However, he admitted that “not many people want to do this.”

  9. denim

    What is money? Money that I personally accept is a non-counterfeited piece of paper, usually called a Federal Reserve Note, issued only by the US government an has this important fine print:
    “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE”
    The enforcement of this statement is by the full force of the US Government police and military power. Some “fiat”
    Bookkeeping frauds such as saying there is money in an account just put there by keystrokes without having a solid source of traceable Fed Reserve Notes to prove it has a non criminal origin is punishable under existing law.

    What kind of money will you accept from your debtors when you sell them something?

  10. washunate

    parent:child::government:citizen

    Sums up the strategy of leftist authoritarianism pretty well. That is certainly a legitimate idea for a social contract; it is just one with which I personally disagree.

    ***

    At any rate, the coupons don’t create wealth. It is the labor of the children doing the chores that creates wealth (and the management of the household, if it’s done well). If the family is complex enough that some level of coupons is necessary to coordiante all the chores, then the coupons can be a valuable part of the plumbing of the household.

    But here’s the key – it doesn’t follow from that observation that moar coupons is better. Indeed, printing 100 coupons and giving them to the eldest child is likely to cause dissatisfaction, not harmony, within the household. And printing 100 coupons and giving them to the child that performs sexual favors for one of the adults is an endeavor upon which most Americans would look unfavorably.

    1. Ben Johannson

      Going on about how printing coupons creates dissatisfaction is moral sentiment, not economics. You can get plenty of moral sentiment at RedState.

      1. washunate

        So you are saying that observing human nature – the actual behavior of people – is moral sentiment? You are saying that pointing out the problems with inequality is beyond the realm of economics?

    2. Calgacus

      leftist authoritarianism Good. I think MMT should be framed as pejoratively, prejudicially and negatively as possible. Makes it more convincing in the end.

      But here’s the key – it doesn’t follow from that observation that more coupons is better. Right. But that is not what MMT says. What MMT/Keynes/Institutional worldly philosophy/economics is that there are conditions when more coupons CAN be better. Modern mainstream neoclassical magical thinking says no; more coupons always does nothing, Money = credit = management/coordination is neutral, and the kids toys do the chores while they sleep.

      A situation when “more coupons” would be better – the parent says to one of the children: No food unless you give me coupons, which you can only get from doing chores. Child says: OK, what chores. Parent says: No chores for you! Parent is obviously insane.

      The hard part about appreciating the JG, full employment etc is to realize how deranged the idea of a monetary economy without a JG is. It is exactly the same situation. And it is the ordinary situation in peacetime capitalist economies, nowadays even an economy so far from peace as today’s USA.

      1. washunate

        You complain about the pejorative nature of the word authoritarianism, and then you proceed to defend the analogy of the parent-child relationship?

        ***

        As for not what MMTers say? That seems to be the catch; it’s always a moving target when it comes to prescriptive solutions advocated in the name of MMT. Joe Firestone called high value platinum coins a game changer. JD Alt wrote a 2 part series where his first conclusion is:

        “We do NOT want a “balanced” budget—or, even worse, a budget “surplus”! What we want (as long as price inflation is under control) is the largest and most effective “National Spending Achievement” we can envision.”

        More spending is so important to Alt that he advocates changing our language – renaming net deficit spending to national spending achievement.

        http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-2.html

        That kind of approach completely ignores one of the best weapons in reducing inequality – increasing taxes on the wealthy – while also sidestepping the elephant in the room that a huge chunk of existing federal spending is not “effective”, to put it mildly.

        ***

        The hard part about responding to critiques of JG is appreciating the authoritarian nature of the employer-emplee relationship in 21st century America. Employment should be separated from the safety net, not be the safety net. MMT professors and JG jobs are both public employees, but surely you’re not suggesting they earn the same wages, are you?

        But the very fact we’re even talking in shoulds here shows the limitations of MMT. If JG is integral to the MMT description of the monetary system, it carries no value, because JG is a political proposition subject to personal preferences, not an objective observation.

        MMT JG advocates should drop the pretense that we’re talking about the plumbing in the monetary system and instead simply advocate JG as a public policy option like everything else.

        1. Calgacus

          You complain about the pejorative nature of the word authoritarianism, and then you proceed to defend the analogy of the parent-child relationship?
          I did not complain about pejorative language. I endorsed it! I meant what I said, and have said it before. It’s an ancient idea – I forget the Greek for it, but Abba Lerner understood it well. If you have the real thing, don’t “sell” it by “framing” it. That just makes people suspect you are trying to pull a fast one. Anticipate objections by accentuating the negative. Wise Yves is a bit Lakoff-leery too.

          MMT JG advocates should drop the pretense that we’re talking about the plumbing in the monetary system. It is not a pretense. Plumbing has universally agreed on purposes, “shoulds” so agreed on that they are hardly ever stated. So there can be right ways and wrong ways of plumbing according to these purposes. There are essentially universally agreed on economic goals, the only “shoulds” that people dare state publicly. That a monetary economy with a JG will achieve them better than one without one is a “pure descriptive science” type of statement, and it is a true one. See a comment of mine on the recent thread http://www.nakedcapitalism.com/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html for more extended comparison JG/plumbing comparison.

          Whether professors and JG workers should be paid the same is question of each society to answer on its own. For plenty of today’s adjunct faculty, the JG wages bruited about by MMT academics would be a step up!

          1. Washunate

            Yeah, I understand that you believe JG is the best solution.

            My point is that is a belief, not a statement of fact. I believe that social insurance combined with rule of law is the best solution. That, also, is a belief, not a fact. It depends upon personal preferences about the goals being pursued.

            No one disagrees that the government can spend whatever dollars it wants to. The only point of contention is who gets the money.

            1. Calgacus

              No, I believe that it is the only solution to specific problems, the only solution anybody has ever come up with, and under reasonable assumptions, it should even be provable to be the only one.

              Social Insurance plus the rule of law is nice, but it is not a solution to the particular and extremely important economic problems the JG addresses. It’s like saying I believe in brushing teeth daily to someone who wants their plumbing fixed. Under certain circumstances I might even believe instituting “social insurance & rule of law” are more important to a particular society than the JG. Doesn’t contradict what I am saying. I am talking about well-specified problems, while you seem to be talking about a more general “Solution”.

              Your point is wrong. I am making (purporting) “statements of fact”, not boring people with my own beliefs & preferences.
              It has nothing to do with personal preferences.”Inflation & unemployment are bad” being practically universally held positions is a fact. I could be for inflation and unemployment & still say this.

              The fact I claim – with enormous amounts of theoretical and empirical evidence behind it – is that the JG solves these problems and the rule of law and social insurance (like SS, unemployment insurance, welfare, govt health care etc) just plain don’t and can’t.

              Do you think the parent in my example is behaving rationally? Do you think there is anybody who would say he is behaving rationally? “No” answers amount to acceptance of the JG.

              1. Washunate

                I appreciate the extended discussion, so let me summarize with four premises inherent in this position that I reject:

                1) unemployment is the root problem
                2) JG can be implemented effectively
                3) inflation can be monitored effectively
                4) JG does not represent a radical change in American politics

                1. Calgacus

                  I do not take any of these as premises. They correspond to accepted consensuses and facts or what I claim are facts. No personal beliefs particular to MMTers.We disagree on factual, scientific matters to which our personal beliefs are not relevant.
                  1) Root of what? Unemployment is a problem. Everybody says so. That’s all MMT needs to say. Of course like most non 1%ers, MMTers usually agree it is a BIG problem, but that personal belief is irrelevant to theory.
                  2) As Bill Mitchell et al have said, no country which has ever tried to get rid of unemployment has ever failed. In any case, the proof of the pudding is in the eating.
                  3) Inflation is hard to define and measure and depends on the definition. But the consensus of economists and the public is that it is possible to make effective worthwhile measures.
                  4) What’s major? I think that the JG is a major change – comparable to the civil rights movement. But the majorness of the change does not depend on the size of the program. You’ve made IMHO wild overestimates of the size of the program. The JG is just a souped up WPA and would be comparable in size. Basically, we’ve done it before.

                  1. washunate

                    Maybe a different way to my explain my perspective is that the problem is not a lack of work; it is a lack of wealth.

                    A job can be beneficial, but it in no way follows that employment is necessarily beneficial. It depends upon the wages, the conditions, and the output. Retirement is a rather pleasant condition of extended unemployment. Shorter stints away from work include weekends, holidays, vacations, hobbies, volunteerism, and faith communities. Parenting is perhaps the most obviously valuable output that happens outside the system of formal employment.

                    There are countless forms of employment, from human trafficking to sweatshop labor to child labor, that are controversial with respect to their value from the American cultural perspective.

                    Indeed, one of the biggest components of preventable human suffering is people who have jobs! There are tens of millions of crap jobs in the United States. If you are unfamiliar with the Social Security Administration’s database on wages, the numbers can be a bit overwhelming/shocking. Over half the work force is paid less than $30K a year. A professor or judge or police chief or hospital administrator or other public employee that makes six figures is in the top 10% of all wage earners.

                    http://www.ssa.gov/cgi-bin/netcomp.cgi?year=2012

                    I find the MMT notion that idleness is bad, something to be minimized, as depressing and defeatist and just generally not my understanding of progress and civilization. It is free time that allows for human curiosity and creativity to flourish.

                    If people need wealth, give them wealth. No need for another 20 million crap jobs; we’ve already got tens of millions of those.

        2. from Mexico

          @ washunate

          GREAT comment that sums up MMT beautifully.

          Debating these guys is like boxing with a ghost.

          The whole purpose of MMT is to do nothing, to defend the status quo by sewing confusión, muddled thinking and disinformation.

          1. Washunate

            Thanks from Mexico, I think that is what has drawn me more into commenting about this. The more one engages a particular sub component of the idea, the less substance the idea appears to actually possess, like a movie set seen from an angle outside the camera view.

            1. PJames

              Washunate,

              here are some of your comments which demonstrate that you don’t actually know all that much about MMT, despite your pretentions otherwise.

              “At any rate, the coupons don’t create wealth. It is the labor of the children doing the chores that creates wealth (and the management of the household, if it’s done well).”

              MMT refers to “the coupons” i.e. money, as financial wealth, which is distinct from real wealth in the form of goods and real assets. Your statement does not refute anything within MMT, in fact MMT says the same thing: the children doing the chores for tokens create real wealth.

              “But here’s the key – it doesn’t follow from that observation that moar coupons is better. Indeed, printing 100 coupons and giving them to the eldest child is likely to cause dissatisfaction, not harmony, within the household. And printing 100 coupons and giving them to the child that performs sexual favors for one of the adults is an endeavor upon which most Americans would look unfavourably.”

              MMT does not assert that moar coupons is always better. It does not advocate printing arbitrary amounts of money and arbitrarily giving it away to arbitrary people. It does not advocate paying people money to do degrading things. You are simply attacking a complete straw man of your own creation.

              “it’s always a moving target when it comes to prescriptive solutions advocated in the name of MMT”

              That is not true. There are some disagreements between MMTers on certain policy ideas, which is perfectly normal. But it is completely false to say that “its always a moving target when it comes to prescriptive solutions “.

              “Joe Firestone called high value platinum coins a game changer”

              So? That does not support your false assertion.

              “JD Alt wrote a 2 part series where his first conclusion is:
              “We do NOT want a “balanced” budget—or, even worse, a budget “surplus”! What we want (as long as price inflation is under control) is the largest and most effective “National Spending Achievement” we can envision.”

              J.D. Alt is an architect and not an MMT economist. He is wrong to say that “what we want… is the largest… national spending achievement”. There could potentially be good reasons for not wanting more overall government spending, or a larger deficit, depending on the circumstances. Alt does point out however that moar spending would be bad if price inflation was out of control, which is one of the circumstances in which more spending might not be warranted.

              “Alt that he advocates changing our language”

              No, he advocates renaming something. He is perfectly entitled to suggest that. It doesn’t mean you or every MMT supporter has to agree with him.

              “That kind of approach completely ignores one of the best weapons in reducing inequality – increasing taxes on the wealthy”

              MMTers are well aware that increasing taxes on the wealthy can reduce inequality. Again, you are attacking a straw man.

              “while also sidestepping the elephant in the room that a huge chunk of existing federal spending is not “effective”

              Again, this issue is discussed by MMT economists. Alt’s article is not the definition of MMT.

              “Employment should be separated from the safety net, not be the safety net.”

              The Job Guarantee is not the same thing as “the safety net”.

              “If JG is integral to the MMT description of the monetary system, it carries no value, because JG is a political proposition subject to personal preferences, not an objective observation.”

              The JG proposal follows logically from the MMT description of the monetary system, but some people don’t like the idea and instead argue that involuntary unemployment is preferable to full employment with a JG program, or else assert without evidence that full employment can be maintained without any sort of JG program. What is central to the MMT description of the monetary system is that unemployment is a feature of monetary economies, which can potentially be eliminated by the currency issuer.

              “MMT JG advocates should drop the pretense”

              There is no “pretense”, only your lack of understanding of what is being said.

              “I believe that social insurance combined with rule of law is the best solution.”

              So either you are arguing that involuntary unemployment is preferable to full employment with a JG, or you are asserting without any evidence that full employment can be maintained without any sort of JG.

              “No one disagrees that the government can spend whatever dollars it wants to. The only point of contention is who gets the money.”

              Again you are attacking a straw man. MMTers are well aware that “who gets the money” is important.

              1. washunate

                I’m not even sure where we disagree. You are demonstrating the moving target.

                I don’t think that’s what you intended to convey[?], but that’s what I’m hearing.

                I know that Wray and others have lots of qualifiers built into their positions. Semantics seems to be half the game. Wray explicitly dismisses philosophical and practical objections to JG because of his belief that they are fallacious and lack a necessary price anchor.

                http://www.economonitor.com/lrwray/2013/12/28/bop-a-mole-1-does-modern-money-theory-need-a-job-guarantee/

                1. PJames

                  “You are demonstrating the moving target.”

                  No, you are simply demonstrating that you do not want to understand what is being said. You are opposed to MMT for personal and ideological reasons, so rather than try to make sense of it you prefer to nitpick and make glib and false statements about it.

                  Why don’t you try to give me an example of your “moving target”, instead of just asserting this as if it were a fact, with no evidence required.

                  Calgacus responded to you with a very clear explanation:

                  “there are conditions when more coupons CAN be better”

                  yet for some reason this is too complicated for you, because J.D Alt wrote something somewhere which seems to suggest that more coupons are always better.

                  Well let me clarify it for you yet again, so you don’t have to keep on pointlessly nitpicking for no reason. Calgacus is correct when he says that “there are conditions when more coupons CAN be better”. It is not correct to say that more coupons are necessarily always better. There, does that make sense?

                  1. washunate

                    Of course I disagree for personal and ideological reasons. I’m not sure where we disagree here? Those are the only reasons anyone has – our personal preferences for how we want our system of political economy to function.

                    MMT wants a JG/ELR as the price anchor. I say monetary price anchors aren’t necessary (and in practice, don’t actually work). The action is in fiscal policy – the political process.

                    Plus, in the US specific context, that’s how the Constitution is written:

                    “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law…”

                    Tweaking the FLSA, the SSA, and other related legislation solves the social problems of inequality better than a JG. IMO, of course, because that’s what this is – opinions.

          2. PJames

            “The whole purpose of MMT is to do nothing, to defend the status quo by sewing confusión, muddled thinking and disinformation.”

            Of course that isn’t true at all. For some reason you really dislike MMT. From reading your comments this appears to be because you don’t actually know all that much about it. You also seem to think that nitpicking is a very important endeavour. However, your dislike of MMT does not entitle you to just make stuff up that is patently false.

      2. Malmo

        OK, but who does the shit work?… and there’s a lot of shit work to be done. For how long? For how much? Would you be willing do the ditch digging under the JG or is that only for the less qualified? Most importantly what say you is my time worth, no matter what job I do? Will the garbage collector earn what the tenured professor who thinks these schemes up makes?

        Put some meat on the JG bone and then let us decide if it’s a fools bargain or not.

        1. jrs

          Haha, can’t even sell a job guarantee, because most everyone’s job is a BS job these days and they know it :) It’s pretty sad really. The work often meaningless, all power in the employers hands, long hours, few protections, pointy haired bosses if your in a cube, horribly abusive bosses if you’re at Walmart etc..

          But a job guarantee would improve conditions in private sector employment due to a tight labor market? MAYBE. if the JG jobs are horrible not so much so, it sets a floor, but the floor could be in the basement. It’s like you can get 3 meals and a cot in prison, but not many people are desperate enough to go to prison for this, even if there 3 meals and a cot are iffy outside it. Because that floor is in the basement. So the JG jobs, how good are they?

        2. from Mexico

          Put some meat on the JG bone and then let us decide if it’s a fools bargain or not.

          Absolutely!

          Enough of this boxing with ghosts.

          1. JTFaraday

            We’ve already seen “the meat,” and decided not to eat it. You need to see it again?

            Maybe some of these MMT-tarded fanboyz need to see it again, just so they know their economic gurus are really serious.

            But I don’t need to see it again. I’ve seen it enough times already.

        3. jrs

          By the way with the job guarantee jobs, if they are just government jobs, couldn’t we pretty much do what we want with them? Make them 30 hour a week jobs with benefits, 4 weeks vacation, living wage and so on? If this isn’t done then I expect we’re really just dealing with apologist for the current @#$# wage system. Ok even my suggestions are a wage system, sure it’s not full communism, but at least they mean to improve the lives of workers over the status quo, rather than just reinforce the status quo.

        4. Calgacus

          The shittier, the less attractive the job, the higher the wage should be of course. So JG jobs should not be the worst the society has to offer.

          Would you be willing do the ditch digging under the JG?Of course. If I needed or wanted the money and was able to, and that was a reasonable job for whatever purpose the ditch needed to be dug.

          The JG is a very general idea, a minimal, necessary condition, not a definitive, sufficient one, whatever that would mean. The society, in the USA Congress, decides what the JG wage is. An effect is that the economy is largely put on a labor standard, like the gold standard. The JG wage isn’t just saying what your labor, your time is worth. It goes the other way too, making the dollar be worth a specific amount of labor time.

          Will the garbage collector earn what the tenured professor who thinks these schemes up makes? Why not? Not my decision though.

          The JG work should be towards whatever goals the society wants, that fit the population’s skills and the JG program’s structure. Of course, a bad JG can be worse than no JG, if the work is bad enough. The traditional JG sector is the military, and it usually produces bads, not goods.But any JG run with the intelligence, wisdom and experience of a 5th grader would be yield results vastly superior to current lunatic macroeconomic mismanagement.

    1. Ben Johannson

      It depends on whether the parents have something for sale the grocer wants that is denominated in the coupons. If they do then he’ll accept them.

    2. Sammy Maudlin

      Scenario 1) Grocer goes out of business because he refuses to accept the mandated medium by which goods and services are exchanged in return for his goods.

      Bad grocer!

      Scenario 2) Grocer is imprisoned because he only accepts another type of coupon in exchange for goods and services of which the government does not approve.

      Very bad grocer!

      Scenario 3) Grocer receives a nice write up in the paper because he gave away food to local food banks.

      Good grocer!

  11. docg

    Forgive me, but I don’t have the patience to wade through the above lengthy and complicated debate over MMT. But as I see it, from a layman’s point of view, natch, the more money you print, fiat or otherwise, the less that money is going to be worth. You can call it inflation, you can call it lack of confidence, but no matter how you want to spin it, there IS going to be a penalty for the unlimited creation of money. Sure, there is no limit to what any government can create, moneywise. The world learned all about that when the Weimar government of 20′s Germany printed endless streams of ever more worthless Deutschmarks. So what exactly is the point being made?
    If you want the government to produce a jobs program, say so. If you favor universal gov’t sponsored health care, say so. And I’ll enthusiastically support such programs. But don’t be so monumentally naive politically (if not economically) as to expect wide support for a program based on pie in the sky. That’s been tried in the past and it never works.
    While there might be some esoteric and complicated economic argument to be made for the endless production of “fiat money,” the ONLY way to raise the needed funds, from a political standpoint, is to either cut money from other programs or raise taxes. There is simply no getting around that. And since this country is now by far the wealthiest that ever existed in all of history, then obviously the way to go is to tax the wealthiest people in the country. All this talk of fiat money, as I see it, is a distraction. Counterproductive and ultimately destructive, because it weakens the credibility of the left.

    1. F. Beard

      But as I see it, from a layman’s point of view, natch, the more money you print, fiat or otherwise, the less that money is going to be worth. docg

      1) You neglect real growth which generally causes prices to fall.
      2) No one is entitled to a risk-free gain by deflation as the population grows or do you wish to loot and oppress young adults?
      3) Bank credit ceases to exist as it is repaid. Money printing can compensate for that.
      4) Bank interest is not created by bank loans except as more debt. Money printing can provide that interest.

      The problem is not that the State can create fiat since it has a perfect right to do so (See Mathew 22:16-22) but the government-backed credit cartel and also that fiat is de facto legal tender for private debts instead of just legal tender for government debts.

    2. Ben Johannson

      No one is advocating unlimited money creation. If any money printing at all created hyperinflation, then most countries of the world would have been in that condition for the last eighty years or so; every penny spent by a monetarily sovereign government comes from marking up accounts.

  12. Robert Dudek

    I’ve asked this question before but have never got a satisfactory answer: Under a fiat regime, why should there be any taxation at all?

    Possible answers:

    1) to force the use of the fiat currency.
    - not necessary, since laws can be passed to force its use for public transactions. Plus, in reality, people would use it with no force backing it simply because of the mere fact of government backing.

    2) To redistribute money from rich to poor through progressive taxation.
    - not necessary. The government could simply issue each citizen a substantial monthly sum designed to ameliorate the effects of poverty.

    Since many people resent paying taxes, reducing taxes to zero over time would take away a key weapon anti-government forces use.

    1. Dan Kervick

      On number 2, and for an economy running at close to full capacity, a government can’t just issue and spend new money indefinitely without generating price inflation. So either it has to tax some of the existing money out of the economy to offset the new issue, or it has to accept the price inflation, which is really just another way of imposing a tax in real terms.

      1. PJAMES

        “I’ve asked this question before but have never got a satisfactory answer: Under a fiat regime, why should there be any taxation at all?”

        One reason is that the government wants to spend more than the ‘non-government’ wants to net save in any given period.

    2. Ben Johannson

      As an example of Dan’s concise answer (well done) a country at war might need more of the economy’s total output to build weapons, train soldier, etc. Just throwing dollars at those real resources is likely to create inflationary pressure as the government is now effectively in a bidding war with the private sector for them. The government might then choose to increase taxes to lower the private sector’s purchasing power and reducing the quantity of stuff it can buy; there will then be excess resources available to purchase for the war effort.

  13. Zero Dark Potty

    This is what Martin Armstrong has been pointing out for some time: the government is not “required” to collect taxes in order to pay its bills. Of course, we know that fiat currency is heir to all the infirmities that politicians and other lower life forms may inflict on it. But in a very real way, the need to tax citizens has been made obsolete by the wide acceptance of fiat.

    The game could be run without end as long as confidence in the fiat’s value as a medium of exchange and store of transactional value was maintained. With today’s dumbed down state of the average citizen, that could be a millennium.

    So why go through the kabuki to tax and collect when it is not needed? Two possibilites come to mind.

    1) It is to bleed off the excess amounts that are being pumped into the system at the top. The big fish get the all-you-can-eat buffet and when it washes down to the minnows, it has to be drained off to avoid runaway inflation. Not a bad deal for the sharks. Typical shit for the minnows.
    2) It is strictly a control mechanism. The more I see of “representative government,” the more I think we need a good five-cent guillotine. The whole purpose of the tax collection is similar to the national security theater you may see in all its refulgence at your nearby airport.

    BS, smoke and mirrors and projection of oppression. When in doubt, hate the fockers.

  14. Hugh

    Chris Mayer goes to some lengths to describe how Warren Mosler made a lot of money. From where I’m sitting, Chris Mayer is saying that Mosler was a very successful looter. Is that supposed to be some kind of a recommendation? Mosler has had some interesting ideas about the monetary system. But still it is hard for me to see that the value Mosler has added to society begins to equal the value he has extracted from it.

    Mayer says, “Don’t let your politics deter you from making sense of MMT. (MMT itself is politically agnostic.)”

    Malmo picked up on this above. There are no morally neutral positions. Money exists in the economy and the economy exists within a society. So it is always a question of how and how well the monetary system is working for or against our priorities as a society (i.e. the kind of society we want). Like the economy, the monetary system is a mechanism by which we accomplish our goals as a society. So MMT’s agnosticism (or rather that of its practitioners) is a fiction. Economists, bankers, not to mention the rich and elites, tend to take a very Pontius Pilate approach to how the economic ties in and is subordinate to, the social.

    As I have written in the past, this is not accidental. Splitting off economic and monetary activities from their underlying social purposes (that is creating a decent and equitable society to live in) is imperative to the kleptocratic enterprise. Once you do this any level of inequality and any degree of looting become permissible, even laudatory. Becoming rich is its own justification. Acquiring the benjamins is absolute proof to your entitlement to them. Being poor, on the other hand, is essentially a capital offense. You are and should be left out on the trash heap to die. But hey, if you are Mayer, you can just say, “Agnostic” and stop there. You don’t have to ask any further questions or look more deeply into matters. As another commenter BITFU noted, that’s a SEP, somebody else’s problem.

    1. Ben Johannson

      “There are reserve accounts and securities accounts” is a politically and morally agnostic statement.

      “There should be reserve accounts and securities accounts” is not an agnostic statement, it is advocacy.

      Mosler is very clear about distinguishing his personal opinions from his description of the nuts and bolts.

      1. skippy

        Thanks Ben for highlighting that delineation, short and clear. Have to use it myself, amends for past inaccuracy’s in try to say the same.

      2. Hugh

        What a dodge! Declarative statements occurring within a moral and political context do not lose that context. Is agnostic the new objectivity? Such statements are no morally and politically agnostic than “The bullet came out of the gun” or “The Zyklon B gas came out of the shower head”. Please up your game. That is just embarrassing.

        1. Ben Johannson

          And there we have the perfect illustration of politics corrupting thought. Even discussing a cloudy sky is a political position that the self-appointed sit in judgment of. A perfect recipe for a terrorist society.

        2. FlimFlamMan

          Is a statement describing how the Nazis killed millions of Jews and others the same as endorsing that murder?

          Of course the slaughter of millions is a moral outrage, but if we cannot discus and agree on what actually happened how on earth do we proceed? What lessons are to be learned? Who is to be held accountable for what happened if we don’t determine what did happen?

          If we cannot discuss and agree on how economies, or even the simple operational realities of currencies, actually function, how on earth do we proceed?

      1. PJAMES

        It is quite clear from your comments that your knowledge of MMT is very incomplete. Many full-reserve banking advocates have an initial negative response to MMT when they see that MMTers don’t condemn fractional reserve banking outright. I assume you are a full-reserve banking advocate. If sometimes takes full-reserve banking advocates quite a while to understand that MMT is not actually their enemy, even though they might disagree on a couple of things.

        MMTers do call for large-scale banking/financial reform. Please see some of the articles in the following links for more info on MMT proposals for banking/financial reform. Note that different MMT economists do have some different views on the subject:

        http://neweconomicperspectives.org/mmt-scholarship

        http://mmtinformationservice.blogspot.co.uk/

  15. indio007

    The US issues no dollars except the coins it mints. The FED the issuer. The US is an endorser.

  16. JCC

    MMT, at first glance and with some light reading about the basics makes a lot of basic sense.

    Also I really enjoy NakedCap a lot, and I’ve learned a lot about how our system is actually working nowadays, but every time the post and following conversations turn to MMT here, my brain goes numb and primarily for one simple reason… if the government theoretically issues all money and if we are theoretically operating under an MMT system, then where is all the money coming from and who is issuing it?

    The Fed has, from my understanding, issued (and the Gov has endorsed that issue) about US$4T, the M0 supply, and yet the broader supply, M3, amounts to about US$16T, and total liquidity, repos et. al., is in the neighborhood of US$45T to US$50T depending on who is counting.

    So, if MMT is only concerned with and about US Gov/Fed issued currency, how are we supposed to deal with all the rest of this credit/money sloshing around the system? How does MMT account for and justify all this money/credit issued by the various private banks? How does it justify/account for fractional reserve “money” not issued by any government?

    I’m not trying to be purposely obtuse, but when people tell me that MMT is “how the system works”, I have my doubts (freely admitting that I am not the brightest street lamp on the avenue and absolutely clueless how any of this “works” – and personally I don’t think any of it is working very well at all).

    Since I am neither a banker nor an economist, the theory that MMT is “how it works” just flat out baffles me and the above discussions haven’t done much to relieve the numbness.

      1. PJAMES

        “As far as I can tell that is the entire purpose of MMT: to baffle.”

        That is clearly not the case.

      2. Calgacus

        I agree that MMT can be baffling. I had to read a great deal to attain some understanding of what I consider the elements, which as usual is pretty different from what many others consider the elements.

        But MMT is just accounting – and understanding what is being accounted for. It is a “philosophy of accounting”. It’s entirely trivial and as old as the hills. The problem in understanding MMT is a philosophical one. Everybody understands it already! But wass ist bekannt ist nicht erkannt. The academic MMT stars haven’t really presented it that way yet.

  17. skippy

    “As a matter of simple GAME theory, LABOR is not a FAIR GAME, and if not supported in some manner real wages will STAGNATE at very LOW levels. This is because people must ‘WORK TO EAT’ while business will ONLY hire if they can make a DESIRED RETURN on investment.”

    ~ Warren Mosler

    H/T L.E.T.

  18. Joe Firestone (LetsGetitDone)

    In my view MMT as a body of thought is not value neutral or agnostic in my reading of it. Nor am I as an MMT writer (I don’t say practitioner, because I’m not an economist). Here’s my account of the values the MMT literature embraces: http://www.correntewire.com/the_job_guarantee_and_the_mmt_core_part_fifteen_components_of_the_knowledge_claim_network And here’s my analysis of MMT as a holistic Knowledge Claim Network (KCN): http://www.correntewire.com/the_job_guarantee_and_the_mmt_core_part_fourteen_mmt_is_a_holistic_knowledge_claim_network

    On the question of private banks, there are a variety of opinions among MMTers. Bill Mitchell who is certainly one of MMT’s “big three” has advocated the Swedish solution for the banks which involves nationalization. I won’t bother to get the link from his site; but just google it and I think you’ll find it. Other members of the MMT core group, don’t advocate for nationalization; but that doesn’t mean that most of them wouldn’t prefer it, if they thought it worthwhile to fight that war in the American context. Warren Mosler is probably opposed to that because he distrusts the centralization of power inherent in nationalization. My own view is that the big banks be nationalized and broken up into a system of public banks that would be spun off to States and localities. I am also for the Fed system including the BOG, the FOMC, and the regional Feds to be 1) nationalized, and 2) placed within the Treasury Department, where they would be accountable ultimately to the President, and would become the instruments of the Treasury directly issuing money in the act of spending without issuing debt instruments. I don’t know how widespread among MMTers this last preference is; but when I propose these in my writings, I don’t get much argument from the MMT core group at all. My personal belief is that every member of it would welcome placing the Fed under the Treasury Department.

    Randy Wray is doing a series on FED independence at NEP right now. Perhaps it will also appear here. Part II is coming up. I think he will advocate ending the independence of the FED and making it accountable to the people. Over the years, the core MMT writers, including Warren Mosler, have frequently made clear that there is no reason why the Government must issue debt instruments, and they also stated that for a nation like the US with its deficits and fiat currency system the best policy is to deficit spend without issuing debt instruments and that the natural rate of interest under these conditions is zero. They’ve also pointed out that the FED could maintain a target rate above zero if it wanted to by paying interest on reserves (IOR).

    To summarize, I think those who believe that MMTers favor the current financial system without major changes are not reading their work carefully. They’re mistaking MMTers prioritizing certain policies as most important right now for healing The Long Depression, for the long-term goals of MMT economists. I think the long-term goals are specified in the link I gave above, and that proposals like payroll tax holidays, State Revenue Sharing, the Job Guarantee, infrastructure reinvention, Medicare for All, climate change and ecological sustainability programs, and restoration of the integrity of the banking system (ending fraud and taking insolvent banks into resolution), are the priorities right now.

    I’m sure NC readers will have noticed that in my case I’ve emphasized using High Value Platinum Coin Seigniorage (HVPCS) to expose the insolvency/GBC myth. In doing that however, I’m not endorsing the current arrangements whereby the FED is independent of Treasury and mainly accountable to Wall Street, Instead, I’m proposing a measure that end issuing debt instruments, implement that natural interest rate of zero, and severely constrain the FED’s role while making it clear to the public that the Treasury can create as much money as it chooses. Once that point is clear to everyone, it will be a small step to get people to accept that the FED should be reorganized under the Treasury which should then be in charge of issuing currency, reserves, coins, and paying IOR. That’s my longer term goal on the road to a public banking system, which I believe is in no way inconsistent with MMT Theory.

  19. h_rostam

    I don’t understand something… currency and taxes aren’t always issued from and then collected by the same source, ie. the Euro…

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