Randy Wray: Debt-Free Money and Banana Republics

Lambert here: Yes, I like a gentle polemic…

By L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute. Originally published at New Economic Perspectives

By L. Randall Wray

Some time ago, I labeled the “debt-free money” campaign a non sequitur in search of a policy. (See here.) However, this non sequitur refuses to die. I went on to joke that if they want a debt-free money, they ought to propose that government issue bananas as currency.

I frequently am asked to do interviews and I almost always accept them. However, when I was asked last week to participate in a radio show devoted to debt-free money, I struggled mightily to get out of it. As you’ll see, the program’s producer took my idea of banana republics and ran with it. I thought readers might get a kick out of this exchange (the producer’s emails are in italics, my responses are in bold). After the exchange, I’ll summarize my objections to the notion of debt-free money.

>>> Subject: debt based money

>>>Dear Mr. Wray,

I would like to invite you to our weekly radio show.  The show will discuss how to eliminate our debt money system and replace it with a wealth based money system. The basis of the theory is to have governments SPEND money into circulation as opposed to borrowing money into circulation.  We would like to hear your views on the matter.

>> On 12/1/15 10:24 AM, L. Randall Wray wrote:

>>> This sounds confused to me. If bananas were money wealth, government could spend them into existence. Otherwise, I cannot make any sense of what you’ve written. I probably wouldn’t be a very good guest.

>> Subject: Re: debt based money

>> Dear Mr. Wray,

>> On the contrary, you would be a wonderful guest. As you are aware, in our current monetary system, all bananas are loaned into existence by commercial banks.  And with each loan, our banana supply increases.  However, each loan has an interest charge. When a commercial bank makes a loan, the principal is created, but not the interest.  Consequently, in order for me to pay back all the bananas I borrowed, plus the interest, I must capture bananas that you borrowed with your principal.  Also, governments need to capture bananas from your principal, to make their principal + interest loans, payments.  An individual can become free of debt, but collectively, we cannot.

>> We are just proposing that governments create bananas from nothing, like commercial banks do now, but spend the bananas for infrastructure needs that everyone wants.  Like roads and bridges etc.  It has been done before.  In 1861 Abraham Lincoln needed bananas to fight a war.  Patriotic northern banks offered to lend him the bananas at 35% interest.  Instead, Lincoln had the treasury create Green Back dollars.  (they have written songs about these )  They were used to pay troops, buy ammunition and supplies.   They were made legal tender. Bananas, spent into circulation without debt, without interest.  Oh yeah, and he won the war.

>> The 1792 coinage act allowed an individual to hike his donkey into the hills, mine silver or gold, bring the metal to the U.S. Mint and the government would turn his metal into legal tender coin, free of Charge. The man preformed the labor, and his labor was directly transformed into bananas. Not as a promise to pay down the road with an interest charge, but as a legal tender banana that could be spent into circulation without debt.

>>Please come on our show.  It will be fun.

> On 12/1/15 1:15 PM, L. Randall Wray wrote:

> Sovereign government can no more borrow its own IOU than you can borrow your own IOUs. And money is not bananas, except perhaps in monkey republics. Money is always and everywhere else an IOU. As my prof, Hyman Minsky, always said, discipline the analysis with balance sheets. Show me the balance sheets in which government creates and spends money that is not its liability, vs the balance sheets in which government borrows its own currency from banks. If you provide those, then we have a place to start the discussion. Otherwise, I cannot make sense of what you are arguing and wouldn’t know what to discuss.

> Subject: Re: debt based money

> That’s the point.  Money doesn’t always have to be borrowed.  It is a violation of natural law for us to be required to borrow money, just to participate in commerce. As a young boy you probably brushed aside an ant hill, built in the crack of a sidewalk.  What did you find the next day?  A partially rebuilt ant hill, a foreclosure sign or a society that did what was necessary to survive without debt?

>This proposal is completely different from what is now being practiced. It requires unlearning, common sense, and approaching the balance sheet and other orthodox systems in a completely different way. If the accounting balance sheet is your main criteria for analysis, the proposal can be manipulated to satisfy the bookkeeper.  A Natural Equity or Asset Monetization Account can be created to balance your E+L = A requirements.  And please keep in mind, if business man “A” starts a company, on October 1st, with $25,000 of operating equity, there will never be any discussion of where or how that equity came into circulation or existence in the first place.  Whether that cash was actually an IOU or a promise to pay, is not important in any accounting system, because the balance sheet only requires data, after October 1st, not before.

<<Can you be available for the show?

<<On 12/2/15 7:47 PM, L. Randall Wray wrote:

<<All money, save bananas in your monkey republic, is debt. It is on the liability side of issuer and asset side of holder. You cannot change that through confusing semantics. If all you want is zero interest on government liabilities that is easy to arrange. You do not have to pervert either accounting or language. A simple new instruction from Congress to its creature, the Fed: Zirp forever. The deed is done. I cannot see how that could take up more than 60 seconds of a show. If you want to schedule 60 seconds, I can probably do it.

< Subject: Re: debt based money

<Wonderful.  We will love to have you on. The host also wanted you to come on to discuss what you have been doing at Modern Monetary Theory.  Perhaps you will be willing to stay on longer to go over that part of your work.

OK, I couldn’t wiggle out of the interview. So here is my objection to debt-free, wealth-based money.

Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the normal token issued by a cloakroom, but they are not debts. You can return them to the cloakroom, but you don’t get a coat. The cloakroom attendant refuses to recognize the tokens as debt. They are your assets, but not cloakroom debts.

What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper. It is “wealth-based”, not “debt-based”. Its value is determined by the value of the plastic, cardboard, or paper.

Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal.

Why would you want the debt-free cloakroom token? Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money.

As MMT says, “taxes drive money”. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal.

If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?

A “debt-free money” would not be evidence of a debt. What would it be?

Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I’d take it. I wouldn’t worry whether I could redeem it. I’d eat it. If I weren’t hungry, I might exchange it for a newspaper at the kiosk. Maybe the news agent is hungry for a banana.

But I don’t find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not “issued”. They are cultivated, harvested, transported, marketed. They’ve got value. But they are not money. Calling bananas money is a perversion of the language.

I don’t think our debt-free money cranks really want government to “issue” bananas. I think they want a “money” that is a record. But a record of what? If not debt, what?

From what I gather, they want government to issue notes (many—like the producer above–love to refer to Lincoln’s Greenbacks) or electronic “money”. But what are notes or electronic entries? They are records of indebtedness—debts that can be redeemed in payments to the issuers. They are debt tokens, redeemable in payments of debts owed to their issuers.

When I’ve engaged advocates of debt-free money, my protestations always generate confusion and the topic gets switched to government payment of interest. The “debt-free money” cranks hate payment of interest by government. I’m not sure, but I think what they really want to do is to prohibit government payment of interest.

That is fine with me. ZIRP forever. Stop paying interest on bank reserves, and stop issuing Treasury bills and bonds. I’m with them. Advocate ZIRP, not banana money.

We don’t need a non sequitur in search of a policy.

However, there are some advocates of debt-free money who understand MMT’s point about sovereign government. Some of these even recognize that the sovereign government’s debt is the non-government’s asset. Indeed, the outstanding US Federal Government Debt is (identically) our (nongovernment) net financial (dollar) wealth.

But they argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding. (I’ll write a blog on that soon.)

Hence the conceit is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more.

And if government would spend more, then we wouldn’t need so much private debt to keep the economy afloat.

While I’m somewhat sympathetic to this view of political realities (although I do not believe Congress would start up the printing presses), the operational realities are quite different from what is imagined.

Our debt-free money folks (including the producer above) believe that government first receives taxes, or asks banks for loans, and then it spends. They want to avoid sending government to banks to borrow bank money, for which banks charge interest. Government then supposedly spends the bank deposits created through the bank loans, and then has to either tax or borrow more bank money to pay the interest.

But that is not true. Government cannot spend “bank money”; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves. Central bank reserves are the liability of the central bank—which is a branch of government.

When Treasury sells bonds to banks, it is not borrowing bank money. Again, it cannot spend bank money so there would be no purpose in borrowing it. Banks that buy bonds must use central bank reserves to purchase them; the central bank debits bank reserves and credits the Treasury’s deposit at the central bank. The Treasury spends central bank money, the liability of the central bank. As the central bank is a branch of government, it is the government’s own IOU that the Treasury is spending.

Indeed, the only way the Treasury can spend is by writing a check on its account at its central bank. All Treasury spending takes the form of spending central bank IOUs. It is always “debt-financed” spending, using government debt.

Telling the Treasury to stop selling bonds will not stop the government from going into debt.

Sovereign government spends first, then taxes or sells bonds. The bond sales serve the operational purpose of keeping interest rates on target. If we target zero and stop issuing bonds that promise interest above zero, we will have already achieved what our “debt-free money” champions want.

However, the currency spent by government and accumulated as net financial assets won’t be “debt-free money” but liabilities of the Fed (FRNotes and FRReserves) and Treasury (coins). Government will be in debt. But it can choose not to pay interest.

There are several ways to accomplish this, all of them technically easy. None of them requires the use of bananas.

For example, Congress amends the Federal Reserve Act, dictating that the Fed will keep the discount rate and fed funds rate target at zero. It simultaneously mandates that the Fed will allow zero rate overdrafts by the Treasury on its deposit account up to an amount to allow Treasury to spend budgeted funds.

I’m not saying that is politically easy, but it will be no more politically difficult than mandating that government spending will henceforth be made in bananas or some other “debt-free money”. And it is at least operationally coherent. It doesn’t pervert any accounting. It is simple and follows normal banking practice.

Your overdraft at your bank is a loan; there is no economic reason why the central bank branch of government cannot allow an overdraft by the treasury branch of government to spend funds already budgeted by the elected representatives and signed by the head of the administrative branch of government. Overdrafts are normal banking procedure; they are well-understood and not at all scary. Uncle Sam ought to be able to run an overdraft at his bank. His spending is already checked by the budget. His signature on his debt creates what is without question the most highly esteemed “note” on the planet. It is accepted all over the globe. His banker—Aunt Janet—ought to accept it.

Again, we don’t need a non sequitur in search of a policy. Our debt-free advocates usually do not tell us how they would change procedures to allow treasury to spend without government going into debt. The reference to Lincoln’s Greenbacks is not helpful.

Even if we grant the advocates the perversion of language—to say that paper money issued by treasury is not the treasury’s debt—do they really imagine that we will go back to the 1860s payments system? Uncle Sam will deliver a wheelbarrow full of notes to your mailbox on the first of every month to pay Social Security? Will Uncle Sam send trainloads of cash to Lockheed to purchase fighter jets?

(Or will Uncle Sam instead mint the trillion dollar platinum coin. Boy oh boy will someone be in trouble if that gets lost in the wash!)

In a later blog, I will address a proposal to have the Fed provide “transfers” to allow Treasury to spend, crediting the Treasury’s account with hundreds of billions of welfare that can be spent. This, I think, subverts normal bank accounting (the Fed would have no asset to offset the deposit liability to the Treasury) even as it creates a government debt (Fed reserves) transferred to private banks when the Treasury spends. In other words, it really does not eliminate government debt—it just allows government to spend debt that need not pay interest. Still, the most straightforward way to accomplish this is—as I discussed above—to direct the Fed to allow interest-free overdrafts to the Treasury. But this is not a “debt-free” way to spend.

And what about our Monkey Republic that spends debt-free bananas? With only the satiable monkey appetite driving demand for bananas, and with no taxes to be redeemed in banana debts, it would probably end up as a banana republic—putting too many bananas into circulation fueling a banana hyperinflation.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. tony

    What is the point of this post? To embarrass a person for an incoherent view of money? This guy is not even your political enemy.

    You could have just accepted the invitation and maybe brought some answers to listeners trying to understand these topics.

    1. James Levy

      Change his politics and you have the same smug all-knowing attitude you get from a Larry Summers. And he’s making an a priori argument, and I don’t think he’s established his first premises to my satisfaction (which I’m sure he would brush aside with the self-assurance of a free market fundamentalist–it’s not my fault you’re too stupid to see the absolute scientific truth of my position).

      1. diptherio

        Yup and yup.

        I’ve proven conclusively how dumb everybody but me is, now why won’t people listen to me?!?

    2. diptherio

      Yeah, Wray has a tendency to get all nit-picky about language with non-professionals who are trying (albeit somewhat ham-handedly) to make MMT points. I remember reading a series of exchanges with a commenter on the New Economic Perspectives site (iirc) who was using the term “fiat money” in a way that Wray didn’t approve of. So Wray mocked him for using nonsense words (just like here) instead of explaining why he preferred “sovereign” to “fiat.” Nowadays, of course, the use of the term “fiat money” seems to have become accepted usage in MMT circles. Don’t know if Wray ever apologized to that commenter for being purposefully obtuse.

      Same thing here. The producer has a non-technician’s partially-flawed understanding, but is trying to get at something that Wray and his colleagues themselves hammer on constantly about (that the gov’t doesn’t need to tax or borrow to spend). Instead of giving some instruction to they poor guy, and explaining why “debt-free” money probably isn’t the best terminology to be using, Wray just mocks him for using lingo that Randy doesn’t like. Either RW is extremely dense, or he’s being disingenuous when he says he doesn’t understand what the producer is talking about. He does, he would just rather put the guy down for having it slightly twisted than try to helpfully hone his analysis. Newsflash: that’s a sh*tty way to get people to agree with you, or to expain anything to them.

      With proponents like Wray, MMT doesn’t need any detractors.

      1. Christian B

        But the languague and definitions are crucial. Control the language and you control the culture.

        I totally understand him and his frustration and I am usually an a%$hole at parties. When people tell me that they just bought a house I act suprised and ask them how they get the money to pay for a house in full. Of course they reply that they actually got a loan from a bank. To which I explain it is the bank that bought the house and is letting you stay there as long as you pay them every month. And then they walk away.

        The housing industry tells us we can buy and own our own home but that is the myth they propogate to cover the fact that you are a slave to your job and the bank for the next 30 years. So yes, we should all nitpick language to expose the reality of a system that seeks to control us.

        So when someone says they want to make “debt free money”, and Mr. Wray points out that what they are actually saying is that they want to make “debt free debt”, we should applaud him and not worry about the nicities. By just going on their show he would give them some measure of validity which they do not deserve. They are not interested in hearing what he has to say, they have their own silly agenda which Mr wray wanted no part of.

        1. susan the other

          I kinda thought Wray was just teasing us with this little parody. Since most everyone is staggering around mentally with these concepts. I like his long-suffering explanations that fiat only has value because of the obligation it carries. But what happens to that value when zirp is the only policy? Aren’t they almost the same thing – debt and interest? So just go with debt and faith and goodwill, I guess. I’m for that too. Zirp forever. And if we could have debt-free money it would be pay-go using an asset like gold but once gold or some other asset were established as money it would instantly become fiat and be manipulated just like a dollar bill or any other derivative of ‘value’. No? Interest is faith and money is fiat. So speaking of language, why don’t we simply remove the word ‘debt’ from the lexicon? Aaaargh.

            1. davidgmills

              In law, fiat means something that is an order to be complied with.

              Thus fiat money is anything the government orders its citizens to accept as money or legal tender.

              I am not sure that Wray really understands the term fiat.

              If the government orders you to accept bananas as money, bananas are fiat money.

              If it orders you to accept a tax coupon as money, like Lincoln’s greenbacks, that is fiat money.

              If it orders you to accept federal reserve notes as money, they are fiat money.

        2. Clive

          I thought it was just me. I can’t watch the TV when there’s some lightweight article or other which features so-called (and they are nearly always called as such) “homeowners”.

          Saying (actually, shouting usually) to anyone unlucky enough to be in earshot “Hah! Homeowner! Homeowner??? Just try not paying the mortgage for a month or two, then you’ll find out who the real homeowners are”.

          At which point I too usually find myself talking to an empty room. Even my mother-in-law’s cat typically finds the scratching post suddenly beguiling. The catnip mouse seems interested in my outrage / frustration though, so I take what comfort I can from that.

          1. perpetualWAR

            Really?Tell me how you find out who the real homeowners are?

            I’ve been asking for years and keep getting differing answers. If you have the key, please share. Because the servicer will never disclose who is the real creditor.

          2. jgordon

            To take your point one step further, stop paying your property taxes for a year or two, then you’ll find out who the real owner of “your” property is.

        3. Benedict@Large

          The idea that one owns one’s own house is sort of like the notion of people claiming to have money in the bank.

          Actually, no, you lent your money to the bank. It may or may not still be in the bank, but it is definitely not yours anymore. It is the bank’s. All you have is a claim that says they will pay some interest while they have it, and that when you ask the bank for that amount of money, they will give it to you.

        4. bdy

          Bingo – “debt free money” is analogous to “home ownership”.

          Yes, the bank owns the home and the terminology is technically inaccurate. But there is still a substantial difference between a “homeowner” and one who rents, in that the mortgage payments might come back one day as equity. No such lottery ticket for the renter. So it’s a useful term.

          Imagining that the word structure somehow fools us into signing our lives away is offensive. The blank stares at parties aren’t moronic. People are simply being as polite as can be expected after being called fools in mixed company.

          Similarly, “debt free money” transfers obligation, otherwise it can’t be money. Duh.

          But it seemed the show really wanted to talk about creating money via spending, rather than lending. Rude of Mr Wray to refuse the conversation on etymology.

          I thought the host remarkably polite and persistent in dis-acknowledging that he was being talked down to, and am a little bummed that one of the MMT smart guys chose not to engage a public forum, for whatever reason.

          1. davidgmills

            That is why the law differentiates between equitable title and legal title. The hope of everyone who has equitable title is that someday they get legal title as well.

      2. Rodger Malcolm Mitchell

        “Fiat” money literally is money created by fiat. Even gold-backed money is gold-backed by government fiat, a fiat that can and has changed at the whim of the government.

        Bottom line: “Fiat money” is a term invented by gold bugs to differentiate money backed by gold, plus the federal government’s full faith and credit vs. money backed by the federal government’s full faith and credit without gold.

        In short, all money is backed by the federal government’s full faith and credit, so “fiat money” simply is money, all kinds of money, every kind of money.

        And Randy is correct that every form of money is a form of debt. There is not now, nor never has been, any form of money that is not a form of debt.

        Even bananas, when used as money, would rely on the full faith and credit of the issuer.

        Randy does make a statement with which I disagree: “As MMT says, ‘taxes drive money’. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal.”

        The first sentence does not necessarily lead to the 2nd. When MMT says, “Taxes drive money,” they mean that taxes are necessary to give value to money. I disagree.

        Even if the sovereign did not collect taxes, it still could issue valuable money. If, for instance, Saudi Arabia said, “You can buy our oil only if you pay us in Riyals,” Riyals would have value, whether or not Saudi collected taxes from anyone.

        “If you cannot use the sovereign’s token to pay your taxes . . . ,” does not mean taxes are necessary to give value to money.

          1. OpenThePodBayDoorsHAL

            Two exceptions: when the holder of gold exchanges it directly for local bank currency, P2P, in person with no bank; or even better, when the holder of gold uses it to buy something from someone who also accepts gold as money. Coming soon to an app near you, geo-locate a human ATM and accept it as payment as a merchant.
            To me, Wray’s argument is akin to the priests in Galileo’s day: the Earth is the center of the universe, because it is. “All money is debt” um except for gold and silver and cowrie shells and tally sticks and many other forms of money that have existed for millenia. I hold a gold coin in my hand: remind me who my counterparty is? Maybe the asteroid that deposited the stuff in the Earth’s crust?

          2. Leonard Tekaat

            All forms of money is debt. Debt (money) can increase in value, or decrease in value relative to the price of the product or service a person wants to exchange their money for in an economy, the interest rate the debt is receiving, and the ability of the debtor to return to the creditor the principal amount in full and all interest payments. Not all money is created equal in an economy based on how the income of the debt (money) is earned and taxed.
            The private sector and the governments of our economy creates money by creating debt. The governments can do a better job of maintaining the value of debt (money) by not relying solely on the Federal Reserve’s Monetary policy. Go to http://www.taxpolicyusa.wordpress.com for more information.

            1. davidgmills

              I have trouble with that argument. Here is why.

              In the English tally system, the king would ask one of his subjects to do something of value, say build a bridge. In return the king would give the subject a tally stick with notches cut out representing, for example, a horse, a cow and a bushel of wheat.

              The agreement was that when the tax man came for the tax due the king, the subject gave the tax man the stick instead of a horse, a cow and bushel of wheat.

              Now how is the tally stick a debt instrument in that situation? I argue it is not a debt instrument. It is a a credit instrument. The government never owes me anything. I owe it. But when I do work for the government, the government issues me a credit to pay what I owe. It does not issue me debt.

              Further evidence of this is found in the Constitution which forbids states from issuing “bills of credit.” The federal government was not forbidden and the Supreme Court held it could do so and that Lincoln’s greenbacks were bills of credit.

              To me that is the difference between government fiat, which is not a debt instrument (which makes it debt free), and private fiat, which is money based on debt.

              It seems to me that modern economists never understood the tally stick system, (the longest running monetary system) and its later derivatives (like the colonial scrip) and so they always argue all money is debt.

              1. OpenThePodBayDoorsHAL

                And crickets when I tried to get an answer to my post above: “I hold a gold coin, who is my counterparty? Where is the debt?”.
                But arguing with priests didn’t get Galileo very far.

                1. Christian B

                  Whoever dug up the gold has the debt. If they do not get something for the coin they lost the energy they used to dig it up.

                  1. JTMcPhee

                    Often the digger is a black mine slave in the southern part of Africa. What debt flows to him? And is “slave wages” then the measure of the store of value of gold?

                2. cnchal

                  . . .“I hold a gold coin, who is my counterparty?

                  Your counter party is the next person that you want to exchange your gold coin for whatever you desire that that person has.

                  If you didn’t have a counter party, your gold coin would have no value.

        1. davidgmills

          That is not what the word fiat means. In law it means by order of the government.

          Like I posted above the government can order anything to be money and when it does the money is fiat money.

    3. Johnnygl

      That email exchange was painful to read. Instead of being curt and dismissive in his replies, Wray should have offered to pick up the phone and talked to the guy about why he saw things differently than the radio show host and maybe persuaded him to take a different view of things. MMT has enough trouble getting its complex ideas out to the public and Wray just slapped away an opportunity to win some people over and chose to publicly embarass them instead!

      Prof Wray, you can do better and you should!

      1. Benedict@Large

        The debt-free money idea has been around for years, in spite of it being thoroughly debunked. Wray didn’t lose an opportunity here. These people simply do not listen.

        1. Yves Smith

          Benedict is 100 % correct. I’ve been in meetings with people of this type and tried to reason with them. It was the ONLY time I’ve ever had a temper tantrum in a meeting and blew it up by storming out. They are utterly impossible. They nearly wrecked one of the higher-functioning Occupy Wall Street groups until one of the leaders figured out how to get them to quit trying to confuse, um, evangelize the group members.

        2. davidgmills

          Absolutely not. Economists don’t understand money based on “bills of credit.” These are not debt instruments. Hence the word credit!! The Constitution gives the government the right to issue bills of credit according to the Supreme Court.

          If only economists would study the Constitution!

          1. davidgmills

            The same holds true for coins. They are not debt instruments either. They operate just like a bill of credit according to the Supreme Court.

            1. davidgmills

              As a lawyer, what I would like to know is what gives economists the right to think they get to overrule the Supreme Court regarding debt instruments and credit instruments.

              1. alex morfesis

                well…not sure if you are the lawyer from TN but…the history of the greenbacks is complicated…Chase, as Treasury Secretary, we are told, did not want to issue and follow Lincolns orders…he thought it better to let the government borrow at 25% from third parties…Lincoln said do it his way…Chase ran against Lincoln in 1864 and lost…Lincoln then appoints him to the Supreme in Dec of 1864 and on the same day, the Senate approved his nomination(ah those were the days…)
                Chase was maybe worse than Trump is today, as he put his own face on the greenbacks…he had actually more support than Lincoln going into the 1860 republican convention, but with all the wrestling involved, Lincoln, who was maybe 4th going in, ended up the nominee…Chase also was involved in the Peace Convention no one ever talks about, which was proposed by Former Pres john Taylor after the Committee of 33 failed in congress to prevent the split of the union…anyway…back to our original topic…

                Chase originally had the votes and had the Greenbacks “He” had issued declared unconstitutional in 1870 in Hepburn v Griswald…later when Knox v Lee etc became the law, he dissented but did not have the majority anymore…

                greenbacks issues are complicated in that it was a different time and place…before electricity and before the supreme court actually met in its own building, as historically, most of the decisions were made in offices of the US Senate…Chase was also the first Justice when the bouncing around of numbers of Justices was reset to 9 as it is today…Lincoln got ten, and Andrew Johnson got crushed and reduced, I think to only 6…

                also, it was before the Federal Reserve system…and remember, congress ruled that the FED would issue Legal Tender…so things are a bit different than they were in the time before edison electric light bulbs…

                so it is not “economists” that are overruling the Supreme Court, it was Congress, in its powers, devising a system that has stood for a hundred years…the Federal Reserve System…blame congress…not economists…

  2. James Levy

    This is a man as absolutely sold on his vision of reality as a gold bug. If Treasury prints dollars, who does it owe them to? Why is that a debt? He’s adamant that it is, and ridicules any who would say it is not, but I don’t see what he means. A debt is something I owe someone. If I find a gold nugget (or as a sovereign authority vested with such power, print a $20 bill) I don’t owe that money to anyone.

    What the author is ridiculing I think is the notion of cash. He finds a cash economy naïve to the point of idiocy. He thinks that Uncle Sam could never pay his debts in cash. Perhaps. But he takes that and then runs with it, insisting that therefore the only way to run a currency is by making it all about private debt-issuers and then foaming at the mouth about balance sheets (as if they were more real than lived reality). He proclaims that he is not just practically correct (which he may be), but theoretically correct (as if the people who disagree are simply irrational and not, perhaps, wrong). Overall, the kind of performance one expects from Economists: I’m right, you’re an anti-rational idiot, don’t make me go over there and argue the case in person because your premises are so false that it would be a waste of my time (how stupid can you people be/balance sheets!).

    1. Nell

      I think you are missing the logic in Wray’s position. Dismissing ‘balance sheets’ suggests that this is the case. Balance sheets are the essence of banking and the FED sits at the top of the US banking system and is defacto, because of its relationship with the US Treasury, an arm of the US government. To understand the monetary system it is necessary to understand the relationships between the entities using and issuing money. A fundamental aspect of the those relationships is balance sheets and a fundamental aspect of balance sheets are ‘liabilities’ and ‘assets’ – which is the language of credit.
      I can understand your frustration as I came into this topic from a ‘debt-free money’ perspective. What concerned me at the time (and still does) was the expansion of private sector debt to the point of economic implosion. As my opinions have developed due to extensive reading, I have come to the understanding that a) our monetary system is a credit-based system b) that credit-based systems are the norm historically c) there is nothing inherently problematic with credit-based systems. It is my opinion that public understanding of our credit-based system would lead to better banking regulations and more productive use of fiscal policy. And that money and wealth are not the same thing and it is dangerous (in the sense of poor economic and political policy development) to think they are.
      I think Wray could have been more helpful in his email exchange – but maybe he gets fed up sometimes.

    2. Yves Smith


      I hate to be blunt, but the fact that you don’t like Wray’s show of his frustration does not make him wrong.

      And Wray is methodologically sound, and you are incorrect. If you can’t explain financial transactions in terms of the balance sheet impacts on the participants, you don’t have even the most basic grasp of what is happening. The fact that MMT can show how money works through this mechanism and the “debt free money” crowd won’t try because they are too intellectually lazy or know they can’t should tell you all you need to know about their intellectual honesty.

      You are basically criticizing an expert in his domain of expertise when you haven’t even made an effort to understand what he is talking about. Would you similarly treat a tax expert this way? Tax is so arcane and often counterintuitive that attorneys in other specialities of law find dealing with tax attorneys to be frustrating.

      1. davidgmills

        What are “bills of credit” then that the Constitution talks about if they are not debt free money? I would prefer using the term bill of credit rather than debt free money, but a bill of credit is issued without the creation of governmental debt. Same with coins. When coins are issued there is no debt created in the issuance of them either.

        Economists need to do some legal research about the history of bills of credit. They are fundamentally different than IOU’s. This concept has been around since the 1,100’s.

        The Supreme Court, in the greenback cases after the civil war, held that Lincoln’s greenbacks were bills of credit. They were the paper equivalent of coins and the Constitution allows the government to “coin money.” In fact the Supreme court said that issuing “bills of credit” was part of the government’s war powers. In times of crisis when the government can’t borrow to raise desperately needed cash, issuing bills of credit are part of its “war powers.”

        Like I said, what gives economists the right to overrule the Supreme Court.

        I get so frustrated, with even MMTers, who don’t get this.

        1. bob

          Double entry book keeping.

          There can be no credit without a debt. There can be no debt without a credit.

          It’s quite simple really. Look it up.

          1. spooz

            There can be no credit without a DEBIT in double entry accounting. Although non-accountants may not be able to distinguish between “debt” and “debit”, there are not at all the same thing. Debit simply means entering a transaction on the left side and credit means entering it on the right side.

            In the case of debt, it can be debited or credited based on whether one is creating or extinguishing it. Along with debt (liabilities), gains, income, revenues and owners (sovereign?) equity can be increased with “credits”

            Accounting basics are not at all intuitive and double entry accounting is far from “simple”. Here is a link which may help clear up your confusion:


  3. Jo

    Prof Randy Wray, to a layperson “debt” is not necessarily an intuitive way of labelling the features of money that you describe.

    1. Yves Smith

      He never said it was intuitive. The problem is that what most people have been taught is wrong, and the need to unlearn that is what makes MMT hard to grasp.

      1. davidgmills

        As far as I can tell MMTers don’t understand “bills of credit” and their history. And if they don’t understand bills of credit then they have to understand people who question them.

        They have a good idea. But they should be speaking in terms of bills of credit and how bills of credit work.

        Joe Firestone’s trillion dollar coin idea is an attempt to go back to bills of credit. But he does it wrong. You just don’t mint a coin and put it in circulation.

        In order for a bill of credit to be done correctly, a person must have provided a good or a service to the government first. Then a bill of credit is issued which acknowledges the performance of the service or the goods provided and then pledges that a certain credit for future taxes due will be provided.

        When Lincoln’s soldiers and suppliers performed services and goods to the federal government, he issued bills of credit (in the form of greenbacks) as payment for the goods and services. That is the proper way to issue a bill of credit. And when it is done this way inflation is nil because the government has been provided something of value in the form of a good or service. Inflation occurs when money is printed but no goods or services are performed in exchange.

        The government could pay me social security with a bill of credit. It would be acknowledging that I paid into the SS fund all the years and have provided something of benefit to the country in doing so. In that event I could pay taxes with a bill of credit and since it would be, by fiat, legal tender, I could pay my bills with it.

        Joe Firestone could properly get his bill of credit idea across by arguing that the government issue should bills of credit for social security.

        1. davidgmills

          Or we could just do what Lincoln did. Start paying all our soldiers and government contractors with bills of credit.

          1. davidgmills

            Maybe I am being to hard on Joe Firestone. If he put his trillion dollar coin in a bank and began issuing bills of credit to soldiers and government contractors, that would work as a proper bill of credit. Maybe he suggested that and I don’t know.

          1. davidgmills

            Well then I missed that. But what is the purpose of just issuing it?

            And like I said if he wants to circulate it the right way, by issuing bills of credit on it, that is absolutely great.

            I liked his idea of coining a trillion dollar coin but I was never clear with what he was going to do with it.

            1. STF

              The purpose of the coin is to get around the debt ceiling only. It is minted and presented to the Fed. It then becomes an asset for the Fed and the Fed credits the Tsy’s account, allowing the Tsy to spend without having to issue debt. The coin itself remains as an asset of the Fed and never circulates. The Tsy’s spending results in the creation of reserves. That’s it.

            2. Joe Firestone

              Hi David, The trillion dollar coin was Carlos Mucha’s idea when he was writing under the handle “beowulf”. I amplified the idea in various ways over the years. One way was by proposing a $60 T coin. I selected that value for a few reasons I won’t repeat here. Now, however, I propose a $100 T coin because that number is better for marketing the idea.

              Anyway, why did I propose minting a coin with such a large face value? Simply because right now the Treasury uses mostly reserves to make payments of its obligations, and only the Fed can issue reserves on its behalf. The Treasury cannot itself issue reserves, so it has been in the position of getting reserves credited to its accounts by the Fed only after the Fed receives tax payments, or payments from the sale of securities or other Federal property, or seigniorage credited to its accounts from when it (the mint) delivers coins to the Fed, or Fed profits. So, Fed credits issued to the Treasury from these sources are generally less than the amount of credits the Treasury needs to redeem its securities when they fall due, and also to spend mandated Congressional Appropriations.

              I want to change that situation to short-circuit the austerity politics we’ve been seeing that the relies on these facts to claim that the Government has a real solvency risk due to fiscal unsustainability problems. So, what would the coin do to change that political nexus?

              Well, if the big coin were minted and deposited in the Mint’s account at NY Fed, then the Fed would be constrained to exchange that coin for newly-created reserves in the Mint’s account, in the amount of $100 T. For reasons explained in my book, nearly all of those reserves would end up in the Treasury spending account almost immediately after it appeared in the Mint’s account, and the the Treasury would have all the reserve credits it needed to redeem its securities as they fall due, and to spend into the economy all the appropriations legislated by Congress.

              Two things should be immediately clear. First, the $100 T coin would never circulate. The Fed would retain it permanently as an asset of the NY Fed. That asset sits on the bank’s balance sheet, and provides it with the authority needed for the Fed to issue that $100T in reserves to the Mint’s account.

              And second, since the coin would sit in the Fed’s vault, it would never circulated, but simply sit at the Fed as the asset that provided the authority to the Fed to use its reserve issuing power on behalf of the Treasury. This and much more is explained in my book.

              1. spooz

                What is the difference between issuing a $100 T coin and just entering $100 T on a chart of accounts as sovereign equity, similar to owners equity? It seems like a contrivance to me. And if one accepts the concept of creating such sovereign equity to issue currency, why is issuing sovereign debt even necessary?

                1. Yves Smith

                  Equity is a liability. So is debt. So you aren’t changing the nature of the equation, just the seniority of the liability. Debt is more senior than equity.

                  If you cannot reduce transactions to double-entry bookkeeping, you don’t really understand them. I cannot stress that enough. It isn’t necessary in a lot of cases, but here is most assuredly is.

                  1. spooz

                    Owners equity is considered a residual claim on a business or a source of assets, not a liability. It is the owner’s capital account and can include both tangible and intangible items (such as brand names, patents or goodwill).

                    Although liabilities (debt) are more senior than owners’ equity, it does not mean that creating sovereign equity (whether you do so with the contrivance of a $1 trillion coin or not) is impossible.


                    1. STF

                      YOu didn’t say anything that Yves didn’t say. Equity is a claim on the assets and cash flows. Debt is a claim on the assets and cash flows. Debt is more senior than equity. They both bestow different rights on the holder and different liabilities (in the legal, not balance sheet sense) on the issuer.

                      If you want to call govt money its equity, go right ahead, but it’s still a claim on the govt that makes the govt legally liable. You haven’t refuted anything WRay has written here. And given the operational necessities of central bank operations, if you run govt deficits without issuing govt bonds and creating reserves only, you will have to pay interest on that “equity” just as you would if the govt issued tbills unless you want ZIRP forever.

                    2. spooz

                      STF, it seems we were talking about reducing transactions to double entry bookkeeping, an accounting construct, in which case owners equity is NOT considered a liability. If you need more links to educate you about basic accounting and balance sheets, I can provide them. I spent a number of years working as a CPA and Controller in the financial industry , so I think I understand it pretty well myself

                      Fiat currency is backed by the markets (and central banks) perception of a country’s strength in terms of its economy and governance. The experience we’ve had with ZIRP is revealing in that it seems that even a large debt burden and a struggling economy can have little effect on the strength of fiat. As long as it is still acceptable for financial transactions, and the public has confidence and faith in a currency’s ability to serve as a storage medium for purchasing power, attaching it to debt is unnecessary, IMO.

                    3. Yves Smith

                      You cannot be an accountant and say that. Equity is ALWAYS on the liability side. You are clearly lying. Go look at any balance sheet.

                      I am banning you over this.

                    4. spooz

                      Yeah, what do I know about “double entry bookkeeping”? I guess spending a large part of my life working as a CPA and Controller in the financial industry doesn’t really count for anything. Economists know more than I do about accounting, apparently. I won’t bother trying to educate them anymore.

                    5. Dr. Roberts

                      @STF Isn’t that essentially what they’re arguing for? ZIRP forever with a slightly different mechanism and only fiscal policy as a means of influencing the economy. I think the debt-free money people don’t really understand the implications of what they want, but it is a real position. You can’t have debit-free money, but you could technically have debt-free money. It would just mean that government spending had to be calibrated to ensure price stability, because you would lose interest rate policy as a monetary tool.

                    6. STF

                      @Dr Roberts. OK, that’s pretty sensible overall, but I’d say it differently. You can’t have money that isn’t a claim on the govt, or for which the govt is not liable. You can have interest-free claims on govt, though, but if that’s what you want, then you must accept ZIRP forever, at least for short-term rates (that is, the CB could still even with ZIRP forever do other things it currently doesn’t do to more directly affect other rates). If that’s what you want, then fine, and it’s essentially what MMT has always advocated, incidentally. But calling it “debt-free money” is not technically correct, and more importantly confuses important basic principles of financial statements, central bank operations, and legal claims on assets and cash flows. And when you make those sorts of mistakes, then any further analysis will be only correct by coincidence even if thus far it’s only technically wrong.

                    7. spooz

                      So, selectively choosing which of my comments to post doesn’t really allow the reader to understand my frustration with trying to make my case. But if that’s what floats your boat, I’m outta here. I won’t be the first poster you’ve chased away, and this topic is where the MMT zealots spurn the agnostics.

                      At least people that understand accounting principles, like Dr. Roberts (above) get it. And I DO fully understand what the implications of virtual ZIRP are. We are there anyways, it would just be nice to get the banks out of the loop of money creation.

                    8. spooz

                      Oops, my bad, none of my comments are in moderation. Sorry. Nice to see an open dialog is still allowed here on this topic, although the general dismissiveness can make one rather defensive.

                      And being on the same side of the balance sheet as liabilities does NOT make owner’s equity a liability. Sorry you don’t understand that. Its a basic accounting principle that

                      Assets – Liabilities = Owners Equity

                      Banning me because your grasp of accounting is not sufficient is your perogative, however. It is YOUR BLOG.

                    9. Yves Smith

                      No, go look at any balance sheet. Equity is on the liability side of the balance sheet. It is the owners’s residual claim on the assets only after all the other creditors are paid. The numbers do not foot unless it is on the liability side.

                      And I am serious about banning you. You’ve misrepresented your background. I have no tolerance for that. This comment is your last. Find another site. NC is not a chat board.

                    10. spooz

                      STF, except, there are no “claims” on a government with fiat currency, since it is not convertible to any commodity or asset. Considering money creation to be comparable to “good will” does not conflict with accounting principles, and taking central banks out of the money creation business is not a bad policy, IMO.

                    11. STF

                      As I said, I have less objection if you want to consider the govt’s money to be its “equity.” But call it that, not “debt-free money,” b/c that just confuses things.

                      All money throughout history, except for commodity money of course–has been a liability of the issuer. That’s what every historical and legal account will tell you. non-commodity monies have always been someone’s liability, whether they paid interest or not. Paper money, too, which doesn’t earn interest, the Fed records it as its liability. If the Fed wants to put that into its equity account, ok.

                      In the history and legality of money, the fact that the issuer is “liable” to accept its money in payment to the issuer (for govt, settling a tax liability) has been considered consistent with calling money a liability. There’s no corollary with equity that I know of–though I could be wrong. At any rate, once you get into govt money, you are to some degree in a separate realm of accounting from more typical CPA land.

                    12. spooz

                      All money throughout history, except for commodity money of course–has been a liability of the issuer.”
                      The nominal value of coins minted by the treasury, over the cost of production, are not a liability.
                      According to the US treasury,

                      Seigniorage results from the
                      sovereign power of the Government to directly create money and, although it is not an inflow of resources from the public, it does
                      increase the Government’s net position in the same manner as an inflow of resources. It is not demanded, earned, or donated; therefore, it is recognized as a financing source rather than revenue. An example is coins delivered to a Federal Reserve Bank in
                      return for deposits. The account is used only by the United States Mint.

                      In the history and legality of money, the fact that the issuer is “liable” to accept its money in payment to the issuer (for govt, settling a tax liability) has been considered consistent with calling money a liability.

                      I’m not an expert on government accounting either, but as far as I know, the entries for tax collection are debiting cash (balance sheet) and crediting tax revenue (statement of operations). What does the word “liable” in your sentence have to do with calling money a “liability”?

                  2. E=A-L

                    “Equity is a liability.” Yves Smith

                    No. Equity is equity = OWNERSHIP = Assets – Liabilities. And shares in equity (common stock) is an alternative to liabilities as a form of money.

                    So debt-free money is possible. It already exists as common stock (shares in Equity).

                    1. Yves Smith

                      Lordie. Go look at a balance sheet. Equity is always on the liability side. It is a claim on the assets of a company, a residual claim after all the more senior creditors are satisfied. Your rights as an owner are subordinate to satisfying all of the financial promises you’ve made, like paying taxes, paying your creditors, paying your employees for the work they’ve done.

                    2. E=A-L

                      Equity is always on the liability side. Yves Smith

                      So? That’s merely so that the sum of the right side (Equity + Liabilities) equals the sum of the left side (Assets). It does not mean that Equity is a liability.

                      And of course Equity is subordinate to Liabilities just as Equity = Assets – Liabilities implies. But so what? Shares in equity (common stock) is still a possible money form (assuming Equity is positive).

                      So no, money need not be debt.

                    3. STF

                      Are there any cases in which the issuer of a share of equity is “liable” to accept its shares in payment to the issuer? Issuers of money are always required to do that.

                    4. Skippy

                      Equity is ownership – ?????? – so residual claims is now conflated with “ownership”.

                      Do try and express those ownership rights unless you have a significant – SHARE – of those notional price units.

                      Skippy… its not like equity’s are not already a money form, so why the double entendre wrt HPM, Gov – Fed – CB – banknotes [scots] vs Corporatist issuance.

                    5. E=A-L

                      Are there any cases in which the issuer of a share of equity is “liable” to accept its shares in payment to the issuer? stf

                      The liability of the issuer is fulfilled when the stock is sold by the issuer for fiat or other assets in exchange for a share in ownership of the issuing company. There is no remaining liability of the stock issuer toward the stock owner since the stock owner is now a co-owner of the issuing company.

                    6. E=A-L

                      Issuers of money are always required to do that. stf

                      You’re just saying that the definition of money is that it must be debt. But it’s the definition of money that is being argued here.

                      Liabilities have value because they are a claim to assets. Similarly, equity (if positive) has value because it is the ownership of assets. Therefore both liabilities AND shares in equity (common stock) are money forms if backing by assets is the defining characteristic of money.

                    7. Skippy

                      Rights of voting and dividends, tho unity of possession w/ the right of survivorship not so.

                      Skippy… which sorta negates the whole extinguished thingy…

                    8. Skippy

                      For all the sophist arguments it always comes down to all sales are final and recourse is diminished or dead w/ the ideological driven agenda of free market behavioral expectations.

                      Skippy… same mob pushing the same agenda with a lick of new paint on it…

                    9. E=A-L


                      I’m not arguing that fiat is equity; the liability of the issuing government is to accept fiat back for taxes and fees so fiat is a liability of the issuing government.

                      However, the notion that all money must be debt is clearly false and I wish that MMT advocates would quit repeating a falsehood. Indeed, it appears they have been cognitively captured by their purported enemies, the banks and other usurers, when they continue to perpetuate that lie.

                    10. Skippy

                      Your use of falsehoods is due to your bias and not MMT or anything else.

                      Skippy… YS has demonstrably shown that, other wise just for S&G what is equity’s denoted in – sea shells – ???? – no its denoted in debt….

                    11. E=A-L

                      ” what is equity’s denoted in – sea shells – ???? – no its denoted in debt….” skippy [bold added]

                      It’s irrelevant what equity is denoted in. A more plausible objection is that a company’s equity might consist of the liabilities of other entities and therefore the value of that equity be contingent on the ability of the company to collect on those liabilities.

                      a) that objection applies to liabilities as money too.
                      b) a company’s equity may easily include fully paid up land, plant, equipment and other tangibles.

                    12. E=A-L

                      its not like equity’s are not already a money form, so why the double entendre wrt HPM, Gov – Fed – CB – banknotes [scots] vs Corporatist issuance.” [bold added]

                      The issue here is whether money MUST be debt so it’s nice to see that someone finally agrees that common stock is a money form though you have not yet conceded that it is a debt-free money form (assuming non negative equity).

                      I have no problem at all with fiat, a liability of the issuing government, but it should pay no interest and be created for the general welfare only and not for the special benefit of the banks and the rich, the most so-called credit worthy.

                      But I have a major problem with government-subsidized private credit/liability creation since it favors the rich. Defenders of those subsides argue that since endogenous purchasing power creation is good that those subsidies are necessary. However, that view overlooks the fact that common stock is an endogenous money that requires no government privileges (eg. a fiat lender of last resort).

                    13. Skippy

                      Your hard commodity arguments about moeny are not compelling, money is not a store of wealth in perpetuity nor a price point which is fixed.

                    14. Skippy

                      BTW a bar tab is credit extended to facilitate a transaction which might or might not end in survivor ship, for either party, that’s the whole point of reconciliation, which ultimately ends in intent.

                    15. E=A-L

                      “Your hard commodity arguments about moeny ” skippy

                      Straw-man. Commodity monies are silly since if used as money they cease to be a commodity and vice-versa.

                      Common stock, otoh, is backed by dynamic assets so a diversified common stock portfolio is a much more likely means to store value.

                  3. spooz

                    So, go ahead and ban me. I quit posting for months after the last time I tried to “discuss” this topic with the closeminded MMT zealots. Its your blog, you can ban whoever you want. It will just make me think of you differently. Not at ALL of Barry Ritholz caliber, no matter what you might tell yourself. He would never be so petty.

                2. Lambert Strether Post author

                  There is also the point that the $100 T coin is permitted with existing legislation (one of the reasons Carlos M was so brilliant to devise it). I don’t know enough to say whether “just entering $100 T on a chart of accounts as sovereign equity” is possible today, legally, or not.

  4. scott

    Not versed in MMT by any means, but I have old Hong Kong dollars that say “Standard Chartered Bank” and “Hong Kong and Shanghai Banking Corp (HSBC)” on them. If these private banks printed these dollars, were they lent to the HK government with interest? Who decides how many need to be in circulation?

    1. Skippy

      Marriner Eccles DID clearly distinguish liquidity & capital, back in 1938…..Next – !!!!!!!

      Bonus question…. now which effects quantity and quality of M more than the other…. Fed issuing reserves or control fraud…

      Skippy…. and why did I not get the memo that half of NC went AET….

        1. Skippy

          “They come from miles around.” – yeah I know

          Yet some plank holders do seem to get twitchy around the term debt, antiquarian memes and all.

  5. JohnB

    Have to agree with the criticism of how Wray handled this – it was a bit unnecessarily uncivil (reminiscent of the uncivil way orthodoxy can be dismissive of MMT) – and I think this kind of nit-picking highlights flaws in MMT’s narrative (not technical flaws – flaws in its ability to impart knowledge to others), which I described a bit in a comment on NEP:

    I’m an MMT’er, and am sympathetic to both ways of framing this – I acknowledge the technical accuracy of how you present it, but acknowledge how the political-narrative of ‘debt-free-money’ coins the whole issue in a far easier to understand way than most MMT narrative does (the latter of which tends to extremely strongly induce cognitive dissonance in people – and its discussion of debt is a part of this – so needs much improvement in its narrative if it’s to gain enough traction among the public and in politics).

    I think a lot more time needs to be put into picking apart the different types of debt that there are, and distinguishing between them, when describing issues like this.

    Remember that the term ‘debt’ carries heavy emotional connotations/reactions to the term (David Graeber’s book ‘Debt’ documents this extensively), which are never going to go away politically – and zero-interest debt, with no timeframe for repayment, is completely different to most peoples general understanding of debt (such that it renders most emotional reactions to the term ‘debt’ irrelevant) – so I think the narrative has to be adjusted to account for this, and you must distinguish between different types of debt.

    If you make these distinctions, I think the term ‘debt free money’ can begin to make a lot more sense – as it’s really about being free of a particular type of debt – and I think it can be quite compatible/complimentary to MMT’s narrative.

    Since the term ‘debt’ is so loaded, I think that developing a new narrative which takes certain types of debt, and just stops calling it debt – to call it something else entirely – is the most sensible way to go; there needs to be a way to shed the moral/emotional baggage that the term carries, and discarding the term is one way.

    1. Schofield

      Best to think of money ecologically as a sort of super over-arching virtual resource that human beings cleverly invented to make the moving of other resources (commodities and services) about an economy and between economies more efficient and reliable. When you’ve done with it (the debt) it goes away through balance sheet accounting but we also prudently want to hang on to some of it for future use in the form of savings.

    2. zapster

      This is precisely the issue. After many stormy arguments about it in an irc channel, I’ve taken to dealing with it from one side of the balance sheet only–money paid to you by the government is “not debt” because you never have to pay interest on it or give it all back. The minute I try to explain that it *is* a debt on the government’s balance sheet, and that that’s not a bad thing, the door slams behind their eyes.

      Since I’m mainly arguing for more government spending, this is a more productive approach, if not exactly correct. My hope is that they’ll get comfortable with it, and can understand the technical aspects of accounting later.

    3. Jamie

      I respectfully disagree that Mr. Wray was “unnecessarily uncivil”. Of course incivility is never “necessary”, but neither is civility. And who is the judge what is civil? And what is the criterion used to make the judgement? This piece seems civil enough to me. If the host’s feelings were hurt he can have a good cry and maybe he’ll think more clearly after. I question whether a teachable moment was lost here, and I don’t see the purpose of posting here as having dialog with the opposition. From my point of view, Mr. Wray’s arguments should be judged on their logic, not on his ability to make converts of committed ideologues. Perhaps he is more interested in expressing his frustration with idiots in positions of power and giving guidance to his disciples than in trying to enlist those idiots to his cause. I see nothing wrong with that.

      As for logic… do you not perceive a slight contradiction between claiming that ‘debt’ is an emotional trigger word and claiming that people sort of intuitively understand what “debt-free-money” is all about? I, for one, have never been able to sufficiently comprehend what people are talking about when that phrase is used. When I have asked for clarification, I have gotten strings of words about banks, fractional reserves and seigniorage going to private hands… or discussions about equity, none of which illuminates the phrase “debt-free-money” or helped me understand what those people are talking about or what their concern is.

      I think MMT is crystal clear on these issues and easy to understand… in the sense that the logic is impeccable and easy to follow… but not easy to believe because of the tremendous load of conditioning to think wrongly about the subject which one must fight free of. That’s why I don’t think it’s as easy as posters above seem to imply to “be nice and make converts”. When speaking truth to the brainwashed, it is the truth that matters, not the delicacy and diplomacy of one’s utterances.

      1. JohnB

        Ok, upon rereading I think ‘uncivil’ was the wrong term to use, but I do feel there was a level of dismissiveness – MMT advocates need to be building bridges and gaining allies, and this isn’t the way to do it – there was actually a perfect opportunity here, to develop new allies, which in my view was wasted (I think Post-Keynesians like Steve Keen, do better at building allies – even with e.g. Austrians).

        Going on a mission to ‘teach’ a person something, in this manner, is something that is inherently going to backfire. Persuasiveness and adapting others narrative in terms of MMT, is – politically – more powerful and useful to MMT for building allies, than making a show of being technically right – especially over nitpicky things like the term ‘debt’.

        On the emotional connotations of debt: Distinguish between debt as it’s known colloquially – a principle that carries interest and must be repaid within a certain timeframe (carrying a lot of moral baggage on top of that) – and the type of debt that MMT promotes use of (no interest, no timeframe for repaying – basically money as IOU – doesn’t really fit colloquial definition and moral perception of ‘debt’).

        If you make this distinction, then ‘debt free money’ when interpreted as referring only to the former type of debt, makes perfect sense – and I think is how most people view that term.

        I see absolutely no point at all, in splitting hairs over the term ‘debt free money’ – MMT’ers should be integrating that (very powerful and politically useful) term into their own narrative, and should clarify it and keep technical consistency, by distinguishing and renaming different types of debt.

        It took me up to two years to wade through MMT’s narrative, and properly sort the conflicting information I had read in that time – it is only crystal clear to people who have already invested the time and effort in learning it, and its narrative makes this harder than it needs to be.

        Most people do not – and will not – get past the cognitive dissonance MMT’s narrative causes.
        MMT needs to change its narrative as much as possible, to reduce that problem – because other people and their tendency towards cognitive dissonance, will not change; and this exchange in the article, shows an opportunity for refining the narrative and building allies at the same time.

        1. zapster

          The fact that governments don’t actually face the same kind of liability that the private sector faces indicates to me that national accounting should have different terms. ‘Debt’ to us is highly risky, while it is not to the government. This is enormously confusing to the general public. I think Dr. Wray once proposed using “government contribution” instead, which seems a lot more sensible. Perhaps “originated” and “destroyed” at the tops of the national debit and credit columns would be better.

        2. financial matters

          I think a different terminology would be useful also reflecting that the government is the source of money and the important point is how that money is managed/allocated.

          Taxes are an important part of this and can be used to deal with inequality and channeling money for public purpose as well as giving value to money and defining a money of account.

          We still need to make choices but we should be informed and have political power. Statements like ‘70% of the people want single payer but it’s politically impossible’ doesn’t sound like a good political system.

        3. Jamie

          On the emotional connotations of debt: Distinguish between debt as it’s known colloquially – a principle that carries interest and must be repaid within a certain timeframe (carrying a lot of moral baggage on top of that) – and the type of debt that MMT promotes use of (no interest, no timeframe for repaying – basically money as IOU – doesn’t really fit colloquial definition and moral perception of ‘debt’).

          OK. I can make that distinction, and thinking about it that way does help me to understand what “debt-free-money” means… (so it means interest free money, just as Mr. Wray says above). But I do not think of ‘debt’ as “a principle that carries interest and must be repaid within a certain timeframe” and my own research (I just asked my companion to define debt – : ) ) indicates that the colloquial understanding of debt has nothing to do with capital, interest or time frames. Her response was simply “when you owe someone something”.

          I am sympathetic to your desire to build bridges, and I agree with you that over-emphasis on language purity can get in the way sometimes more than it helps sometimes… but one also has to be careful because changing the language can fundamentally change the message. I think we are all interested in finding ways to talk about the issue that will bring understanding and change. If ‘debt-free-money’ does it for some people, that’s great. But it seems to complicate, not clarify, in my case, to talk about different kinds of debt.

          I also struggled over several years to “get” MMT, so I also agree with “it is only crystal clear to people who have already invested the time and effort in learning it…” That’s why I note that conditioning is in play… because the logic really is pretty simple once you stop fighting it, but the misinformation is so prevalent it takes great courage to take the contrarian position, and when you talk about it you will almost certainly be labeled arrogant and ideological in your convictions… never mind that you are right. Under the circumstances, I think the better narrative is a chimera. When people are resisting the truth, the way in which it is presented is not the determining factor, it is their motives for resisting that will be determinative.

        4. Yves Smith

          Jamie is correct and then some when he calls the “debt free money” crowd ideologues. I often wonder if someone hired them to confuse people about MMT. As I said above, the only time I have even had a temper tantrum in public was in dealing with debt free money types, and that was because they had been actively and aggressively proselytizing an Occupy Wall Street group for months, and the majority of members was sick of their campaigning. So I have seen these people up-front, including on of the putative intellectual leaders. They are charlatans and aggressive too.

          1. beene

            Yves, if you can show any debt based money system any where in the world in any century that didn’t either bankrupted the nation or the nation had to bale out the debt money system I will say you are correct that debt based money system is good for the nation. As opposed to a debt free currency which poses the same risk but at least benefits the nation till it doesn’t.

            1. Lambert Strether Post author

              1) We don’t do assignments, so prove your own argument instead of putting the burden on somebody else.

              2) You seem to believe that Yves claimed “debt based money” is “good for the nation.” Leaving aside that’s the same as saying “gabba gabba hey hey” is “good for the nation,” Yves made no such claim, so you’ve shifted your argument, and to a straw man, too.

              “Charlatans and aggressive” covers the case, I think.

              1. beene

                Nay, I asked a simply economic question about debt based money, and stated a fact about debt based money.

                The simple truth is debt based money has always made banks rich and always ended up either bankrupting the nation backing it or requiring the nation (taxpayers) to bale out the banks.

                The Charlatans are those who promote a known false system which only they benefit from, which definitely covers debt based Fiat.

                1. Skippy

                  You have a few hundred years of factual history to inform yourself of before making statements in toto.

                  The false system shtick is reminiscent of those afflicted by some esoteric belief system, seeking to make things right with the creator.

                  Skippy… not compelled by religious arguments here…

                2. STF

                  Name 1 country that didn’t have “debt-based money” and I’ll explain to you why it actually did and you don’t know what you’re talking about.

          2. JohnB

            I understand your personal experiences at OWS, and how that affects your view of debt-free-money types, but I think it’s a bit too ungenerous to dismiss them as ideologues and charlatans – after all, these are the same criticisms many MMT’ers must face on a regular basis – I know that MMT’ers happens to be right, but then that’s how the DFM types feel too ;)

            If the discourse was less confrontational, there might be more opportunity for a dialogue that could actually resolve the differences. It seems a total waste to miss the opportunity to make allies here.

            Maybe discussing their opinions of the Credit Theory of Money – the best explanation for Wray’s view here, in my view (all wrapped up in a succinct theory) – and explain that their ‘debt-free money’ idea has a point (no interest, no timeframe for principle repaid) – while still ultimately being debt (but, in a very narrow way, in my personal view – when you look at how people colloquially view debt as having a timeframe for repayment and drawing interest), so I think something as simple as distinguishing between different types of debt could resolve this.

            The confusion over the term ‘debt’ surrounding this whole debate, reminds me a bit of the mind-melting confusion and cognitive dissonance you get, when trying to explain Tax Anticipation Notes to people, and how they are a strange amalgamation, being ‘sort of’ like money and also ‘sort of’ like government bonds/debt.

            The Positive Money crowd have done a lot of good – I wonder how much their lobbying, might have played a part in the Bank of England endogenous money report – so it’d be good to see differences here resolved.

      2. James Levy

        But you are missing the point–he’s making an ultra-TINA argument as if no other system could exist (or is too stupid to even comment on) rather than simply describing what is. I don’t feel bound by what is. If I did, I’d be a successful capitalist instead of a heterodox crank.

      3. James Levy


        1. Jamie

          The Treasury “owes” the money it creates to it’s (the government’s) creditors… the people who supply the goods and services the government purchases. It’s not a future debt. The money wouldn’t be issued if the debt were not already incurred (or mandated to be incurred by Congress in some spending bill). No money is created (issued) unless and until there is a debt of the government that needs to be paid. What other use has the government for money? Why issue it at all?

        2. Foy

          James, why are you swearing and yelling (capital letters) at people? I’ve noticed other recent comments of yours lately with a similar tone, calling people ‘imbeciles’ and ‘assholes’. It’s unpleasant to read. I really like the commentary on this blog as it’s almost always civil and often humorous when people discuss their disagreements. It’s one of the few blogs around that still has a commentariat that hasn’t degenerated to the standard of which your above comment is an example.

          I and I’m guessing a few others would hope that this isn’t the start of slide down to the lowest common denominator…or maybe it’s just me. Well done to Jamie replying politely to your question.

          1. Carla

            Thank you, Foy. Much of the tone in this discussion is unnecessarily rude and insulting. Some of us, Yves, do “get” that MMT is descriptive. Some of us think there ought to be a money system that works better for more people than the one that is operating now. If trying to learn and work out what such a system might be makes us “charlatans” well then… why do you even permit moderation-free comments?

        3. Lambert Strether Post author

          “WhO” -> WHO.

          Pro tip: You don’t have to hold the shift key down. The “CAPS LOCK” key will provide a more consistent result.

          Don’t thank me, no thanks necessary!

    4. Leonard Tekaat

      The basic questions about money seems to be “what form of money hold it’s value the best and is the money supply able to expand and contract without creating deep recessions, high asset apprection rates, and financial crisis.
      Macro monetary policy and macro fical policy is not an exact science. Mistakes are made by central banks and governments. Mistakes must be corrected as quickly as possible before a the economy becomes so unbalanced that high inflation or a deep recession is created.
      Currently the central bank and the government reactions take place years after the mistakes are made with monetary and fical changes. Usually when it is too late to prevent a financial crisises from occurring. The imbalances in the economy have been building for years.
      It would be better if we could rebalance the economy annually with the 2% Apprreciaton/Inflation Taxation Policy. For more information go to http://www.taxpolicyusa.wordpress.com

    5. Jason

      Exactly. What is the point of calling the Central Bank’s liability as debt when it does not have any of the implications that people normally associate with that word? What does the Fed owe to a person who holds a $100 note?

  6. craazyman

    Professor Wray is correct about money, taxes and bananas.

    It’s a lot of mental work on a Sunday morning to get through this post, but this is the kind of post that separates the men from the boys in the peanut gallery. Guys, don’t embarrass yourselves with pugnacious platitudes. Professor Wray is right.

    If you can eat it, smoke it or drink it — it ain’t money. If the government has an “infininite banana making machine” then Professor Wray might be wrong, but there is no infinite banana making machine. The only infinite machine is an infinite banana certificate making machine, that gives you a right to get a banana. That’s a debt.

    You could imagine things far beyond this where the boundaries of language and reality get more nuanced and complex — like a South Sea Island paradise where the trees and bushes give you all the food you need and all the shelter you need and all the clothes you need and the “govermint” puts on a feather headdress and dances around a fire chanting “oooma ooom agooom ooom a ooom a goom” every equinox to make the world new and keep the trees working. That would be a debt free govermint. But that’s not our reality.

    1. Thure

      I would have to agree with the craazyman on this.

      If you think about it, there is no such thing as a credit, only debt; kind of like a completely fungible option that can be exercised on demand for any resource.

      Credits and debits are just accounting artifacts for keeping score of where the demand is.

    2. Steve H.

      That funny moment, when the melt price of a coin exceeds its face value, but the government keeps insisting that it is still money.

        1. Steve H.

          – If you can eat it, smoke it or drink it — it ain’t money.

          Agreeing w Craa, and providing a case to be accounted for in a definition/theory of money.

          Alex m below points out that there are differences between money, currency, and legal tender; I’m using ‘money’ generically. What I’m trying to grasp is that if the resource substrate for the (money) goes up, its value as (money) decreases until its worth-less. So the less valuable the substrate, the more its value as (money)? But the noble metals are a counter to that.

          So, the point: money is whatever the government says is money, but as my neighbor Pearl said, “It’s only worth what you can get for it.”

    3. diptherio

      Of course he’s right, and the debt-free designation is confused, but feigning ignorance of the point that the non-expert (a “boy,” obviously) is trying to make — i.e. that the Fed gov’t faces no budget constraint (in the ordinary sense) and could seek to reduce or eliminate endogenous money creation through the financial system with exogenous creation and injection through a Job guarantee, BIG or some other mechanism — isn’t helping his cause any, imho. But yes, all money is a liability for someone and cash is just a gov’t liability that the gov’t promises to redeem with deductions from your tax bill. But the gov’t has options for distributing these tax-redemption IOUs to the economy beyond what it is doing now — ways that would cut out financial middle-men — that’s what the producer was getting at, I think, and I think that it is also correct (although poorly phrased).

      1. Paul Boisvert

        Yes, Wray is often counter-productive with both the tone of his arguments and with an inability to focus on what’s causing the confusion of his interlocutors–instead he just belittles them for being confused. As Diptherio points out, the “debt” of the gov’t is that it legally owes Joy Taxpayer a tax credit in exchange for her cash. Wray barely mentions this in passing, but it is the crux of the confusion, and I think it is Wray who isn’t using language in its normal sense here.

        People (correctly) think of THEIR tax bill as THEIR liability, not the government’s. They (again correctly) don’t think of the entity to which they owe something (taxes) as a “debtor”, but as a creditor. The fact that the gov’t does also “owe” them a tax credit in return for their cash is true, but claiming that that makes the gov’t a “debtor” is kind of a weird way to put it. I have many debts (car loan, mortgage), and when I hand cash to the creditors to whom I owe the debt, they too are required to credit me with a reduction in my debt to them. But no one says (in the normal use of language) that that makes Citibank a “debtor”, merely because they must reduce my car-loan debt to them when I give them cash. I am the debtor, they are the creditor–that’s the way we normally phrase it.

        Now of course Citibank did have a ‘debt’ on the day it gave me the car loan–it owed me the cash I was about to borrow. But once my check for the car cleared Citibank (and their Fed reserves were debited), Citibank no longer carries any “debt” on its balance sheet–it only carries an asset, namely the market value of the loan. It is just not considered to be a debtor. So it will naturally seem weird to people to say the Gov’t is a “debtor” in the “tax debt” situation: in fact, my tax bill is an “asset” on its books, not a debt, and a liability on my books!

        Furthermore, it’s not true that the gov’t owes me anything for ALL my cash–only some of it. Once I’ve paid my tax bill, I can then shower the gov’t with donations of my spare cash, for which it owes me nothing. (The same is true for my debt to Citibank, of course–once I pay off the loan I can then generously them extra cash, if I like.) So is only some money gov’t debt, but not all money? There’s a lot more “money” in the world than the total tax obligations. Confusing–at least initially. I’m sure Wray can parse this very carefully, but that’s what it needs–VERY careful, FRIENDLY explanation, as it’s extremely natural that even intelligent, well-meaning lay people will be confused here, and they don’t deserve to be belittled for it.

        I had a personal exchange with Wray years ago about “belittling” confused people–going into some detail, he eventually (thoughtfully) conceded I had a point. So I’m sorry to see he’s still doing it. MMT is indubitably correct, but has many subtleties and obscurities that need careful explaining if the point is to win converts, not just to belittle people. One hopes that is the point… :)

        1. perpetualWAR

          No, Citibank converted the car note that you signed into a security. Where did they get your permission to convert that note into a security? You cannot discharge the debt if they have converted that note into a security. It is no longer a negotiable instrument.

          Someone explain how they are getting away with doing this please.

        2. Christian B

          I do not think Wray is belittling confused people. He is belittling people who think they know it all.

          1. Banana Breakfast

            If you think you know it all, you are by definition confused, or wrong, which is the same thing but without the self awareness.

            These guys don’t know they’re confused, so they’re just wrong. But approaching it in this way isn’t likely to correct either issue.

          2. Paul Boisvert

            Two points. First, if Siri believes she knows it all, and the fact is that she doesn’t know it all, then she is confused, both about that fact, and about whatever substantive things she has incorrect beliefs about (since if she weren’t confused about them, she would have the correct beliefs about them, and thus actually would know it all.) Second, Wray never belittles people who think they know it all who happen to agree with him, only ones who disagree with him.

            Third (yes, apparently I am confused about how many points I was going to make) it’s not about Wray being a bad person (which I don’t think he is) for belittling people, nor about the potential hurt feelings of those who may or may not deserve the belittling. It’s just always (always) an ineffective way to get one’s point across–not to the ones who are being belittled (who may in fact not have open minds), but to the OTHERS who are reading the exchange, and who may be honestly confused, have potentially open minds, but who will see a man espousing what is on the surface a quite confusing theory telling people who don’t get the idea (yet) that they are idiots.

            The potential convert reading that will say, well, then I must be an idiot too, cuz I don’t get it–but I’m certainly not going to waste time asking questions or pursuing it. Either it’s so hard that most people are not going to get it, or it’s wrong, or both–but if it were intelligible and worthwhile why would someone espousing it be going out of his way to be dismissive and alienating about it?

            I’m a college calculus teacher, and if I reacted the way Wray does to “dumb” questions, I’d alienate not just the (lazy, thoughtless) student who asked the question, but all the other students, who have good questions, and need to know that I always react positively (not negatively) to questions. Otherwise they will simply not ask them, not wanting to risk being humiliated, and in particular, not knowing themselves (as they are not experts) whether their questions are “dumb” (in my opinion) or not.

            So I say to virtually every question, roughly: “Good question–I can see why you might think that, it’s a natural and common mistake. Here’s the subtle point you’re missing…” Teachers who don’t do that are just not teaching as effectively as they would be if they did it. Wray honestly believes our society would be much better off if everyone understood and endorsed MMT. He can be a very effective teacher of the theory–what puzzles me is why he doesn’t choose to be more effective in how he does it, rather than less effective.

            1. Christian B

              What if one of your math students kept at you all day saying that 2+2=678? Trying to show you proof after proof? What if they wrote a blog about it and people started listening to, and believing them?

              Then someone created a radio show asking you to come on and talk about the new math and how great it is?

              There is a point where all you can do with people is be dismissive and burn the bridges so they do not creep into your town and build walmarts of stupidity.

              Can’t we all face it? Some people are just smarter at somethings than others?

            2. Lambert Strether Post author

              Wray’s books are great. And I’m sure his teaching is, too. And I’m not sure that “suffering fools gladly” is a universal recipe for successful outcomes; it might work your you, in one of your classes, but this is a public forum, and the context is different. Those committed to the “debt free money” vacuity cannot be reasoned out of their position, sadly. Mockery is appropriate in such situations.

    4. craazyboy

      ” and the “govermint” puts on a feather headdress and dances around a fire chanting “oooma ooom agooom ooom a ooom a goom” every equinox to make the world new and keep the trees working.”

      And a wise and competent guvermint would make the trees work harder every year to keep up with population growth, so we didn’t get inflation, of course. Or maybe that’s called deflation – from the tree’s standpoint.

      1. craazyman

        I thought this “exchange” was a hoax and presented here for amusement. But If it isn’t a hoax, and this really happened, then Professor Wray is just being honest. He should be commended for his honesty. Not enough people are honest these days. People make shit up and believe it! Making it up is OK but believing it, that’s where people get in trouble. They should believe less and more carefully. But if they have an honest person telling them he’s not a good talk show guest, then either find somebody else or tell him the host will argue with him forcefully, because he (the prospective guest) may actually want the PR and maybe that would be entertaining!

        1. craazyboy

          Well, I’m waiting for the part when we learn that trees want to be paid dollar bills because they think they are getting their dead relatives back.

        2. Christian B

          craazyman, why do you want to hurt people’s feelings with your terrible honesty? We need to lie to build bridges that go nowhere. We need to lie because the truth hurts and prescription opiates are hard to come by these days. We need to lie because we are 98 years old, comfortable on our deathbed, what good is the truth at such a late date.

          And where does it end? If money and debt are mere words, what does that make of god?

        3. Yves Smith

          I’m late to this thread, but having dealt over a period of months in person with people spouting “debt-free money,” and being evangelical about it, what Wray wrote is entirely plausible.

  7. BruceNY

    This post is very confusing.

    Can someone please explain to me why the ability to pay taxes with the “money” determines whether the system is asset/debt or “debt-free”?

    In an extreme case, if the U.S. said “no taxes will ever be collected again”, do we still have the same asset/debt system? I think we would. and then if you just combined the Fed and the UST, wouldn’t that then be the equivalent of a “debt free” system?

    I always understood the argument that a fiat money system needs taxes to provide value to the fiat itself. Otherwise it could gresham’d out of existence if there were defectors to another medium of exchange. But I do not understand why the existence of taxes requires the asset/debt split, which is just an accounting fiction anyway as the Fed and UST are both operating companies as it were of the same “holdco”, ie there isn’t “really” an asset/debt system in any case.

    1. Yves Smith

      People who operate a system based on MMT principles would never get rid of taxes. You need them to insure the acceptance of the currency, and you also need them to prevent money creation from leading to too much inflation. You always will have taxes if you have a government.

      1. Steven

        It seems to me that what insures the acceptance of money is the reasonable likelihood its possessor will be able to exchange it for wealth equal in value to what (s)he presumably had to give up in exchange for that money. You need taxes to counteract the (black) magic of compound interest not to underwrite the value of money. A market economy needs money primarily to facilitate the exchange of wealth not to pay taxes to governments. It has been a while but I’ve read a little bit of both Wray and Minsky. My impression is the Minsky was much more solidly fixed on the dangers of run-away creation of debt (i.e. ‘money’), than Wray.

        Wray’s colleague Michael Hudson buys into MMT – while at the same time writing extensively about the dangers of Super Imperialism, about ‘finance (a)s the new form of warfare’. In a market economy people need access to money. At the same time, in an economy that does everything possible to eliminate opportunities to earn that money by automating and off-shoring employment, I’m not sure MMT’s money creation combined with Wray’s guaranteed employment is the answer.

        Hudson seems to get that if you create money sooner or later you are going to have to create real wealth to ‘back’ it. I’m not sure Wray does.

  8. JLCG

    The assimilation of money with bananas is very helpful. Bananas rapidly rot but money is supposed not to rot though everything in nature tells us that everything decays and is transformed.
    The human desire that wealth should be perpetual is the cause of wars, murders, hangings, torture. In short the desire for something unnatural requires the use of violence.

      1. JTMcPhee

        …and apparently, as with dry and wet rot, and other molds and spores when they take root in an otherwise competent structure, money rots the souls and hearts of the people who embrace its “convenience” and customarity…

  9. Ulysses

    “But that’s not our reality.”

    Indeed. I have no dog in the fight between different camps of people looking at debt, fiat money, etc. Wray makes sense here, as far as he goes. Yet what he and far too many that study how capitalist economies work consistently forget to mention is that nothing has “real value” except labor. Even bananas! They need to be peeled, used to bake bread, bartered for other useful things, etc. Otherwise, they just rot on the ground, of no use to anyone.

    Capital doesn’t have “value” because it obliges someone to replace it later, with or without interest. It only has “value” in a system where many people are willing to exchange their labor for certain small amounts of capital, which they can then use to buy things that they don’t make themselves. It only has value in a system where the natural resources that people need to survive are not (like on craazyman’s South Sea island paradise) freely available to all. Only a very few remote regions of the world still have people living completely outside the money economy. Today, the indigenous people in these regions are fast losing their way of life as logging, mining, and other industries displace them.

    A money system cannot function without organized coercion– that allows a few to hoard many tokens of value and to deprive the rest of most of those tokens. Many people receive, either as wages for labor, or some sort of maintenance payment, a very modest amount of tokens of value. Maybe enough to live with comfort, more likely just enough to survive. The hoarders of these tokens take pains to ensure that some won’t have enough resources to even survive, so that those who labor for them are kept in fear of a similar fate if they don’t please their token-hoarding masters.

    Wray is right that money itself, whether metallic or paper, has no intrinsic value. It is merely an advanced method of keeping track of who has the power to force others to do their bidding. Money, accounting, stocks, bonds, etc. are merely representations of the fact that a few have power over many. It is the same with legal and political systems:

    “Laws and government may be considered in this, and indeed in every case as a combination of the rich to oppress the poor.”

    — Adam Smith

    1. financial matters

      I think these are good points.

      I think we also need to be careful about basing money on labor as labor can then be considered as a commodity similar to gold.

      As you point out, money is not neutral but denotes power and is probably best considered as a social and political construct.

      This is why it’s so important to try and understand where money comes from and how it is distributed.

      These are social and political decisions such as who gets to bear the brunt of various austerity measures.

    2. John Zelnicker

      @Ulysses – If you dig a bit deeper into Wray’s writings, he does indeed deal with labor as the only thing that has “real value”. The value of any money eventually devolves to how much of the money thing does it take to buy one unit of labor power.

      1. Paul Boisvert

        …and, of course, the whole basis of Marx’s critique of capitalism is that in a capitalist society labor-power IS a commodity, and (essentially) nothing but a commodity. Laudably, Wray’s (and MMT’s) take on political economy is about as socialist as you can get without actually being a socialist (or at least admitting it publicly.) This is why it’s such a step in the right direction!

        1. Lambert Strether Post author

          The Jobs Guarantee, advocated by many MMTers, would establish a baseline for both wages and working conditions. That’s something simply raising the minimum wage would not do. It’s also something the BIG doesn’t do. The JG tackles the wage relation, central to capitalist society.

  10. alex morfesis

    Prof Wray nails it…but first a word from our sponsors…the Bernaze sauce…our current federal reserve system was sold to us as a “better system” then existed at the time…which is quite true…before the fed there was JP Morgan, before JP there was the guy who would not finance the run of railroad tracks across sacred native lands (mr Drexel) who was asked to step in front of one of his own moving trains and let it hit him so that “progress” could be made…the local “clearing house” system that existed between local banks was quickly becoming a problem when the average shmoe could get away from the “grasp” of the local cabal by getting on a train or a vessel that soon was moving at faster than jogging speed…one of my beefs with Marx is that he never moved faster than 12 miles per hour nor ever read under the power of a light bulb…the world moves a bit faster than that today…enough of the commercial aside…

    most folks have been sold that those paper things in your pocket are good as gold…to me they are better than gold…gold is heavy and hard to chip away at, and can have other items in it, and quite frankly, most people do not know how to scrap and test a piece of gold to make sure it is not 8 ct vs 18 ct…

    there is a publication that anyone who wants to understand money can pull up from a simple search

    a counting house dictionary…by Richard Bithell published by Goerge Routledge & sons…

    governments always create original issue discount zero paper when they “circulate” money declared as “legal tender”…

    as the purported chinese saying goes, the most valuable government debts are backed by silver bullets…

    the value of having an insane military budget that flexes its muscle on a regular basis unfortunately, is that historically, currency is not backed by gold…but by might…might being the capacity to extract “tribute” from parties, usually in the name of “taxes” but mostly in the name of plutocracy…most people complain about taxes after coming across some bureaucrat who acts as if they are there because of some patronage…(which might be true) creating frustration on the part of the average person who does not understand that the dollar you just got from your enterprise, job or commerce is only worth 80 cents since you will owe the government “taxes”(80 cents is a random, plucked from the sky number)…

    so…if you pay interest or get an original issue discounted zero note from the government(any government) you are still “paying”…it is not free…

    the value of reading the few hundred pages of definitions in the “counting house dictionary” is that you will find or maybe come to understand the difference between currency and legal tender…

    during the coup against jfk in the last 6 months of his administration, the treasury had its rights to raise capital yanked by congress in support of the federal reserve system.

    the right of the lord of the manor to “first nites” has evolved into a more (somewhat) civilized right of “first dollar”…if you breath, you owe tribute…”taxes” being the new and improved operative word for “tribute”…just like being a serf in the minds of some is somehow not having been a slave…(bernaze at its best…)

    and the “greenbax” crowd also tends to not want to do any actual reading…there was something called “inflation” that happened to the north…oh somewhere around 185% over a little more than 4 years…most folks reading this would scream if inflation was 18.5% over four years…not 10x that…

    living in DC was not cheap and most supreme court justices used “rooming houses” because of the costs in the Civil War(there were other reasons, since the Court system required the Justices to travel and do other work in various “circuits”), but the idea is that the cost of housing was not cheap due to inflation, and although it was war, the country had many fits and starts between the default of the debt of the southern states(hey we lost the war, so we aint payin…pass the dr pepper…) and the global disruptions from the collapse of the local “latin currency union” in europe with demise of the nobility, and the fall of the raj and the fall of the chinese monarchy…and the death/murder of JP Morgan which led to the actual creation of the federal reserve system, now a wee bit past 100 years old…

    ah the good olde days of chaos and money…

    as Prof Wray sorta points out in some of his writings…the problem with money or “currency” is that it is not local…and he argues that local “cabals” are better than some giant “central” committee or federal reserve system…

    the US federal reserve system is the best lousy system the world has seen…they scrap and skim less historically (or used to…) than any system in the 5000 to 5 million years of human civilization(depending on what you believe about how long we humans have been “existing”)

    could the system be better…most certainly…the fed has devolved into some notion about “full employment”…historically, that “full employment” mandate used to be around 2.5% to 3%…post volcker national banking act of 1979/1980/1981, it became 5%…

    and we have not recovered since…

    most folks make it easy for the “banking” system to run their lives…they have been sold on “convenience”(more bernaze)…so just do things “online” and with only “one” institution, for “your benefit”…duh…

    if most folks kept three or four accounts instead of one, the “banking” system would suddenly be much nicer to the average “consumer” and would start treating folks like “citizens again…

    anyway…my vote is for Prof Wray, and is W(r)ay of saying things…life is too short to be nice all the time…read the “counting house dictionary” and then have a hissy fit if you must…but you probably wont…either way…you probably wont read the 300 pages…or you probably will have no need for a hissy fit when you see the long history of currency and the differences between legal tender and currency and money…they are not the same thing…

    mankind bounced at the edge of semi nomadic life for thousands of years, never quite getting over the hump…in the 100 years of the mandate of the US Federal Reserve system, we have gone from the smell of horse manure on the brick roads to the smell of smog…and hot water on tap…may not be perfect…but most folks from 100 years ago would laugh at our complaints…

    time for some bagels…

    1. beene

      “as Prof Wray sorta points out in some of his writings…the problem with money or “currency” is that it is not local…and he argues that local “cabals” are better than some giant “central” committee or federal reserve system…

      the US federal reserve system is the best lousy system the world has seen…they scrap and skim less historically (or used to…) than any system in the 5000 to 5 million years of human civilization(depending on what you believe about how long we humans have been “existing”)”

      If during the 2008 debt crisis would a country that depends on public spending be in better shape if those billions of fiat had been given to the taxpayer who would mostly spent it into the economy or what the Federal Reserve insisted that we save an preserve a the parasitic banking system?

      1. alex morfesis

        You are correct…tried to convince a few folks who could have made it happen that issuing some form of treasury bill that homeowners who were in trouble could tap into and use to pay part of their mortgage…in 250 dollar increments up to four units or a grand per month for up to 30 mths would have easily stabilized the housing market and the t bills (or some form of financial instrument) would have a student loan type no bankruptcy clause…that was before i dug into prime brokerage and derivative operations of the market and realized it all got broken on purpose

  11. Fabian Incerto

    The problem is not that Randall Wray’s concepts are so complex. Actually they are quite simple. The problem is not in understanding them but integrating them. Here is where Randall Wray meets his impasse. He assumes that he is not understood and then takes an arrogant stance. It is not misunderstanding that is the voice that is being raised. It is the complexity of the application into the complex systems of our society.

    Randall Wray does not seem to have the intellectual capacity to dialogue outside of his silo. I personally wish he, or someone who agrees with him, would be willing to embrace outside disciplines to further a step forward in our economic challenges.

    I assume his arrogance is a defense mechanism to the challenges of true dialogue and interdisciplinary debate. What is not lacking in Randall Wrays writings is clarification but open dialogue outside of his intellectual silo. This has been and will be MMT’s challenge. It may prove to be too simplistic in and of itself to be able to carry on that challenge. Economists tend to be thin skinned because it truly is a young discipline, or maybe more correctly put, a young discipline that has had to step outside of its own arena and into cross disciplines in its dialogue.

    1. Yves Smith

      I have to tell you, anyone who uses the term “debt free money” does not know what they are talking about and have not bothered looking at some of the mechanisms the MMT people use, most important, showing through double entry bookkeeping how transactions move in a banking system and how the government creates money.

      You incorrectly posit that he has been understood. They very existence of the expression “debt free money” says the people who use it have not bothered giving MMT any sort of look.

      So Wray getting a call from them is like a scientist getting a call from phrenologers asking him to discuss phernology as if it were a serious idea. I agree Wray is too visibly upset to help his cause with people who are new to this debate, but his annoyance is fully justified.

  12. Charles Fasola

    Wray is so smug and sure his views cannot be challenged. However, Huber debunks MMT and Wray’s opinions more than adaquately. He and MMT’s prescriptions are not reality based descriptions of government borrowing and spending.
    As for the comment above concerning the Federal Reserve being defacto an arm of government, the statement is not reality based.

    1. bob

      Well, he’s smug. And you’re not. Therefore, he can’t possibly say anything that you would even bother to consider.

      Pot. Kettle. Black.

      “As for the comment above concerning the Federal Reserve being defacto an arm of government, the statement is not reality based.”

      You’d have to prove that. With something other than smug. But, seeing as how you’ve adopted the smuggest is rightest mantra, how can you possibly improve on that?

      I know, I probably not even allowed to enter the smug contest. I hardly know the rules.

      Is “not reality based” now some sort of “god says” trick? Reality is the new God, and reality will not allow anything that is not reality based. Therefore, any mention, or discussion of anything deemed “not reality based” is to simply be dismissed as heresy.

      Burning at the stake is optional, but preferred.

      1. Charles Fasola

        And a pike driven is most appropriate in yout case. If you need anymore proof than reality that the FED is private then arguing the point becomes a waste of time.
        When you make an effort to educate yourself then your comments might be worth condidering..

        1. Skippy

          Insinuations are not to be confused with reality nor the basis for arbitration of it.

          Skippy…. bricks and mortar do not have agency….Greenspan did…

        2. bob

          A pike isn’t going to change reality.

          Although, you do wield that word “reality” with the certainty of a sword.

          You get to define “reality”, without defining it at all.

          Add a few parables explaining your new reality to us all you you could quality for God status. Probably too much work, is it your day of rest yet?

          “reality” as proof! Same way they determined that the earth was the center of the universe-

          “All the stars revolve around us! How can you argue with that?”

          1. Charles Fasola

            The reality, genius, is simply the FED is not in any way shape or form a public/government institution. You are obviously oblivious to the many statements made by individuals of far greater knowledge of the subject since the creation of it. To be perfectly blunt, you show yourself to be misinformed, and oblivious to reality where the FED is concerned.

  13. Keith

    If positive money were not a threat, why were the two Presidents that wanted it assassinated?
    (Lincoln and Kennedy)

    If the current monetary system was a good one, why is the way it works kept so secret?

    If economists understood the way money is created and destroyed on bank balance sheets they might not have been blind to 2008.

    Current economic thinking treats banks as intermediaries.

    No one seems to able to see the dangers of housing booms and busts in progress around the world due to their ignorance of money.

    In the housing boom phase there is massive money creation by banks. This feeds into the general economy and creates a positive feedback loop driving house prices higher still.

    In the housing bust phase there is money destruction on bank balance sheets. This sucks money out of the economy and creates another positive feedback loop driving house prices down further still.

    Debt based money requires prudent lending by bankers and they just can’t manage it:

    “What is wrong with lending more money into the Chinese stock market?” Chinese banker recently
    “What is wrong with lending more money into real estate?” Chinese banker last year
    “What is wrong with lending more money to Greece?” European banker pre-2010
    “What is wrong with a NINA (no income no asset) mortgage?” US banker pre-2008
    “What is wrong with lending more money into real estate?” US banker pre-2008
    “What is wrong with lending more money into real estate?” Irish banker pre-2008
    “What is wrong with lending more money into real estate?” Spanish banker pre-2008
    “What is wrong with lending more money into real estate?” Japanese banker pre-1989
    “What is wrong with lending more money into real estate?” UK banker pre-1989
    “What is wrong with lending more money into the US stock market?” US banker pre-1929

    Understand the current monetary system designed by bankers for bankers.

    They take a cut at every step but still manage to go bankrupt and need unconditional bailouts.

    Understand the current racket:

    Hidden secrets of money web-site – videos 1 to 4.

    Episode 4 describes the current monetary system.

    Steve Forbes – Editor in Chief of Forbes Magazine endorses episode 4 (can be seen at the end) so it has very good credentials. He thinks the current monetary system is going to collapse too, we are going to need something else very soon.

    If you want to get in deeper read:

    “Where does money come from” available from Amazon

    1. bob

      “Steve Forbes – Editor in Chief of Forbes Magazine endorses episode 4 (can be seen at the end) so it has very good credentials”

      Yes, steve forbes will save us all with his “truth”.

      Is this like some non-sequitur stream of consciousness designed to completely baffle with bullshit?

      It contradicts itself-

      “If the current monetary system was a good one, why is the way it works kept so secret?”

      “Understand the current racket:

      Hidden secrets of money web-site – videos 1 to 4.”

      Wow, youtube videos? Is that like some sort of super encryption? Hardly anyone can find that. Super-duper top secret eyes only.

      Did Jesus drop the links into your head while you were sleeping? Are you really a prophet? Or, more likely a tool of the great teacher steve forbes?


      Go back to the beginning. It’s very simple really, and no secrets involved.


  14. craazyman

    shit already enough peanut gallery confusion and confusion about confusion and confusion about the confusion about the confusion. We need an unbiased third party to come in here and explain all this to us so we all agree. Where the hell is Andrew Dittmer? He can explain this so every single one of us understands and agrees with each other on every point. Each comment we post would be “That’s right”. There’d be 100 “That’s right” comments down the thread of comments. It would look like a high-riise building, but it would go down, not up. The only reason this does’t happen is either 1) he as better thiings to do or 2) people like being confused. Maybe both. If it’s only #2, people would pretend they don’t understand just to argue. And even Andrew Dittmer couldn”t help us. But nobody, if they were honest, could say they donn’t understand. Even the Libertarian what was his name “Caine” or soemthing. Even he, when Andrew Dittmer interviewed him here, even he had to agree he was wrong. That was impressive.

  15. Dr. Roberts

    If I were to sum up the difference between the MMT folks and the Debt-free money folks without delving into the semantic arguments it would be this:

    MMT people want to use regulation to minimize the rents extracted from the financial system.

    Debt-free money people want to use rents extracted from the financial system to finance the state.

    1. Benedict@Large

      Sorry. There’s no such thing as debt-free money, so it doesn’t matter what they want.

      And your claim regarding MMT is absurd also. MMT is a description of how money works. Nothing more. It is definitely not a wish list of what anyone (MMTers included) want it to do.

        1. beene

          Nay, coins are not debt instruments, and they exist.

          Lambert explain how my statement “concise statement of fact between” is without meaning.


          1. Skippy

            Oh boy the old AMI argument, try coinage is an insignificant proportion of the M supply which is complicated by classifying capital as either debt or equity – trust dynamics in a electronic medium…

            1. beene

              Skippy, it is insignificant proportion, but still fiat without debt, and the argument was it did not exist.

              1. Skippy

                What you seem to negate is the term in question is not empiric and subject to application i.e. which period of time line is applicable in application and what relevance does that have with the currant state of the monetary system.

                It starts to devolve into is the christ figure a deity or not and be worshiped… all whilst the empire rolls on….

                Again if issued as a tax credit from antiquity whats the point… philosophical preference – ?????

        2. beene

          The follow quote from Wiki about MMT confirms what Dr. Roberts stated in his post.

          “Modern Monetary Theory (MMT or Modern Money Theory), also known as neochartalism, is an economic theory that details the procedures and consequences of using government-issued tokens as the unit of money, i.e., fiat money. According to modern monetary theory, “governments with the power to issue their own currency are always solvent, and can afford to buy anything for sale in their domestic unit of account even though they may face inflationary and political constraints”.[1] In contrast to orthodox monetarism, MMT explains inflation as being caused primarily by resource constraints rather than monetary expansion.

          MMT aims to describe and analyze modern economies in which the national currency is fiat money, established and created by the government. In many systems, banks can create money but these horizontal transactions do not increase net financial assets as assets are offset by liabilities. In addition to deficit spending, valuation effects e.g. growth in stock price can increase net financial assets. In MMT, vertical money (see below) enters circulation through government spending. Taxation and its legal tender power to discharge debt establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that must be met. In addition, fines, fees and licenses create demand for the currency. This can be a currency issued by the government, or a foreign currency such as the euro.[2][3] An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government’s deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities per se.”


        1. beene

          And if you were half as honest as you are brilliant you would admit what Dr. Roberts said is correct and even quoted in the last sentence of the Wiki quote I posted.

  16. Benedict@Large

    Debt-free money is a double-entry transaction with only one side. What this means is that if you accept accounting as a method for tracking money, debt-free money cannot exist.

    Yet over and over, we hear these people jumping up on their various podiums claiming the solution to our woes is debt-free money, not understanding that to make this statement, one also has to deny accounting as our method for tracking money. Is it any wonder then that, having explained this away 100 times, Wray gets frustrated (and perhaps a bit nasty) at being asked to explain in again? What was it about the first 100 times that you weren’t listening to?

    This is not a minor point, Hair-brained schemes like debt-free money, advanced by people who simply refuse to do their homework, cloud the discussion of how money actually works, and in doing so, cloud the search for solutions to our economic quagmire. They need to be put down (yes. repeatedly) if we’re ever going to restore the proper functioning of our economy.

    1. Charles Fasola

      Possibly you should delve a bit into the history of money and its creation before making such blanket and dogmatic statements. You and other MMT disciples are similar to those who believe their religious beliefs are the only true ones. In fact the best example is you and other like minded believers are like members of a cult.

      1. Skippy

        The emotive plea coming from the stripes that think gold is a store of value its a bit rich.

        Historically gold was a substitute in weight for a commodity – service…. wheat, e.g. GLD was just a controllable medium for the state to regulate taxes.

        Skippy…. loving the maypole thingy of taking ones own ideological perfidy, flinging at others and then pointing at it…

  17. Synoia

    Interesting, this is what I believed i’ve learned from the exchange above:

    1. Bitcoin, and its imitators, is not money.
    2. The discussion in Congress about the US’ “debt limit” is simultaneously a discussion about the US’ “wealth limit” (Wit an adjustment for the trade imbalance).
    3. Randell Wray is not alone is his demanding behavior.

    The problem with written communication is that the contest and tone of the message is either missing or distorted. “Wink, wink, nudge, nudge.”

    Thus I am slow, and probably appear somewhat stupid, to form conclusions as to the tone of the message, and try to understand the facts presented.

    1. Yves Smith

      Wray is not the best teacher of the MMT crowd, but his impatience results from the fact that MMT and the debt free money fallacy have been discussed in great depth by the MMT types, and “debt free money” is just incoherent. If you use double entry bookkeeping to show how banking and government debt work, as they have repeatedly, you can show that the MMT principles are correct and how transactions move between parties.

      Money is always created as someone else’s liability. A bar chit or a credit account from a local merchant is a form of money.

  18. Norb

    Whenever we talk about money, we are really talking about social engineering. Money is a tool. It is a powerful instrument used to shape society. As current events are demonstrating, probably the most powerful.

    The genius of neoliberalism has been the ability of it adherents to obfuscate that simple fact. They have radically re-engineered society in the name of individualism while at the same time downplayed the role of social engineering.

    Confusion reigns because most of us never give the origin of money a second thought. We accept the going social norms and uncritically accept the current value of our “money” as a thing outside of our control. Thus the neoliberal narrative of everyone deserving exactly the wage they are paid for their labor. Unfair wages do not exist. It is easy to accept this notion as it takes no effort. It is the reality which is reinforced day in and day out.

    Without reorienting the role of government in the service of the people to ensure a just society, and using money creating powers to ensure that end, we are left to navigate the minefields of debt on our own.

    1. Ulysses

      “Whenever we talk about money, we are really talking about social engineering. Money is a tool. It is a powerful instrument used to shape society.”

      Well said! It is easy to imagine a money-free world, but only if one is capable of imagining a radically less authoritarian social structure than any we have known for centuries.

      I very much agree with Yves and others who point out that MMT is merely descriptive, not prescriptive. Yet I think some people are frustrated by this. What is the point of understanding how money creation works as a tool of the powerful if we don’t start to forge our own, different tools to counter that power? Are we really content to stop at mere analysis of a current social reality without demanding a program to change its worst aspects? Doesn’t such a programmatic approach have to do more than to simply beseech the powerful few, who control the money system, to be more humane?

      People loved John Lennon’s song Imagine, not because the lyrics were rigorously analytical, but because they were exhilaratingly unfettered by the status quo. Properly understanding “our reality” is always important, but only as a first step towards changing it when it no longer suits our needs!

        1. Ulysses

          Not quite sure if I understand precisely the point of the analogy. Do you mean that scholars– who examine unpleasant social realities– aren’t often, and maybe should never be, the same people who lead revolutions to change those realities?

          If so, sure, makes sense to me! Although I should say that I’m generally in agreement with the polemic written by Hedges in his Death of the Liberal Class: where he points out how most academics, politicians, clergy, etc. have retreated too far into their own “comfort zones” to help the rest of us cope with, let alone resist, the neoliberal assault on humanity.

          “If not now, when? If not us, who?”

          [Grafitti observed in the late 90’s on Wickenden Street in Providence, RI]

          1. Norb

            I get the point. It says some people can’t do it all. We have the ideas and the analysis- what now-you want me to actually do something more like changing society? Its a defensive response to a criticism of ones work. It is the self-destruct mechanism built into progressive ideology.

            The larger point is that criticism must lead to the creation of something else- a different way of living. I don’t see any billionaires creating fair workplaces and advocating social policies that would actually help common people. So why do we support them in any way?

            Using money and resources to create a positive and livable future for all should be the goal of every sane individual. It should be the litmus test for future inclusion into any social structure leading into the future. How else do you keep those responsible for the current destruction from undermining anything new or different that could be built?

            The financial propaganda war has been to convince common people that they too can become millionaires. To “invest” their savings in the stock market and 401k’s. What a bunch of mopes we are. When criminals run the show, its only a matter of time before everyone is robbed- one way or another.

  19. DP from Durbs


    Could anyone point me towards some accessible introductory materials on MMT? Keeping in mind that I’m a bit thick when it comes to economics.

    Any help would be muchly appreciated.


  20. Norbert Haering

    I posted a critical comment about six hours ago. Is there any reason it did not get cleared? I did not use any dirty words.

  21. TarheelDem

    Did I miss something?

    I remember MMT being about the sheer lunacy of Grover Norquist’s “no taxes” pledge. Not about bananas or even trillion-dollar coins. Those only came up when Congress wanted to strangle the economy in the crib. Pardon me, default on US debts.

    This article from Randall Wray is far from clarifying.

    1. Yves Smith

      Yes, you did miss something. It looks like you have not bothered to do even basic homework on MMT. And we’ve posted on it for years, and we are far from the only source, so the material is out there.

  22. jgordon

    Debt-based money isn’t a bad thing; if we don’t have debts to each other, we don’t have a society. On the other hand though interest bearing money should not exist at all. There is a fundamental mismatch between a symbiotic, made-up mathematical system that expands exponentially forever, and the systems of the natural world that are only finite. Sure, it starts out well enough, when the differences are small and when the extraction and processing of natural resources is growing at a quick enough pace–but at some point the natural world is exhausted while the debts, credit markets, and interests due continue growing at an exponential pace.

    This is a recipe for instability and then collapse when the powers that be can no longer duct tape things together. If any were wondering why things have been so friggin weird and unstable with the economy for the past ten years, this is one of the root causes, even deeper than simple oligarchical looting or lousy government policies (though those are certainly contributor factors).

    1. craazyboy

      You got it backwards. If you can borrow the next 500 years of resources and labor at low or no interest, and spend it today, the world runs out of resources before your 500 years of payments are due, and with no one left to pay off, you can revel in your deal making aptitude in the after life.

      Besides, there is “time value of money”. Ask anyone that wants to buy a car today but doesn’t have the money. She can wait until she saves up the car price in full, or take out a loan with interest and buy the car now. The interest is the cost of immediate gratification.

          1. Skippy

            Your complaint seems more about the ideology which enabled unethical money creation aka control fraud…. rather than casual links…

              1. Skippy

                Lambert…. I mean the bastardization of risk tools and crunchy frog product for the increased remuneration of the executive suite… which strangely enough is highly correlated to credit creation…

                Skippy… Black does include financial instruments in the mix…

                  1. Skippy


                    Would add loaning out to friends to have them buy your crunchy frog and thus increase its notional price, which can then be realized for a profit… fits the description.

                    Skippy… file under corruption…

          2. Skippy

            In addition I would note the divergence between productivity and wages around the early 70s and the advent of Rubinomics.

          3. Skippy

            The connection you seek might be wages as a correlation of the increase in credit, rather than the profit taking which has been the feature for some time…. just saying…

      1. Christian B

        You can only borrow resources from the future generations, so the interest that will be paid is there, just more difficult to see. But they will usually pay in a lack of those resources.

        1. Skippy

          Well there is whole colonialism thingy which was only magnified by the “free market” trope…

          Skippy…. yet at the end of the day its a distribution drama and not interest.

        2. JTMcPhee

          Might one offer that one does not “borrow resources from future generations?” Seems more accurate to describe it as what is known in old law as a “conversion…” http://definitions.uslegal.com/c/conversion/ Oil, trees, arable land and soils, potable water, breathable air, more than a tiny set of living species surviving maybe around the volcanic jets at the tectonic plate boundaries in the deepest parts of the acidified oceans?

          But as with so much of what grieves people about the covetousness and grasping and overbearing of others, one has zero rights, no rights, none at all, if there is no remedy — or if the aggrieved party, those future generations, is unfortunately not currently “in esse,” and only very conditionally, given how we current occupants are mucking up the planet, even “in posse…” — those future generations, what enforcers can they bring out to hale the malefactors of today into court? and how will they levy any kind of remedy or judgment against the rotting but mostly satiated carcasses or long-dissipated ashes of those thieves who are “borrowing” in the present?

      2. jgordon

        Right, buying a car on credit and paying the interest for it–that was the point. It seems innocuous enough with one transaction, but when you do the math it creates an exponentially expanding credit system in total. The natural world however is not exponentially expanding at the same time.

        In other words, taking out a loan on a car and paying interest on it = eventual systemic collapse. I got this idea from Chris Martenson’s site, where there are charts showing total credit market growth over the past few decades:


        You’ll see a near perfect exponential curve fit for said credit markets, except for the past few years, when things went haywire and the greater depression crisis got started.

        1. JTMcPhee

          The NYT says in effect we are all screwed, those of us not at the pinnacle of the “growth” pyramid and even them, if you carry the interest forward:

          “Imagining a world without growth,” in the context of walking away from addiction to combustion-as-resource, http://www.nytimes.com/2015/12/02/business/economy/imagining-a-world-without-growth.html?_r=0 (I note that Porter’s piece is apparently getting scant play in the wider MSM so far — oh well, it’s a Dec. 3 entry, and not “good news…”, http://www.deccanherald.com/content/515242/imagining-world-growth.html)

          Could the world order survive without growing?

          It’s hard to imagine now, but humanity made do with little or no economic growth for thousands of years. In Byzantium and Egypt, income per capita at the end of the first millennium was lower than at the dawn of the Christian Era. Much of Europe experienced no growth at all in the 500 years that preceded the Industrial Revolution. In India, real incomes per person shrank continuously from the early 17th through the late 19th century.

          As world leaders gather in Paris to hash out an agreement to hold down and ultimately stop the emissions of heat-trapping greenhouse gases that threaten to make Earth increasingly inhospitable for humanity, there is a question that is unlikely to be openly discussed at the two-week conclave convened by the United Nations. But it is nonetheless hanging in the air: Could civilization, as we know it, survive such an experience again?

          The answer, simply, is no.

          So humanity really is like a big old malignant cancer, no alternative to “growth” as the author assumes it, even if it kills us…

          I’d note that as with all the other expostulations of those who serve the Overlords, this is a pretty comfy position for currently rich sh_ts to take, since they will garner more and more of the consumables of that politcal-economic organization, and be either comfortably deceased with the best of care and palliation, and hence immune to restitution, punishment or consequence after a life of pleasure and very little work (except in an odd reading of the Newtonian definition, W = F x D), or able to migrate their consciousnesses and maybe even largely immortal physical carcasses to some “Elysium” or “terraformed nearby planet,” or maybe a cyber-existence where the pleasure button is jammed down with a fork and a shot of Superglue…

          I guess the Second Law and Murphy’s reformulation of it maybe have an iron grip on reality that the heedless hyperkleptocracy evades for a time… takes a lot of energy (does that Energy = Money x C Squared?) to transfer entropy onto the backs of others…

          1. BadBentham

            I would say that, in general, economic growth (and prosperity) is preferable, as long as it is backed by the necessary ressources. However, this statement strongly differs from the current system that is “Either grow, or Die”, with the fundamental function of Capitalist “Return of Investment ” , meaning in praxis that “growth” is for the other 99% necessary to retain just the current status quo.

  23. Pelham

    “Government cannot spend ‘bank money’; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves. Central bank reserves are the liability of the central bank—which is a branch of government.”

    So if the government is writing checks on its deposit account at the Fed, and the Fed’s reserves are what the government deposits, where do the deposits come from? Tax payments, perhaps? Then what do taxpayers pay their taxes with? Money issued by the government, right? But I thought all money in the real economy was created by private banks making loans by typing numbers into a borrower’s account.

    It’s all Alice in Wonderland. We need a banking and money system that any 10-year-old can understand. With any complexity beyond that it’s just a license to run in infinite circles and tangents, empowering a few at the expense of everyone else.

    1. Skippy

      What is monetarists and quasi monetarists driving the car with a neoliberal GPS satnav say about the direction we have all been travailing in.

    2. jgordon

      Well that complexity is exactly the point, isn’t it? A simple system provides few opportunities for looting, graft, and fraud. Therefore a simple system is simply out of the question.

      Although along with that above point, systems tend to grow in complexity over time even absent any nefarious intent. The Administrator’s assistant needs an assistant, and then the assistant’s assistant needs assistants; it’s like water rolling downhill. And then like fungus Strategic Vision Coordinators for the East Coast etc start popping up out of nowhere and multiplying in organizations, and these people need assistants whose assistants eventually end up needing assistants. And then colleges that are already overburdened with administrators feel the need to hire angry Gender Studies professors who also need various assistants…

      This sort of progress continues as long as their is abundant free energy and resources to feed into the system. And of course the more such complexity is gained the opportunities for waste and parasites there are in the system. In fact, anytime such an over abundance is present, such pollution builds up in the system–that’s exactly what pollution is–the missallocation and over abundance of energy and resources–whether in industrial/ecological processes or in social processes. Eventually the algae bloom gobbles up all the available resources and then whole system quickly collapses and decomplexifies though. That’s about where we are in story right now.

      1. Norb

        The algae bloom example is a good one. The simple story of an algae bloom filling a pond clearly demonstrates the power of exponential growth and how system collapse comes quickly. When will the pond be full? On the last doubling- from half to full. Half full is not so bad? We still have the other half as the reasoning goes. What hubris. The human mind has been conditioned thru evolution to respond to rapid change most easily. Slower changes not so much. One more reason to dislike our neoliberal overlords- using our own evolutionary deficiency against us.

        Your description of our current complex system rings true. My feeling is that we are headed for a great unwinding. I think in the future we are going to have a lot less assistants and many more farmers- people working the land with animals again. Not such a bad thing if we are given the chance.

  24. Pau Hirschman

    So when does the expansion of the Fed’s balance sheet turn against the very notion of keeping a serious ledger book? Now at nearly 5 trillion, the ledger book is still respected by creditors–which is pretty impressive. But can the ledger book expand indefinitely, with no concern for destroying credibility? Money is debt, and debt is a promise to pay a creditor. Mustn’t a time come when people (and govts) no longer believe the Fed can “manage” the flow of world debt by buying this or that asset (now that it has shown itself willing to buy whatever assets it needs to in order to maintain confidence in “the system”) simply by expanding its balance sheet? When people come to believe the Fed’s promise is an empty act?

  25. John

    Christmas is coming and I want my pony. I have been saving my magic unicorn dollars which are debt free so I can buy my pony so I won’t have to borrow any money from nasty Mr. Bankster. Mr. Market won’t get involved because he likes double entry bookkeeping. And I won’t get involved with that because I don’t like the negativity of the debit side of a balance sheet….in fact I don’t want any negativity at all..I only want sunny days, magic unicorns and my pony. Why does Mr. Wray have to be such a downer with all his debt negativity?

  26. Bobbo

    Mr. Wray suggests three times that the central bank is a branch of government. That is demonstrably false in the case of the Federal Reserve. The Federal Reserve is a bank of the banks, by the banks, for the banks. The public should be immediately suspicious of any economist who suggests otherwise.

    1. Lambert Strether Post author

      From the post:

      “Congress to its creature, the Fed”

      “Congress amends the Federal Reserve Act, dictating that the Fed”

      These statements in no way suggest that the Fed is a “branch of government” (of which there are three: Executive, Legislative, and Judicial.”

      Please just don’t outright make stuff up, mkay?

      1. Bobbo

        Lambert, three direct quotes which show I did not “outright make stuff up”:

        Central bank reserves are the liability of the central bank—which is a branch of government.

        As the central bank is a branch of government, it is the government’s own IOU that the Treasury is spending.

        our overdraft at your bank is a loan; there is no economic reason why the central bank branch of government cannot allow an overdraft by the treasury branch of government to spend funds already budgeted by the elected representatives and signed by the head of the administrative branch of government.

        1. Yves Smith

          The Board of Governors is a government body. Monetary policy is implemented by the Fed’s regional banks, most importantly, by the New York Fed.

          The regional Feds are most assuredly creatures of Congress. Look at how Congress just voted to cut the dividends the regional Feds pay to member banks with more than $5 billion in assets. The member banks had no say in that decision.

          The member banks hold NON-VOTING preferred stock. They have no formal governance rights, although in practice, as we know, the Fed cares a ton more about banks than about the real economy. But if you look at its charter, the safety and soundness of the banking system was always its #1 duty. That has been perversely interpreted under Greenspan, and it’s stuck, to mean the Fed should help boost bank profits (as opposed to make sure they don’t go bankrupt, which means making sure they have an adequate level of profits and loss reserves).

          1. Charles Fasola

            A simple question then, who comprises that board? When you look you might find the defacto answer as to who really controls the fed.

  27. Min

    I think that there is a difference in the definition of debt free money here. The debt free money people mean money that is not borrowed; for instance, coins and currency that the Treasury creates. Wray means money that carries no obligation by the issuer. Both are using common meanings of debt, but different ones.

  28. econoclasm

    What a strange thread.

    I am no MMT’er, but I thought it was a good article, written with humour.

    I respect Wray as an academic doing good work in his field.

    He was nice enough to try to wriggle out of the interview, rather than simply ignoring the request, which is what a lot of people would have done.

    (MMT does fall a bit short re: Bitcoin, though.)

  29. backwardsevolution

    Reading the post and the comments reminded me of why I seldom visit this site. MMT is the law here. If you disagree, you will be rudely shouted down.

    1. Skippy

      MMT unlike many economic schools opinions are not laws, but a description of the sovereign payment system. Many from said economic schools don’t even have a functional model of the financial system, but are quite happy to opine about everything else under the sun, real money, human nature, et al.

      Skippy… I guess some think their personal bias is afforded more gravitas than is warranted… we have religion for that pursuit.

      1. Yves Smith

        I’m not.

        I have cited Michael Schrage (technology expert and long-standing colleague) who states that businesses need to fire 15% of their customers because they are too high maintenance. The underlying problem is either that they are cheap and unduly demanding, or they want the service provider to be something other than it is, which leads them to be abusive. The business is much better served getting rid of those that make undue demands on its resources and finding better customers.

        Or as Barry Ritholtz says, “Embrace the churn.”

        He has self-identified as part of that 15%.

    2. Yves Smith

      No, your comment is utter projection. Who has been doing the yelling in this thread? The MMT opponents.

      We insist on honest argumentation here, which means arguments that are substantiated and no straw manning. Readers who can’t do that, and MMT threads seem to attract them, are indeed not welcome.

      Wray has a very large body of work as do all the leading MMT writers, both academic and more popular work, that lays out his theory in detail. I have yet to find an MMT opponent who represents MMT accurately in trying to rebut it.

      One can argue with some of policies that MMT advocates are interested in, for instance, Wray’s idea of a jobs guarantee, but that is ancillary to MMT. Similarly, post Keynesians (who despite the way the name sounds are close adherents of the original Keynes) believe that deficit spending is necessary most of the time. But how you engage in deficit spending is very much open to discussion.

      MMT is on vastly firmer and more demonstrable grounds than macroeconomics because it is descriptive. It lays out how monetary operations work in a fiat currency. Saying you disagree with MMT is like saying you disagree with electrical wiring.

      If you deal with MMT accurately and honestly, you’ll have an audience. But you don’t come close to meeting that standard.

      I suggest you read another site. You aren’t willing to do the work to understand a system that is at odds with your preconceived notions.

  30. washunate

    This is some fascinating morning reading. We are all clearly procrastinating on our Christmas shopping.

    But seriously, I think the implication of Wray’s position is what a lot of people who use MMT ideas for policy advocacy do not fully take into account. Wray suggests money is a unit of account and a means of exchange, but not a store of value. He’s interested in defining it as transactional, not wealth. Nothing wrong with that; it’s just semantics, creating a clear distinction between the English language words “money” and “wealth”. An FRN is money, an ASE is wealth. A bank account is money, a deed for land is wealth. Official government reserves get a little muddled here since gold is money in the international financial system, but generally, this is a pretty clear academic definition.

    But the implication is that you can have significant changes/volatility/etc. in monetary prices if the money is not distributed fairly/efficiently/whatever. That inflation (or whatever word we want to use) is at the heart of the looting. Our power structure utilizes MMT. Everyone in Washington knows that federal spending is not constrained by taxation. We have transferred trillions of dollars worth of wealth to connected insiders in finance, defense, healthcare, agribusiness, real estate, energy, and so forth utilizing the principles of state money.

    1. BadBentham

      Actually, I would say it is more than just semantics. The issue is that money in general IS considered as (THE only!) measure of wealth, and “growth”, while a deed for land in itself is considered to have NO “value” at all. With the dark “joke” that the land is indeed a “positive” entity in itself, and can grow and prosper, while the money system as a whole is fundamentally a zero sum game. – Marx,e.g., coins the term “fetishism” to address the fundamental problems of such logic.

      1. washunate

        I agree with you that it makes the most sense to use the national currency unit as a common denominator in measuring the value of things. The inherent inability to put everything into a cost-benefits calculation is an important critique of economic analysis, one that I do take seriously, but it is not one that I myself worry too much about. The USD is a great unit of measure, from the cost of prison to the cost of pollution.

        What you don’t address was my point – that MMT advocates who say moar deficit spending is the answer don’t address the implication of distinguishing the ideas of money and wealth. Once you accept a fiat system (one I support, by the way; I don’t want a gold standard) you have to deal honestly with the reality that the monetary prices of wealth no longer have any anchor. MMT tries to have it both ways, claiming wealth isn’t money yet simultaneously inventing a magical play land of price stability, re-linking the buffer stock of full employment to price stability. That’s what Wray says the MMT Insight is: you have to choose a buffer stock.

        My point is that we should be intellectually honest and acknowledge that if we define money to exclude store of value, then we have to completely separate value from money. Pretending that JG/ELR/whatever can serve as a substitute price anchor is nonsensical.

  31. RBHoughton

    I suspect that MMTers must repudiate debt-free money because their knowledge and qualifications become worthless the day we abandon the present financial system. We have had it for over two centuries and its has got incrementally worse for an increasing part of humanity.

    Western society exists under the control of a dominant minority whose qualification for leadership is wealth. It was formerly a creative minority in the 19th and 20th centuries but in recent decades it has lost its creative power and become static under a science of economic law which it believes to be immutable. It remains unable to advance or retreat.

    When the creative minority of a society in growth atrophies, the society it leads lapses into a static condition from which the invariable dynamic reaction is the secession of the proletariat to generate a new civilisation through the transition of society. This was the conclusion of Arnold Toynbee when examining the history of mankind and the many civilisations that have arisen and fallen. It appears to be the likely resolution of the human condition today, indeed one sees the evidence of it everywhere.

  32. JTMcPhee

    I can understand what I would call “real wealth,” that is, something humans can eat, wear, live in, ride around in, enjoy, preserve, operate and stuff. A rice bowl, a fertile paddy, a water source, and some seed are wealth. Roads and reservoirs are wealth. The smarts, the collective wit and wisdom of the people (minus the so many vulnerability-creating “innovators” and their “products”) might be a kind of wealth. “Money” somehow gets involved in “valuing” and “exchanging” Real Wealth, at least over the last several thousand years. With patently problematical political-economic outcomes.

    What kind of wealth is the “money,” is the what is it now, $2 quadrillion in “notional value” derivative constructs that may not be readily used directly to buy sh_t like elections and laws and regulations to suit the suits, or $3 million zoomy-cars and $256 million megayachts and islands and apparently whole countries, and private jets and wars and $4 billion office towers with their hyperfast forerunning links to the “Market (sic).” But the Cloud, the shadow, the enormous blimp that psychically represents that Funny Munny “wealth” somehow creates, in the persons real and corporate who create those “dollars” or whatever they are, an enormous amount of clout and leverage and deference and obsequiousness and “respect” over way too many also greedy people, who are willing to do whatever the activity is via which they give over to the LLCs, and other tax fronts for those Really Sharp 0.01% Dudes, the title to, the “legal” ownership (under a system they run that creates and protects and fosters the “endless” growth, “compound interest” and all) of, all that bling and “property” and built stuff like those yachts and private jets. Where is the debt or credit that characterizes that construct?

    And does “debt” equal the same thing that stuff like tally sticks and the behaviors of tribes depicted by Graeber in the Good Old Days, what looks like a more honest and complete history of how we humans used to interact to “transact,” BEFORE “money” in whatever essences it currently exists, does “debt” equal mutuality of exchanges and relationships (not “barter” but something altogether different, per Graeber’s review), or is it that Puritan notion of moral compulsion to genuflect before what are called “creditors?” Is it rule by balance sheet, by spreadsheet formulae that tell us where we stand against each other? That Puritan notion, augmented by “innovation,” that gets interestingly carried forward and imposed on the Mopes by people who on the one hand, cheerfully and arrogantly default readily and disappear their corporate “legal” entities into “legal” bankruptcy (essentially a Jubilee for what I take to be DEBTORS) to extinguish deposits and pension funds and contractual obligations of all sorts, and demand “bailouts” from a system that has to draw some portion of its validity from Real Wealth and the labor and Commons extraction that I believe creates it. And yet DEMAND that the Mopes, in Greece and Argentina and Ukraine and most of the rest of the world pony up “money” or give over “legal title” to their Real Wealth and the Commons their polities and governments were supposed, presumably, to husband for the common good, because they have an ineluctable DEBT/obligation/contract that binds them to compliance to whatever a “monetized” exchange is?

    The gonifs are always way ahead of the Mopes. Nature of the Beast — and as “it,” the monetary-based system, keeps on growth-ing, there apparently will be a bad end to it, but not before the Rulers get to die or flee comfortably, their every whim attended to, every pleasure center titillated to its max, and free from any “debt” to the miserable residue they leave behind. No retribution, let alone restitution. That seems to me to be the outcome our collective jostling that forms our political economy has in store.

    MMT may say what is, what the physiology of the bones, stripped of nerve, muscle and skin, is.

    But I ain’t the only person who’s pointed out that there’s a need for a different Prime Directive, an organizing principle, other than “Le déluge est sur nous, sauve qui peut.” Assuming of course that the net set of vectors of power and wealth (redundant) and the political economy that they frame and drag about and that bears down on us Mopes and Muppets (mawkishly attached to our families and friends and our own puny existences, with our own consumptive defects and blindnesses) does not equilibrate out to “Game Over, time for humanity to shuffle off this mortal coil.” So that maybe it’s just how the Universe was ordained, expressed in how the genes are wired, since we don’t seem able to figure out how to redirect “the world” toward evening things out, toward actual “conservatism…”

    Will “understanding money” point in that direction, or just further empower the MIT types and Dimon and Blankfein and the rest with even more ways to rip off and rip up all that’s left of a once lovely planet?

      1. JTMcPhee

        The three iron rules of plumbing:

        Payday is Friday.

        Sh-t flows downhill.

        Never chew your fingernails.

  33. John Hermann

    If we are interested in applying precision of thought to this issue, it is clear that the general dictionary definition of “debt” – which equates it with “liability” and perhaps also with “credit” – must be abandoned. To conflate debt with liability is indeed sloppy analysis. In a rigorous economic analysis the word “debt” will imply a payment schedule (i.e., a timeline), while a “liability” will not necessarily have this feature. And although a debt is a form of liability, the words are not synonymous.

    With a monetary deposit (taking the form of bank credit money), the depository has a contingent liability towards the depositor — an obligation to provide the depositor with currency on demand. However a deposit is not, in itself, a borrowing or a debt.

    Likewise, the government has a liability towards those who possess currency (or its equivalent) to accept it for the payment of any tax obligations. This liability is also contingent, because not every citizen in the possession of currency has an obligation to use it for paying tax to the government, or even to pay tax to the government at all. And it cannot be construed as a debt because no payment schedule is attached to the mere possession of currency.

    1. Yves Smith

      No, that is incorrect. One can have debt without a fixed payment schedule. A revolving credit agreement is absolutely, positively debt and does not have a fixed repayment schedule. Consumer revolving credit agreements didn’t either until after the crisis, when regulators imposed a requirement that the minimum payments be high enough to amortize the balance in 60 months. Similarly, a bank deposit is a liability of the bank and does not have a fixed payment schedule. Accounts payable are also a debt. They don’t have a fixed payment schedule. Ancient tally sticks were very clearly forms of debt.

      A bond has a fixed payment schedule. A bond is a promise to pay principle and interest on specific dates.

      You are conflating “debt” with “bond”.

      1. Ernest Scott

        When he said “a payment schedule” above, I don’t think he necessarily meant a “fixed payment schedule.” The cases you cited were cases of variable payment schedules but payment schedules nonetheless, which is different from central bank or treasury liabilities where the principal balance could, in theory and if desired, remain outstanding in perpetuity.

        In general I am sympathetic to his viewpoint that this debate might unnecessarily be muddled by a case of “differences without a distinction,” and that for clarity’s sake it might help to give certain kinds of debt a new name.

        I think good candidates are, like he’s saying, the debts or liabilities of powerful centralized institutions that have the option of keeping the principal balance outstanding for as long as they like (and set the rules and terms themselves on how and when it can be converted into anything else, if it’s convertible at all).

        1. Yves Smith

          You are also misunderstanding, or worse, choosing to misrepresent the point I made. Many of the old credit cards set the monthly payment rate at an “interest only” level. The debt would not be amortized.

          More generally, you can have all sorts of debt obligations that do not provide for a repayment schedule. You have debt with an interest rate that keeps adding interest to the principal (negative amortization) with the minimum monthly obligation set BELOW the level needed to amortize the debt and even in some cases to pay all the current interest. For instance, option ARMs. That product actually makes sense for people with erratic but generally high incomes, like top entertainers or Wall Streeters, who get big bonuses. They have low regular payments, with the expectation that they make a big payment now and again when they have a windfall. That is generally accompanied by collateralization (as in you can seize an asset if the borrower defaults and interest rising to a higher rate if the borrower did not start repaying). Similarly, zero coupon bonds were very popular in the early 1980s due to attractive tax treatment. No fixed payment schedule whatsoever.

          You also have normal commercial transaction, supplier credit. Most suppliers provide for interest rate penalties if not paid, but those are pretty much never invoked except in case of bankruptcy of the vendor. The real enforcement mechanism is the desire to continue the relationship with the supplier.

          Loans between individuals are also often not terribly formal.

          I am not a fan of efforts to rationalize inaccurate use of terminology. You are not helping by contributing to sloppy thinking and incorrect usage of well established concepts.

          1. Ernest Scott

            Good points all. Not trying to contribute to sloppy thinking, just trying to point out what I think contributes to the conflict between the two sides in this debate.

            Which is that for some people their concept of “debt,” or what “really counts” as a debt, is highly sensitive to the balance of power between the counterparties or two sides of the transaction.

            So your additional examples above are still cases where the creditor expects some kind of payment of principal (or ability to seize collateral) at some point in the future, and where, importantly, the creditor has substantial power to both set terms of the debt and enforce payment if necessary.

            This is a different situation from that with powerful central institutions like central banks or treasuries, where there is a significantly lopsided balance of power in favor of the debtors that is unique and exclusive to these institutions alone in society, such that they can not only extend their liabilities into perpetuity if desired, but have substantial power in dictating the terms of the relationship and can’t be forced to pay or redeem or convert at any time against their will.

            MMTer’s are, of course, aware of the importance of these power dynamics, which is evident in how they are vocal about making the distinction between a “currency issuer” and a “currency user.”

            I just think that this is what jars some people about some MMT concepts, not so much the technical details or the accounting treatment, but the fact that, for them, there are some situations that, even though having origins in debt relationships and are a subspecies of debt and still very “debt-like,” have nevertheless evolved to the point where there is a critical enough difference in the balance of power that they think this, conceptually, deserves to be put in a different category and possibly deserving of a different name. An example of a difference in degree producing a difference in kind.

            And while this can be seen as rationalizing the inaccurate of terminology, I see it more as trying to explain maybe why the opposing side has a problem with the terminology, such that they don’t think it is so accurate or the concepts so well established.

  34. Egmont Kakarot-Handtke

    Money and debt in six elementary steps

    Comment on ‘Randy Wray: Debt-Free Money and Banana Republics’

    Money has taken various historical forms (token, coin, note, deposit, etc.) and the banking system in each country is the outcome of a murky historical process. Therefore, the first thing to do is to abstract from historical detail and to define a clear-cut analytical frame of reference. This frame has been called by Keynes the ‘monetary theory of production’ and it is as close as possible to the economy we happen to live in. The frame of reference consists of the elementary structure of the monetary economy.

    (i) The pure consumption economy consists of the business and the household sector. The household sector provides the labor input to the business sector which consists initially of one firm. The product of the firm is sold to the household sector. Example: the wage income per period (e.g. year) is 100 [thousand/million/billion, euro/dollar/yen]. So, in a period of defined length the households put in their work and the firm owes in total 100 monetary units to the household sector.

    (ii) The firm issues IOUs and these are used in turn by the households to buy the output. For simplicity, the wage income of 100 monetary units is fully spent on the consumption good. Starting from zero at the beginning of each period IOUs are created by the firm and vanish completely until the end of the period. Clearly, IOUs are debt and they are used exclusively for the transactions between the business and the household sector.

    (iii) IOUs work fine with one firm but not with many firms. If the business sector consists of many firms the need for a general IOU arises. This general IOU is produced by the central bank and is called money. The central bank gives the firm money in the form of current deposits and the firm owes overdrafts to the central bank. The firm pays the workers by transferring the deposits instead of IOUs. The workers spend their income and the deposits return to the business sector which reduces the overdrafts. At the end of the period all deposits and overdrafts are again zero. So money is created out of nothing and vanishes into nothing until the end of each period. This process can continue in principle in all eternity no matter how big or small the economy is. There is no such thing as a fix quantity of money.

    (iv) Only deposits are money but, clearly, deposits are always exactly equal to overdrafts. Hence, money is the central bank’s half of what is essentially a credit relationship. Both sides of the central bank’s balance sheet are equal at any point in time by logical necessity. So Randall Wray is fundamentally right: there is no such thing as debt-free money. But note that deposit/overdraft money as transaction medium is entirely different from credit for houses and cars or for financing real investment of the business sector or for financing public deficits. Not to keep these things properly apart is a recipe for guaranteed mental breakdown.

    (v) The production of deposits and overdrafts is in principle not different from the production of bread or haircuts. The central bank pays wage income to its employees and recovers its costs by charging a transaction price. The transaction price is economically different from interest on credit. The sum of wage incomes of the consumption good producing firm and the central bank is fully spent by the household sector. There is neither saving nor dissaving of the household sector, and the profit of the firm and the central bank is zero throughout. This process can continue in in principle in all eternity. What we have is the most elementary version of a proper functioning monetary production economy (2014).

    (vi) Things are different if the central bank does not charge a transaction price but interest on overdrafts, which in sum must again be equal to its wage bill. This is how things have developed historically. And this is how the creation of money as a means of transaction became linked to interest. As a matter of principle, these things should be kept institutionally apart. In a well-designed monetary economy the central bank finances the wage bill of the business sector whatever it is and charges a transaction price that covers exactly its costs. Problems of the monetary order do not arise because money is created out of nothing, or because money is one half of a debt relationship. Problems arise because the transaction function and the credit function are not properly kept apart.

    Conclusion: Wray is right on insisting that debt-free money is a nonsensical concept. His banana and cloakroom examples, however, are idiotic. The advocates of ‘debt-free money’, on the other hand, have a valid point: the production of transaction money should not be paid for by interest but by a cost covering transaction price. For the inclusion of the store-of-value function and household-, business- and government sector debt see (2015a; 2015b).

    Egmont Kakarot-Handtke

    Kakarot-Handtke, E. (2014). Economics for Economists. SSRN Working Paper Series, 2517242: 1–29. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2517242.
    Kakarot-Handtke, E. (2015a). Essentials of Constructive Heterodoxy: Financial Markets. SSRN Working Paper Series, 2607032: 1–33. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607032.
    Kakarot-Handtke, E. (2015b). Essentials of Constructive Heterodoxy: Money, Credit, Interest. SSRN Working Paper Series, 2569663: 1–19. URL

  35. Greg

    It is quite baffling to me the number of people on here who are dismissive of correct accounting or use of balance sheets as if its a triviality and not germaine to money and wealth. Mr Wray is not being needlessly nitpicky he is simply asking for consistency. Balance sheets and accounting are all about “scorekeeping”, a way to determine who has more and who has less. Wealth is a “score” denominated in a numeraire of choice….dollars in the US. Getting the scorekeeping wrong is the worst type of fundamental error.

    Obviously the scorekeepers (banks and the govt) can put their thumbs on the scale and often do but we still must have a unit of measure AND a well distributed list of rules for keeping score in order for us to have a stable economy.

    Additionally, talking about money without credits and debits is meaningless. Its just barter without it. The real destabilizing factor in our economy is the notion of interest and who gets to set it at what level.

  36. BadBentham

    I believe, the fundamental issue with “debt free money” results from a misperception/misunderstanding of e.g. the Greenback. There is that difference between “ALL money is fundamentally based upon debt” and “NOT ALL created money has to appear on the debit side of the balance sheet” . Both assertions are basically true. In general, it is thought that creating +2 money units results in -2 debt units on the other side of the sheet. The classical zero-sum game. However, it is thought as well that the state will at no time have to fulfill all his debt liabilities at once. So, he can, in his special role as a state, use creative accounting ( e.g. the Greenback) and issue overall, say, 20-30% (?) of the fresh money supply with no “negative” (debit) account in the balance sheet, while still serving all his outstanding liabilities (those determine the actual value of the money) ; with the money probably still keeping its original value; especially in a generally deflationary milieu. It is the basic idea behind the 1T$ coin as well. Of course, it can have great one-time benefits for the state (e.g. 1861) and the economic growth (e.g. infrastructure) to vastly use this instrument of “overlaying” cash. However: This form of “phantom money” , without “counterpart”, is still bound to the very rules of Fiat Money; it still relies upon credit. And, still the state has to serve all his outstanding liabilities. – So, one can say, the Greenback is the exception that very much proves the rule. ;) – Sorry if my line of thought is slightly ambiguous; I am not a native speaker.

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