On the Upside-Down World of MMT

Cross-posed from Credit Writedowns

I ran across a post by Robert Murphy over at the Mises Institute blog on Modern Monetary Theory. Since I have been pushing the idea at Credit Writedowns that the centrality of secular debt accumulation makes some ideas from MMT and Austrian Economics compatible, it was interesting to see a Mises scholar work over MMT.

Murphy is sceptical about stressing the idea that government deficits are exactly one-for-one non-government sector surpluses. He calls it the upside down world of MMT. I, on the other hand, see the logic. This is something I covered in a post called Economics 101 on government budget deficits. But here’s what Murphy had to say:

When I first encountered such a claim — that the government budget deficit was necessary to allow for even the mathematical possibility of net private-sector saving — I knew something was fishy. For example, in my introductory textbook I devote Chapter 4 to "Robinson Crusoe" economics.

To explain the importance of saving and investment in a barter economy, I walk through a simple numerical example where Crusoe can gather ten coconuts per day with his bare hands. This is his "real income." But to get ahead in life, Crusoe needs to save — to live below his means. Thus, for 25 days in a row, Crusoe gathers his ten coconuts per day as usual, but only eats eight of them. This allows him to accumulate a stockpile of 50 coconuts, which can serve as a ten-day buffer (on half-rations) should Crusoe become sick or injured.

This is an admittedly simple story, but it gets across the basic concepts of income, consumption, saving, investment, and economic growth. Now in this tale, I never had to posit a government running a budget deficit to make the story "work." Crusoe is able to truly live below his means — to consume less than his income — and thereby channel resources into the production of more capital goods. This augments his future productivity, leading to a higher income (and hence consumption) in the future. There is no trick here, and Crusoe’s saving is indeed "net" in the sense that it is not counterbalanced by a consumption loan taken out by his neighbor Friday.

As Murphy rightly says, "of course you don’t need the government in order to save." Here’s the problem, though. There are no transactions involved in Murphy’s example.

When we talk about GDP as a measure of the size of the economy, we are talking about a statistical measure of transactions as measured by the money unit of account. I don’t really think this is very complete picture of the economy. It’s an income statement measure, when the balance sheet and cash flow statements are more telling. The balance sheet is very important – or as I have said in the past: It’s the debt, stupid.

But GDP is all about measuring transactions in currency volumes. GDP really is a sum of net financial transactions that occur in any given period that can be registered in specific unit amounts in the money unit of account. I know that sounds like a bunch of mumbo jumbo, but what I am really saying is this: If no transaction occurred, as far as GDP goes it doesn’t matter. if no money changes hands, as far as GDP goes, 99 times out 100, it didn’t happen.

For example, Kate is a housewife, who, despite her busy schedule at home, is able to grow coconut trees in the back yard to make coconuts for food or barter. Now, Kate is unpaid despite the value of the work she is doing. So, none of her work at home is recorded in GDP because there were no money transactions to measure.

Then, what about her coconuts? Well, for 25 days in a row, Kate gathers her ten coconuts per day to feed her family as usual, but the family only eats eight of them. This allows her to accumulate a stockpile of 50 coconuts, which can serve as a ten-day buffer (on half-rations) should the family become sick or injured. Kate is saving. But this saving has nothing to do with GDP or national income and product accounts that are used to measure economic activity. Now if Kate took her 50 coconuts and sold them to her uncle, Sam, for $5 each, she would have $250. And if she gave Sam $230 in return for his goods and services, she would have saved $20 as measured in GDP. She would be net saving $20 and Sam would have a net deficit of $20.  That’s how it works.

In fact, I explained exactly this in the government deficits post:

Imagine you and I are the only two people in an economy. For the sake of argument, say we use sea shells as a currency and we trade with no one else but each other. So when we do trade, we exchange goods and services with each other for the amount of sea shells these goods and services are worth. From an accounting perspective, it’s a wash; if you buy my goods, I get the sea shells and lose the goods of equivalent value and if I buy from you, you get the shells and I get the goods of equivalent value. So far, so good.

Now, let’s bring a third person into the mix, Harry. Harry is a foreigner with whom we agree to do business. Where he’s from, he uses silver as his currency. No matter; in trading with Harry, we agree to an exchange rate between our sea shells and his silver and we are ready to go. Now, we can trade with each other and with Harry. If Harry buys from either of us, we get silver and he gets an equivalent value of goods. If we buy from Harry, he gets sea shells and we get the goods, also equivalent in value to the shells…

Now, let’s introduce some deficits and debt into the scenario. For the sake of argument, let’s say that year in, year out we produce the same amount, the same value of stuff. However, in one particular year, you produce a lot of stuff – and I want to buy it. The problem is that I produce less stuff that you want to buy. What do we do? I could issue you an I.O.U. and tell you I will pay you back sometime later. You accept the deal and now I have received the goods and services and you have received an equivalent value from the two sources, currency and the I.O.U. Again, it is a wash from an accounting perspective. I have a deficit in this particular year and you have a surplus.

Now, even if we add Harry and his silver and foreign goods into the mix, it’s pretty much the same. For example, if you bought some of Harry’s services but didn’t have enough sea shells to pay for it, you could issue an I.O.U. to him for the shortfall. You would have a deficit with Harry for the year and Harry would have a surplus with you for the year. So, even when we introduce debt and deficits into an economy, the accounting is the same; there is no value leakage…

What holds in my little example for three people also holds for three groups of people too. You could have 100 million people in a group that you represent that does trade with my group and Harry’s group and the accounting would be identical. So, let’s give our groups names. I am the government, you are the non-government sector and Harry is the foreign sector. The sea shells are the domestic currency and the silver represents foreign currencies…

Notice I haven’t talked about government as the creator of currency and the private sector as the user of currency. I haven’t focused on any misallocation of resource or malinvestment issues. I haven’t raised the spectre of inflation or currency depreciation. I have simply presented the economics and accounting of budget deficits.

I wouldn’t poo-poo these accounting tautologies. They  are real. They have value and they help you understand what’s happening in the economy. The reality is the non-government sectors cannot net save unless the government is deficit spending.  The only way the private sector can pay down it’s debt burden is through a net negative shift in trade or government balances. The other way to reduce debt burdens is through debt forgiveness and default. With the U.S. household sector highly indebted, these are the choices. (Of course, the real debt burden can be inflated away – that’s what is happening right now in Vietnam for example. But that’s a topic for another day).

So what about government deficits. This is where it gets ideological. Here’s where Murphy is onto something. He says: "Not All Spending and Income Are Created Equal" – meaning private sector allocates capital better than the public sector. Clearly, if the government sector allocated capitalism well, we would all be looking to the Soviet model for pointers and China would still be a strictly communist country instead of the increasingly market-based economy it has become. Even the Cubans understand this.

So when you think of government deficits as the primary way to reduce private sector debt burdens, you really should also be thinking about the malinvestment and future slow GDP investment that a misallocation of resources would create. That’s where MMT has work to do.

For example, regarding the US stimulus, did cash for clunkers increase long-term economic growth or reduce it? Did the first time homeowner’s tax credit increase long-term productivity or reduce it? How about this one: did the bailouts of AIG, Citigroup, and Bank of America make America a more efficient global financial powerhouse?  If you answered yes, the spending in those examples was good, to all of those questions, then you are going to want to see a lot more of that going forward. Most people would answer no, government is misallocating resources, to those questions.

So, the right question for policy makers then is: If we think private sector allocates capital better, in what measure, if any, is stimulus warranted to arrest a recession like the one we have had? What are the objectives of that stimulus: preventing a deflationary spiral, returning the economy to full employment? How do we prevent the Predator State from siphoning off that stimulus into crony capitalist boondoggles and bridges to nowhere? Can we? Who provides the oversight for these measures and how? And how long into a recovery should this deficit spending continue, and by what measure?

My take: the stimulus we have seen up until now has been ineffective. Too much of it was engineered to bail out reckless allocators of capital in favoured industries in the private sector. And too little of it was designed to help deleverage and return the economy to full employment. This leaves me thinking that in future the only way to prevent malinvstment is to bolster automatic stabilizers and only use these and tax cuts in order to address the shortfall in demand. There are a lot of ways to shape these automatic stabilizers and tax cuts to get the job done but having the government craft specific programs to help specific sectors of the economy like housing only insures that the economy will not be able to readjust.

What do you think? Comments appreciated.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. F. Beard

    So, the right question for policy makers then is: If we think private sector allocates capital better, in what measure, if any, is stimulus warranted to arrest a recession like the one we have had? Edward Harrison

    Stimulus is not warranted except for genuine infrastructure needs such as roads and bridges.

    But from both an ethical and a practical point of view, a bailout of the entire population is justified.

    What the US has is essentially a government enforced and backed counterfeiting cartel which allows banks to issue “credit” in other people’s goods and services. That’s counterfeiting.

    So let’s forget stimulus and start talking about restitution.

    1. traderjoe

      Why does a sovereign nation borrow its own currency – at interest – from private corporations?

      Why don’t more MMT’ers talk about ending the Fed and having the Treasury issue non-interest bearing script like a Lincoln Greenback? There’s a big difference between deficit and debts.

      1. F. Beard

        Why does a sovereign nation borrow its own currency – at interest – from private corporations? traderjoe

        It should not. Government should only create, spend and tax its own fiat. However, that money should only be legal tender for government debts, taxes and fees, not private ones.

        Why don’t more MMT’ers talk about ending the Fed and having the Treasury issue non-interest bearing script like a Lincoln Greenback? traderjoe

        Good question. Government spending and taxation alone can control the amount of government money in circulation.

        There’s a big difference between deficit and debts. traderjoe

        Agreed. The deficit is simply the government’s spending minus the government’s revenue. That deficit need not be filled by debt. The US Treasury could simply “print” the difference.

      2. stf

        “Why don’t more MMT’ers talk about ending the Fed and having the Treasury issue non-interest bearing script like a Lincoln Greenback? There’s a big difference between deficit and debts.”

        What are you talking about? Those are core MMT proposals that are plastered all over their research.

  2. Neil Wilson

    Private Capitalism appears to allocate capital better because it socialises its costs whereever it can.

    Once you add back the true cost of pollution, unemployment, underemployment, bad health and early death its not nearly so clear cut.

    The sole purpose of the state should be to put the floor in via automatic stabilisers to prevent the ‘chase to the bottom’ from occurring in labour markets. And it should be set at a level where people get a basic living from a week’s work.

    Private enterprise should then have to bid up from those levels to be able to make a profit.

    And yes anything that requires a ‘Wisdom of Solomon’ decision from the public sector should be avoided. Wisdom is in very short supply where politicians are concerned.

  3. Cahal

    This whole ‘misallocation of resources’ stuff confuses me slightly. Don’t 90% of businesses fail in their first year? I honestly don’t get why the private sector is supposed to be so magical. Please clarify this to me if I have it wrong.

    1. edwin

      Not 90% of businesses getting corporate welfare from the government. 100% of those succeed brilliantly.

    2. MLS


      I’m not sure if the number is 90% or 50%, but when those businesses fail, capital is destroyed and it stops flowing to them (assuming bailouts don’t occur). Thus, the remaining capital in the economy is free to seek out other returns, and eventually find it’s way to the successful 10%. When the government misallocates capital to a particular “business”, it does not respond to any profit motive and continues to allocate that resource to an inefficient use. Over time this pulls capital away from more worthy projects.

      Ask yourself – is better to invest $100 and lose it all or invest $100 over and over with negative returns?

  4. Mike the Mad Biologist

    I wondered about the same thing myself, but there is one other issue: a lot of spending needs to happen that isn’t, not for macroeconomic reasons, but because we need those public goods (e.g., repairing transportation infrastructure, more rail, public health). That it would ameliorate our current macroeconomic problems is a bonus.

    There is a lot of stuff that is being massively cut back, often cruelly so. Alleviating those cutbacks is critical and would also serve as stimulus; I’m not sure how ‘automatic’ that could be made, however.

    1. Just a thought...

      There is no shortage of people working on roads in my city.

      Spending more on infrastructure (which I fully support) is not going to magically get us back up and running at full employment. The majority of unemployed and underemployed do not have road construction, track laying, bridge building, etc.. skills. And you can only have so many flag holders.

  5. paper mac

    I think that it’s probably not worthwhile to argue with a guy who believes stories about lone individuals collecting coconuts are good and instructive models for the operation of complex economies, particularly when he can’t even recognise that Crusoe’s savings are the natural environment’s deficits.

    1. craazyman

      never a deficit when it comes to Nature or Imagination.

      Both are infinite. People might say the world is not infinite, but I say Nature is infinite if we include all the galaxies. Life is infinite across the universe and therefore so is Imagination. I don’t believe there is an end to the universe, I think it’s more complicated than that. And there never was a big bang either. That’s a form of mathematical mythology.

      Let’s say I write a screen play that sells for $1 million (I admit this will never happen). Let’s say I have also written 5 others, sitting on my computer. Now I’m a big name screenwriter and my 4 screen plays are worth $8 million. From nothing, due to the existence of money.

      That’s $8 million in wealth (sort of like savings, but it’s not a transaction) that comes from the infinite Imagination.

      the money wave collapses on the observation of my screenplays and I’m now a rich dude with Hollywood girlfriend, until I OD. Then my nature wave collapses and I’m all Imagination.

      1. Cedric Regula

        The way we really do it:

        We lose a buck on every transaction, but make it up in volume.

    2. bxg

      But he’s not trying to explain the economy using coconuts!

      He’s simply showing an artificial example where someone is actually saving, without a government being anywhere in the vicinity. He is giving a counterexample to people who say this is absolutely 100% _impossible_.
      When trying to argue against a claim of total certitude, any counterexample works … whether or not it is plausible or complex or realistic or not. He’s trying to disprove a mathematical claim. Indeed, simple counterexamples are best
      in such cases.

      Of course, as he also notes, the conflict/contradiction is resolved not so much because the MMT’ers can’t do math right, but they use a very particular definition of the word “savings” that is not always aligned with how normal
      English-speaking people naturally use the word.

      1. bob

        “He’s simply showing an artificial example where someone is actually saving, without a government being anywhere in the vicinity”

        Which is completely pointless when you are trying to discuss monetary policy.

        1. bxg

          No it’s not.

          We don’t know everything about monetary policy, and it’s better than nothing to admit about anything “we don’t know” if that’s the case. But suppose some group comes up and says “I _do_ know, the answer is definitely X, and here’s the mathematical proof”. It’s still valuable if you can shoot this down and say “your proof is just plainly wrong, here’s why, so while the answer may or may not be X your so-called proof doesn’t show it”. Even if you can’t offer an alternative explanation, moving us back from a wrong argument for believing something to a state of being aware of our ignorance is still a good thing.

          Not necessarily saying this is so of MMT or not, but there definitely is value if one can definitively shoot down a bad argument even when one cannot offer a replacement.

          It’s a plain fact that many economists play games with the word “savings”. They cite mathematics to say that something just must be so about savings (but, and they will be clear about this is you look, only if “savings” is understood in a very particular sense somewhat foreign to ordinary language). But if honest they know full well that their claims will be seen in due course by many without the qualifier surviving – many people will think something has been shown about what must happen to savings (here in ordinary english usage) which simply hasn’t. The originators are blameless of course! – their paper/article clearly noted their unorthodox re-definition of the word. And if subsequent reporters/textbooks/classes drop the qualification … as expected and intended … who’s really to blame?

          1. bxg

            To argue further.
            Some people present a mathematical argument that the claim is relevant to monetary policy and our economic situation, that can help guide policy, but which is entirely independent of politics, debt, productivity, the economic structure, human nature, bioligy, physics, personalities, America, capitalism, the planet Earth. Their arguments would apply perfectly well if our society were instead a colony of fungus living in some alien’s armpit in a faraway galaxy. Since it’s not contingent in any way, because it’s a mathematical “proof”!

            If some people believe such arguments, it’s legitimate and valuable to show … e.g. if necessary by means of simple counterexamples … why the reasoning is nonsense. I mean, it’s kind of obvious that it’s nonsense, but if someone presses the issue a simple and unequivocal counterexample should help.

          2. bob

            “He’s simply showing an artificial example where someone is actually saving, without a government being anywhere in the vicinity”

            Back to the statement. Yes, he is showing an example of where ONE PERSON is an economy. Effectively, he is the government, of him. He sets policy.

            His policy works only given the staring point of free land, existing coconut trees, coconuts that never sour, and a steady diet made up of only coconuts.

            It is not relevant to a government of more than one person.

            The rest is deconstructionist masturbation. By definition, you are on your own with that.

  6. Jim

    “The reality is that the non-governmental sectors cannot net save unless the government is deficit spending.”

    Haven’t a few economists (like Steve Keen) basically hypothesized that we could live in a world without government or foreign trade where the banks make loans that create deposits, and these loans are used by firms to create productive investment and households save a portion of their incomes, which turn out to be equal to the liabilities of the business sector.

    Thus, in this scenario, households as a sector, can net save as long as businesses net deficit spend (i.e. invest in tangible productive investment more than they save out of profit income.)

    1. Jim Haygood

      Quite so. We live in a world distorted by enormously bloated, insolvent governments, which have come to be regarded as essential.

      But prior to the 1930s, the US government was quite small — on the order of 3% to 5% of GDP for the first 150 years of the nation’s existence. Nevertheless, very substantial savings, investment and economic growth unfolded, with an essentially negligible level of cumulative deficit spending over the period.

      The claim that government deficits are the axiomatic mirror of private saving doesn’t comport with reality.

  7. beowulf

    “The sole purpose of the state should be to put the floor in via automatic stabilisers to prevent the ‘chase to the bottom’ from occurring in labour markets. And it should be set at a level where people get a basic living from a week’s work.”

    Excellent point. Whether through a floating tax holidays or a job guarantee, the idea is for a timely countercyclical response. That’s why public investments on infrastructure, are poor examples of “stimulus spending”, the long-term planning and spending required will stretch across business cycles. Better that a transparent, merit-based system (structured like the base closing commission) be used to select the projects with the positive benefit-cost ratios instead of letting congressmen earmark spending on bridges to nowhere.

  8. Edward Harrison Post author

    As I said at Credit Writedowns in response:

    “I know of MMT’ers who think that more consideration has to be given to the government malinvestment issue. It is real. Again, we would be looking to the Soviet model if it were not. I don’t think we could make an a priori assumption that the private sector is always better at allocating capital. There are externalities, agency costs, and time horizon issues.

    Clearly, it’s hard to separate the cronyism from the misallocation in this last recession so it’s really an ideological question as to whether the private sector misallocated resources.

    I have said that credit cycles are endemic to capitalist systems. So I am saying misallocation is endemic to the private sector. That doesn’t mean that we want government dictating terms. it does mean we want government oversight and we do need government to sort out those misallocations.

    Bottom line: some people are going to take an extreme ideological position on this issue. I think extremes are almost never good. In my view we have shifted too far toward thinking the private sector has magical qualities that must be protected from government interference. Yes, government can be a problem. But it can also be a help.”

    1. Carla

      “How do we prevent the Predator State from siphoning off that stimulus into crony capitalist boondoggles and bridges to nowhere?”

      And into bankers’ bonuses, the ethanol from corn scam, and the thousands of other frauds that private industry has jammed down our throats through its control of “elections” and “elected” officials at the state and federal levels.

      The problem is not government vs. private enterprise. The problem is the utter perversion of representative democracy. We seem to have lost any concept of “a public good.”

      With the executive branch owned by Wall Street and Corporate America, and exactly one independent voice left in the U.S. Senate (Bernie Sanders of Vermont), I don’t understand how people can even talk about a “public sector” vs. a “private sector” anymore.

      There IS no public sector. There are hundreds of millions of Americans struggling to make ends meet, and with the possible exception of family members, each one of us is on his or her own.

      So we don’t really have a financial problem. We don’t have a monetary system problem. We have a DEMOCRACY problem.

      1. ajax

        Yes, I see a problem with all the lobbying in Washington.
        Where are the lobbyists for the common good?
        They seem to be in short supply…

    2. Paul Tioxon

      The institution that sorts out the private sector misallocations would have to be the government, under any circumstances. It may not be the US government, or the government as it is currently constituted. But the nation state, and the strong central government bureaucracy that is responsible for maintaining the social order, by what ever name or political structure, will do the sorting out.

      The private property of citizens is only the product of our social order as it developed historically. The historical process that it is a part of seems to be unraveling. The private sector does not self regulate. It is by its structure limited to self interest, and narrow proscribed forms of behavior consistent with its structure. SO, even if we came up with a new entity to sort things out during periods of discontinuity, that would be the new governor of the relations of the members of the larger social order.

      Automatic stabilizers do not exist any more than the invisible hand, stock market circuit breakers, or war to end all wars. During these times, open deliberations, good faith behavior, and a unified and commonly held expectation that we create the social order by our decisions is the needed reform. If it was not a political struggle, if it was not about power, state power, over defining how we socially transact with one another on a daily basis, then we could propose simple mechanisms of reform. But we are past that point.

      MMT may provide the model within the new social order that will emerge in the coming decades, because it shows not that there is some exclusive universal law governing how we must maintain our social order when it comes to money, but that our social identity is a fiction of our own making. It can be one way or another, as long as it is rational, just and pragmatic we can all comprehend a common culturally learned set of expectations that will not collapse every 5 to 10 years as part of a business cycle.

      MMT posits a mechanism, within a larger system, one that shows the social nature of economics by the transactions mediated by money. Money is not understood as a static mechanism like some wind up wrist watch. You can not just wind it up, walk away from it, and it will continue to function, like clock work. Our social order is maintained by deliberate decisions among people just as complex as the financial transactions carried on everyday by people. For the economy to work and for MMT to find a worthwhile place in the polemic struggle the rigorous attention to the economic and the sociologic simultaneously is necessary to make conscious, deliberate, democratically informed political decisions.

    3. TC

      I agree with watching waste, but would also say this is a secondary concern compared to getting the general idea right first.

      Of course there will be lots of graft and corruption. Getting the money out into the world is important.

      And doesn’t the Coase theorem count for money? hahaha. Matt R destroyed Coase.

  9. taunger

    Weren’t all those bailouts the work of tremendously stupid private capital misallocation? And while certainly not my favorite solution, better than the problem that preceded them?

    Why again do I want to relinquish all the goods for private sector allocation?

    The false dichotomy that either the AIG and other bailouts were good or gov’t spending undercuts the very sensible reasoning through the rest of the piece. I wonder why write the first 10 paragraphs when just as much support for the conclusion is in the final two.

  10. MyLessThanPrimeBeef

    What about let the government net save and the private sector deficit spend?

  11. bobbyp

    “What about let the government net save and the private sector deficit spend?”

    In a fiat currency system, the government cannot “net save”. What would they do? Print up a bunch of money and put it in a safe? Why bother? Or perhaps you are thinking of a system where there are still taxes, but the government just takes what it requires from the economy.

    In that case….where would folks like you get the money to pay the taxes?

  12. Philip Pilkington

    “…the stimulus we have seen up until now has been ineffective…”

    Nonsense. We could debate whether the stimulus was adequate or not — but to say that it’s been ‘ineffective’ is just rubbish.

    Calculations came out that there was a 1.5x multiplier. That’s not half bad. Could it be better? Maybe. Is it ineffective? Definitely not.

  13. bobbyp

    Mr. Harrison,

    Thanks for the clarification comment above.

    The assumption that the private sector is inherently better at “allocation” than the public sector is simply pernicious. Both sectors are capable of both wise and stupid choices.

    To simply spring from the idea of “malinvestment” to the Soviet style command economy is not warranted, not without some degree of elaboration or context.

  14. Edward Harrison Post author

    Scott Fullwiler said the following at CW that I agree with:

    “Remember, though, MMT’ers were largely against the details of the stimulus and were in favor primarily of tax cuts and block grants to states on a per capita basis. We were completely against bailouts So, regarding cash for clunkers and homebuyers credits, etc., we were very clear in real time that those weren’t the best ways to try and stimulate, and way too small.”

    1. Philip Pilkington

      To be honest, I understood what you were getting at and I agree. I’d just be cautious pushing the ‘stimulus was ineffective’ line because deficit terrorists WILL pick up on it and use it to beat you over the head.

      I know… it’s all politics and all that… but what can you do?

    2. Philip Pilkington

      Here’s an example of what happens when you aren’t crystal clear in what you’re saying.

      A while back Dean Baker ran a very good article pointing out that a debt default was actually preferable to what certain Tea Partiers were advocating. Moments later the blogosphere was a-buzz with posts from the chronically (purposefully/selectively?) illiterate claiming that Baker was advocating a default:


  15. ambrit

    Dear Jim;
    I’m sorry, but you seem to be positing that banks view themselves as “public utilities” while the exact opposite appears to be the case. As the earlier mentioned case of Shelia Bair demonstrates, to go against the tide of cronyism and predatory practices requires an extraordinary will and self composure. These qualities are, alas, in short supply in human societies. External regulation and “curbing” functions are needed to keep even a semblance of order and comity workable in “homo economicus” world.
    Sad to say, but bitter experience has taught us that “laws and not men” is the most efficient way to go.

    1. okie farmer

      “These qualities are, alas, in short supply in human societies.” ambit

      No one has ever shown that homo sapiens are predominately selfish creatures. Predominance of evidence points the other way. What we do know is that there are ‘leavers’ and ‘takers’ among us, to use Daniel Quinn’s terms, and we have seen with our own eyes that the financial industry is a magnet for ‘takers’, which means its highly likely a sociopatheic system and self-selects for what Harry Stack Sullivan called “the prevailingly psychopathic”. Does MMT allow for that fact or is it subsumed under its broadest rhetoric as something that is irrelevant to understanding their system? As a psychologist friend of mine once said, ‘The corporation is by its own definition, a sociopathic enterprise’, which if true means that whether ‘prevailingly psychopathic’ humans self-select for corporate finance, or not, anyone who works in it has to act in a sociopathic fashion or be expelled from the system.

      A huge, vast majority of humans are not psychopathic and arrest, try, and jail those that are within a definition of criminality that has not been applied to most so-called ‘white collar crime’. How is that the petty thief is much more likely to go to jail and the people who have stolen our country go free? How does MMT explain that, or would MMT say it doesn’t matter?

      Just askin…

  16. SqueekyFromm

    The way I read the whole shells and silver thingy, is that debits always equal credits. Which is true, even with Enron, I guess. Not that it mattered.

    Maybe the real problem is that one group of islanders need $2,000 in shells per month to pay on their 30 year mortgage, while on the other island, the people live on hammocks between the palm trees. Therefore, any disruption of the shell stream on the expensive Island, causes BIG problems.

    Which once again is accounting:

    Debit: Losses from Writeoffs
    Credit: Sea Shells Receivable.

    Squeeky Fromm, Girl Reporter

  17. Valissa

    OK, then, would Ed (or anyone) please tell me why MMT matters, or why any of these not-real-world monetary theories are useful to study/learn (other than to have academic arguments). Despite having a degree in math, I continue to question the relevance of MMT or Austrian economics or Keynesian or any other economic theory to REAL LIFE (it’s all theology to me). Real life is not that amenable to reduction to equations.

    Over and over again I have heard that government budgets and finances are not like individual finances, so I do not see how examples using coconuts (or whatever) are relevant to how governments function or to political economy. When I hear that economists aren’t required to learn much history I am not surprised. I gave up on my economics books and started studying more money/economically oriented history books and articles. Found that way more useful to my understanding of the real world.

    As Hugh keeps pointing out, why aren’t we hearing more about theories of ‘kleptocracy economics’ to explain what’s actually going on instead of what academic theorists think is best for us and should be doing? As Fat Cat II keeps pointing out, is any economic theory ever going to stop playing the ‘externalities’ game?

    1. Valissa

      Shorter version… epistemological innovation needed in the field of economics. Is there any chance of that happening in academia?

    2. Cedric Regula

      The short but true answer is we have a bunch of economists and they spend their careers arguing with each other, and that’s why we need economic theories.

      I thought the Coconut Model of the economy was inadequate too.

      I prefer the Beer Bar model.

      Joe Sixpack made 10 bucks mowing a lawn today and heads for the beer bar. There was no Fed POMO today and we’ll assume incremental government spending was zero from happy hour on. Joe Sixpack has no idea what we’re talking about anyway.

      Being a saver, he puts one dollar in his shoe in case he gets carried away and transacts the rest on beer.

      He begins transacting bottles of Bud. Down the bar Joe Fivepack runs out of cash, and demands a beer loan from the bartender. The bartender must make daily payments to his beer distributor reserve, and realizes that if he can borrow one dollar from Joe Sixpack and loan 9 dollars of beer to Joe Fivepack until tomorrow, he can increase the GDP of his bar and still meet today’s cash payment to his beer distributor reserve. Joe Sixpack winks approval, then the bartender shakes on the deal with Joe Fivepack, and Joe Sixpack then hands the buck to the bartender. The next day Joe Fivepack mows a lawn and settles up with the bartender. The bartender gives the buck back to Joe Sixpack, the saver, and he puts it in his shoe along with the other buck.

      A little windy, I know, but it’s amazing to know it can and does work that way sometimes.

      1. craazyman

        I’ll Never Be a Repo Man

        I started getting the spins about half way through and I’m not even drinking! I’ll never be a repo man or even a pawn shop operator. I can’t figure out how “the other buck” in Joe Sixpack’s shoe came into existence. He walks into the bar with a buck in his shoe, lends it to the bartender, then the bartender gives it back the next day. That’s only one buck.

        So how did he get “the other buck” that somehow was in his shoe when the bartender gives him back the first one. Was this printed into existence by the Fed and basically handed to him as a bonus, because he’s a talented drinker? Or did he borrow it from some counterparty drunk somewhere, knowing he’d never have to pay it back? I don’t know, but it sounds like an easy way to make a buck. :)

        I guess that’s why their all rich, and we’re paying their bar tab. I think if I tried that trick myself, I’d end up owing somebody 2 bucks, with fees and penalties. LOL.

        1. Cedric Regula

          You are showing great potential to be an economist, but the way it really happened is Joe Sixpack forgot about the buck in his shoe for some reason, and loaned the bartender one of the 9 bucks he had laying on the bar for beer.

          It was just lucky fate he ended up with two bucks to keep in his shoe.

    3. stf

      You obviously didn’t understand the post. MMT would be critiquing the idea that looking at a coconut economy is useful. MMT rails against traditional economics and its methodological approach. And regarding “kleptocracy,” both Jamie Galbraith (author of Predator State) and Bill Black (author of The Best Way to Rob a Bank Is to Own One) are in the MMT camp–is there any other school of thought that can point to such authorities on these issues?

      1. Valissa

        stf, you obviously did not understand my point, either. Perhaps it was a waste of my time even commenting on this thread since very few seem to understand what I am asking. I know it’s hard to read tone of voice in comments, but I am at peace with knowing I don’t belong in this conversation. My own quest for knowledge heads in other directions and that’s good to get clear on.

      2. attempter

        Galbraith and Black are relatively good, which in itself isn’t saying much, given the extremely low bar. Unfortunately, their prescriptions are still firmly within fruitless anodyne reformism, which proves they don’t really understand kleptocracy (which needs no quotation marks, thank you).

        is there any other school of thought that can point to such authorities on these issues?

        Um, yeah.


  18. tz

    “The reality is the non-government sectors cannot net save unless the government is deficit spending”.

    You repeated it but have not so far demonstrated it. If a gold meteor crashed, and every one of the 300+ million people in the USA got a few ounces of gold, or were simply employed or other income and they all put half under their mattresses, they would all be saving.

    If you mean it wouldn’t show up in the “GDP”, it is because the GDP is a broken and often stupid measure. War increases GDP. If the government spends to have a crew in a circle digging holes at one point and filling them at the other side, it all counts toward the GDP although production is net negative.

    If I “save” by buying bonds of a productive business (instead of government debt), it is a net positive. If I “save” by simply not spending, I am still saving. Why do you only call it “saving” if it happens to end up buying a US debt instrument (and why does China seem to be buying them up instead of us?). Maybe it is semantics – maybe you don’t call actually having a personal reserve “saving”.

    I really don’t understand. Hundreds of years ago everyone saved some commodities to get through the winter. This was impossible without the king going into debt?

    As to the bailouts or what is spent, the solutions that are typically proposed requires getting canonized saints or perhaps ascetic monks to run things so they will distribute things on something other than corrupt cronyism. Even the complaints about the republicans fighting the yet-another-consumer-protection-bureau (or as Obama said, “We won”). Which brand of corruption, R or D?

    If more power causes more corruption, why is the solution to centralize and accrete more power instead of to disperse and destroy coercion (I’m all for empowering individuals – give them standing to sue the banksters, since you can capture regulators or corrupt guardians, but not tens of millions of people).

    For debt, we could start by changing the tax laws such that any interest becomes fully deductible if it isn’t easily dismissed in bankruptcy – student loans and credit card debt are the big things that come to mind – or simply make all interest, fees, and penalties, everything other than principal deductible. Extend the tax payment deadline to august or october – effectively a zero interest loan for that period for anyone who owes the government.

    But that wouldn’t have to flow through the hands of the condescending regulators and bureaucrats, nor through the hands of Goldman Sachs to get to individuals so it will never happen.

    1. pebird

      I assume that when you mean saving by not spending is that you have more US currency in your posession than you otherwise would have had.

      Those USD are a debt liability of the US Government (via the Fed). If you want to earn interest on those, you can buy a US Government bond, or you can hang on them with no interest.

      Either way you are holding somone else’s liability – which is how it works in the nominal world. You can move to the real economy and buy some commodities for hoarding – not saving in a macro sense.

      Remember we are talking about net financial assets, not net real resources.

    2. Stephen

      GDP is a measure of activity. Somehow it is assumed that steadily increasing activity is good but that is only a requirement for Ponzi schemes like our current debt system.

    3. Jim Haygood

      Tiene razon, TZ.

      Ed Harrison’s objection that ‘there are no transactions involved in Murphy’s example’ amounts to a criticism of GDP accounting (as his subsequent example of Kate the housewife demonstrates), rather than a proof that government deficits are needed to enable private-sector savings.

      To express it more colorfully, “We don’t need no stinkin’ transactions.”

  19. Yulek

    About your idea of sea shells and silver economy:
    If each of participants creates goods and services, which they trade with each other, then it means each of them are making different things. Due to low number of people involved, they actually have to make really useful goods and services to make such an economy work. After all if every one would be making rope, collecting coconuts, and providing barber services, then there would be no need for trade, as every one would be providing for themselves. Right?

    If in such an economy, where every one makes valuable and needed things someone makes less of some of his products, would he not increase the value of his wares and services depending on that product? There would be no need of debt, commodities, goods and services get more valuable when they become scarce (so called law of supply and demand I think).

    Now I am not an economic scholar, I actually find economic science full of nonsense and boring, but since we have a global financial crisis I’ve been reading a little bit here and there, and I came to a conclusion, that money, no matter what their form is (sea shells, precious metals, fiat currency, legal tender, and whatever else humanity will come up with), it is still a commodity, that is heavily affected primarily by the law of supply and demand. The more money floats around the less is their value relative to other goods, services and commodities (happened with silver coins in Rome, in Spain after the new world conquest with gold, and several times with other monetary constructs). Therefore, it would seem to me that monetary theories are virtually pointless. Money is, was and will be primarily driven by supply and demand (which is why some idiots from FED tell the people, that Ipad2 is cheaper than Ipad1, ignoring the rise of price of energy and food, every one needs to eat, most don’t need an Ipad).

    Of course, those are my thoughts, if you disagree, I am looking forward to your reply

    1. ajax

      I think it’s always good to think on one’s own about
      economics. It occurred to me that for a couple who bought
      a new house on a mortgage loan 15 years ago, it might
      make sense to treat it today as “spending in the past”,
      or stimulating the economy 15 years ago. Then the
      mortgage payments (since the couple spent their
      money in the past) lessen how much they can spend
      today as consumers.

      Then people who saved $10,000 for retirement 30 years ago
      and use it this year could be thought of spending what
      they earned 30 years ago this year.

      Currencies can suffer devaluation through inflation,
      the price of gold goes up and down, AAA-rated
      bonds occasionally lose a lot of value,
      coconuts have a short shelf-life and so on.
      It’s complicated.

  20. William Wilson

    I was confused by several aspects of Ed’s post; however, in a reply to comments above Ed mentions Scott Fullwiler’s remarks to the effect that the advocates of MMT suggested alternatives to the following actions taken by the Obama administration:

    ‘For example, regarding the US stimulus, did cash for clunkers increase long-term economic growth or reduce it? Did the first time homeowner’s tax credit increase long-term productivity or reduce it? How about this one: did the bailouts of AIG, Citigroup, and Bank of America make America a more efficient global financial powerhouse? If you answered yes, the spending in those examples was good, to all of those questions, then you are going to want to see a lot more of that going forward. Most people would answer no, government is misallocating resources, to those questions.’

    Though those alternatives were likely to have facilitated relief of the current economic crises, they were not even considered by the administration. Here again, we see that a relatively simple (but apparently novel concept in the context of mainstream, faith-based economic principles/concepts) economic macroeconomic model should easily provide both a better understanding of that discipline and a real solution to the current economic crises.

    Were Valissa to try to comprehend the MMT concepts:


    While this is a useful site for relevant material to start, there are several other sources with more links), one will recognize that the modern money concepts are rational rather than faith-based.

    1. Valissa

      I think you missed my point. I see no reason to further understand MMT as it seems a pointless exercise other than to have economic arguments. I no longer respect the field of economics as a source of knowledge about the real world. However, it seems that economic arguments are enjoyable and educational for those who have already bought in to the belief system, so by all means party on. btw, rationality is typically in the eyes/mind of the believer.

      1. Just a thought...

        As economists say about lucky horseshoes, it doesn’t matter if you believe.

      2. Robert E Most

        Valissa, Some 30 years ago, I wrote an essay on JK Galbraith’s New Industrial State. It almost got me a great scholarship to some weird cult-like leadership summer camp, probably hosted by the Koch Brothers. Having narrowly escaped service (by my failure to impress) to the TriLateral or whatever the hell conspiracy, I kept reading econ, cybernetics (no not the Ron Hubbard stuff, but Norbert Wiener) taking a lot more math than I needed, and ultimately decided not to bother myself with Economics – the profession had little understanding of positive feedback, no understanding of externalities and if i could see that at age 19, and the profession could not, then why bother?

        I too see the problem as more one of kleptocracy than precise school of economics, and (with Carla) a failure of democracy. But I take the long view. Kleptocracy will be overthrown, possibly within the framework of our remaining feeble democratic-republican institutions, when the middle class gets fed up AND gets a clue. The TEA party sure won’t get it.

        And academic economists will get a clue when/IF a younger generation gets it. Wait for the guys my age to die off. The point for me is, MMT allows us to see better available solutions. Almost no one understands it now, but it may take only a few more years, the right crisis moment, and a better articulation (i.e. a dumbed down slogan or two)for MMT to become useful. As Cullen Roach (pragcap.com) points out, the modern fiat monetary system is only 30 years old.

        How many contemporaries understood Copernicus? But how many adults do you know today who think the Sun revolves around the Earth?

        Compared with physics (Oh I dunno this E=MC2 stuff just don’t make no common sense, and spintronics?) any new social idea has the harder job to sell itself versus the reigning ideology in “common sense”. And the mis-sense of neolib econ is heavily underwritten by those creepy uber capitalists.

        Situation nearly hopeless. Optimism warranted anyway.

        1. Valissa

          Interesting and entertaining reply, thanks! However so far the only two reasons I’ve been given to study MMT are:

          (1) it’s rational, not faith based

          (2) very few understand how awesome it is and how much better it is than everything that has gone before

          Once upon a time I had friends who when to EST (Erhard Seminars Training) seminars. When I asked them to explain what it was about, I was told I had to attend a seminar to understand. Naturally I never went.

          1. stf

            If one more person does/doesn’t support MMT I don’t really care, especially when he/she doesn’t appear to have understood anything he/she has read about the topic yet still answers everyone with a completely antagonistic tone.

          2. Valissa

            Hmmm, that’s interesting… I’m not feeling antagonistic. More like a combination of curious, skeptical, amused and frustrated. OK now, someone SELL ME on MMT… don’t just keep saying some variation on ‘if you only understood you would understand’. Why is MMT so great in plain simple English? Do economists ever study sales or marketing? Or are those as unimportant as history?

          3. stf

            Let me say this a different way. To say that those of us that have a good understanding of MMT have explained it in broad and detailed terms where desired hundreds of times is not an exaggeration. In doing so, we have developed the ability to determine rather quickly rather someone is worth taking the time to engage with or not. At least for now, you appear to be in the latter group.

          4. stf

            OK, so ignore my 7:52 post, as we were posting at the same time.

            Why is MMT worth looking into?

            1. Our approach is based on how the monetary system actually works. Every transaction affects the financial statements of those involved; if you don’t understand how the financial systems are altered by a transaction, you don’t understand the transaction. MMT starts with the accounting. It’s not everything, though some of our critics seem to think we think it’s everything. But we are the only school of thought in economics that looks at the world through the lens of how score is really kept in the real world.

            2. We base our understanding of monetary operations on primary sources–rules, regulations, laws, speeches by individuals doing the actual operations, etc.

            3. We’ve predicted the following before almost anyone else did:
            a. The households sector was over indebted (we started explaining this in the late 1990s).
            b. The financial sector was too big and fragile, and financialization was going to make it a lot worse (Minsky started saying this in the 1980s).
            c. The Euro is bound to either dissolve or require serious rethinking, as it has serous design flaws (we said this back in the late 1990s and early 2000s).
            d. QE1 and QE2 would not do much of anything to move the economy and would not be inflationary (we wrote about QE2 back in late November).
            e. The Obama stimulus wasn’t nothing, but it wasn’t even close to enough (on our blog in real time).
            f. Govt deficits don’t raise interest rates.

            I’ll stop there for now.

          5. Valissa

            Thank you, stf, that was a helpful listing. Makes it more clear what your positions are.

            “we have developed the ability to determine rather quickly rather someone is worth taking the time to engage with or not. At least for now, you appear to be in the latter group.”

            I completely understand and accept that. I have belonged to many different kinds of belief groups over the years and am aware when I don’t belong. Thanks for your honesty.

          6. TC

            Hi Valissa,

            Read this post here.

            If MMT is true, its likely we live in a world where potential real growth is far higher than the current economic paradigm. Its probably double what most people think. We’d be much richer in just a few years, and after a few decades the world would not be recognizable.

            Quote from the post:

            “I think this is what Warrens intuition was telling him when he says things like “We could have 15% real growth if we had policy right.” And this is the method on which to find that growth – the combination of fiscal and monetary policy to control r so that we live in bubble land.”


  21. Just a thought...

    There is no “Law of Supply and Demand.” There are two separate laws: the Law of Supply and the Law of Demand.

    The Law of Demand holds that other things equal, as the price of a good or service rises, its quantity demanded will fall, and vice versa. A Demand Curve is a graphical depiction of the law of demand. It has a negative slope.

    The Law of Supply holds that other things equal, as the price of a good or service rises, its quantity supplied will rise, and vice versa. A Supply Curve is a graphical depiction of a supply schedule plotting price on the vertical axis and quantity supplied on the horizontal axis. The supply curve is upward-sloping.

    1. Valissa

      Buehler? Buehler? Anyone?

      Inventory accumulation? That’s so… grounded in reality, so tangible. Interesting that the question has been ignored.

      Or are commodities (assuming inventory accumulation would be in the category of commodities) not as relevant in the fiat money theories such as MMT? But they must have some sort of value in the system. Are they only relevant as transactions?

      1. RebelEconomist

        My question was a socratic one to Ed, Valissa, designed to lead him to consider his economic understanding on which his enthusiasm for MMT is based. However, I am sympathetic to your view of academic economics (to be fair, less true of MMT). It gives so much emphasis to theory unnecessarily and inefficiently expressed in mathematical terms that most economics graduates and even academics have a very hazy understanding of how the economy actually works. Unfortunately, economics is very resistant to change, because the mathematics has become a test of academic machismo, meaning that, like Catch 22, questioning that way of working disqualifies you from being regarded as a competent economist. I tried to teach economics in a practical style in a (good) UK university once, and found it did not go down well – even the students worry that they need to speak the language to get on in the profession. Despite the way that economics is presented, I hope you don’t give up trying to get your head round the economic system.

  22. John Hall

    I thought this was a good post and clarified some things that had confused me (you should probably send it over to Murphy to see his reply).

    No one disagrees with the tautology, the only difference is that one is talking about an economic transaction and one is not necessarily. However, Murphy’s point remains, saving isn’t the same thing as net saving. We’re not talking about saving minus borrowing we’re talking about saving minus investment. I don’t think there’s anything necessarily good about net saving per se. I do care about the levels of saving and investment and their growth rates and their proportion to income.

    When someone says debt burden, I think the ratio of household debt to household wealth (or income). Assuming a constant current account and a decrease in the government deficit, we can agree that private net saving (S-I) will decline. One of Murphy’s points is that this doesn’t necessarily get you to lower a lower debt burden since the debt burden isn’t the same thing as S-I (for instance, corporations might decrease their debt burdens sharply and households might increase their debt burdens or hold them constant).

    There have been some comments about government spending not being the same as private spending. The crucial thing is that GDP is a measure of money spent in economic transactions and not a measure of values (in any private transaction people expect that they will value what they purchase/sell for more than what they give up). On a strictly transaction basis, government spending means the same as private spending. However, Murphy’s point is more that real GDP per capita is only an approximation of economic welfare. Unfortunately, I think this gets him into trouble. If the value of government spending is less than the value of private spending and we know that reducing the budget deficit will be matched by a dollar decline in net private saving, then the value of what we give up by reducing the budget deficit will be smaller than the value of what we give up when net private saving declines ( presumably?). I think a better argument is that private investment drives the business cycle. A sharp increase in government spending doesn’t necessarily mean that future growth rate of GDP will be faster (just that the level will be higher and I’ll grant some uncertain Keynesian effect). However, a sharp rise in private investment normally is consistent with several more quarters of stronger growth in GDP. Holding everything constant, I would expect continued GDP growth over the next year or two when private investment is strong and similarly weak growth when investment is weak.

    @Valissa: most of economics can be understood without resorting to equations. Austrian economics, in particular, avoids it, but much of the most important insights can be learned without resorting to equations.

  23. David Wright

    You are too kind. Instead of engaging with the ideas of MMT which deal with modern monetary transactions, Murphy returns us to the 18th Century and an economy of one individual with no government. Useless and irrelevant to our current economic arrangements, or, to the accounting identities of macroeconomics which is at the core of MMT. If Murphy thinks his Crusoe analogy is a fitting response then it is clear his model for our existing economy needs to be updated by at least 2 centuries.

    As someone who works in that portion of the economy that makes goods, it is clear to me that our existing ‘private’ financial market has also produced massive malinvestment – which tanked the economy and badly hurt many sectors. Unfortunately the ‘private’ sector connected to our political class is the rentier class and not those of us in manufacturing. Malinvestment is therefore not limited to government.

  24. Viator

    Markets existed long before there were central governments as we know them. Governments came late to markets when they discovered the growing wealth created by markets and found a golden goose. Did an economy exist back in the middle ages when governments basically ignored markets, and in fact despised the growth of the nouveau riche in towns and cities.

  25. dictateursanguinaire

    Ed – great post. Although, I do sort of sympathize with the guy who was wondering why you took time to respond to such a silly argument; I’m a relative ignoramus about economics per se (well, less than a B.A., at least) but even still, that argument is so reductive that it’s nearly bound to be fallacious just from a logical perspective. Also, kudos for taking on the side that you ideologically hew closer to. Funnily enough, your statement that the U.S. has now shifted too far to the private sector would still put you to the left of much of the Dems, which is bad just from a perspective of open and honest economic debate, regardless of which side you lean towards.

    I do want to address one thing implicit in your arguments, however.

  26. dictateursanguinaire

    whoops got a little ahead of myself. Anyways, the whole thing about efficient allocation of capital – unfortunately, what many economic libertarians (i.e. extremists) miss in arguments is that they are not arguing with extremists from the opposite end, for the most part. When people throw out arguments like, let’s say, the Leonard Read essay about the pencil, it’s setting up a strawman. Not many significant economists are running around today saying that the gov’t would be more efficient at making pencils than the private sector. Government can malinvest, to use the phrase, but that has no bearing on whether gov’t has a right to invest or not or whether or not it’s NEVER efficient. Where most people disagree is not on having state socialism or not, it’s whether having effective and sensible regulations and a good sized and effective public sector is a good idea, or at least just being OPEN to such suggestions. Once the argument is put in those terms, it’s very difficult to take the Mises/Paul/Rockwell crowd very seriously. The thing I always remember is reading the Economist during the headiest days of the American healthcare debate, and their editorial which was, paraphrased, “Look, we’re on the right economically but the people who are stridently and categorically against universal healthcare of some sort just don’t get it.” And I think that’s where it’s at. We need some sort of economy not entirely dominated by the state or private sector; proceed from there for debate.

    1. F. Beard

      We need some sort of economy not entirely dominated by the state or private sector; proceed from there for debate. dictateursanguinaire

      The solution is separate government and private money supplies. That way, government monetary mismanagement would not affect the private sector. The government could still tax since every private money would have a free market exchange rate with the government’s money.

  27. dictateursanguinaire

    last bit, sorry, just wanted to say that I was not considering you an economic libertarian and thus extremist – even if you might think of yourself as a libertarian, I very much doubt that, e.g. Rand Paul, would consider anyone who even debates MMT to be anything but a fascist, so I’m considering you a mixed-economy type in my schema

    1. F. Beard

      I very much doubt that, e.g. Rand Paul, would consider anyone who even debates MMT to be anything but a fascist, dictateursanguinaire

      Those who advocate government recognition of PMs or anything else but the government’s own fiat as money are the fascists.

  28. Nyeve

    I like the example of Kate and Sam, from a transaction point of view, everyone is an island with either a trade surplus or deficit.

    I agree with the final paragraph that the stimulus has been ineffective. I’d rather have see those bailout billions spent on a humans-to-Mars space program, a real one like Zubrin’s Mars Direct.

    1. Valissa

      “I’d rather have see those bailout billions spent on a humans-to-Mars space program”

      Best idea yet…Go Mars Society! (btw,I’m a member)

  29. MyLessThanPrimeBeef

    Here is my Always Modern Monetary Theory (AMMT):

    Money printed = money in the public sector + money in the private sector + money in foreigners’ hands.

    Assume government gets rid of money as soon as it’s printed (why waste it by hording? a good gov’t always spends very little cent it has), the more $ it prints, the more money owned by the private sector (let’s leave out the foreigners for a sec).

    In short,

    MP = MPS

    MP = money printed

    MPS = money in the private sector.

    That’s the key mathematical identity.

    So, the way for the private sector to have more money (who cares about saving) is for the government to print more.

  30. flow5

    MMT is concealed greenbacking reconstituted. Treasury-Federal Reserve collaboration exists in its present state, because whenever in the past the FED’s responsibilities were subordinate to the Treasury’s, this country experienced intolerable rates of inflation.

    1. F. Beard

      Treasury-Federal Reserve collaboration exists in its present state, because whenever in the past the FED’s responsibilities were subordinate to the Treasury’s, this country experienced intolerable rates of inflation. flow5

      The solution to that is simple – allow genuine private currencies. Then if the government overspent wrt taxation then only the government and its payees would suffer.

      1. Valissa

        I think private currencies is a great idea, but not sure how they would get allowed by TPTB. It’s a major power issue. Let’s say they did though, I think they would inevitably develop some type of connection or relation with the state’s fiat money as there would be a need to transact between the two (or more) currencies on occasion. So I don’t see how the private money could be completely separate from the fiat money in practice. How would you keep them from co-mingling and/or effecting each other’s value? Would speculators go private moneh

        Also who would be charge of the various

        1. F. Beard

          I think private currencies is a great idea, but not sure how they would get allowed by TPTB. It’s a major power issue. Valissa

          Main Street and the government should have no problem with private currencies but it does cut the bankers out of the loop. Who cares?

          Let’s say they did though, I think they would inevitably develop some type of connection or relation with the state’s fiat money as there would be a need to transact between the two (or more) currencies on occasion. So I don’t see how the private money could be completely separate from the fiat money in practice. Valissa

          People would at least need the government’s money to pay their taxes. However, the price of government money would float wrt private monies so that if the government overspent then its money would become cheaper on the open market. Taxes would then be easier to pay in real terms.

          How would you keep them from co-mingling Valissa

          Why would one wish to prevent that? Let people use what they wish for private debts.

          and/or effecting each other’s value? Valissa

          People would be free to use or not use the government’s money for private debts. That would serve as a needed check-and-balance.

          Would speculators go private moneh Valissa

          Sure. What would stop them? But what tools would they have if the government enforced counterfeiting cartel was abolished? Leverage would be very limited by market forces.

          Also who would be charge of the various Valissa

          No one. The usual laws against fraud and insolvency would still apply though.

  31. Billy Ray Valentine

    I think if you ate 8 coconuts a day you’d be shitting out Mounds bars!

      1. Valissa

        Ka-ching! btw, why are economists so serious and earnest? Where is the Jon Stewart of the economic world? Or the Stephen Colbert?

  32. Magpie

    I give Robert Murphy credit for trying to discuss MMT in a reasoned manner.

    Unlike others, I see merit in his discussion of the uses of national accounting identities.

    However, and I must say this clearly, his Sam & Tabitha example showed he doesn’t have a clue about MMT mechanics.

    In that example, Tabitha (i.e. the taxpayer) saved some money and lent it to Sam (the government). With that money Sam bought some assets to provide Tabitha some services. When the loan expired, instead of repaying Tabitha, Sam pulled a gun and demanded an amount of money equivalent to the loan, and repaid the loan. In Murphy’s view, this is equivalent to charging taxes.

    Notice that it is Tabitha who makes all the payments in Murphy’s example.

    However, what MMT proposes to stimulate the economy in a depression is for the government to increase spending (thus, it is Sam who makes the first payment, not Tabitha).

    If there is no inflation, Tabitha is not required to pay any taxes (notice that the money Sam lent Tabitha is fiat money: at most some pieces of paper, or some bits in a computer hard-drive). If there is inflation, Tabitha could be required to pay taxes (I said “could” because there are other means).

    In other words: this situation is equivalent to Uncle Sam making a loan to Tabitha, a loan whose payment is contingent upon inflation.

    Ironically, by trying to avoid paying taxes, it would be Tabitha the one trying to cheat Sam.

  33. vlade

    While MMT has quite a few things going for it, it misses the elephant in the room.
    As a number of other economic thoughts, it’s predicated on the great unwashed public (GUP) going with it.
    To be specific, MMT is correct that government printing money need not lead to inflation. That is, as long as the GUP trusts the currency and is willing to use public (government) money to settle private transactions. The moment this trust evaporates (i.e. the distinction between private and public money becomes apparent, not only implied), poof, MMT assumptions are gone (and, to be fair to it, quite a few other’s school of thoughts too).
    Printing money is one of the ways to evaporate this trust – not for any rational reason necessarily, but hey, we’ve got a long history of being irrational (that’s what being human is all about, after all!).

    It’s really rather simple – any and all economic theories require some sort of belief (because they deal with future, which is by definition uncertain and requires us to believe in) – and that includes commodity currencies where the commodity has no intrisnic value (say gold/silver) immediately extractable by the final user in absentia of anyone else (and there’s even limit to how many coconuts one can eat). Once that belief is gone from the society, the economy fails, for its predictions are no longer consistent with reality.

    Thus the most important function of an economist is to action as a priest, propagating belief in his/her version of the world – as, unlike many other instances, the word here can shape the world.
    If MMT successfully persuades GUP that debt doesn’t matter, it will not matter. If a different school persuades it (as they have now) that it does, it will.

  34. Rodger Malcolm Mitchell

    “As Murphy rightly says, ‘of course you don’t need the government in order to save.'”

    Oh really? Where did the coconuts come from? Where do dollars come from?

    Rodger Malcolm Mitchell

  35. Robert Longtin

    I don’t have the laser vision to read all 86 comments in 9 point type, so excuse me if I repeat a previous post. Depending on your perspective, Murphy is either on target or out to lunch with the coconut barter-system analogy. The late Paul Samuelson, of course, would applaud, wherever he is, but an MMT’er like L. Randall Wray would grumble, “There you go again.” Wray has published extensively on how erroneous the barter-system theory of money is. It presupposes that money is a market-lubricating phenomenon. Wray claims money is actually a hail-to-Caesar phenomenon that subjugates and forces citizens to accumulate shekels to pay their taxes. That’s the heart of the debate. If Wray and the MMTers are correct, Murphy is making a false argument based on an imaginary world. If Murphy is correct, his arguments have traction and can be debated.

  36. jaymaster

    The Caruso story works with MMT too, when one critical question is answered: where did the coconuts come from?

    The tree of course, which in essence created them out of thin air (and a bit of water and soil in the real world). The tree then had to “sprout them into existence”, in order for Caruso to obtain them.

    If the tree created 10,000 coconuts, and no one was interested in eating or trading them, there would be no inflation. They would just hang there on the tree, unpicked.

    But in the real world, in a fiat system, we don’t need to rely on the fickleness of nature (or the markets) to generate a “just right” amount of coconuts. The government has the ability to create them at will, and from thin air.

    Now to complete the MMT story, we also need a coconut destruction mechanism. This is the tool the managers of the economy would use to withdraw excess coconuts from circulation if things do get overheated (i.e., inflation creeps in). Because MMT states that inflation is most certainly a risk with fiat currencies. MMT’s cure for inflation is government taxation, which in effect pulls excess currency out of circulation and effectively “kills” it if inflation becomes an issue.

    I think a huge ape, on the order of King Kong, might fill the bill. This ape has an infinite ability to consume coconuts when necessary. But during normal times, he only needs a few coconuts to keep him functioning. But he also has huge stores of fat, so that during times of economic struggle, he can go for years without eating a single coconut. This would equate to a tax cut in the real world (which some MMT’ers have been calling for for years now). But if/when the coconut supply gets too big, and inflation does appear, the ape can step in and remove the excess coconut supply.

    IMO, the point that Austrians etc, are missing is that modern fiat money doesn’t grow on trees like coconuts, or come from a hole in the ground like gold. Instead, it is a fictitious construct that is completely under the control of the issuing government.

    1. Cedric Regula

      I think the coconuts come from the Federal Coconut Reserve. But obviosly if we can pay our taxes in coconuts, then a bunch of monkeys in Congress will destroy the coconuts.

      This completes the coconut life cycle, to the satisfaction of MMTers.

  37. F. Beard

    I think a huge ape, on the order of King Kong, might fill the bill. This ape has an infinite ability to consume coconuts when necessary. jaymaster

    Who makes the decision that there are too many coconuts in circulation? Who measures the price inflation rate? The government? Do you see a conflict of interest there?

    Hence the necessity for private currencies so individuals can escape the government’s money supply if it is not properly managed. They would serve as a needed check and balance to government spending.

    1. jaymaster

      Yes, the government makes the decisions, and yes there is a potential for conflict of interest there.

      But that’s why we vote, at least in the US….

      1. F. Beard

        But that’s why we vote, at least in the US…. jaymaster

        We vote for the management of a single, one-size-fits-all money supply for ALL debts including private ones. But why is that necessary? It isn’t. Let the government create and manage its money as the MMT folks say and let the private sector create its own monies and manage them.

        Taxation would be no problem since any private money of consequence would have a free market exchange rate with the government’s fiat. The only tax that would have to be abolished is the capital gains tax since that partially defeats the purpose of private currencies.

  38. Hugh

    I missed this thread. I just wanted to second Valissa’s thoughts. MMT no matter the protestations to the contrary does not deal with kleptocracy. So it like every other economic theory does not deal with the economy we have.

    While some economists that lean to MMT, like Jamie Galbraith and Bill Black, discuss criminality in the system, neither that I know of has addressed the criminality of the system itself. We do not have just some, even many crooks in the system. We have a system that is being run of, by, and for the crooks. The two concepts are very different.

    The truth is we have no theory of kleptonomics, that is of the economy we have. MMT certainly does not provide it. We have need of one both to understand the consequences of kleptocracy and how we might unwind those consequences with the minimum of damage to ordinary people, i.e. us.

    I have often said that MMTers are their own worst enemies. Their expositions of their theory are notoriously and unnecessarily opaque. And their reaction to questions about and discussion of MMT and its limitations is generally hysterically hostile. The result is that, despite having some good ideas, it remains marginalized both in the admittedly discredited field of economics itself but also in the wider world. If and when MMTers address the great issues of our times: kleptocracy, class warfare, and wealth inequality, I will pay more attention to it, but not until then.

    1. F. Beard

      If and when MMTers address the great issues of our times: kleptocracy, class warfare, and wealth inequality, I will pay more attention to it, but not until then. Hugh

      Abolishing the government enforced money monopoly for private debts should fix those. Well, a bailout of the entire population might be needed too.

      The MMT crowd has 1/2 the solution but private money supplies are needed too.

    2. TC

      We are not claiming MMT is perfect, only better.

      MMT doesn’t cause the world to ascend into heaven where everyone gets a free lunch.

      MMT is about money at the source. Once it gets out into the world, there are problems with society that MMT cannot solve. These are important problems, but they require solutions that MMT or current economic monetary theory cannot provide.

    3. attempter

      Theory of kleptonomics? It’s pretty simple.

      Neoliberalism was a strategy and process for the oligopolists to maintain as much wealth and power as possible in the face of Peak Oil and the terminal morbidity of the profit rate, as all sectors matured. It’s the most monumental, and final, primitive accumulation process. (As history has shown, capitalism must keep on repeating the original accumulation process or it stagnates and collapses. And it must repeat this at ever-shorter intervals.)

      Globalization was the extension of the old-style imperialist accumulation. The added feature is that the globalization cadres (IMF, WTO) are intended to impose direct administrative rule over populations in the style of Nazi repression bureaucracies, taking over from governments abdicating their sovereignty. Government will continue to function only as bagman and thug.

      The basic unit of organization, extraction, and domination is the corporation. It represents the same aggressive anti-sovereign force meant to enter and dominate the void left behind by abdicating government and eradicated civil society.

      Meanwhile neoliberalism maintains representative pseudo-democracy, kangaroo “elections” between identical criminal gangs who strive to trump up misdirectional “controversies” to differentiate themselves and round up two vast herds of sheeple. Wolin called this sham representation “inverted totalitarianism”. (Although here too the kleptocracy is building on the crimes of the past. As early as Federalist #10 and 51, Madison openly admitted a “republic” was a scam to keep the people divided against one another so parasitic elites could rule.)

      To cap the structure, financialization delivered the entire hierarchy into the hands of the banksters. Thus all the crimes, all the liquidations, are coordinated from one center. The debt economy also served the double purpose of:

      1. Stringing the people along, propping up consumerism, the “American Dream”, the “ownership society”, the mortgage bubble, and other scams, while the entire real foundation of their economic life was subverted, eroded, and destroyed.

      2. Rendering them so indebted that short of a revolutionary self-jubilation, they can be permanently indentured.

      And thus we have the plan for the final stage of the liquidation:


      Post-oil we’re slated for the new feudalism. The kleptocrats will become a network of warlords ruling over vast tracts worked and mined by slave labor in the form of indentured debt serfs. The criminals will try to maintain as luxurious a lifestyle as possible through this mechanism.

      It’ll be far worse than the original feudalism, since these serfs won’t even have their commons, nor will they have the consolation of the medieval church, nor their oppressors restrained by it in any way.

      That’s what the kleptocracy intends. Neoliberal corporatism is the strategy toward that. With the intentional crash in 2008 and the subsequent Shock Doctrine onslaught of the Bailout and “austerity”, we’re entering endgame. This is now a full command economy based on chronic corporate welfare and acute bailouts, while governments are openly abdicating all roles but serving as this bagman, and to act as thug on behalf of these corporations.

      As I describe at that link, between economic liquidation, privatization, undischargeable ever-mounting debt, and the police state, we’re to be crushed forever.

      Either the kleptocracy must perish, or humanity itself must die.

  39. jaymaster

    In my understanding, MMT in its pure form maintains that tax cuts and increasing government spending are equally effective in boosting a malfunctioning economy.

    And in my opinion, putting that money back into the hands of the folks who earn it, and allowing them to make decisions as to how to spend it, is bound to be more efficient than allowing the government to dole out vast sums.

    Across the board tax cuts also cut down on the potential for the crony capitalism/kleptocracy that we are certainly witnessing today.

    I think most followers of MMT accept the fact that governments can be too big, and that they are certainly capable of misallocation of capital.

    Of course, both of these thoughts are anathema to many progressives, which is another reason MMT has so many political enemies….

    1. F. Beard

      In my understanding, MMT in its pure form maintains that tax cuts and increasing government spending are equally effective in boosting a malfunctioning economy. jaymaster

      The reason the economy is malfunctioning in the first place is the government enforced monopoly money supply for private debts.

      So now the economy is short of money? Then allow the private sector to create some. Indeed some cities are creating their own local currencies. All legal and tax impediments to private currencies should be abolished and then the private sector will never again suffer a shortage of money.

      Debt forgiveness or better a bailout of the entire population is also called for.

    2. JTFaraday

      “And in my opinion, putting that money back into the hands of the folks who earn it, and allowing them to make decisions as to how to spend it, is bound to be more efficient than allowing the government to dole out vast sums.”

      Well, one thing I’ll say for them. They do recognize that it’s not the mere matter of “putting that money back into the hands of the folks who earn it” so they can “decide how to spend it,” but what looks to be the growing problem of those with little to no opportunity to “earn it” at all.

      (Right. I know. It’s probably their fault).

      1. loaded

        Absolutely right JT. Where I come from (Cayman Islands), the Fed just hands out money like beads during Mardi Gras.

        So if you’re not rich, it’s your own damn fault.
        Work. It’s such an antiquated notion.

  40. Clark Thornton

    The post from Ed Harrison, from the Mises take on MMT, has been very instructive. I’m still not grasping the entire controversy (and I have a 30-year-old M.A. in econ, from a good school that was one of the last to cave in to the mathematization of this pseudo-science). I think that one of the interesting points is the question of “private money”–I’m not sure, but I recall that the recent conviction of a silver bug for issuing his own coins, perhaps is a harbinger of things to come. The TBTFs do not want anyone to be outside their fraudulent system, yes?

  41. Michael Warhurst

    To start with, if you do not think that the recent ‘great recession’ created and fostered by the TBTF’s (the high and holy of capitalism) does not prove beyond any shadow of a doubt that ‘capitalism’ is not about, nor capable of, allocating capital correctly without strict and enforced regulation by government then you must live in another galaxy.
    The private sector has been proven to be capable of responding only to greed unless strictly regulated.
    Morality has three positions:
    Moral, which means one knows what it is and does it;
    Immoral, which means one knows what it is and doesn’t do it;
    Amoral, which means one never considers morality in the first place.
    Morals are the combination of all human and social values – none of which can be measured nor described in terms of dollars.
    Capitalism’s only value is dollars and if something is not describe-able nor measure-able in dollars it is impossible to consider by capitalists nor capitalism.
    Under current practice ‘money’ is created by private financial institutions through their extreme leverage of assets – out of thin air – and is related to and ultimately created through governmental or personal debt. (If the leveraging of assets to create ‘money’ is not inflationary then I do not know what is!)
    Private financial institutions creating ‘money’ out of thin air and lending it to governments is obscene, unnecessary and incapable of building communities or responding to a single human or social value. Private financial institutions are capable only of responding to individual greed and therefore cannot allocate capital any other way than into the pockets of wealthy elites who possess incredible advantage over working class individuals and are the holders of their personal and governmental debt.
    The only reasonable way to create ‘money’ so that human and social values and morality are served is for the government to create ‘money’ and spend it into the economy.
    This would eliminate the debt enslavement of individuals and government (the collective of individuals) to wealthy elites.
    America is a republic. A form of government created by Plato in response to the Greek democrats forcing Socrates to suicide by swallowing hemlock. Plato did an historic freak out and created a form of government which is the diametric opposite of democracy. Democracy is run by the majority of all voters, while a republic is run by wealthy elites.
    Democratic republic is an oxymoron and a practical impossibility as the current situation in the USA unequivocally proves.
    A government which is stalemated or when government authority is divided up many times, the wealthy elites and their corporate vehicles will control everything and eventually suck up all of the wealth. The wealthy only know that they have sucked up all the money possible when there are only two classes of people – rich and poor; only then will they stop sucking.
    When financial elites inevitably go amok with greed and destroy the financial system (while collecting obscene amounts of more wealth), what does neocon economics prescribe?? Higher interest rates!!?? Higher interest rates effectively transfer money from working folks to wealthy elites. Sooo- wealthy elites create inflationary economies through unwarranted debt which can only be rectified by – guess what?? – transferring even more money to themselves through higher interest rates!!??
    The concentration of wealth by wealthy elites is a ‘heads I win, tails you lose’ proposition. Heads wealthy elites win by excessive wealth accumulation through working class & government debt and inflating markets; and tails you (consumers) lose through higher interest rates paid to wealthy elites (ostensibly to combat the scourge of inflation) by the working class and governments.
    The safest and fairest way to take excessive money out of an overheated economy is through taxes NOT through interest rates.

  42. Mike

    If anyone thinks that the bailouts were anything more then a way to fleece more money from americans is sadly mistaken.
    Are we to think these banks did not realize how risky these
    mortgages were? In 1997, Brooksley Born warned in congressional testimony that unregulated trading in derivatives could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it.” Instead of heeding this oracle’s warnings, Greenspan, Rubin & Summers rushed to silence her.In June 1998, Greenspan, Rubin and the then head of the SEC, Arthur Levitt, Jr., called on Congress “to prevent Ms. Born from acting until more senior regulators developed their own recommendations.” How can we be lead to believe that these
    men really thought That a free market was also a unregulated market and they had not checked up on these
    OTC derivitives. I believe this was all a scam as not the first and definatly wont be the last but might be next to last. This Liar Greenspan testified there was no need for government oversight, because the derivatives market involved Wall Street “professionals” who could patrol themselves. LOL, all these men should all be in jail as should the mortgage companies, wall street brokers, AIG,
    rating agencies and especially Summers, Rubin, Levitt and
    especially Alan Greenspan who i know protected his wall street buddies from being shut down and losing their profits.

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