Randy Wray: Helicopter Ben – How Modern Money Theory Responds to Hyperinflation Hyperventilators

L. Randall Wray is a Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College. Cross posted from EconoMonitor

In the first part of this series on hyperinflation I addressed the critic’s view that if Modern Monetary Theory were adopted, this would inevitably lead to hyperinflation. I argued that this is obviously false—MMT describes how any sovereign government that issues its own currency spends. They’ve all done it for the past “4000 years at least” as Keynes put it. All modern sovereign governments spend by “keystrokes”—making electronic entries onto balance sheets—what most critics somewhat misleadingly call “printing money”. There is no other way to spend a sovereign currency into existence. Only the sovereign government can create it. If you try to create US currency in your basement, you go to jail.

In the second part, I argued that hyperinflation is a rare occurrence. Obviously, if “keystrokes” inevitably lead to hyperinflation, then hyperinflation ought to be a common feature of just about all economies for the past 4000 years. Instead, we find that experience with hyperinflation is quite limited, and seems to result from very specific circumstances such as unwillingness or inability to impose and collect taxes, with civil war, or with huge external debts denominated in a foreign currency. And while goldbugs and others think that tying a currency to gold (or to a foreign currency) is a sure-fire way to avoid inflation, what we actually observe in the real world is that such systems are inherently unstable and rarely last long before they crash—often with an exchange rate crisis and high or hyper-inflation.

In this final part of the series I will address the belief that the US (and other countries with large budget deficits in their own floating rate currency) faces hyperinflation. Many fear that “Helicopter Ben” (Chairman Bernanke) has pumped so much “money” into the economy that high inflation, if not hyperinflation, will be the inevitable result. This is one of the reasons for the run into gold—supposedly an inflation hedge.

In reality, there is no surer bet than the wager that the US will not experience significant inflation for many years to come.

Let us first deal with the helicopter story. In the aftermath of the financial collapse of 2008, the US government (Fed plus Treasury) spent, lent, or guaranteed to the sum of $29 trillion to save Wall Street. (That, in itself, is the story of the century; but it will have to wait for another day.) What concerns our hyperinflationary hyperventilators is the record increase of bank reserves—created as the Fed lent reserves, purchased toxic waste assets, and bought Treasuries from banks. The Fed makes purchases and lends by crediting banks with reserves (the Fed’s liability) in exchange for an asset (either the bank’s IOU, or the asset sold by the bank to the Fed).

Most of this occurred during QE1 and QE2, undertaken in the Fed’s misguided belief that it could pursue a “quantity target” (increasing reserves) rather than simply a “price target” (low interest rate) to stimulate the economy. (That too is an amazing story of self-deception, to be told another day.) It didn’t work. Now QE3 seems inevitable, and it will not work, either. But in any case, the banks have got a couple of trillion dollars of reserves that they do not need.

The hyperventilators scream hyperinflation! As soon as banks start to lend out those reserves, borrowers will pump up the economy beyond full employment, causing inflation. Worse, banks can lend a multiple of the reserves (the so-called deposit multiplier)—so rather than lending a measly $2 trillion, they might lend $20 trillion or more. That would add trillions to our GDP of about $14 trillion, obviously way beyond the capacity to actually produce goods and services. And all that comes on top of the Federal government’s record budget deficits—and its borrowing. So a debt-fueled spending bubble will make us the next Zimbabwe or Weimar.

Here’s what is wrong with the analysis. First, it misunderstands the relation between bank reserves and lending. Second, it misunderstands the economic situation.

Banks do not lend reserves. Indeed, they cannot—there is no balance sheet operation that allows banks to lend reserves to anyone except to another bank that has an account at the Fed. The reason is quite simple: reserves are an entry on the balance sheet of the Fed. When a bank lends reserves, the Fed debits that bank’s account and credits another bank’s account. You and I do not have accounts at the Fed. No bank can lend reserves to us. Period.

What do banks actually lend? Their own IOUs. Let us say that you are credit worthy (maybe a stretch, given the state of the economy—perhaps like many Americans you’ve lost your job and are delinquent in your house payments). You go to your bank and ask for a loan—for a car, a boat, a house, a TV. You provide your IOU to the bank (promising to make payments) and the bank provides you with a check (its IOU) that you hand over to the seller. The seller deposits the check and gets a credit to a demand deposit. (If it is a different bank, there is a clearing of accounts using reserves—we’ll get back to that.) In other words, banks make loans by crediting demand deposits—which are the IOUs of banks. As we MMTers say “loans make deposits”.

(When you repay a loan, the deposits are debited, or “destroyed”. You write a check, the bank debits your demand deposit and your IOU to the bank is simultaneously debited. The process is the reverse of bank lending.)

So to be clear: banks create demand deposits when they make loans; they do not lend reserves.

Now, what about check clearing? When a bank gets a check from another bank, it credits a demand deposit and sends the check to the Fed for clearing; the Fed credits that bank’s reserves and debits the reserves of the bank on which the check was written. The reserves “move” from one bank to another. Again, no reserves have escaped into the economy—they are all safely locked up at the Fed. They cannot get out except through ATM machines, in the form of cash. When you make a withdrawal of cash from your demand deposit, your bank debits your account and the Fed debits the bank’s reserves. Of course, you could just have well spent using a demand deposit—you took out the cash for convenience (perhaps to finance illegal purchases?).

The only other way that reserves disappear is when the banks buy Treasuries from the Fed or from the Treasury—they essentially “pay for” Treasuries using reserves. That is the end of the story of reserves. Except for cash withdrawals or purchases of Treasuries, they stay locked up at the Fed.

What about Helicopter Ben? When the Fed bought all that junk as well as Treasuries from banks, Ben had the Fed credit their reserves. The Fed also changed its practice and began to pay interest on reserves—25 basis points. So effectively reserves became indistinguishable from Treasuries—they are government IOUs that pay interest. Banks can choose to hold a Treasury that pays interest, or reserves that pay interest—it is a portfolio choice. One has a maturity (maybe as short as 30 days), so it is like a time deposit, and the other has zero maturity so it is like a checkable deposit. But since the market for Treasuries is highly developed and liquid, banks have no problem moving from their “time deposits” (Treasuries) to their “demand deposits” (reserves). (No substantial penalty for early “withdrawal”!)

The main case for hyperinflation rests on the misguided belief that banks are for some reason more willing to pump up lending when they hold “demand deposits” rather than “time deposits”. Clearly they do not lend either one. They use reserves (“demand deposits”) for clearing with other banks, and for ATM withdrawals. But Treasuries (“time deposits”) serve just as well—banks can always borrow reserves from other banks or from the Fed, using Treasuries as collateral (and they’ve got other assets that also serve as collateral except in a run to liquidity).

Indeed, banks do not need either reserves or Treasuries in order to lend. Recall they lend their own IOUs. If they then find they need reserves for clearing (or, later, to meet required reserve ratios), they borrow them from other banks (fed funds market) or from the Fed (discount window), or they sell assets to obtain them.

Turning to the state of the economy, except for the final stages of the speculative boom in commodities (that will surely end soon) there are no significant inflation pressures. Fourteen million people are looking for jobs. Even the most rosy projections see high unemployment for years. As Eric Tymoigne has demonstrated, at the current pace of “recovery” we will not get back to the employment levels of January 2008 before 2017—and meanwhile the potential labor force will have added millions of high school and college graduates as well as immigrants. (http://neweconomicperspectives.blogspot.com/2011/09/after-great-recession-bleaker.html)

And the US is in relatively good shape—compared with Euroland and Japan. Further, all the recent evidence for the US shows a “double-dip” is underway. I expect resumption of the financial crisis any day (the lawsuits against the biggest banksters will help hasten that). Even the Chinese economy is slowing—which could increase their efforts to produce competitive exports.

Just where are all those borrowers who are willing and able to borrow the $2 trillion or $20 trillion that hyperventilators believe banks want to lend? The US private sector (firms and households) have instead ramped up their net savings—they are not borrowing, they are not even spending their diminished income. They are scared. They are (rationally) tightening belts, paying down debt, and accumulating claims on government and banks.

In short, the prospects for inflation have not been smaller since 1930.

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  1. Jim Haygood

    Actually, MMT is unlikely ever to respond to ‘hyperinflation hyperventilators.’ When current abnormally negative real rates finally normalize — with a corresponding surge in nominal yields which will provide strong incentives for governments to inflate away the real value of their debt — MMTers will fade into the woodwork, just as hard-core monetarists did in the mid-1980s when it turned out that the connection between money supply and inflation was not nearly so tight as Milton Friedman had imagined.

    Nevertheless, despite the sloppiness of the link between money supply and inflation, Friedman was right that inflation is always and everywhere a monetary phenomenon.

    MMTers end up sounding like Modigliani-Miller, circa 1958, when they said that it doesn’t matter how a corporation finances itself. Now MMT zealots (‘zealot’ being the mirror image of a ‘hyperventilator’) assure us that ‘if “keystrokes” inevitably lead to hyperinflation, then hyperinflation ought to be a common feature of just about all economies for the past 4000 years.’

    This is a straw man argument. Hyperinflation don’t bother me. Rather, it is the chronic mid-single digit inflation — averaging about 4% over the past hundred years in the US — which marks a distinct and radical inflection point from oscillating but (on average) stable price behavior over the preceding millennium. Four percent may sound modest, but it is economically and socially corrosive. And it’s unquestionably the misbegotten offspring of a gov-worshiping, ‘spending keystrokes’ mentality.

    In all likelihood, today’s pathologically low sovereign yields are as fleeting as ‘Nasdaq 5000’ was eleven years ago. Year-on-year CPI is already at a disturbing 3.6%. So enjoy your ‘no inflation’ climatic optimum while you can — those glaciers are melting fast. And the empty mirage of MMT will evaporate with them, as is entirely appropriate for a ‘thin air’ based theory.

    1. Peter T

      Jim Haygood:
      “Hyperinflation don’t bother me. Rather, it is the chronic mid-single digit inflation — averaging about 4% over the past hundred years in the US — which marks a distinct and radical inflection point from oscillating but (on average) stable price behavior over the preceding millennium. Four percent may sound modest, but it is economically and socially corrosive.”

      What do you find so corrosive about steady, expected inflation at 4% (or 2% if that is chosen as target)? It seems to me an elegant way to put real prices under pressure, because keeping a real price constant requires raising the nominal price repeatedly, which causes the buyers to research the market better.

      Hyperinflation, however, is economically and socially corrosive, because it destroys the money that we need to act economically and destroys the trust of the people. I don’t fear that hyperinflation is around the corner, but every monetary system should have safeguards against it.

      1. Johnny Clamboat

        “What do you find so corrosive about steady, expected inflation at 4%”

        My guess is that it’s the doubling of prices every 18 years in the face of artificial interest rates.

        1. Yves Smith Post author

          Australia has had one of the highest growth rates in the OECD since 2000 and it tolerates inflation at that level and higher. And its currency has appreciated pretty dramatically too. Oh, and it didn’t have a dot com bust, which meant its growth story was superior prior to the commodities boom.

          So tell me again why a bit of inflation is bad?

          1. Toby

            Of course the sensible time to deal with the flaw of a system dependent on infinite growth on a finite planet is after it’s too late to do anything about it. While there are still ‘idle resources’ to be turned into goods and services we should carry on pushing Growth. The only thing that delivers prosperity and wealth and health is perpetual growth. Everyone knows that. That’s beyond dispute.

            And if we have no problem of planetary carrying capacity, if I and those who share this concern are being too ‘Malthusian’, then we most definitely have a problem of technological unemployment. Getting money to people via wage labour is not going to work much longer. Do we really want to insist on humans doing any old job just to ‘earn’ money with which to buy stuff? If yes, for how long?

            A little bit of inflation is exponential because of the maths of percentages, in just the same way that a little bit of GDP growth is exponential. Without the growth, the inflation gets ever worse, becomes more and more corrosive. While the time scale may seem long from the human perspective, if we don’t deal with this fundamental flaw in our interest-bearing debt-based system soon, our progeny will suffer from our addictions and be unable to do anything about it except flee.

          2. PianoRacer

            What Toby said! “A little bit of inflation” very, very quickly turns into exponential growth! a 5% / yr increase DOUBLES in 14 years, HALVING the savings of anyone denominated in that currency in that time! The result of this is to force excessive speculation to beat inflation, which MASSIVELY misallocates resources in the economy!

          3. Fiver

            Australia is going to crash and burn when China meets its appointment with misallocated investment Reality. The inflation associated with riding a once-in-history commodities boom is not at all instructive for the US.

          4. Siggy

            Inflation is about the loss of purchasing power. The persistent loss of purchasing power is what frives people to the acceptance of greater and greater levels of risk. It has the effect of altering perceptions and makes it possible to foist all manner of frauds; e.g., that CDO’s could AAA tranches when the CDO is predicated on the income streams of first loss bonds. That is, folks accepted CDO’s with AAA ratings when the CDO’s had an expected valued of zero.

            I know there’s a great deal more to it than that, but that is merely a beginning. The persistent loss of purchasing power destroys capital formation by eliminating savings. Why save if the saved amount will buy substantially less in the near to midterm future? Look back over the past 40 years and consider the relationship between savings and the rate of loss in purchaisng power which may be expressed by 1 / the Index of Inflation.

            Over an extended period of time, a little inflation can be just as deadly as hyperinflation.

            What Mr. Bernanke is doing will benefit the banks and the banks only.

            What MMT does is offer an excuse for a profligate Government. You want a lot of services and no taxes, MMT is the ticket then. Just print away. An if you think that Japan is a poster child for controled inflation, go look again and reflect on the effect on birth rates. Moreover, Japan is a closed society, there is no immigration, there is no intergration, there is no assimilation.

            Yves, you did a wondeful job in ECONNED, please do a bit of homework onhow the persistent loss of purchasing power of the operates to induce fraud. Sit at a trading desk and ponder what to do with a wheel barrow of money that won’t but the wheel barrow. That’s what’s been going on for 35 years.

        2. Peter T

          Johnny Clamboat:
          “My guess is that it’s the doubling of prices every 18 years in the face of artificial interest rates.”

          The world changes during our lives, and mostly to the better. We change with the world. Why should the price levels of our childhood be something so valuable to sacrifice our welfare for? Doubling of price levels every 18 years or every 40 years seems not to difficult to deal with by the human mind. Your investments can double, too, over ten or twenty years. – Hyperinflation is a completely different beast, because it not only changes price levels, but creates a contempt for thrift and mutual trust among people.

          1. steve

            A constant 4% inflation rate also has the benefit of basically forcing one to put their retirement savings into the hands of someone else in the form of either stocks or bonds. Because everyone knows these investments always beat inflation and frauds are made whole. It increases trust!

          2. Toby

            At 4% global GDP growth the world’s economy is doubling every 18 years. For how long is this a sensible way to to treat the planet? How much of the planet’s ‘idle resources’ should we turn into goods and services? Is there a maximum number of people the planet can support?

            Without constant GDP growth our money system collapses. Indeed, it is only really because of the oil glut of the last century, alongside multiple other factors, that humanity experienced a population explosion as well as growing prosperity for many. As the EROEI for oil falls (from 100 to around 15 today) this cannot be sustained. Growth is over. We need a new socioeconomics comfortable with steady state. Interest-bearing debt-money is not capable of that. The changes that need to be brought about are profound indeed.

          3. Peter T

            “A constant 4% inflation rate also has the benefit of basically forcing one to put their retirement savings into the hands of someone else in the form of either stocks or bonds.”

            Steve, retirements have to be either financed by a tax, like Social Security, or by investments, like a 401k. Investments bear risks. Diversification reduces risk but cannot remove it.

            “At 4% global GDP growth the world’s economy is doubling every 18 years.”

            You mistook 4% inflation for 4% GDP growth (by the way, I prefer 2% as inflation target). GDP growth per capita is both still possible and needed (but not needed at 4%) – we should aim for increasing GDP not by increasing volumes but quality of products, to reduce the impact on the planet.

          4. Toby


            I don’t believe I mistook anything for anything. How can inflation be good without GDP growth above the rate inflation? I was talking about GDP growth on purpose because that’s what this is all about. Perpetual growth is impossible on a finite planet. Period. You don’t seem to have understood my general point at all.

            How do you propose to increase GDP growth by improving the quality of products? To me, high quality means lower built-in and perceived obsolescence, which means slower cycling of consumption. Thus higher quality across the board (which I am all for, and far less junk and needless consumerism too) would translate to less growth. And that’s a good thing. Do you see this differently? Are you thinking of Paul Hawken’s low ownership solution, e.g., where we don’t buy fridges, we rent them out; this means it is in the interest of the manufacturer to build them to last and generate as few defects as possible? I’m all for that sort of thing (along with other radical changes), but strongly believe that means lower growth.

          5. Nathanael

            The whole *point* of inflation is to get people to spend or invest money. Yes, 4% inflation forces people to put their retirement savings into bonds… which in a *functioning* economy, mean it forces people to lend money to a city government which needs to build a new water treatment plant (municipal bond!), and then that money goes to pay workers, and everyone benefits. Whereas if people put their retirement under their mattresses, nobody benefits.

            That is rather the point of inflation — to keep money in circulation. And secondarily, to prevent the “dead hand” of past wealth accumulation from controlling the economy — though progressive taxation is better at doing that. Mild inflation is a good thing, although it seems hard to convince people of that.

            Remember, there *are* things we need to keep investing in, even for a steady-state economy… and in a money-based economy without mild inflation, more and more money will go under the mattress.

          6. Nathanael

            Put another way, the purpose of inflation is to keep people doing *real things* rather than putting all their value in “money”, by continually devaluing the money slowly. Reduce the use of money as a “store of value”, increase the use of it as a “medium of exchange” — and keep the rate of inflation low enough that it’s still easy to use as a “unit of account”.

            I absolutely agree that we need to shift to a “steady state” economy with a stable population, but that really doesn’t say anything about inflation.

            Your steady-state economy will still require labor (for repairs, crop growing, & so forth) and so you still want to steadily devalue *past* labor relative to *present and future* labor, hence inflation.

          7. Peter T

            the purpose of inflation is to keep people doing *real things* rather than putting all their value in “money”, by continually devaluing the money slowly. Reduce the use of money as a “store of value”, increase the use of it as a “medium of exchange” — and keep the rate of inflation low enough that it’s still easy to use as a “unit of account”.

            Thank you, Nathanael, I find your description short, precise, and correct.

      2. Birch

        Researching prices is a consumerist ritual, and with the present level of energy expended on it can be counted amongst the inefficiencies of capitalism. I’m not saying it isn’t good to do, but imagine a steady-state economy where the going price of something is a long established known. Then, prices higher or lower than that common price can be understood as being of higher or lower grades. It would be easy to compare the grade against the price and know if it’s fair or not, without the variable of ‘how much has the price changed this month.’

        And when inflation is more than a layman saver can get in safe deposit accounts, it’s theft. Even if interest rates are greater than inflation, inflation is a tax on anyone with cash, a tax that goes to the banks not the government.

        1. Peter T

          “Researching prices is a consumerist ritual, and with the present level of energy expended on it can be counted amongst the inefficiencies of capitalism. (…) It would be easy to compare the grade against the price and know if it’s fair or not, without the variable of ‘how much has the price changed this month.’”

          Inflation above 10% does indeed become a nuisance, requiring unproductive price research too often, but with 2% inflation, a yearly update seems sufficient. Each year, we have a “back to school” ritual, and an annual “check the market” ritual seems appropriate for humans. Occasional market research helps the economy to become more, not less efficient.

          “And when inflation is more than a layman saver can get in safe deposit accounts, it’s theft.”

          I disagree. There is no human right to get additional money for the money you already own, not even a right to keep your money’s purchasing power. If you want to earn money on your savings, invest them in productive ways. That brings you market risks, of course, but helps the common good. “Equity instead of debt” should be our guide.

        2. Pete

          Toby hits the mark. Here’s a simple question. When will people learn that you cant live off stupid bits of paper they call money?

    2. Birch

      I wonder to what degree the screaming about hyperinflation is cover for the more insidious creeping inflation. Anyone being frugal and saving (perhaps in order to start a business without usurious bank debt) is being robbed by steady inflation and low secure deposit rates. But this is okay, because it’s not the dreaded hyperinflation.

      1. MyLessThanPrimeBeef

        I understand more public sector deficit (more government spending is better known, though the government could just as well lower taxes or even, gasp, give you money directly) would make up for frugal savers being robbed.

    3. marc fleury

      I think the correct statement is that monetary easing is always and everywhere a POSITIVE CONTRIBUTION to inflation. But if the background is one of debt deflation driven by a balance sheet recession, then you will have a deflationary force counter balanced by a inflationary contribution of QE. It can be effectively use to SLOW DOWN the rate of deflation. we know too fast a deflation with create a fisher moment (where deleveraging cannot happen fast enough, or rather contributes to further deflation and higher leverage ratios). This whole “hyper inflation” needs to take into account the broader picture. As the OP says, besides commodities, the story is still deflationary .

  2. Tertium Squid

    “banks create demand deposits when they make loans; they do not lend reserves.”

    So, what percentage of those reserves are excess reserves that the banks are not required to hold as reserves?

    And what would happen to any voluntary reserves if the Fed stopped paying interest on reserves?

    And furthermore, if there’s nobody borrowing, don’t the banks just wager their capital in the stock casino? Wasn’t there 85% “inflation” in the market in 2009-2010?

    “And the US is in relatively good shape—compared with Euroland and Japan.”

    Our big banks are immune from contagion?

    1. marc fleury

      Clearly QE was designed to smoke savers out of cash by lowering yield. In a time where returns are meager, to lower the yield curve seems like the sensible thing to do. The “wild” ‘swing though is probably more market psychology in EQ than anything else (although it clearly was a catalyst). the bond markets just showed stabilization and a liquidity crisis was averted. First things first. Don’t turn a balance recession into a liquidity crisis or you will end up with a depression. Bernanke had that much clear in his head.

  3. Tao Jonesing

    So to be clear: banks create demand deposits when they make loans; they do not lend reserves.

    Wait a minute. Satyajit Dat told us a couple of posts ago that “It goes back to how financial institutions make money – primarily, by lending other people money (that has always been and still remains the core of banking profits).”

    So, who is right?

    1. Yves Smith Post author

      Loans create deposits. Das said nothing about reserves.

      And if the two ever are in conflict. Wray is the expert on monetary operations, while Das is an expert on derivatives.

      1. Leverage

        I may be wrong but I think you all are reading it wrong. Banks make money means, there, banks profit from making loans.

        That’s right, banks profit from loaning. How money is created is an entire different thing, and I don’t think that’s what Das was talking about in that phrase. Actually what banks create is not real fiat money, but credit; but you know that well.

    2. Marshall Auerback

      Wray is correct, not Das. This is confirmed by the NY Fed itself. Senior Vice President, Federal Reserve Bank of New York, Alan Holmes today explained why the then faddish Monetarist policy of controlling inflation by controlling the growth of Base Money had failed, saying that it suffered from “a naive assumption” that:

      “The banking system only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt.”

      1. Tao Jonesing

        Thank you, Mr. Auerback.

        I was aware of that Fed paper and had assumed that Prof. Wray was correct. However, given that an MMT advocate had conducted the interview of Mr. Dat but had not called him on that particular statement, I wasn’t sure what the “offical” MMT answer is.

      2. jonboinAR

        So the volume of lending DOES have a connection to the volume of reserves? IOW, there can’t be more lending beyond a certain point without more reserves, by fact or by law? Okay, which is it? Connection or no connection?

        Wray either directly stated or strongly implied that there’s no relationship between the volume of reserves and the volume of lending possible, saying that therefore injecting reserves in whatever amount CAN’T cause hyper-inflation by encouraging banks to lend excessively. Is he telling the truth or not?

        1. John Zelnicker

          jonboinAR — There is a connection, but the important point is the direction of causality. What Wray is saying is that banks are not constrained by the amount of reserves the bank has on hand. They make the loans they want to make and afterward they find any necessary reserves to meet legal and regulatory requirements.

          1. Nathanael

            The presence of the central bank as “lender of last resort” is crucial to this behavior. Banks in the 19th century, with no central bank, got their reserves before making loans.

            Of course, the causality still came from the loans, but it was more complicated. If they wanted to make loans, they went out to find the reserves, then made loans (so, a time delay). If they didn’t want to make loans, they didn’t bother to find reserves at all.

      3. marc fleury

        it goes further than that, the monetary creation was firmly in the hands of the banking system via securitization. Balance sheet regulation failed to capture ‘off balance sheet” instruments, almost as a tautological statement.

        I have pointed this out several times to “randall” he devotes a lot of time and effort to the “tail wagging the dog’ (lend first seek reserves later) but completely ignore the REAL monetary creation.

        Monetary theory became “passe” because monetary level were not in control of the FED, mostly due to securitization. Period. There was no legislation that could influence that so why bother.

        clearly the crisis of 08 brought Minsky back with a vengeance and I wish Mr Wray would spend more time on the big monetary picture as opposed to re-ashing the same points about reverse causality of reserves, it feels quaint and frankly missing of the big modern monetary picture.

        If mr wray would also engage in debate in these forums as opposed to just posting from the tower, almost talking down at us, maybe we could all really move forward.

        1. Nathanael

          Ka-ching. Exactly. We had an uncontrolled monetary expansion. It operated through the invention of fraudulent securities, which were then sold to money market funds (often through various intermediaries). This amounted to a huge supply of money which was “off the books” from the Federal Reserve point of view.

          Normally, banks’ money creation is regulated by reserve requirements and other such stuff, but this wasn’t.

          It’s important to be clear on when the bank creates the money. Deposit: depositor turns cash in to bank, receives account which has equal money value — *bank also has cash and can use it*. If the reserve requirement were 100%, then the bank would not be allowed to use the cash, so it couldn’t create money.

          What banks classically do with the Fed in place is to issue loans (because loans are where the profits come from), have the Fed print money to back them, borrow that money from the Fed, then solicit deposits (creating money) so they can pay back the Fed’s money and the Fed or FDIC doesn’t shut them down.

          If the reserve requirements are not enforced, but the Fed lending is available, the banks can create arbitrarily large amounts of money.

          So the banks arranged to evade the reserve requirements. Banks holding mortgages (bonds, the right to receive future payment) “sold” them to special-purpose entities which then issued *short-term* bonds to fund them. “Short-term” is the key here. These *short-term* bonds are what money-market accounts are filled with — because they’re short-term and tradeable, they’re money.

          So effectively the banks converted their mortgages into money. But they did so in a way which *reduced* their reserve requirements rather than *expanding* it — allowing them to create an uncontrolled monetary expansion.

          Of course, when the mortgages turned out to be bad (inevitable), people started fleeing the bad money market funds — the currency issued by these banks was repudiated. This caused an instant and very large contraction of the money supply. The Fed couldn’t reverse it because the Fed *only gives money to banks*.

          Imagine if your town started using IOUs issued by Bob for money. Eventually, someone notices that Bob doesn’t actually have any US Government money to back up those IOUs, and he’s left town…. suddenly your entire town has a money shortage and stops buying things…

          The government backed the money market accounts but simply could not fully restore people’s willingness to use risky private money.

          There’s a reason the government is supposed to be in control of the money supply. :-P Otherwise you get bubbles and busts.

    3. Ming

      Thank you professor Ray for a Succinct post on the role of bank reserves that are deposited at the Fed. The fact that checks are in fact IOU’s between banks, that all cheques are cleared at the federal reserve where cash is electronically moved between accounts at the federal reserve is very ‘eye opening’ for me. Thus banks can create deposits and loans; but they do not create hard (or electronic) cash.

      Are all actual ‘hard (or electronic) cash’ transfers between parties, occur either at the ‘street level’ via actual hard currency between parties, or handled electronically via the fed? Is it fair to say that when banks make loans(debt) to other banks, the actual cash is only transfered at the Federal Reserve?

  4. Luddites for Tax Relief

    “Fourteen million people are looking for jobs. Even the most rosy projections see high unemployment for years.”

    That’s grim. what’s worse is only a few leaders seem to be concerned about it.

  5. CB

    “I expect resumption of the financial crisis any day (the lawsuits against the biggest banksters will help hasten that). Even the Chinese economy is slowing—which could increase their efforts to produce competitive exports.”

    Two questions. Is the administration trying to suppress the bankster lawsuits because it understands the financial/ political consequences? In this economic environment, who is going to buy more Chinese exports?

  6. Piano Racer

    Notwithstanding the infantile ad-hominem terms like “hyperventilators” and “gold bugs”, which saps this piece of what little credibility it had to begin with, it amazes me the lengths that people will go to to convince themselves that the status quo is somehow sustainable.

    Here are two other mechanisms that will contribute to inflation, and then hyperinflation (which is not “super-duper-inflation” but rather, a widespread loss of faith in the currency):

    1. The Fed is “printing” hundreds of billions of dollars and loaning it to the Federal Government (“Motetizing Debt”). The Federal Government is currently spending ~1.5 trillion dollars that it doesn’t have every year into the US economy to pay for . Most of that money (at least half) didn’t exist before the government borrowed it, because it was created by the “Fed”. The money is now in the economy, and is continuing unabated (or are our deficits set to shrink in the future? Hah!); it will take time for prices to rise accordingly, but inflation is ALREADY high, even by the horribly corrupted hedonics/substitution inflicted CPI. Our status as world reserve currency complicates this, as we are able to “export” (diffuse, really) much of our inflation. But this pisses other countries off when their oppressed citizens can no longer afford to eat, and they will not put up with it forever. Look to the Arab Spring for evidence of the effects this is having.

    2. As inflation rises and faith in the currency erodes, people will want to get rid of their dollars quickly before they depreciate. This effectively increases the money supply (“Velocity of Money”). Think about it: if you had $100,000 sitting in a vault for a decade, but suddenly want to get out of dollars because you are losing purchasing power, you spend it for something else that will hold its value (Gold? Hammers? Heirloom seeds? I don’t care what, it doesn’t HAVE to be gold). The only reason that isn’t happening now is because of the HUGE, UNPRECENTED effort the FedGov is going to to FORCE investors into the asset classes they choose. This will not work for much longer.

    I leave you with a quote from one of my favorite texts:

    “Legislatures are as powerless to abrogate moral and economic laws as they are to abrogate physical laws. They cannot convert wrong into right nor divorce effect from cause, either by parliamentary majorities, or by unity of supporting public opinion. The penalties of such legislative folly will always be exacted by inexorable time. While these propositions may be regarded as mere commonplaces, and while they are acknowledged in a general way, they are in effect denied by many of the legislative experiments and the tendencies of public opinion of the present day.”

    –John Mackay, 31st March, 1914

    1. MyLessThanPrimeBeef

      I think if one is for peace, one can’t be fore MMT.

      When the Grand Duke of Fenwick tried MMT, his big, bad neighbors were not very happy about having to accept more Fenwickian money. No choice – they had to buy that sovereign money. Where else could they put it? It created a lot of tension.

      But there was no war. The Grand Duke wised up.

      Until, someone said, ‘we are not scared by our neighbors. We are tough. What are they going to do?’

      Then, many bad things happened.

      1. Piano Racer

        I think it ultimately comes down to the fundamental, corrupting tyranny that inevitably results when a government forces by penalty of force a people to use their paper as a prerequisite for interacting in the economy. An economy based on corrupted paper is slightly better one that lacks specialization (which is what we had before there was money), but an economy truly based on free markets, where each individual is able to choose their own unit of account/store of value/medium of exchange, is MUCH more efficient and productive. It’s how America became great. Only if/when we are free from legal tender laws will we become great once again (if we haven’t completely ruined / extracted our natural resources by then… hmm…)

        1. MyLessThanPrimeBeef

          Would you believe I put that in there to see if people would catch it?

          In any case, do you think we should lower taxes to fight deflation if we would raise taxes to fight inflation?

      2. marc fleury

        To be fair MMT’ers really have little to say about FX. And effect on trading partners. The models are always macro-macro world govt type stuff. i have again asked many times to randall when he posts here, but I am starting to suspect that either 1/ he has nothing to say 2/ he doesn’t engage ‘forum’ eww. I actually think it is 1.

        But do not despair. I think QE2 (not QE1 though) has given us a clear datapoint with our trading partner. The dollar HAS depreciated against a basket of currency and this has clearly been a “beggar thy neighbor” policy by the US.

        On the one hand I think it is a repayment for the marshall plan, I only mean that tongue in cheek. The “exorbitant” privilege, degaulle used to talk about referring to the US dollar, is very much on display. This is no zimbabwe.

        On the other, the chinese replied tit for tat (supposedly) by printing their own to maintain peg, but the peg has moved a little.

        third and in absolute, it has show QE to be an interesting and flexible “tool” in the FED belt. It is also a currency depreciation weapon. It is fine grained too. Nice.

        One datapoint doesn’t make a trend but I think this “planetary” QE experiment clearly says the logic of QE stops at sovereign borders. The dollar has depreciated in tandem with QE in FX and the traditional “full employment, wealth creation out of thin air” argument has vanished and only plain old currency depreciation remains. Again, not a bad thing.

    2. Yves Smith Post author

      Go look at what happened in Japan, and then we might have an intelligent discussion. Printing creates inflation only when the economy has not too much in the way of slack resources. We have massive slack, or did you somehow miss that?

      And a debt overhang is massively deflationary, another big piece of the puzzle you ignore.

      I frankly find the “goldbug” and “hyperventilating” descriptions to be accurate. That’s how this camp is commonly described by my hedgie buddies, who care only about making money.

      1. David

        Hey Yves-how have your “hedgie buddies” performed against gold these last 10 years…….Wow think about all the incredibly complex research your “hedgie buddies” do before they make their “investments” cough cough bets, on the other hand commonsense seems to guide those crazy goldbugs who just buy and forget.

        1. Skippy

          Most humans have a very biased time mechanism, their reality works, till it doesn’t.

          Skippy…watch out for those cracks in time, the first step is a MOFO.

          Skippy….American greatness lol, try last northern latitude continent un-touched, yet isolated by two seas from the worst parts of euro centric war.

        2. Yves Smith Post author

          My hedgie buddies bought it at around $700 in 2007, as did I, which meant their returns on gold are better than your example of the goldbug who blindly bought ten years ago (in reality, probably longer).

          You were saying?

          1. PianoRacer

            Hmmmm… I wonder why is it always the case that those who characterize others who value gold and advocate its use for any number of reasons (store of value / medium of exchange / unit of account / speculative investment) “hyperventilating gold bugs” always bought in several years ago? Perhaps it is how they resolve the cognitive dissonance between their arguments / ideology and gold’s inexorable rise? I would never question the accuracy of Yves’ words, but I might wonder what percentage of her financial assets she allocated to gold in 2007? And what percentage of that did she allocate to physical? If the answer to the first question is quite low (as I suspect), then her point is greatly diminished. If the answer to the second is quite low, then the jury is rather still out, isn’t it? Finally I would wonder what position Yves holds currently? I hope she hasn’t completely liquidated to “realize” her gains, for if so, she’ll be missing out on the best part! But I would still tip my hat to her if that was the case; one can’t be blamed for riding the wave of an economic event without fully understanding what is driving it!

          2. Nathanael

            Read Krugman’s blog THIS WEEK and you’ll understand why it’s good to buy gold just before a HORRIBLE DEFLATIONARY period.

            On the other hand, sell it just before a steady-inflation period.

      2. PianoRacer

        “Go look at what happened in Japan, and then we might have an intelligent discussion.”

        I’m sorry you don’t find my comments intelligent discussion, Yves :(

        Never underestimate the power of many central banks working together selling gold into the market to suppress the price. Your time horizons are too short, Yves. Yes, they’ve all kept the game going for a long time (many people’s entire lifespans!), and it worked remarkably well for the second half of the 20th century. But the endgame started around 2000, which is when the gold price began to inexorably rise. Time marches on and their grip is loosening. As their efforts become more desperate, people will look around and come to the same conclusions about how best to store the value of their labor as mankind has for millennia.

        “Printing creates inflation only when the economy has not too much in the way of slack resources. We have massive slack, or did you somehow miss that?”

        I’m not familiar with this concept, but then I am in IT and only started studying finance recently. Can you clarify and/or point to a resource for me to study? Your use of the word “only” makes it seem like it is 100% certain… what exactly does “slack resources” mean? Your elucidation would be much appreciated!

        “And a debt overhang is massively deflationary, another big piece of the puzzle you ignore.”

        I agree, it is TOTALLY deflationary! And in fact, we have had MASSIVE deflation over the past decade… IN GOLD! You don’t have deflation in fiat money unless you want to. Meanwhile I will hold my gold as I expect it to rise in value as long as our debts increase! Look at a chart of the gold price and overlay the debt ceiling raises to illustrate our point perfectly!


        “I frankly find the “goldbug” and “hyperventilating” descriptions to be accurate.”

        All the people I know who value gold are very, very happy people. If they do any actual hyperventilating, it is because they are astounded by the returns on their investments over the last decade.

        And they are not, to my knowledge, insects. So I question the “accuracy” of these descriptions, other than, as I originally mentioned, infantile, unnecessary pejoratives that detract from the conversation.

        “That’s how this camp is commonly described by my hedgie buddies, who care only about making money.”

        Oh ok, your hedgie buddies said it so I guess it must be true. Sorry Yves I love you – you changed my life! – but I am disappointed by your rebuttal on this one. But excited for the vigorous debate! Thank you for all you do!

        1. Nathanael

          Goldbug dumbassery.

          Watch your gold go absolutely nowhere and start to decline within 10 years, as people realize *you can’t eat it*.

          If I had a warehouse, I’d be long in copper, which unlike gold is in constant, high, and rising demand.

          1. Piano Racer

            Your ad-hominem attack wounds me sir! I assume it was merely a result of a lack of an actual rebuttal.

            You can’t eat Yen or Dollars either, but people still value them as currency! But I agree, storing wealth in commodities is a great hedge as well – but they’re not money as they typically fail the durability test (honey lasts pretty well though). Now, commodity-backed notes, like the Tobacco Notes used in the southern US – THAT is a currency!

            As to “demand”, I agree that copper is a fantastic investment from an industrial perspective, though I would prefer silver to copper personally – I hold both! The good news is that they hold monetary properties as well (divisible/durable/portable/rare) so you’ve got multiple drivers of demand. Glad we can see eye to eye on some of our investment philosophies, even if we cannot agree on how one should conduct oneself in a civil debate.

    3. Jesse

      Thank you.

      The MMT crowd is not really modern, and often appears cultish. The use of language is telling.

      Alan Greenspan can said to be the true founder of MMT.

      He said that fiat would work if central bankers would emulate the restraint of a gold standard.

      There have been numerous instances of high inflation since the end of WWII. Hyperinflation is a special somewhat odd case. But it is certainly possible.

      Whether the money is issued directly by Treasury, or through a debt based system is another matter. I wish like hell they would stick with that, and drop the pretentiousness.

      1. marc fleury


        interesting and thanks for saying it clearly. I wish Randall had continued the work of minsky, his mentor and focused on MACRO MONETARY where it is at meaning the BANKING SYSTEM MONEY MACHINE == SECURITIZATION. I think he dropped the ball and went ‘micro-macro’ again focusing on true, but big-picture irrelevant stuff like “lend first reserves later”.

        If you want more cutting edge research, and a slightly less political slant, I recommend Trond Andressen and his buddy Steve Keen (although Keen is definitely political) they put down some models that rock in mathematica.

        See my own generalization of Andresseen’s work http://www.thedelphicfuture.org/2009/11/exponential-monetary-growth-permitted.html

        (mega wonky) while not strictly minsky in the sense that it does not deal with debt as influencing prices (as keen’s work does) it covers a subset namely the endogenous growth. Spoiler: expo growth in good time, expo decrease when bad debt spikes. I wish main stream econ would pick these studies up. I feel very lonely sometimes.

      2. chris

        If Alan Greenspan can be said to be the true founder of MMT does that make Ayn Rand its patron saint?

        When does the MMT go Galt then?

  7. financial matters

    “Only the sovereign government can create it. If you try to create US currency in your basement, you go to jail.”

    The government is already heavily involved it’s just a matter of how to use that power.

    How can trillions be available to save the banks with no strings attached? Billions of TARP money poured out while no accountability on bank executive bonuses…

    Now when it comes to talking social security and Medicare we don’t have any money and have to get serious about austerity.

    I see MMT as a way to regain control of the money supply to benefit the general population instead of the financial sector. They don’t claim ‘deficits don’t matter’ but they claim that full employment and capacity utilization matter.

  8. Keating Willcox

    So, according to this N. Ferguson is really wrong, and all those countries that experienced hyperinflation in the last 50 years didn’t exist.

    For those countries, hyperinflation was caused by governments living beyond their means and spending too much. With a fiat currency, the move to hyperinflation is quick. In a country with hyperinflation, other countries currencies work fine. You can do business today in Zimbabwe, just not using Zimbabwe money.

    The mechanism is simple. Once the government spends much more than it takes in, everyone knows that the currency is worth less. The banks have nothing to do with this. And hyperinflation has only one cure. The government must go back to spending only what it takes in.

    The author is correct in that the banks have little to do with hyperinflation. It is the government and its frugality that makes for inflation. Countries can be persuaded to keep a relatively balanced budget by law (such as US States have, although they cheat when they can), by backing the currency with a metal, a basket of metals or some other currency, or by moral principle. The Euro is an example where there was a law, a 3% budget excess limit, but with no punishment and with big bank profits from the “safe” loans, most countries simply ran up the credit card. The Euro is fine, the Eurozone is fine, but the banks that made all those “safe” loans are completely broke, in such massive debt that investors are leaving in droves. The answer is simple. Have an orderly bankruptcy of all these banks, have each country return to its own individual currency for its own expenses, and make sure all currency transactions are nearly free from expense. Tough luck for bankers, Europe continues with no problems.

    1. High on the Hog

      Fill a rocket ship or two with “investors”, send ’em to the moon, where they’ll begin lunar colonization to save the human race.

    2. Yves Smith Post author

      Fergsuson is an economic historian, not an economist, and it shows. Citing him is a proof of the weakness of your argument. All you have done beyond that is describe your personal beliefs.

        1. gs_runsthiscountry

          A roman goddess of dawn spends her days waiting for the fall to night, so that she may see the arched streaming colors of the northern lights.

    3. mwyiwqxhvkew

      So, according to this N. Ferguson is really wrong, and all those countries that experienced hyperinflation in the last 50 years didn’t exist.

      Nope, it doesn’t argue that.

      For those countries, hyperinflation was caused by governments living beyond their means and spending too much.

      Yep, but (almost?) always paired without external and internal forces that destroyed real productive capacity.

      With a fiat currency, the move to hyperinflation is quick.

      Not always.

      The mechanism is simple. Once the government spends much more than it takes in, everyone knows that the currency is worth less. The banks have nothing to do with this. And hyperinflation has only one cure. The government must go back to spending only what it takes in.

      Nope. The mechanism is the government spending more and more than the real productive capacity of the economy, usually combined with loss of credibility as a sovereign (like, ability to collect taxes) and problems with the real economy (like, being wrecked by a war or ravaging the underlying agricultural economy or nationalizing important industries in an incompetent manner).

      Government deficit financing is more complicated and less dire with a more sophisticated analysis than Ferguson seems to understand. Under BOTH a standard, rigorously neoclassical formulation and an MMT analysis, there are economic circumstances under which a government can run primary deficits indefinitely without chronically rising inflation. For the former, real interest rates must be below real growth rates, meaning that the intertemporal government budget constraint does not add up.

      The author is correct in that the banks have little to do with hyperinflation. It is the government and its frugality that makes for inflation.

      Not always.

    4. Nathanael

      “For those countries, hyperinflation was caused by …”

      Assertion without proof. I assert that hyperinflation was caused by a government which was already distrusted, which couldn’t enforce tax collections, and which had no services to provide, deciding to print vast quantities of money.

      We’re not there yet in the US. Oh, we may be soon, with the rule of law collapsing…. hyperinflation is very much a political phenomenon.

    1. wsm

      Boosh – we’d be interested in which data series you are graphing in your link. Right now it just shows up as a blank graph. Thanks!

  9. Susan the other

    Where is it written, legislated, or otherwise codified, that a government, our government or any other government, cannot supply the necessary amount of money to keep the economy running smoothly? Who makes these decisions to suffer “austerity” when all austerity is is a non-functioning government desperately in need of an adequate supply of money?

    1. Shawn Grant

      Banksters. They’re the deficit hooligans. Huge fan base too, including the ball-bag-across-the-nose crew, even though they may not be aware of it:

      Listen to the typical drool :
      “was caused by governments living beyond their means and spending too much” or

      “Countries can be persuaded to keep a relatively balanced budget by law ”

      It all dovetails nicely into Christian violence, where somebody “is gonna get it in the end times. Sinner Gov’mint went wild with credit, blasphemers!”

    2. Rex

      “that a government, our government or any other government, cannot supply the necessary amount of money”

      That’s a bit too broad. A state government does not have its own fiat currency so cannot just supply the necessary amount of money. The flip side is the argument that the US debt is like a household buying necessities, paying bills and making spending choices around its budget. That is the erroneous model that MMT tries to confront.

    3. marc fleury

      while I agree with the general sentiment of this post, do not underestimate the power of self-righteous politics. In america it gets couched in T-party non-sense but take germany/greece. It made FT commentary with Schauble (sp?) article the other day. WHY SHOULD GERMANS WHO PAY TAXES DILIGENTLY AND ARE PRODUCTIVE BAIL OUT THE GREEK WHO SYSTEMICALLY AVOID PAYING TAXES AND ARE LAZY A*SES. (capital letters for emphasis on self-evidence). We all know the macro theory and why austerity makes no sense from a keynesian standpoint but the self-evidence of the political statement above, specifically when underlined with racism as is still latent in the PIGS acronym and you realize why this is bound to be complicated.

  10. Tim

    “The hyperventilators scream hyperinflation! As soon as banks start to lend out those reserves, borrowers will pump up the economy beyond full employment, causing inflation. Worse, banks can lend a multiple of the reserves (the so-called deposit multiplier)—so rather than lending a measly $2 trillion, they might lend $20 trillion or more. That would add trillions to our GDP of about $14 trillion, obviously way beyond the capacity to actually produce goods and services. And all that comes on top of the Federal government’s record budget deficits—and its borrowing. So a debt-fueled spending bubble will make us the next Zimbabwe or Weimar.”

    That is a straw man argument. None of the goldbugs I’ve listen to for ten years have made that final leap of faith, only a few idiot economists. Inflation is simply too much money chasing too few goods. Employment doesn’t have to be high to create hyperinflation, just the quantity of goods (could be interpreted as commodities) has to be low, relative to the masses with their money. We have indeed seen this in spades from qe1 and 2. Look at the continuous commodity index if you aren’t sure. Remember zimbabweans Panning for gold to by bread, not Sony play stations.

    And there have been more than a handful of hyper inflationary episodes in currencies (that didn’t always destroy the currency) in the last few decades. I apologize I don’t have the article from the past that listed them.

    To say that their will not be hyperinflation of currencies relative to goods of necessity is just as ignorant as saying we can’t possibly end up in a economic depression.

    Remember the stagflation quote? Stagflation is when everything you want is really cheap and everything you need is really expensive. I believe this is our most likely destiny on a scale an order of magnitude larger than the 70’s, ignoring the possibility of ww3.

    1. Yves Smith Post author

      Wow, you really cannot read. The post very clearly described how banks do not lend out reserves.

      As I seem to recall, those who believed the world was flat were just as worried that ships were in danger of sailing over the edge as you are about hyperinflation. Where is your counterargument to Wray? Hyperinflation has indeed hardly every occurred, and it takes a very particular set of bad conditions, the most important, the destruction of a significant amount of productive capacity, to achieve it. You’ve not responded to his fact based argument, merely done the equivalent of putting your fingers in your ears and yelling “Nah nah nah.”

      So tell me exactly how Japan has had 20 years of massive printing and deficit spending and has no hyperinflation. The onus is on you

      1. Tim

        Yves, I do apologize and perhaps the debate illustrates how “gold bugs” and economists talk past each other. I’m not disagreeing that CPI will stay low and possibly even interest rates will stay low, but even if those two things occur it does not prevent double digit inflation increases as perceived by the majority of people who spend the majority of their money on necessities.

        Regarding Japan, I guess the big difference there is they never were the reserve currency country, and therefore weren’t the rudder of wealth flows of the world. One fact we can’t argue with is the acceleration of wealth allocation into commodities since we began. You may argue that is correlation not causation, but a lot of people seem to see it as the latter.

        I’m curious what your explanation is as to why current inflation reading are positive for the US so many years into this new deflationary paradigm if not for the QE? Shouldn’t it be negative or at least running below current GDP growth?

        I realize the mechanism of QE isn’t directly related to inflation as explained by mr wray but the effects in markets and economic numbers suggest that indirectly it has been highly effective at producing inflationary symptoms in everything not directly related to economic expansion. And because of that, myself and other gold bugs are quite comfortable with our present level of economic ignorance. LoL
        Thanks for the great website.

      2. PianoRacer

        I know very little about Japanese economics. They are very far away. I would love to rebut a fully-fledged argument though! Perhaps the idea that Japan has done as much “printing” as the US is as flawed as MMT? Do they have a graph that looks as exciting as this one?


        If so I would surely want to find an answer to your question, if even for my own sake!

        1. PianoRacer

          Destruction of productive capacity.. where have you been Yves?! We don’t make squat here anymore! Hyperinflation will happen the day after China stops shipping us everything we consume in exchange for paper and electrons! On that day, we will once again start to make things again. Or perhaps we will use our giant military (10x the rest of the world combined!) to change their minds? Or… perhaps we are already doing that now? I wonder how long it will work…

          The good news is that we DO have lots of productive farm land, enough to feed us all! Though we may have to cut down some on meat.. and our farming is 100% reliant on oil which we import most of in exchange for those papers and electrons.. and even that seems to be harder to find lately (BP/Fracking/Shale)… hmm…

    2. JustAnObserver

      One assumption that just about everyone in the (hyper)inflation argument seems to make is that the identity:

      Inflation = “too much money chansing too few goods”

      has only 2 aspects – money & goods and ignores the “chasing” … or, rather, they assume that “chasing” is unbounded in the sense that any increase in money automatically results in more “chasing” of goods. (*)

      However in a deleveraging/balancesheet ressesion type of environment an economic actor is much more likely to use any increase in money to pay down debt => no inflationary pressure results. Indeed following the MMT argument that banks create/destroy money via the debt mechanism any increase in money income from one source (e.g. the Federal Government) results in an opposite destruction of private (debt created) money.

      Imagine the following scenario: The gov decides to take action on the hosuing market by using its power to create money in order to pay down all underwater mortages to the extent that all owners end up with at least a few % of +ve equity (idea = to try to solve the mobility issue).

      In spite of the very large sum involved it seems to me at at least that this is not inflationary – at least not in the CPI/RPI sense – since the householders are given no opportunity to “chase” anything with it. Over the long term, of course, this would lead to house prices stabilising and then resuming an upward drift, asset price inflation for the masses resumes!

    3. Nathanael

      “Inflation is simply too much money chasing too few goods.”


      As long as there’s massive unemployment, we can’t have general inflation, because there’s an excess supply of services. QED.

  11. MyLessThanPrimeBeef

    Instead, we find that experience with hyperinflation is quite limited, and seems to result from very specific circumstances such as unwillingness or inability to impose and collect taxes, with civil war, or with huge external debts denominated in a foreign currency


    Interesting indeed.

    To fight inflation or hyperinflation —- more taxes.

    Does it work in reverse?

    To fight deflation —- lower taxes????

      1. John M

        “Just when do we get lower taxes? I’d like to hear from our MMT zealot friends.”

        You can hear it (read it) at MMT’s favorite website, http://moslereconomics.com/. (MMT is sometimes named Mosler Money Theory.) You can find MOSLER’S LAW: “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.”

        Somewhere, Mosler wrote that the Bush tax cuts were one of the best things Bush did. My own view is that the Bush tax cuts for the wealthy were fundamentally wrong, but a similar amount targeted at the poor and middle class would have been good — maybe too much.

        1. MyLessThanPrimeBeef

          Thanks John.

          I am for cutting taxes for anyone but the super rich.

          I am also for printing money and handing 100% of it directly to the real sovereign of the country – its people, instead of through some middlemen, like the Pentagon.

          1. MyLessThanPrimeBeef

            But if it can help generating additional employment, even tiny, I will reluctantly cut taxes for the super rich as well.

          2. MyLessThanPrimeBeef

            By the way, is it possible to have negative taxes?

            Instead of the people paying taxes to the governement, the government pays taxes to the people?

            Would that stimulate the economy?

          3. MyLessThanPrimeBeef

            That would be nice.

            Say you make $100,000, instead of paying the government some fiat money, you pay nothing. Not only that, but you get, for example, $50,000 back.

          4. jesseg

            It’s also related to a guaranteed minimum income – something Nixon even explored (it hink it was called F.I.T.) – but was destroyed by southern agrarian business interests who worried that it would raise the price of their (black, formerly sharecropping) labor.

            The minimum income has its own set of ‘bugs’ though slightly less capitalized, or influential – i suppose.

        2. Praedor

          MyLessThanPrimeBeef: But if it can help generating additional employment, even tiny, I will reluctantly cut taxes for the super rich as well.

          Not a single rich person has created a real job out of their own pocket as a result of personal tax cuts. They spend it on yachts, mansions, high-priced call girls/mistresses, useless rocks (diamonds) and the like. They do NOT hire 100 people at a good wage.

          No, tax cuts for the wealthy simply stretch the already bloated pockets of the wealthy. The only way I go for yet more welfare for the rich (tax cuts) is if GOOD DOMESTIC JOBS are directly created with the money they get. They have to DEMONSTRATE they created good-paying, permanent domestic jobs or no cut. Tied to this is a luxury tax to prevent the further purchase of baubles and googaws (and mansions and jets).

  12. Schofield

    Ah the sadomonetarism of bubble blowing! All the bankers like to do it, private or central! Alas after the inevitable prick comes deflation !

  13. John M

    I believe that MMT is correct if one assumes that overall things (goods and services) don’t change (say, in availability). Then, as long as we have economic growth, zero inflation demands that the money supply grow with it. Include net savings into the mixture, the money supply has to grow faster. Money velocity may alter this picture somewhat.

    However, with too much money chasing the goods (ie. not saved), we get inflation. Inflation leads to reduced savings and increased money velocity, worsening inflation. Likewise, deflation leads to increased savings and reduced money supply, worsening deflation.

    Hence economic growth and positive net savings requires reasoned deficit spending, watching and controlling the amount so that we don’t go too far in either direction.

    Add resource depletion to the picture. What happens now? We saw a taste of it with OPEC in the 1970s. The embargo was followed by stagflation, at least partly driven by oil. This ended for two reasons: the FED driving up interest rates sky-high, and businesses investing in more fuel-efficient equipment reducing the demand for oil.

    Oil shortage turned into a glut.

    What happens now as Peak Oil approaches, assuming it hasn’t already?

    There is talk of speculation driving commodities inflation. What happens with actual shortage of commodities? (Summer of 2008, I thought that the oil price increase was substantial rather than speculative, and I thought the reduction before Election 2008 was price manipulation to try to get a Republican victory. I was apparently wrong.)

    The long-run solution is going to be something sustainable — like it or not. The best case solution: population growth stops due to lowering birth rates. Wind power, solar power, fusion power, some other power I haven’t yet thought of, gives us sufficient energy to live a comfortable, possibly even luxurious, sustainable lifestyle, with zero economic growth.

    This would be a gold-standard aficionado’s paradise, with constant money supply, constant savings, no deficit spending — maybe.

    It’s got to be possible to combine MMT with ecological economics (economics informed by the laws of nature).

    1. MyLessThanPrimeBeef

      Population growth.

      For the little guy, it’s about GDP per capita.

      For the alpha male, it’s the gross GDP. That’s why China is more powerful than Grand Ducy of Fenwick. Good for its leaders. But for the typicall Fenwickian, life is better.

      So, let’s talk about GDP per capita and how it can be manupilated.

      Like one can grow profit by shrinking expense in the face of declining revenue, GDP per capita can grow, even if the total GDP shrinks…if you shrink population even faster.

      And this is where it can get dark and evil.

      So, we want to talk about GDP/capita but maybe we shouldn’t.

      On the other hand, corporations are always talking about the size of a market. But corporations are inherently biased towards more population growth. It’s good for their business. As long as they are around and talk of market sizes and market shares, population explosion continues.

    2. jesseg

      I wouldn’t put my money on fossil fuel as the first scarcity to have massive economic implications. I think it will be food – and the scarcity in question will be adequate growing conditions – which means a combination of access to suitable water, phosphorus, pestilence free environs, etc… global food productivity, and not peak oil, is what I would be watching out for…

      And the result? massively murderous malthusian ‘corrections’ — met with resistance by those on the wrong side of the ‘corrected’ ledger.

  14. peterpaul

    I think he does not understand the true cause of hyperinflation. The cause is a collapse in the perceived value of a currency. As people lose faith, all of that pent up money – in the form of deposits, credit, cash on hand, stocks, etc. – is quickly liquidated and goes searching for anything solid, or of “real” and not representational value.

    People start trading their paper for anything they can get so fast that it drives the “price” of goods up. The government could never print another dollar and we could suffer from hyperinflation…

    1. Because

      Your wrong as well. Hyperinflation is caused by the animal spirits.

      Currency collapse ‘could’ trigger it. More likely, other factors you don’t even think about could.

    2. John M

      Taxation gives the currency a value, if the taxes are required in that currency. I’m not sure if taxes are sufficient to give value to guarantee the necessary confidence.

      However, if the government tries to pay off its debt, and tries to take in an overall surplus, and tries to take back dollars distributed by the FED (or posted to accounts at the FED), then confidence in the currency will go sky-high, as taxpayers scramble after fewer and fewer dollars to pay the taxes. The government won’t succeed, but in the meanwhile, dollars will become so hugely valuable that we’d get hyperdeflation.

  15. F. Beard

    If they then find they need reserves for clearing (or, later, to meet required reserve ratios), they borrow them from other banks (fed funds market) L. Randal Wray

    That sounds legitimate.

    or from the Fed (discount window), L. Randal Wray

    This is clearly illegitimate; the government should never lend money. This is fascist privilege for the banks.

    or they sell assets to obtain them. L. Randal Wray

    This is problematic since:

    1) Banks create the principal but not the interest for their “loans”. Thus, in aggregate, there is not enough money outstanding to exchange for the assets since some of the principal has been used up to pay interest.

    2) Demand accounts should be payable on demand (immediately), not after an asset sale.

    3) The value of the assets typically drops (during the bust) just when they are most needed to be sold.

  16. abelenkpe

    Without either cheap easy credit or wage inflation there will be no inflation. Seems to me we already had inflation. Cheap easy credit masked decades of stagnant wages and helped the cost of education, cars and homes go through the roof. Now those things need to correct to be in line with what wages will actually support as consumers (aka workers) wake up to the reality of their financial circumstances.

    1. Melted Coin

      Just like Argentina, it’s more insidious. Speculative financial systems depend on victims, more or less.

  17. Chauncey Gardiner

    Unfortunately for us, it appears based on data that is being generally ignored by the MSM, that we are well into an inflationary environment. These include such sources as the BLS Foodstuffs Index and the information more fully discussed at this link:

    All the while we are being treated to the Fed/FRBNY’s QE-ZIRP “Operation Twist” show while inflation has been and is being artfully concealed.

    (As an aside, gotta say I just luv their spinmeister’s language creation-media dissemination abilities. Even find myself repeating these terms from time to time.)

  18. Because

    You have to remember, “hard currency” is about a selective set of facts:
    1.Its real goal as Jefferson said, is to inflate and deflate to where you lose everything. The myth that hard currency “controls” inflation is hilarious. The examples pre-1929 of this was astounding. It was what directly lead toward the union movement and anti-capitalism. Which lead toward the conservative great invention: The Welfare state.

    When that didn’t work, they left hard currency.

    2.The real goals of hard currency are even more sinister. They aren’t about stable money supply, but valuations of the wealthy. As the credit expansion and economic boom end, the wealthy is usually at a spot where their productive capital has fallen as market forces dictate more and more profit to the non-wealthy due to the expansion. Thus increasing economic expansion down the road. Instead of continuing to increase business and service production to meet the demand after a cylical recession, hard currency demands the upmost reevaluation of this wealth. It isn’t the wealth of the business, but the personal wealth of the capital owner. It is like what I said in a previous thread, not about Wal-Marts wealth, but the Waltons personally. In a hard currency deflationary spiral, “Wal-Mart” itself is damaged as is its employees. But the Waltons vast sums of “cash” are hyper-inflated by this deflation. Making them more personally wealthy than BEFORE. Isn’t it amazing? To hard currency types, this is virtue. They deserve the capital value and nobody else, because they are gods. We see it all the time with these types. Who gets hurt besides the labors? Petty Bourgeois, middle managers. The paradox of capitalism and ‘free markets’ is complete.

    3.The myth that Congress has more control in hard currency is another farce. Hard currency is a international,global affair. As they say: who controls the gold makes the rules. Whether it be in Russia or Canada. Congress’s ability to spend and create jobs is very limited in a hard currency scheme. Which is the point. Every job the government creates for joe blow or petty bourgeois joe blow devalues their capital fetish. Eventually the host-country, just runs out of gold as seen during the 19th and 1929 panics which lead toward private bailouts. Then the collapse becomes a fictional business strike.

    The fact is, people supporting “hard currency” hate you. They hate your job and hate your lifestyle. You belong in the sewers, you belong in the trash bin. Only the owners of capital deserve to live the good life, because you aren’t one of them.

    Similiar to Bolshevism in so many respects, considering that Bolshevism was created by them, it is little surprise.

    1. F. Beard

      Government recognition of gold as money is fascist on its face. Without government recognition of gold as money, it is just another (somewhat useless) commodity.

      Ron Paul is deceived if he thinks a gold standard is libertarian.

      1. MyLessThanPrimeBeef

        I am curious. What would you say if someone writes this:

        Government recognition of common stock as money is fascist on its face. Without government recognition of common stock as money, it is just another (somewhat useless) commodity.

        1. F. Beard

          I would agree except common stock is not a commodity.

          Government should only recognize its own fiat (which should be as inexpensive as practical) as money. End of story.

          1. MyLessThanPrimeBeef

            1,001 nights.

            Another story. What if we the people just get together and vote on whether to use common stock or gold as private money?

            Disclaimer: I am for cowrie shells.

          2. F. Beard

            What if we the people just get together and vote on whether to use common stock or gold as private money? LessthanPrime

            Then it would not be “private money”; it would be a form of fiat.

          3. F. Beard

            Private money should be whatever people mutually agree upon for private debts. That could be common stock, store coupons, futures contacts, shiny metals, etc. But government money must be pure fiat so as not to favor any private money form.

          4. MyLessThanPrimeBeef

            So, this would be OK then:

            What if we the people just get together and mutually agree on whether to use common stock or gold as private money?

            But this is not OK:

            What if we the people just get together and vote on whether to use common stock or gold as private money?

          5. F. Beard

            But this is not OK:

            What if we the people just get together and vote on whether to use common stock or gold as private money? LessThan

            Correct. 51% should not be able to tell the other 49% what they shall use for private debts. It is literally none of their business.

          6. F. Beard

            Yes, every last one of us would have to agree, now and forever. But since that won’t happen, the solution is to allow anything as a private money form as long as both parties agree to it.

    2. Leverage

      “1.Its real goal as Jefferson said, is to inflate and deflate to where you lose everything.”

      Interesting, I’ve read some stuff from Jefferson, as I think he was a powerful thinker and interesting historical figure. But I haven’t read all his writings about money, finance, banking and economics.

      Typically he’s portrayed as a hard-money man, along with some quotes from him expressing this. But I don’t know how he evolved over time (after all, he used soft-money to expand USA when he was president) and when he was an old man. Could you point me somewhere or expand on this?

      Similar things can be said of a lot of the founding fathers (being European I don’t know all the figures all that well, but I’ve some knowledge), a lot of them had some sort of knowledge on finance and money and strong views. Both Franklin or Adams showed that a lot of the misconceptions about the economy can be linked to the misunderstanding of money.

      P.S: I agree with this point anyway, hard money was terrible and unsustainable, and has always been. All ancient societies knew this, as well in the early middle ages, etc. In my mind, some gold bugs have an agenda on this and exploit it with their propaganda. For the good or for the bad though, they are a minority of the financial establishment, which favours inflationary money and banking cartels (I don’t agree with this system either BTW).

  19. Jon

    Yves –

    Here are 3 points from a admitted hyperinflation hyperventalist that I would be curious to get your take on.

    1.) Hyperinflation does not require full employment as you wrongfully assume. Didn’t Zimbabwe have huge slack in the economy, 80% unemployment, etc? In fact, I would argue that an economy with high unemployment is even more suceptible to high inflation because it is not producing enough goods to keep prices stable (the too few goods part of the ‘Too much money chasing too few goods’).

    2.) You also assume that banks have to lend to consumers and businesses in order for the money to get into the economy. This is also an incorrect assumtion as the government is currently borrowing and spending money into the economy all the time at a very high rate in comparison to the size of our economy. I understand that the government doesn’t really even need to borrow the money because of the whole keystroke principle but the fact is that money is entering the economy through Gov’t spending. And what happens when the Gov’t spending balloons because of the entitlement funding crises. This spending is also very inefficient because it is simply spending and not investment that will produce future returns.

    3.) One of the assumtions of MMT says that citizens of the soverign issuing that fiat currency have to hold the currency to pay taxes. Does this not take into account the instant convertability at the point of transaction? Also credit cards make the convertability automatic and instantaneous. My point is that no one truly has to hold the currency to pay taxes but rather they can easily flee the currency and then instantly convert to pay any taxes or expenses that are required in dollars. Also foreign creditors hold huge sums of dollars and do not have to pay any taxes to the US gov’t. They can dump their dollars at any time.

    My first two points will likely lead to HIGH inflation at which point flight from the currency described in my third point will lead to HYPER inflation.

    1. JustAnObserver

      I read somewhere (on Credit Writedowns I think) that a necessary condition for hyperinflation as distinct from the garden variety just getting very high is a a massive and abrupt destruction of a country’s productive capacity:

      o Weimar: The French military take over of the Ruhr to extract war reparations.

      o Zimbabwe: The takeover of the white owned farms. (Don’t get me wrong here a don’t necessarily think that was wrong in principle but the timing and the subsequent looting by Mugabe’s kleptocracy was a disaster).

      So by this token the HyperInflation crew have the burden of proof in showing where/when/how in the US this destruction of the means of production will take place … remember it has to be both massive and sudden.

        1. JustAnObserver

          Thanks. I’d forgotten about #2 which, for the USA, implies that hyperinflation will *never* happen and so “hyperventiling” is a precisely accurate description of these people.

          BTW: A third example of HI – apparently the most extreme ever – is Hungary after WW2. Was that some kind of counterexample or were #1 & #2 actually satisfied.

          1. geerussell

            The united states could still have hyperinflation even with debt denominated in dollars but it would require some pretty serious bad things to happen.

            A loss in the ability to effectively collect taxes could destroy demand for dollar currency and lead to currency revulsion.

            We could lose (or almost lose) a war so badly that we lost a big chunk of our productive capacity. Or perhaps a zimbabwe style failure of government leading to same.

            Detailing exactly what series of events will get us from where we are to that point is a burden hyperinflationists are failing to meet. The bottom line being it takes more than simply printing money to do it.

          2. MyLessThanPrimeBeef

            I think if you are introducing a new car, it’s up to you to prove its brakes work and it’s gas pedal doesn’t have any sudden acceleration problems.

            It’s not up to the consumers to prove it’s not safe.

            Please prove that MMT is inflation and hyperinflation safe.



          3. F. Beard

            Please prove that MMT is inflation and hyperinflation safe. LessThan

            It would be if genuine private currencies were allowed. That way, if government mismanaged its fiat, the private sector could shelter from the “stealth inflation tax.”

          4. geerussell

            “Please prove that MMT is inflation and hyperinflation safe.



            That’s like saying Newton imposed gravity on us.

            MMT is just a description of the realities of the monetary system as it exists. A useful tool for understanding what’s happening around you and anticipating the result of various actions. Your own judgement is still required to determine policy and safety.

          5. MyLessThanPrimeBeef

            Your own judgement is still required to determine policy and safety.


            That’s the part that could be imposed on us.

            And it is up to the imposers to prove its safety, not us serfs.

        2. wunsacon

          >> 2) Debt denominated in a foreign currency.

          Fossil fuels. That’s mother nature’s foreign currency.

          1. wunsacon

            …and as we’re seeing from our f’ups at the Deepwater Horizon and in our colonies in the ME, we can’t make the supply of oil grow the way we can make the supply of cash/credit grow.

          2. Nathanael

            The need to import fossil fuels *could* provide *either* the massive clampdown on productive capacity (if the fossil fuel spigot turned off) *or* the debt (if we started paying for our imports of oil in something other than dollars), but not both.

        3. wunsacon

          >> A loss in the ability to effectively collect taxes could destroy demand for dollar currency and lead to currency revulsion.

          The US *HAS* lost its ability to collect taxes. Right-wingers are seeing to that.

          1. Fraud Guy

            Only from the middle class that makes over $200,000 per year, or who make their money from investments. They are trying to increase the tax burden on the lower 98% of the middle class.

    2. John M

      I initially wrote a rather long response to your point 3, but I realized it wasn’t really responsive. Hopefully, this will be shorter and address your first issue of point 3.

      If you did nothing with dollars yourself, other than paying taxes with your own (foreign-denominated) bank accounts that instantly converted to dollars, your bank would still need the dollars — either physical or in its account at the FED. If your bank didn’t have sufficient funds at the FED, the FED could increase the account and presto, now sufficient funds exist. That could be called a loan or gift.

      That, of course, is a form of deficit spending, so that practice has to be limited. The FED may refuse to gift or loan the dollars, so the bank would have to borrow from someone else. (At the other bank’s agreement, the FED would increase our bank’s account and decrease the other’s.)

      This produces the demand for dollars. I don’t know if this demand suffices. It still requires limiting FED deficit spending to a certain degree. (If taxes ultimately consisted of increasing US Treasure numbers in a FED account, they would be meaningless.)

      Foreign creditors potentially dumping a huge number dollars at once? That’s probably a huge issue. It’s a question whether they would do it suddenly to crash the system without any early prior hint of such a decision.

      A smaller sudden dumping would do wonders for the US economy. If the dumping occurs by a sudden purchase of US goods, the demand goes through the roof and employment rises. If the dumping occurs by purchasing other currency, it weakens the dollar in the foreign exchange, and reduces our trade deficit — more purchasing from America, greater employment again.

      (There’s a separate issue — is importing actually good or bad? Is exporting good or bad?)

      1. geerussell

        The question that needs to be asked and answered is this: What nation, having traded vast quantities of real goods and services to obtain all those dollars, is going to cut its own economic throat by dumping them to crush the value of the dollar?

        Certainly not China. They’re a rival with a well developed sense of self-interest. Easing slowly out of dollars over a couple generations… maybe. Setting fire to a $2T pile of value that would not only extinguish what they’ve obtained so far but dry up one of the main markets for continued exports… not so much.

        1. marc fleury

          ah, the fallacy of Rational Expectations. As a frustrated male it is much more fun to set a bonfire of whatever you got in store and waggle your appendage in the general direction of the enemy.

    3. Nathan Aschbacher

      You’re conflating unemployment and productive capacity when you shouldn’t be. One can be an indicator of the other, but they’re not the same thing.

      Zimbabwe had neither the labor force nor capital assets to produce much of anything useful or interesting to much of the rest of the world.

      Additionally, they also could not conduct much foreign trade in their own currency, meaning that their outstanding liabilities were denominated in something they had no control over.

      This combination of conditions was essentially their undoing. Their aggregate economy had basically no comparative value already, and as a result they had no ability to trade on the value of their economy to manage their liabilities.

      The United States is not in this condition at all.

      Beyond that, and something that I think doesn’t get nearly enough play in these discussions, is that the U.S. Dollar is still the de facto global structural reserve currency. If the U.S. Dollar falls apart, so does almost everything else. As a result it’s in the interest of almost everybody to maintain the fiction of a high-value Dollar in virtual perpetuity, because nobody wants to be a first-mover on attempting to transition away from dependence on it. There’s a form of economic M.A.D. holding the pieces together and working seriously to the United States’ advantage. The Nixon Shock should have taught us this lesson, but entirely too many people (almost everybody) failed to learn from it or learned the wrong lessons.

      This is frankly where I see MMT. It’s the other prong of what should have been realized following the Nixon Shock. It’s the mode of thinking and prescription that simply points out that we had the Nixon Shock, and along with it our entire framework for understanding money should have changed, but our entrenched anachronistic policies and institutions remained. So we live in this bizarro world where our political-economic institutions are configured for a world that no longer exists, but we refuse to do anything about it. It would be like inventing the lightbulb, but then filling each one with oil and using the filament inside to light a wick.

    4. Marley

      1. I do not where in the article anyone can find a reference to full employment being a “pre-requisite” to hyperinflation. I think the article was merely framing an argument used by many to explain their views on hyperinflation. As far as Zimbabwe goes, one of the best MMT treatises on the subject can be found here:

      2. Yes, Gov’t spending is SO inefficient … because you know, it all goes to GOV’T employees, who pay rent for GOV’T housing, and buy their food in a GOV’T supermarket, driving their GOV’T-made cars filling it with gas from the GOV’T gas station. NONE of it, of course, goes to the PRIVATE sector. MMT 101 – Theory of sectoral balances (public sector deficit ~= private sector surplus). Have a gander:

      3. Have you been peeking in at NEP’s MMP blog posts? If so, you should ask questions there to clarify what is being taught. The questions around sovereign currency lead to the argument of why anyone would accept the currency, even when there is no precious metal backing it. The answer is taxes, yes, but since #1 and #2 are baseless (and you require these to justify #3), I am not sure what is going to convince anyone to “flee the currency”. Perhaps you missed this entry at NEP:
      It’s an erudite look at what you’re attempting to portray albeit punctuated with a view that is not in line with yours.

  20. chris


    You hope that the speculative boom in commodities will end soon. Hope is not an investment nor logical strategy as the markets can remain illogical far longer than you (or I) can remain solvent.

    It will remain to be seen if the civil suits for fraud instigated by the FHFA against select (but not all) banks (which of their own volition or through entities they acquired) made representations and warranties that are as full of holes as their marked-to-fantasy asset values.

    Finally, the FDIC quarterly report (yeah, some of us pay attention) for the second quarter of 2011 indicates that consumer credit (exclusive of student loans) has started expanding again. You may wish to check reality before repeating “they are not borrowing”.

    1. chris

      Tsk, Tsk. An incompleted thought.

      It will remain to be seen if the civil suits amount to anything when as Yves notes above “More Proof of DOJ Lack of Interest…” no one is pursuing enforcement of the law.

  21. histriorian

    PeterPaul above is absolutely right about hyperinflation. Hyperinflation and inflation are two completely separate things. Hyperinflation is not caused through economic mechanisms. It can have many causes and some of those can be economic, but fundamentally you have to get people to believe they have to spend all their money today because tomorrow it won’t be worth much. That implies a pretty high level of loss of faith in the system, and we’re nowhere near that point.

    Moreover, no currency has lasted all that long, and certainly no currency that was backed up by empty promises. The emptier the promises, the less time it lasts.
    The U.S. can continue to make policy mistakes for the forseeable future and still not get hyperinflation. However, if it does so for a long enough time, hyperinflation is all but inevitable.

    1. Nathanael

      I believe China had a paper fiat currency which lasted for 400 years or so (before an emperor managed to discredit it), and Egypt had a system of standardized official government-issued barter rates for literally *thousands* of years.

      It’s all about trust in the central government. If people trust it for other reasons (it keeps everyone fed and housed and so forth) it can issue infinite empty promises and they will work as money indefinitely.

  22. Element

    Mr Wray,

    I think you and the assorted tag-team of MMT affectionados here completely miss the point, misunderstand, and serial misrepresent the intent of the ‘Goldbugs’ (and no, i am not one).

    In the end the core issue they seek to address and eliminate is the instability that results from the ubiquitous tendency of humans to ALWAYS pretend to be richer than they really are.

    You noticed this too, right?

    1. Govts do it via printing (as much as MMT wish to rationalize it into denial)

    2. Bankers do it via fractional reserve leverage.

    3. ENRONs do it via accontimg lies.

    4. Humans do it via private credit.

    Unfortunately, MMT academics and semi intellectuals fail to grasp that the poor human suckers that suffer the result of all this finamcial and fiscal make-believe seak a more reliable mechanism of exchange that prevents the instability caused by 1, 2, 3 and 4, thus to avoid criminality and fraudsterism of fiat muney.

    Thus to negate bubblism and debt saturation and failed mouse-click ‘bailouts’ / easing, inflation, austerity and sysemic colllpse.

    Have a problem with that?

    Given collapse is now baked-in, (and i think only a fool would believe MMTwill save the day now) why don’t address this aim of ‘goldbugs’ (limiting the negative effects on the family of said bug) rather than harp on a paradigm they long ago realized was anti-thetical to their REALISTIC best interests (i.e. paying their bills)?

    Standing on your MMT soapbox and spruiking MMT theory all day reassures no one at this point.

    1. skippy

      Person_Element_repeat a trillion times, there is no store of value, ” “, ” “, it is an arbitrary construct differentiating wildly between society’s and timelines. Human beings seeking certainty in this universe sooner or later lament. Personally in my book, its a hangover from metaphysics, bloodlines to deity’s thingy, living on the top of the hill, color of cloth, et al. Society equals coercion, even if every one had the same stuff, individuals would endeavor to establish some form of identity accentuation. Even if the intent was not to elevate status, some individual or group might see it that way, whatcha gonna do? I don’t think even a nation of clones would fix it, environment problem.

      Skippy…Hell I can remember the locker room measurement days, then I grew up.

      1. marc fleury

        someone is either very high or using an AI quote generator and failing the Turing test miserably. Although one could argue that Mr Wray fails the Turing test as well.

  23. r cohn

    Suppose the Treasury credited everyone 1 billion dollars.The treasury would in turn sell debt to the Primary dealers,who would immediately sell them to the Fed.Has not the FED created 1 billion/person and would this not create hyperinflation

    1. John M

      Most likely would create hyperinflation.

      As I understand the theory, there could be too much as well as not enough deficit spending. If the treasury or FED created a billion dollars per person, money would have to be borrowed or taxed to get a large chunk of it back out of the system.

      Beware of all or nothing thinking. Too much money creation, you get inflation. Not enough money creation, you get deflation if there’s actual economic growth.

      1. Nathanael

        1 billion per person would almost certainly be too much. It would create a very strong devaluation immediately.

        Whether it would create *continuing* hyperinflation is about whether people expected it to be repeated. If people understood that it was a one-time thing, it might actually not create hyperinflation.

  24. Ian

    All very technical, but, wasn’t there mass unemployment in Germany in the the 1920’s and also Zambia (who have never heard of full employment)?

    1. Nathanael

      Germany in the 20s faced a money shortage and the extraction of vast amounts of wealth to foreign countries (the reparations, which had to be paid in hard currency). Repudiation of the foreign debt pretty much fixed that, but it took Hitler to do that.

      Haven’t studied Zambia, but there *are* technological / ecological sources of unemployment as well as “economic” sources.

  25. SH

    I’m sure I missed this argument, but Wray has not misstated his case much. Warren Mosler is the policy man. That’s when you get to the magic of what we should do with the power of this ability to squeeze a few extra dollars in there with little to no effect with little consideration of whether or not it’s fair.

    If this system has been in place for 4000 years without me even knowing it, then I say f it.

    The hardest argument is why inflation does not happen when there is not full employment. We’ve had stagflation so it is not that hard point to counter.

    The real argument is why does monetary restraint crash the economy. Why has the inverted yield curve always signaled difficulty. I realize that is not now, but why will it be different when we hit full employment and we up taxes to restrain the economy instead of raise rates? I guess I’m better off dying before that happens ’cause I don’t want to wait to find out.

    Why not just get to a non modern monetary system and not worry about any of that?

  26. mannfm11

    I don’t agree with what Bernanke is doing, but in principal I agree with Randal’s description of what goes on. The point people miss is there weren’t any reserves when this mess hit. Banks were lending their own credit and they were paying each other with it. Most of the US currency that is evidenced by the assets that were on the Fed balance sheet at that time had left the US banking system years ago. For instance, you might recall that Saddam Hussain had $1 billion behind his wall in one of his homes. There was probably only $750 billion in the Fed balance sheet at that time, so here was a good part of 1% of all the US money. I doubt the big banks had more than $10 billion or so and most of that was for exchange with customers on a day to day basis. Treasuries have basically been the reserves of banks for years. Once a prime player in the banking system, Citi or BAC went sour, the exchange of the banks good credit ceased. If they were exchanging reserves at that time, the crunch wouldn’t have occurred.

    There are 2 problems right now. One is that banks act as surety for loans. They guarantee the borrower can pay because they evidence it with a deposit. The deposit is their liability, not the borrowers. They are also liable in this manner for all the loans on their books. Low capital reserves mean that banks are near to committing fraud if they don’t have sufficient capital. The stories about the solvency of US banks is a fiction, as the too big to fail banks are all rated C- by Weiss or worse. So, the swapable money goes for speculation instead of loans. The second is of course the insolvent borrowers, that a bank would be a fool to guarantee good funds on many potential customers. The river is running the wrong direction.

    There are hard choices to be made. I believe we need a ton of bankruptcy judges, haircuts on bank balance sheets, including the shareholders and then some kind of stimulus to get the ball rolling. We are merely bankrupting ourselves. The whole monetary system is debt and thus only the holders of the debt can pay the debt. In the case of banking, the holders of the deposits are actually the holders of the debt and it is of utmost importance those that owe the debts acquire the deposits of the holders of the debt. Otherwise, the debt has to be paid by the very default of the capital position of the bank, then haircuts on bondholders and depositors if necessary. Those that own the debts of the US are the only ones that can pay it, debts including the bills we call money. The system is full of paradoxes that the average person cannot even begin to comprehend. What are called reserves are exactly what Randal says they are, assets against existing deposits and bank money for the purpose of limited customer cash needs and to pay other banks in clearinghouse operations.

    1. SH

      Hi mannfm11:

      The key phrase of the day which I’ve read in many sources is “unreserved credit creation”. I give you the deed to my house and you give me a loan for that amount minus a haircut, but in order to give me the loan you go in your basement, print the cash and give it to me. It’s “unreserved credit creation”. You did not have to have the cash to begin with. All you needed was collateral and you get to “print, print, print, baby”.

      In my opinion, that is the problem we’re all dealing with here. It’s not kosher. MMT does little to talk about why you have the right to print me money when I don’t. I would love to loan myself money.

      This argument is slippery because it moves credit creation from banks to the voting public if you talk about fair. The only thing worse than bankers is a voting majority that can print their own money.


      1. Nathanael

        Actually, it’s fine if the public prints its own money — the problem comes when the bankers attempt to pass off the money they printed as the money printed by the Treasury, basically, so the problem would come if any member of the public could print the SAME money as anyone else.

        A voting majority for printing Treasury money and spending it on government projects works as long as the economy is capable of being mobilized using money.

        Printing money doesn’t work if there’s something else, other than lack of money, preventing projects from being done (a shortage of engineers, or a civil war, or whatever), but that’s just not the case now.

  27. marc fleury

    Sorry, I will start with SLIGHTLY TANGENT. I was disappointed to see that Bill Gross article in yesterday’s FT was not covered and came here this morning with the hope that it would. As much as i enjoy Randy’s writing (and his book) I would have hope for a pragmatic discussion of the points Mr Gross makes. Essentially and against MMT grain he claims that QE DESTROYS CREDIT CREATION AND LIQUIDITY AND IS THEREFORE CYCLICAL MINSKY.

    This has taken me so of guard, I remained stunned for a day… and was hoping for a discussion here on NC. I have written a piece over at my blog and was hoping to get something started here. I promise to read the actual OP and the comments (the look like a TROLOLOL fest that could be fun)

    This flies in the face of so much MMT yet could be a valuable insight.

    FROM: http://www.thedelphicfuture.org/2011/09/wonky-bill-gross-on-qe-is-credit.html


    This piece is so wonky, I actually needed a full day to wrap my head around the concepts and only after a long discussion (more listening then talking) with someone who knows a lot more about the term structure of credit (as in is a professional) did I finally reach some sort of synthesis.

    The piece is by Bill Gross, the head of Pimco, one of the largest buyers of credit and bonds out there. You can find the piece here. There are too many money shots but if I had to boil it down the claims are

    1- QE flattens the yield curve and that is bad for investors
    2- by removing the transformation of maturity premium, banks have little to no incentive to lend
    3- Liquidity by the FED results in less liquidity by the banks because the banks lower their leverage.
    4- what is supposed to stop a minsky negative dynamic in fact exacerbates it. By killing broader liquidity while expanding base liquidity.

    Let me try and address the points in order see if I can steady my thoughts on these points.

    On 1. It is clear that QE flattens the yield curve. That is the whole point. By using QE the FED effectively targets a very low interest rate in the broad economy to stimulate it. This is the intended and stated target. The conflict between offer wanting a higher rate of return in times of crisis and demand wanting lower is partly settled in the markets but mostly influenced by the FED cost of money to member banks which is now close to zero. This is a spread point, not a curve point.

    Obviously the offer (capital holders) do not like this situation. In fact for the same or increased risk (there is recession, there will be default) you get less compensation so it goes counter to the mathematical logic of the buy side on bonds. Clearly Gross is talking up his book here and has already issued public calls “to boycott expensive bonds”. As a personal aside I do relate to this having largely shunned the muni market for these very reasons. The risk/return doesn’t look right to me (and I am pretty low in terms of risk profile). So the net-net is I pursue options strategies in broad equity markets.

    And again, herein is also another justification of QE: to smoke investors out of cash and bonds and into risk asset. The flight to safety is really a risk tilting towards cash (cash preference) as opposed to bond/equities. The buy side of bonds may not like it but that is the point. So yeah investors don’t like it but there it is.

    So the primitive conclusion is that there is less offer on the buy side. Liquidity in the market because private investors don’t like the risk profile. First paradox is “more liquidity by the FED imposes LESS liquidity by the private sector” a ‘crowding out’ argument as it were on the yield.

    1’/ I am not sure the crowding out argument is valid. True I have moved up the risk profile, effectively being smoked out of my cash hole, but because that position in the market has been flooded with cheap FED money. The market is akin to electron orbitals around a nucleus: the lower orbits (more stable) get filled first and the ‘bathtub” gets filled as all lower positions get filled. In other words, the effective rate in the market is still a MARKET rate and so the market has CLEARED it is not like there is no liquidity there. THERE IS CHEAP CASH, JUST NOT MINE OR PIMCOs. True the money that is sitting there is bank money sitting on top of high powered FED money and not private money but liquidity is still there by definition of a market clearance at that rate. In other words TOTAL liquidity has increased, at least in theory.

    2/ but not so fast says Bill Gross, that is not the whole story. We have focuses on yield, you also need to focus on the yield CURVE. Banking theory tells you that maturity transformation by the banking system (what Gross alludes to in the beginning) is its raison d’etre. Essentially banks borrow short term (overnight) and lend long term to an econ that wants longer maturities to plan, the 8year ‘compromise’ bill alludes to in the beginning. Maturity transformation IS THE MAIN FUNCTION performed by the banking sector. Banks lever up and multiply the credit in the economy. So the first point is that banks will make less profit because the yield curve is flattened. In fact they would rather shorten their maturity since it doesn’t pay more to go long and take more risk. This Bill says means there is less offer on longer maturities. I understand the point, which is essentially the same point as above (but around maturities, the slope of the curve as opposed to just the absolute return). The corrolary , that banks would lend less, seems iffy by the same clearing logic used in yield. Yeah you need to move out but the MARKET CLEARS. Again, I have this cash, it doesn’t pay as well as before but what am I to do? sit on it? no, I lend it and take the return it gives me, again the bathtub will fill in order and markets will clear. I just make less because the whole “energy level” as it were has been lowered by QE: again the stated goal of QE for obvious macro economic reasons of stimulus and avoiding death spirals. So jumping to the conclusion that banks don’t lend seems specious. They don’t lend for other reasons, a prevalent view is that we may be witnessing depressed demand by the larger corporations who don’t see the need to invest and that the smaller concerns are just not addressed by the banks because they shun that risk. This is orthogonal to the base levels of corporate bonds.

    3/ Ah but that is STILL not the full story says Bill. The LEVERAGE in the banking system will also go down. I really have a tough time understanding that one. Basically it says that banks lower their leverage because the returns are so low. It seems counter intuitive on the surface of things. In case there is little return people in fact tend to lever to multiply their return on capital. That is the whole point of leverage. It seems that leverage would in fact be need in order to maintain profit levels at the banks. If not it says MMT will effectively screw the profit levels at the banks in direct contradiction with most MMT tenents that profits come out of investments. In fact the person I was talking to works for a bank in exactly these products and says that argument doesn’t hold water on the surface of things, I must admit to not having followed that logic at this point.

    4/ The link to minsky is tenuous by now but goes as such: if there less leverage we are cyclically contributing to the decrease of liquidity in the system. There is less debt available. In other words, if you have followed the logic so far the claim is a flat yield curve gives you this paradoxical result: MORE liquidity results in LESS liquidity (FED liquidity UP-> banks leverage DOWN-> econ in minsky/fisher spiral) THERE IS NO HELICOPTER. Because the banks reduce the liquidity as the FED increases its liquidity because QE flattens the yield curve.

    That paradoxical result is very interesting

    1- Gross may be simply talking his book and maybe full of it when he says “and banks, poor banks, lower their leverage”.
    2- in case he is not full of it, it may be an explanation of why more FED lending lowers bank lending. The usual arguments or “banks don’t lend, econ doesn’t borrow, pushing on a string etc” may in fact find some justification in the arcane logic of modern monetary theory.
    3- a more likely picture, as with any complex system like the banking network, is that too much of one thing is bad. QE1 stabilized the fisher capsizing boat (smoke cash out). QE2 propped balance sheets and played currency wars, QE3 will be counter productive. Too much of a good thing?

    I just don’t know. Thoughts very welcome.

    1. Nathanael

      Well, remember, lowering leverage is critical and desirable — because leverage is what causes systems to blow up. Leverage causes instability, and leverage is what blew things up in 2008.

      “Animal spirits” are what cause Minsky booms in leverage, and after it’s shown to be a tissue of instability and the markets freeze up, the resulting attempt to deleverage is what causes the long recession.

      The goal is to increase liquidity and solvency without increasing leverage. QE does not accomplish that, and in that regard Bill Gross is right.

      This cannot be done by lending money. This could be done by giving money to banks — which the Fed is trying to do — except that that rewards criminals, which causes everyone but criminals to opt out of the banking system and deleverage even further. (And it increases inequality, which also hurts the economy.)

      So it can only be dealt with by directly transferring wealth to the poor debtors (via bankruptcy proceedings or money-printing or taxing the superrich and giving the proceeds to the poor or whatever).

  28. joebhed

    Much ado about nothing.
    The main reason that hyperinflation cannot result from excess reserves is because reserves are not spent into the economy – period.
    Only real money flows can affect the general price increase that measures inflation..
    Therefore excess reserves cannot cause inflation.
    Excess lending – more money lent than economic production and consumption – can cause inflation.
    And the banks are in no way limited in their lending by the reserve requirements, but do need to meet their reserve requirements at reporting time – not a problem.

    The problems of general inflation creep are mainly caused by compounding interest over extended periods of time, and can never end as long as we create all money as a debt, repayable with interest, that is NEVER created.


    This is also the cause of the siphoning-off of the real wealth created from those who create the wealth(labor) to those who issue the debt and control the monetary assets.

  29. Dan Duncan

    Randall Wray, Marshall Auerbach, Warren Mosler, Billy Mitchell, Yves Smith:

    Please, for the love of God, take a remedial algebra class. Take a few minutes to understand the difference between a f*cking function and a f*cking equation. Please.

    And then…look at all your MMT primers on any of your websites.

    Maybe, just maybe you’ll see how ridiculous your assertions are.

    When you hit us with your laughable MMT assertions that:

    (I – S) + (G – T) + (X – M) = 0

    You are flat out wrong. By performing the operations to get to (I – S) + (G – T) + (X – M) = 0, you are conflating functions and equations. You are mixing cause and effect. I can break it all down for you, but I know you won’t take my word for it.

    Take MMT Guru, Billy Mitchell. Get his explanation on MMT.


    Then, go to anyone you trust who has any math training:

    Sources of GDP do not merely equal Uses of GDP—as you claim. Sources beget Uses. You’re not working with simple “=” signs, you’re working with “->”. It’s different! When you have causality and an “->” you cannot mix and match LHS and RHS variables willy nilly. It’s not that simple.

    Stop the MMT madness. You’re making fools of yourselves.

    1. odusgissjbfrei

      Take a few minutes to understand the difference between a f*cking function and a f*cking equation. Please.

      In economics, the correct terminology would be more like “f*cking definitional equation” and “f*cking behavioral equation”.

      Sources of GDP do not merely equal Uses of GDP—as you claim. Sources beget Uses. You’re not working with simple “=” signs, you’re working with “->”. It’s different! When you have causality and an “->” you cannot mix and match LHS and RHS variables willy nilly. It’s not that simple.

      They don’t ignore the causality. The description of Treasury and Central bank operations details the causality of financial flows and stocks. This is what is focused on with great detail on the internet because most people don’t seem to understand it. So claims like “government deficit spending finances private saving” are bolstered with accounting facts as well as GDP identities.

      But I think you’re right in this sense: they don’t make their behavioral assumptions clear enough. Ricardian equivalence is out as a modeling convention because all MMT literature could be seen as an exposition on the statement “Ricardian equivalence is stupid” and standard Keynesian effects clearly apply, but I’d like to see everything spelled out.

    2. marc fleury

      dan duncan,

      you are an idiot. a pompous idiot. “mistaken equation with function”… WTF.

      That equation is an accounting statement, not a theory. I have actually been thinking about it for a while since it was posted the other day (I can’t remember the poster) and there are insights in there, such as austrians tell a true story without monetizatoin, and MMTers tell a true story with monetization, the insight being “monetization of a market MATTERS”. As simple as that. In the meantime why don’t you go an crawl back to whatever hole you came from. For real?

  30. Bam_Man

    I agree with the author of this piece.

    All those excess reserves at the Fed are not just sitting there waiting to be “lent out”. That is not their purpose.

    They are sitting there in case there is a “run” on the banking system, which in a perpetual ZIRP environment is a distinct possibility.

  31. DocG

    What worries me is not necessarily runaway inflation (though I’m not completely sold on Wray’s argument being bulletproof), but the impression on the part of so many that Quantitative Easing is a form of “creative accounting,” i.e., more or less the same sort of scam Enron tried to pull. When literally trillions of dollars are being piped into ANY part of the economy, real, virtual, fabricated, digital, analog, whatever, there HAS to be some sort of serious consequence down the road. Whether it will take the form of inflation or not isn’t clear, but whatever goes up must come down, that’s just a fundamental law of nature. Something is being blown into a huge bubble and when that bubble bursts, it will be very bad news indeed, I feel sure of that. http://amoleintheground.blogspot.com/2009/06/ponzi-economics.html

    1. Nathanael

      It’s taking the form of transfer of wealth to the rich criminals running the banks. To be clear, this is the main effect of QE: yet more money going into bankers’ pockets.

      Unfortunately, this is an unsustainable disaster. The US has hit wealth inequality levels which will trigger massive social instability soon.

  32. wunsacon


    Maybe J6P won’t borrow money against those reserves. But, there are more ways than that for the reserves to enter the economy.

    First, banks can lend to the wealthy and investors, instead.

    Second, when banks or investors “blow up” again, the Fed will “buy” more trillions in fake assets.

    Third, “borrow and spend” (the center-right model) is more inflationary than “tax and spend” (the left model). Almost entirely because of the huge drop in tax revenue from the earlier Ponziconomy levels, the government is taking the money it “borrows” from the Fed and putting it into the economy.

    Nevertheless, I expect the following:
    – credit deflation (because J6P can’t continue borrowing money)
    – commodity price inflation (because the government keeps spending dollars it hasn’t collected via taxes and because I believe in Peak Oil / Land Export Model theories)

    1. geerussell

      In my crude understanding of it, in MMT terms the operations you referred to are entirely independent of each other and concepts such as “borrow and spend” and “tax and spend” don’t have any meaning.

      – Taxation destroys dollars. It doesn’t collect, it extinguishes them from existence.

      – Government spending creates dollars. It doesn’t draw from a pool of collected or borrowed dollars, it brings them into existence from nothing.

      – Issuing treasuries isn’t borrowing. It provides a savings vehicle for dollar holders. It’s a tool for managing interest rates and currency exchange rates. A micro stimulus as it steadily spends money into existence via the coupon.

      Any of these three operations can be performed in greater or lesser amounts independently of the others.

      1. marc fleury

        almost all true. Issuing T-bonds IS borrowing. QE, which is at the heart of MMT, is buying those bonds at varying maturities, is however paying those bonds with money conjured out of nothing. Make what you will of that creation of wealth at a keystroke. It has got to be one of the most fascinating (at least to me) topics in human behavior. Is it stealing or saving the world. In any case, I remember reading some research in MMT circles where money would be birthed without debt. It was some japanese guy.

        1. geerussell

          At the risk of going too deep into a side discussion… I don’t understand how, following the MMT logic, that t-bills are borrowing.

          As I read it, MMT says operationally these aren’t borrowing, they’re spending (in the form of interest paid) and the dollars parked in tbills don’t actually fund or finance anything.

          I’ve seen that idea described in a few MMT writings, most recently here, see Q6:


          1. marc fleury

            it is not ‘big-picture’ and definitely side discussion but *technically* speaking t-bills are debt instruments, they carry an interest. Nothing more.
            QE is the art of creating money (no interest) to buy said Tbills back.
            The MMT view is then that ‘liquidity”, as in CASH is injected/removed into the economy via such bond operations. When the public says QE it understands the ‘printing money’ when in fact it is a process of printing money to buy debt (thereby forcing the money in the system).

  33. Markar

    I’m tired of the straw man argument of comparing the US to Japan as justification for deficit spending with no worry of inflation. Japan is a nation of savers with a huge export economy and trade surplus. Their deficit spending has been funded internally. The US is exactly the opposite, and without our reserve currency status, we become “Zimbabwe” overnight.

  34. AndyC

    “Just where are all those borrowers who are willing and able to borrow the $2 trillion or $20 trillion that hyperventilators believe banks want to lend?”

    They are in the next several cohorts of young people that currently have no debt

    They will be working for the new CCC and new WPA at some point

    An unemployment check is an unemployment check but a job for the government digging and filling holes is a PAYCHECK and will be deemed credit worthy

    Then the banks can lever up yet again

  35. chow

    i would very much like to see the discussion move away from Austrian, neo-Classical, MMT towards ecological economics or biophysical economics. While i personally think MMT is better than Austrian or neo-classical, I know that none of these theories really are capable of dealing with the reality of the earth and our species’ place on the earth. Until we can figure this out, we are on a very fast path of destruction.
    Can we please start researching ecological economics, biophysical economics, thermoeconomics, etc??

  36. marc fleury

    and yet another great opportunity squandered on Naked Capitalism. As I pointed out above, Bill Gross just penned one of the most insightful articles on QE yet, basically claiming that QE3 INDUCES DEFLATION in the FT. Here we are discussing silly topics of QE causing hyperinflation. While I cannot deny the LULZ potential of this trolling topic, I am disappointed we did not collectively rise up to this occasion. I will see you all another day. Good day NC.

      1. Leverage

        It does. He maybe starts to get it, finally.

        QE is conducted throught reserves: it drains financial assets from the financial system in exchange of reserves on the CB account. Indeed QE is deflationary: it also drains a lot of money in form of interests that are paid to the Treasury from the FED.

  37. PianoRacer

    These words from over a century ago may bear reflecting upon:

    “It would be a great mistake to suppose that the statesmen of France, or the French people, were ignorant of the dangers in issuing irredeemable paper money; No matter how skillfully the bright side of such a currency was exhibited, all thoughtful men in France remembered its dark side. They knew too well, from that ruinous experience, seventy years before, in John Law’s time, the difficulties and dangers of a currency not well based and controlled. They had then learned how easy it is to issue it; how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the workingmen and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries or wages; how securely it creates on the ruins of the prosperity of all men of meagre means a class of debauched speculators, the most injurious class that a nation can harbor, more injurious, indeed, than professional criminals whom the law recognizes and can throttle; how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality. All this France had been thoroughly taught by experience. Many then living had felt the result of such an experiment – the issues of paper money under John Law, a man who to this day is acknowledged one of the most ingenious financiers the world has ever known; and there were then sitting in the National Assembly of France many who owed the poverty of their families to those issues of paper. Hardly a man in the country who had not heard those who issued it cursed as the authors of the most frightful catastrophe France had then experienced.”

    1. F. Beard

      Pure fiat is the ONLY ethical government money form. However, we need private money supplies too. That is where gold MIGHT have a place as money but I have serious doubts that it could survive without government privilege to any large extent.

      1. Piano Racer

        I agree wholeheartedly that we should be free to choose what we want to use as a medium of exchange, and that would solve many problems! And we don’t need just one! I would be happy to hold and exchange gold, silver, copper, or even paper if it is backed by commodities, as the Southern US used to do (tobacco notes – http://www.answers.com/topic/tobacco-as-money)!

        I don’t think the government can ever claim to be ethical if it forces its citizens to involuntarily give up the product of their labor for the good of the state! Income tax is just stupid anyway; any tax discourages the activity / good it is taxing! WHY WOULD YOU WANT TO DISCOURAGE LABOR AND INCOME?!

        Maybe a simple import tariff to encourage infrastructure investment as well as self-reliance should fund a country’s government? Also why can people not choose weather or not to participate in government? Why must they force us? If government bestows as much good on humanity as many would claim, would there not be enough selfless honorable individuals who would commit their excess capital to fund it, for the good of all?

        1. F. Beard

          Before we should even think of abolishing government, there is the little matter of restitution for the entire population. The entire population should be bailed out of debt with an equal amount going to savers. Otherwise, the abolition of government would just perpetuate past injustices.

  38. Fiver

    3 Cents:

    Re the supposed hermetically sealed Fed balance sheet:

    Why on earth would anyone believe what the Fed says it is doing AT ALL? Given MMT (and many others) hold that money is nothing more than a abstract unit on a balance sheet, why believe any of it is honest if all the Fed needs to do is make it all “add up” regardless of what created any given problem or how mammoth its scale ? And particularly so when we know for a fact that the entire financial/corporate system is not only hopelessly corrupted, but that it has also infected everything it has touched over several decades? It is more than passing strange in an environment where lying is standard practice to leave that fact out of economic theory or policy practice.

    The real issue is:

    How much future production can be ASSURED of taking place in order to extinguish existing (and accumulating) debt? In case nobody other than Toby has noticed, even if nothing else at all went wrong, the ability to ASSURE continued growth indefinitely is a clear violation of what’s physically possible on this planet. In fact, given the brute facts of increasing population, the scramble for resources, and massive ecological degradation it is already preposterous to pretend that a 30-year mortgage, bond, or any other long-term paper will be worth anything resembling what we peg it at now, if anything. In other words, there is no chance whatever that our current version of a debt-based financial structure will last.

    Manipulating the mechanics of money as widely advocated to produce result “x” presupposes some very deeply entrenched views about the world to in fact be true. Well, just as it was and is exceedingly dangerous to promulgate the model of atomistic, stand-alone individuals operating on the principle of “self-interest” long after the “enlightened” was jettisoned in an accelerating devolution from “greed is good” to Anything Me Is Good rather than one rooted in a million years of human history that conceives people as primarily social, cooperative beings, it is now profound Denial to put all our best efforts into thinking up new ways to consume everything on earth as quickly as possible.

    We are going to need a money system to match a far, far, far more limited life-style – whether we choose our course wisely or default into a spiral of global madness within a mere couple decades.

  39. richard in norway

    What the policy works seem to be forgetting is that the inflation rate is not the same for everyone. I have done some rough calculations of inflation in the UK

    Official inflation is 4.6
    But inflation for minimum wage earners is about 15%

    4.6 is not hyperinflation but 15% in a zero income rise environment is pretty dank close

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  41. Elizabeth

    Interesting. But I’m wondering why New York City seems to be in an inflationary spiral right now. Perhaps not a good test case — lots of uniqueness to New York — but everyone here has noticed that things cost considerably more. The best guess anybody has is that the landlords are greedy and jack up the rent on commercial tenants. That would explain why neighborhood businesses are going tits up after 20 or more years (oh yeah — it’s a “recession”) and being replaced by upscale burger chains, mobile phone outlets, and bank branches. But the question remains: Why are these franchises willing to pay inflated prices for real estate? (Remember, they’re in this “recession” too.) Perhaps a selective granting of credit is at work, reordering commercial society.

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