The money scoreboard

I am going to fill in a few posts for Yves while she is away on conference. Here’s one that is a thought piece I wrote last week at Credit Writedowns. It is a mental model of the economy I am toying with based on some comments the modern monetary theory folks have made to me.

This post is intended to be a hopefully brief synopsis of how the monetary system works using an Austrian framing with MMT terminology. If you don’t know what that means, you’ll see what I mean as I proceed.

MMTers like to say that money is like points and the government is just a scorekeeper. I have never really liked that analogy because the money unit of account is not just about keeping score it is also a government IOU. The government then owes its citizens something every time it issues an IOU. It is indebted to us in some capacity. So the money represents not just a ‘point’ but a debt too, even if that debt is only in fiat currency. This is the inherent problem with fiat currency for me; the promise the government makes to repay in something it can create in unlimited amounts makes that promise somewhat irrelevant.

Nevertheless, the scorekeeper/point analogy has some utility in terms of our institutional arrangements. So I am going to try to use it here.


The amount of money or credit in the system does not change the productive capacity of a society at one point in time. A country can produce whatever it can produce based on the available physical and human capital. As Andy Xie noted money contracts introduce a distribution problem, but they do not change the inherent productive capacity of a society.

So money is the way that we measure that productive capacity and set prices for wages, consumer goods and services and assets. In most monetary systems including in the euro zone, government has been tasked with setting the currency unit of account to make that measurement. If we were to simultaneously increase the price level of wages, consumer goods and services and assets by 1000-fold, all that we have done is change the nominal amounts, not the actual capacity to produce. The ‘points’, as MMTers would call them, are now worth one one thousandth in productive capacity of what they previously were.


The problem therefore is debt. See, debt introduces a money distribution problem because debt contracts are almost always agreed in nominal terms. If the government were to decree a 75 percent decrease in all prices for wages, goods and services and assets, all would be the same except the debt. The debt would be four times as onerous for debtors in real terms and four times as beneficial for creditors.

Our credit-based monetary system and its contracts signed in nominal money units of account create a need for price stability in relative terms as well as in absolute terms. For example, if the price of labour rises less rapidly for the average worker than the value (price) of output, as it has for the last three decades in the US, you have a distributional problem. Suddenly, people can’t afford stuff and the economy slumps unless it is creating more debt – (so-called Ponzi finance). That’s why all central banks are tasked with maintaining price stability.


Here’s where I get Austrian using MMT language. Recession is the way our economic system restores these points (the money unit of account) to real value. Often, the scorekeeper (government) creates so many points that the economy bumps into the whole distributional problem where prices for wages, goods and services and assets have gotten out of whack in relative and/or absolute terms. Businesses have overestimated how many points their customers have to buy stuff with and they ratchet back production, cut back staff and so on – classic business cycle stuff. The vast majority of the downturn comes from reducing inventories and output to recalibrate for how many points people actually have.

But, governments don’t like ‘recalibrations’. So they lower the price of the points to spur greater demand for them, promoting a greater distortion in the relative and absolute number of points available. Put simply, the scorekeeper has padded the score artificially, creating distortions due to the fact that debts are contracted in nominal terms.

Monetary Policy

Remember, however, that the government is just a scorekeeper here. They are not a player. They create the points, put them up on the scoreboard. And the scorekeepers can never run out of points. They can put up points in infinite quantities limited only by how fast they can bang out the keystrokes it takes to change the score.

Now, the government can change the score on the sly in two ways. First, it can change relative scores. That is to say, it can give some people more points and other people fewer points. It accomplishes this via monetary policy. Its monetary agent, the central bank, acts on its behalf and is never permitted to add points to the scoreboard. It is only allowed to reallocate points. For example, the central bank can take some points away from those who hold points as bonds and add some points to those who hold their points as reserves. These are point swaps. There is no net addition to the number of points on the scoreboard, ever.

Relative price levels change and winners and losers emerge because of this policy. More and more people owe more points than they can possibly hope to pay back. Eventually when the price of money falls to zero, the game of padding the score artificially is up.

Fiscal Policy

Unlike its agent, the central bank, the scorekeeper (government) can always add or subtract points (net financial assets) in the system if it so likes. This is called using fiscal policy. If you pay taxes, what you have is a net loss of points. Deficit spending, on the other hand is a net gain of points. That is to say, when the scorekeeper (government) taxes you, on net, it is draining points (net financial assets) off the scoreboard. Whenever the government spends, it is adding points to the private sector’s scoreboard (instantly creating a zero-day net financial asset).


During a recession, the scores – both on absolute and on a relative basis revert to their mean trend values. If the score has been padded a ton as it has in the past generation, you get debt deflation as more and more people become unable to pay off the points they owe. And this is the problem we now face. The government wants to keep adding to the score, but doing so always creates distributional problems because debts are contracted in nominal point (money) terms and because some people receive points (money) while others do not.

I will stop there. I think the scoreboard thing is an interesting way to look at it. It has its limitations but I hope running through the analogy was useful.

P.S. – Randall Wray argues the case for nominalism forcefully i.e. that all state money has been fiat money. For that view, see here.

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About Edward Harrison

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


  1. allcoppedout

    The problems for this model are qualitative in terms of what is in the economy and the labour value in it. The ‘motivations’ of some poor sod building a mud wall by hand in Vietnam and the bankster who ‘needs’ bonuses that would weekly buy the whole operation, or how to change consumption from plastic and crap textiles to sustainable use. That there is now always an excess capacity of workers etc.

  2. F. Beard

    The government then owes its citizens something every time it issues an IOU.

    Wrong! The government owes us nothing in exchange for its fiat other than a few services it charges for such as licenses. Instead, fiat is the means by which we pay our “debt” to government or else go to prison.

    1. Calgacus

      No, F. Beard, Ed is absolutely right. i>Instead, fiat is the means by which we pay our “debt” to government or else go to prison. Yes, that is what the government owes its citizens when it issues fiat money IOUs – it promises to accept its fiat in tax payments to the government. Fiat money is a form of debt, used to discharge debts going the other way.

      The tax payment can be considered as just another purchase of a good or service, like license plates, like a gold standard. When we pay taxes, we get the good called “not living in prison” or “not getting our head chopped off & displayed on a pike”.

      1. F. Beard

        Whether or not money is always debt, the following are NOT required:

        1) 3rd party debt. In other words, the government need not borrow to deficit spend. Nor should the private sector be hindered from creating its own monies.
        2) Usury
        3) fractional reserves

        1. Skippy

          Beardy… why not just come out and say your a neoliberal and that’s the world you want. All this nit picking over money is a sideshow.

          Skippy…Every thing you say come stright out of a CATO Institute play book. Which of these things stick.

          ‎1)Be a male,straight,caucasian,preferably US and high income(much better if the money were “gained” by family privilege or inheritance) citizen.

          2)Worship Milton Friedman as your God and Ayn Rand as your Godness

          3)2 of 3 non science-fiction/fantasy book that you have ever read in your life are Ayn Rand’s book and the other is a course of very basilar economy

          4)Believe that a society dominated by a unchecked metaphysical market where everyone ultimate goal at life is to make more money than everyone else (no matter how) is the best socio-economic-philosophic system and the maximum peak of human civilization ever

          5)Think that poor are poor because toooo lazy,that the 1% people who share the 35% of total wealth desperately need a tax cut and Bill Gates is a much better person than most of the world population

          6)Concept like “externalization”,”monopoly”,”imperfect/asymetral information”,”market failure”,”Bargaining power”,”exploitation” must be aliene to you (or fucking liberal commie myth!!)

          7)Convince yourself that the dogmatic “Tax is a theft” “governments always do wrong” “markets always do the best” slogan are self-evident because….yeah are self-evident! No matter if History is against you

          8)Vote Republican even if in your opinion they are just anti-drugs,pro-war,anti-abortion,anti-science,anti-gay,bible-humper nuts.They will give you a tax cut after all.

          9)Want to privatize school,privatize the road,privatize the police,privatize the park, maybe even privatize the water,privatize the air……..yeah great IDEA…privatize the air! After all if everyone must pay for the air their breath everyone will work harder and the GDP(that is the only indicator of human development and happyness in libertariantopia) will increase!!

          10)Most Important! When the “fiscal conservative” and the neoliberalism policy fail always blame the filthy socialism and state intervation!! the market CAN’T FAIl…it CAN’T fail…because….milton friedman says that!

          1. Skippy

            And I don’t believe for a second your interested in bailing out anyone, just smaller government, will do anything to reduce it.

            Skippy…free markets is all you pine for.

          2. F. Beard

            And I don’t believe for a second your interested in bailing out anyone, Skippy

            Then you and the truth are at odds.

            just smaller government, will do anything to reduce it. Skippy

            Wrong. Big government is currently needed to ameliorate the damage caused by the government backed counterfeiting cartel. It will take time for the need for government to shrink even after the cartel is abolished.

        2. F. Beard

          why not just come out and say your a neoliberal and that’s the world you want. Skippy

          The neoliberals are committed to usury; I seek to reduce it to insignificance.

          All this nit picking over money is a sideshow. Skippy

          I reckon you think sights on a rife are nitpicking? Waste much ammmo, did you?

    2. Marat

      Its funny- the liquor store keeps insisting I pay for my whiskey even though I never agreed to the regime that enforces this requirement.

    1. Lafayette


      WCV: Let’s stop giving money to the banks and do a printing-funded tax refund for the masses!

      OK, let’s do that. No more Quantitative Easing. So, what happens?

      Some banks will stop their credit-card services, others will refuse to deal in mortgage or other realty credit. Which means what? A decline in economic activity and even further unemployment.

      I am no particular fan of banks – quite the contrary. I find that some, the biggest, have indulged in systemic fraud (by securitizing bad-debt into Toxic Waste that they sold to the world). This means gross negligence in not practicing the necessary creditworthiness checks – which would have excluded, perhaps, 100% of those applied for a sub-prime loan.

      However, let’s not forget this important historical fact: Americans have been using credit these past decades to bring the future into the present. How’s that?

      Once upon a time – and I am old enough to remember that period – Americans would save in the present to buy goods/services in the future. Meaning, they paid cash.

      However, over the past three/four decades they have employed credit to bring the future into the present. We invented the Instant Gratification Consumer – and we are not the only country to have done so.

      Why wait to purchase a product or service tomorrow when you can have it today (by purchasing on credit)? Which means that “shop-till-you-drop” became a bad habit. We went binging on cheap credit that was foisted upon us by a Fed Chairman (Greenspan) who thought low interest rates guaranteed high employment and that financial markets were so clever that they never failed. Both were dead-wrong calculations.


      One must understand the process of securitization to understand that debt is rolled over (by selling debt instruments) in order to obtain funds which are again lent by credit institutions – which is a cyclic process that continually repeats itself thus creating an economy’s “Debt Mountain”.

      However, when the underlying debt instrument is non-productive (of repayment) it becomes virtually worthless (except for its residual property value). So banks holding such debt start declaring losses and because their assets are insufficient to cover the losses they fail.

      Which reduces the supply of Credit in an economy that has become credit-dependent to maintain Consumer Demand. The consequence is inevitably unemployment, since production of and the sale of goods/services is reduced.

      Is this the outcome we should want for our economy given how far down in the Deep Doodoo it finds itself?

      Methinks not.

      SO, WHAT TO DO?

      Yes, to all of the following:
      * Prosecute banksters who committed fraud.
      * Undertake stimulus spending to augment Consumer Demand and lower Unemployment
      * Give real teeth to the new Consumer Agency such that it can prevent such manipulations that caused the SubPrime Mess. Reinforce as well as enforce the Truth In Lending Act (of 1968). And,
      * Regulate by law the process of creditworthiness checks for new mortgage loans (or other realty credits) and audit Main Street banks for maintaining the checks.
      * Place Fed auditors in the top fifteen large banks performing continual audits of their banking processes. (The Fed has ultimate responsibility for the functioning of all financial markets according to its charter.)
      * Assure (by competent oversight) that the firewalls instituted by Dodd-Frank assure the same guarantees of separation between Commercial and Investment Banking as did the Glass-Steagal Act. (Because Commercial Banking is (or should be) risk averse whilst Investment Banking is (or should be) the opposite, ie., risk-prone.)
      * Assure that the Fed implements an active audit of the creditworthiness checks of all the local lending institutions.
      * Continue the Quantitative Easing that allows bank relief of the Bad-Debt (which permits the Fed to inevitably either sell the mortgages back to the originating banks or directly back into the housing market at some later date thus recuperating the funds.)

      No, we don’t close down banks. We allow them, in this time of need, to lean on the Fed to maintain their capital requirements. Because to do so would be not only vengeful but contrary to the best interests of the economy as a whole.

      MY POINT

      Banks may indeed be Too Big to Fail – so they also deserve Stringent Operational Oversight by Fed professional bank auditors/surveyors.


      If we want to take the motivation out of bankstering – or any such wild profiteering of privileged positions in commerce/industry – then we should have the courage to put marginal income taxation (above $500K per annum) back to where it was before Reckless Ronnie arrived in the Oval Office. Ditto Capital gains …

      1. Foppe

        Oh, no! If we punish bankers in any other way than by imposing Stringent Operational Oversight, the banks would stop lending, and we would all die!

        Seriously — I realize that you’re being paid to post this neatly structured drivel here, but please tell your paymasters that your cover has been blown, and go bore someone else.

        1. JTFaraday

          Seriously, I’d rather listen to Pilkie drone on, (and I just shipped *him* off to Foxconn over on the other thread).

      2. F. Beard

        Yes, it would be a disaster if the banks stopped extending “credit” UNLESS deflation was prevented by a bailout of the entire population metered to just replace existing credit as it is paid off.

        So you see Lafayette, the banks DO NOT hold the economy hostage.

        Aren’t you glad?

  3. Susan the other

    The nominal value of currency is as relative as inflation/deflation. If the stock market is predicted to be at 100,000 in a decade or so, just what does that do to the nominal value of currency. Or rather, just how does the nominal value of currency stimulate such a farcical exchange? And as long as prices are controlled so that necessary goods and services can be bought and sold, it really isn’t important to my thinking. But there certainly is a lot of energy put into rationalizing value. And always the sinister aspect of supply. Choke it off in a world of 8 billion people and the nominal value of currency will skyrocket. Without price controls, that is. I think price controls should be used and should also be predicated on birth control.

    1. Ming

      IT is a pernicious illusion, that people believe in the market value of the stockmarket. The indexes i.e. (the DOW Jones index) only measure the price of the transactions for the stocks in the index. Hence, if each stock component of the Dow Index recorded only 1 share traded, but the share price was double that of the previous day, both the market value of components of the Dow Index AND the Dow Index would double, even though this would not be a measure of the true value of the components of the Dow.

  4. F. Beard

    In other words, fiat is just a convenient means for government to extract tribute from us. And that right to tribute is God-sanctioned:

    Therefore it is necessary to be in subjection, not only because of wrath, but also for conscience’ sake. For because of this you also pay taxes, for rulers are servants of God, devoting themselves to this very thing. Render to all what is due them: tax to whom tax is due; custom to whom custom; fear to whom fear; honor to whom honor. Romans 13:5-7 New American Standard Bible (NASB)

    1. Marat

      If you agree that one theory of property rights is correct than it is not god-sanctioned, another then it certainly is. What we have and will always have is some kind of amalgamation.

  5. larry

    Ed, I don’t think this was clear at all. The Austrian and MMT approach do not gel well. As a consequence, the govt ability to create jobs on its side of the ledger is confused.

    1. jake chase

      Larry, you are being kind. The post is an incoherent jumble. Readers of this blog understand what money is, what debt is, what monetary policy is, what fiscal policy is. If you want to explain football, talk football. There is no point in talking simpleminded mush.

      The whole problem is the process of debt creation. It is run by banks for the benefit of bankers. Most of the debt fuels asset speculation, which create bubbles and crashes. For 30 plus years, debt fueled consumption too, while globalization depressed wages. What consumers need now is debt relief. Whether or not they will get it is a political question. What does MMT have to do with all this? Nothing. Now, wasn’t that easy?

  6. joebhed

    Time to have the “what is money?” question again.
    I suggest everyone have a quick read of Nobelist Soddy’s “The Role of Money”.
    The building blocks of the national economy’s foundation go: the monetary system supports the financial system that supports the economic system, and nothing but THAT understanding will allow us to rationally discuss the real villain in the global economy today – debt.

    I’ve said this before – we do not have a credit-money system. We have a debt-based money system.
    The banks do not issue their credits unless they are secured by a debt.
    Google again economist Robert Hemphill’s quote on the system of money and banking.

    If we have no debt, then we have no money.
    And, we can have no money without debt.
    The money system itself is thus parasitic.
    What’s wrong with that picture?

    As the MMTists embrace Innes’ errant definition of money as debt in their study of the quasi-scientific basis of monetary economics – it becomes natural and acceptable to have the system of fractional-reserve banking as the debt-based source of our monies – in the good times.

    A far more progressive approach FIRST defines the monetary prerogative as that of government, and thus the idea that private bankers obtain a monopoly privilege of providing the national economy with its means of exchange by issuing debts becomes preposterous.
    As it is.

    We have much to understand about money.
    I applaud the effort.
    But it is based on fallacy.
    Rad Soddy.
    There is NO scientific basis for creating a nation’s money supply by issuing debt.
    Since the Rothschilds adopted the gold-keepers practice of issuing “receipts” rather than issuing money, we have been on the wrong track.
    And the reality is that we cannot move forward from this debt-based money premise.
    We need a new money system.

    1. Calgacus

      Joebhed: Talking about credit without debt is talking nonsense. They are two words for the same thing, viewed from opposing perspectives. It’s as if you are demanding to be given physical objects which only have a right side, not a left side.

      MMT does not imply private banking or “fractional reserve”. It just analyzes them correctly – and shows that reserves are essentially irrelevant. I happen to think pretty much all private banks should be nationalized, with private banking having about as much importance in our monetary system as bounty hunters do in law enforcement. There might be some useful but unimportant things for them to do around the edges, but money is far too important to be left to the bankers.

      The kind of monetary system you want is just as much debt-based = credit-based as the current one, because money is a form of credit/debt. Innes & his many predecessors & successors are absolutely right. You seem to want to make things more complicated than they really are, and from what I have read of Soddy, he agrees with Mitchell-Innes, and does not make crazy, fundamental distinctions between credit, debt & money. Sure, people like Abba Lerner urged creating more government fiat money by just plain printing it & using it for good purposes. But they knew & said that these freshly printed dollars are debt in & of themselves, just as a bond is.

      1. joebhed

        Thanks for that.

        “Talking about credit without debt is talking nonsense”.
        Actually, I was talking about “issuing money” without issuing debt.
        I’m fully aware of how double-entry bookkeeping rules the economicus mundi.
        What I don’t understand is why MMT advocates are incapable of understanding the import and benefit of the money-issuance structure that I discussed above.
        When it comes to the national money SYSTEM, there is no science base for bringing money into existence through that arcane mis-step of debt-issuance.
        That is the key.
        And I pity MMTers, and others looking for solutions today, for their inability to grasp the tenet of debt-based money, and to recognize it as the cause of the many crises that we all face.
        So, just to be clear again, the issue is NOT whether a deposit of a dollar issued debt-free can escape the prison of double-entry bookkeeping.
        The issue is limited to debt-free money creation via direct government issuance versus private debt-based money issuance.
        MMT says that the method of money-issuance is irrelevant, when it is, in fact, paramount.
        And in fact, many chartalist economists DO advocate issuing debt-free money, albeit under the banner of ‘fiscal’ expansion in support of expanding the aggregate demand of the economy.

        For some reason, its OK to issue money directly through government spending, without debt, in times of public purpose need, but it is heresy to adopt a ‘monetarist’ position that ALL money should come to exist without debt, issued by the government.

        If MMT has an analysis of full-versus fractional reserve banking, please say where it is.

        To say that MMT doesn’t imply anything about private money or fractional-reserves (the process by which private bankers create the nation’s money) is to say that we address the 800 pound gorilla(government debt-free deficit spending when necessary – which is money-creation) yet do not imply the 8,000 pound gorilla(government debt-free issuance of all money as monopoly provider of the nation’s medium of exchange).

        I cannot agree that Soddy’s recognition of the credit-debt nature of the present money system means that he agrees with the money-as-debt concept at all. It is the acknowledgement of what is, not what should be.

        Soddy does imply fractional-reserve (private bank-credit based money creation) banking.
        Writing on the UK situation at the time in The Role of Money, he says:
        “”On The Private Issue of Money.
        By allowing private mints to spring up Parliament has fundamentally and perhaps irretrievably betrayed democracy.””
        “”If, from the first, the creation of money had been preserved,as it should have been, as the prerogative of the State, the chequered history of the last two centuries and the impending dissociation of the whole Western civilization would never have occurred.
        But the banker alone knew this aspect of money, and for long he kept it as the high secret of his trade. But it is a secret no longer.””

        Soddy’s historical fundamental differences are between Wealth, Virtual Wealth and Debt. Our understanding of these concepts can go a long way to replacing the broken, insolvent, unsustainable debt-based money system.

        1. Ransome

          Lending at interest is not traditional although lending for fee is traditional. It depends on collateral and risk. Frequently loans have been backed by governments, with twice the value of the loan offered by the borrower as collateral.

          Investor’s created a sinking fund that offered loans that were repaid once a year, after the harvest. A fee was added to pay for the system and to reward investors. Fiat currency requires no investors, only a small processing fee and collateral.

          If you read about AT Stewart, the merchant prince of NY, he did not borrow money because of the debt penalty and became the wealthiest merchant in the world. You don’t need gimmicks to become wealthy. He invented the mail order business, the department store and realized workers were consumers. He expressly prohibited the cheating of customers because he relied on repeat business. He did not advertise, relying on word of mouth. Very revolutionary.

        2. psychohistorian


          Thanks for the point about public and private money which is not really discussed by the MMT folks that I have seen nor do they explain how to implement their theory in a world where all is owned by a small percentage of people….i.e. what good does it do?

          How about more discussion about public/private money and property?

          Please and thanks.

        3. Calgacus

          Joe, you were talking about credit-based & debt-based, hence my comment. I understood you to accurately identify money as credit, which is another word for debt. The sort of monetary system you propose certainly is a “debt-based” monetary system – no more or less debt-based than the current system.
          No chartalist economists “advocate issuing debt-free money”, because it is a contradiction in terms. It’s like saying they advocate green banknotes which are not colored. A state that just issues money but not bonds is thereby issuing debt, because that is what this money is, a debt of, a claim on the state. Yes, issuing bonds, having private banks, having publicly backed modern private banking, may or may not be good ideas. But I am talking about conceptual understanding and consistent reasoning therefrom, something quite absent in mainstream discourse.

          Issuing interest bearing bond debt in addition to the issuance of currency is a policy choice that has ABSOLUTELY NOTHING to do with double entry bookkeeping. One can no more escape from double entry bookkeeping than one can escape from the multiplication table. Unfortunately many MMTers seem to have this misimpression too. The bonds do not back the money, which is not “based on” the bonds or “debt-based” because of that. Modern banking means that the state stands behind private bank’s debts. This is a license for the most gigantic frauds. Which implies that they must be stringently regulated.

          You shouldn’t criticize MMT unless you understand it, and if you don’t understand that according to the dictionary definition of “debt” & MMT, the money you are talking about IS debt, and that there is little else to MMT but understanding & applying this, then your criticisms simply don’t make sense.

  7. marc fleury

    I must admit to being totally confused by the presentation and analogy. I will reread again, but first read was a complete fail.

    In any case, I do believe that a basic point of the MMTers is that money in the system can in fact help realize productive capacity. “inherent” capacity is a fuzzy concept, there is ‘realized’ capacity via money. Isn’t the whole point that money creation stimulates your economy?

    In line with other commenters I find that a simple theft of other people’s work and time by the government. Whether you want your gov doing that or not is a matter of taste, I believe this is where MMT’ers fall flat: not in the factual description of the banking system but in their political prescription. MMT will be a fad because of the political recommendations that are dubious.

    I do like the mix with austrian business cycle, I do believe that actual monetary policy is a mix of money induced capacity creation and business cycle coming on top of it. For all the waste the bursting of the minski bubble causes there was REAL wealth creation on the way up, across the world. Be it in over-inflated real estate or the lifting of china out of abject poverty.

    I do like your writing in general and I do welcome the genre you are trying here (discussing publicly how you think about the problem).

  8. F. Beard

    Recession is the way our economic system restores these points (the money unit of account) to real value.

    Wrong. Recessions destroy real value (eg. unemployment) because our elastic money supply based on debt, usury and fractional reserves can only expand so much before it must shrink.

    Often, the scorekeeper (government) creates so many points that the economy bumps into the whole distributional problem where prices for wages, goods and services and assets have gotten out of whack in relative and/or absolute terms.

    The problem is not too many points but that the points are created as debt.

  9. john

    The Scoreboard
    Govt money is a form of reciprocal IOU: in order to benefit from the protections provided by a (nominally) fair and representative governing system we agree to participate in the economy of that Govt, including making our income and paying our taxes in its “IOUs”; the reciprocal obligation of that Govt is to be nominally fair and representative. As the folks, whom I admire, down at Zucotti Spare are discovering, nominally fair and representative Govt is not self generating: http: //

    So while in practice it functions like a scoreboard, like a scoreboard, to be useful, everyone has to agree what game they are playing.

    The increase in the supply of money is inflationary only if it is distributed equally: wherever money concentrates you see the inflationary affects, but the gross supply can leave you in a deflationary environment if distributional failures are allowed to persist. From this point of view, the accumulated US debt is a vast inventory of unproductively concentrated wealth: there is no shortage of dollar IOUs, however they are concentrated where no one does anything real with them so they slosh around the world look for risk free reward rather than funding real consumption or real (in the Kalecki or Levy sense) investment.

    Serves primarily to shift the location of risk. Creditor gets fixed contractual terms, debtor deals with whatever crap reality deals. Where the IOU of Govt is used as license to enforce the interests of creditors at the expense of debtors the uncertainty of reality is transformed into the risk of debtors and debtors eventually loose as uncertainty always trumps risk. We don’t know what we don’t know.

    Minsky’s instability hypothesis states that markets are inherently unstable. None the less we all agree we’ve not found a better way to arrange productive human affairs. When the “moment” arrives, however, what most people experience is not the result of Govt having totaled up too many points on the scoreboard, what they experience is private lending’s illusion of points provin illusory. I did not cause the construction industry to suddenly disappear, none the less I am left with a set of term debt and lease structures, well within conservative norms in the private speculative bubble, but grossly misaligned with the new deflationary reality. Uncertainty has been made first my risk, then my cost.

    I’ll grant the Greenspan Put did not help, but the credit cycle predates central banking so you can’t pin it on the Govt.

    Monetary Policy/Fiscal Policy
    No problem for me with your metaphor here.

    Because the Govt has ceased to be nominally fair and is certainly only nominally representative, there is a system wide breakdown in trust. This is what will make the IOUs of a nominally representative democracy valueless: the corrosion of trust in the institutions of the dollar denominated global economy is the greatest threat to the dollar. A previous historical inflation is currently manifest in asset values in the developed world that bear tenuous relationship to productive capacity. Trend S&P from 1946 to 1980 points to a current value somewhere between 700 and 1000. The illusion of deregulated wealth since 1980 has the S&P a third above that, but that delta exists now only as financial assets who’s value the Fed assiduously maintains while the larger political system dismantles the real capital stocks that once made those valuations look plausible through deflation.

  10. Linus Huber

    Well, I am not an economist. I understand that you theorise on the functions of the monetary system. Nevertheless, to me the important aspect is savings which should represent stored labor (consumption at a later point in time). We now have a system where governments (through Central Banks) punish you when you save as the rate of interest is kept artificially low while inflation eats away your savings. As far as I know, this is called financial repression and I consider it theft of the worst kind.

    As for money, I do believe the continuous fight against any type of deflation is ridiculous. Why should there be such support to those that over-leverage or went into that much debt that they cannot service nor pay back the principle. The inflationary bias has and is producing bubbles again and again which calls for ever more inflationary measures; a complete nonsense. All those instruments available for investing are subject to confidence of their values and once confidence should recede, the next crash is due.

    Money should not simply be a means for exchange but also has to have the function as a store of value.

    1. sidelarge

      But the concept of “value” is not as simple as you make it sound. Karl Marx spent thousands of words wandering almost aimlessly around the question of whether there is such thing as fundamental “value” that predates everything else. When you sold something to someone, you “discover” its “value,” but it’s a Wittgenstein-esque logical fallacy to assume that there was that value all long “stored,” so to speak, in that product.

      Money and value are more intertwined than they seem on the superficially intuitive level.

    2. john

      A joke I read recently:
      A German comes into an Inn and asks the innkeeper for the nicest room. The innkeeper takes a deposit and gives the German all the room keys and asks him to go make a selection. The German heads up the stairs.

      The innkeeper takes the deposit across the street and pays his debt to his wine merchant. The wine merchant crosses the alley and pays his debt to his hooker who comes back into the inn to pay her debt to the bar tender who in turn pays the innkeeper.

      The German comes back down the stairs, handing the innkeeper the keys and says “none of these rooms are good enough”, the inn keeper gives him back his deposit and out he walks.

      Contracts are all made in the context of their time. The exist through time. Uncertainty, at some times, is a larger factor in their final resolution than risk, something that can be quantified and priced into the contract. When a general debt deflation kicks in, all kinds of people who in normal circumstances could have paid their debts can no longer do so because the German does not show up an make the deposit. It is the flow of money that gives it value: in a deflation those who have money can no more eat the money than those who don’t. Value inheres in what we do that makes life possible and makes life better, not in our abstractions that we use to measure relative values of those things.

      1. Rawls

        For the pro-deflation guy, economics is not a morality play. There is no karma. Everything doesn’t balance itself out. That’s not the way the world works.

        1. Linus Huber

          You might be right but I do believe that there is some justice at the end. Over the past 30 or so years we have built up enormous debt in most western countries (most total debt levels are at a range of about 400% of gdp). Now consider what it takes to service that debt; all this of course has been a boon to the banks. But are we really able to service that and more debt and do you believe we can continue to increase further and further without reaching a point where it becomes completely unsustainable? I do believe that once that point has been reached, we have no option but to face a deflation as debt will be either paid off or has to be written off.

          We are living in a debt bubble and we usually do recognize the extent of a bubble only after it starts to implode. So, I definitely do not the option of potentially deflationary period.

          In addition, we have IMO to have a different approach of viewing inflation. There is inflation of goods required in daily life and inflation of asset prices. Until 2007 nobody seemed to realize that we lived on the boom produced by inflation of asset prices. The reaction of the authorities after the crash, in form of enlarging the monetary basis has mainly produced inflation for goods required in daily life and rather non in asset prices. This does not really help anyone.

    3. Ming

      I believe it is erronous to look at money as a store of value. For money to be a ‘store of value’, prices for goods and services have to remain stable. But for prices to remain stable, demand and supply condtions and other external general conditions (such as the law, and political situation) in which the supplier and the buyer interact must also remain stable. For example, the price of a gasoline is $4.00/gallon, but if some sustainable energy source becomes very widespread, and battery cars become cheap to produce and enjoyable to drive, the price of gasoline may drop due to a percieved drop in future demand for gasoline… conversely, the potential for an impending war in a nation would cause gasoline prices to spike upwards as the government and the people stockpile fuel. I beleive it is more correct to view money as something the buyer will exhange with a seller, sometime in the future, at a price that will be yet to be determined (sometime in the future) . The seller will accept the currency with the implicit trust that the national issuer of the currency is healthy and that there will be other supplier availble to sell him a product or service that he wants, at some time in the future.

      1. Ian Ollmann

        Consider a generation that saves its money, to claim labor from the younger generations in retirement. It should be obvious that this retired generation has no intention of working at 90. Thus, the supply of money saved must all compete for the excess production of today. You can no more save up work from 30 years ago than you can eat a loaf of bread from 30 years ago. Most things don’t last that long. Your real wealth in retirement will be a function of the amount of excess production created by younger generations and how much more you saved than the next retiree.

  11. PG

    Money is both a measure of value and a title to value.

    The concept of “public debt” cannot be applied to a government issuing a fiat currency.

    The liability of a government issuing a fiat currency to the currency users is to well manage the currency.

  12. indio007

    Federal Reserve notes only discharge debts. Technically the US is only liable as endorser. No one ever redeems FRN’s so it is really just a B.S. game with a one way flow of real assets and labor.

  13. JKH

    The scoreboard analogy is an insipid one, but you’ve done something interesting and creative with it.

    MMT at its core is only about accounting. Its major contribution along that dimension is to make the case that all viable economic outcomes are constrained by accounting logic. The sector financial balances model is a good example of this, but the entire MMT analytical framework resonates with this basic idea.

    It’s an important contribution, because too much of mainstream economics seems to bypass it as a fact.

    1. BarbaraNH

      I’m a layman when it comes to economics, and MMT opened my eyes to many basic but important facts I didn’t know before about how the economy works, such as that taxes don’t fund expenditures; the government can’t go bankrupt; federal budget constraints are voluntary; commercial banks create money when they lend (also meaning the government has no control over the money supply); federal budget deficits are just the flip side of private savings; the government isn’t borrowing when it sells bonds; perhaps most important, it’s all about real resources.

      It’s taken at least six months of fairly regular reading to penetrate these and other things well enough to accept them, and while I’ll never understand them as an economist does, I get enough to realize that the government has much more maneuvering room when it comes to economic matters than I thought it did.

      I’m very grateful to MMT economists for making these facts available in great depth to the general public.

      1. Nathanael

        All correct except one point which you might like clarified:

        “commercial banks create money when they lend (also meaning the government has no control over the money supply);”

        The government is supposed to control the money supply by regulating the lending done by commercial banks. This is why, back in the 19th century, when *all* money was created by commercial banks, the “Office of the Comptroller of the Currency” was created.

        The fact that commercial banks now control the government is the reason the government has no control over the money supply. Theoretically, one could have commercial banks, but have their *lending policy* subject to strict government regulation, and thus the government could control the money supply. In practice, the banks lobby Congress to get the regulations removed.

        “perhaps most important, it’s all about real resources.”
        It sure is. Here are some key thoughts you’ll appreciate:

        The importance of money is that *shortage* of money can prevent real resources from being deployed properly. Without money, mutually beneficial actions (housebuilder builds house for homeless farmer, farmer grows food for hungry housebuilder) *don’t happen* because of the difficulty of arranging the barter transactions.

        This is why money needs to be distributed so that everyone has enough of it: anyone who is too poor can only deal in barter, which causes loss of productive activity. Even people who have *some* money but not enough fail to make deals which we really would like them to make — enterprising would-be businesspeople don’t start businesses due to lack of startup capital, etc.

        Concentration of money in the hands of the 1% *destroys* real economic activity for this reason.

  14. Rawls

    This is a poor explanation of MMT. From how I understand it, MMT basically says that because money is simply a unit of exchange printing more money is not necessarily a bad thing if it means more circulation (demand) in the economy. Inflation can be contained via raising reserve ratios, and it’s not a bad thing in itself. A more apt explanation seems to be that because we live in a monetary economy that is imperfect, it is the job of the Central Bank and government to make sure that everyone has the financial resources necessary to invest at maximum levels and to keep the economy operating at capacity.

  15. Rawls

    The only people who lose are creditors and other parasites who use finance to feed off of the work that real people are doing.

  16. Ming

    I must challenge your assertion concerning the following:

    Here’s where I get Austrian using MMT language. Recession is the way our economic system restores these points (the money unit of account) to real value. Often, the scorekeeper (government) creates so many points that the economy bumps into the whole distributional problem where prices for wages, goods and services and assets have gotten out of whack in relative and/or absolute terms. Businesses have overestimated how many points their customers have to buy stuff with and they ratchet back production, cut back staff and so on – classic business cycle stuff. The vast majority of the downturn comes from reducing inventories and output to recalibrate for how many points people actually have.
    But, governments don’t like ‘recalibrations’. So they lower the price of the points to spur greater demand for them, promoting a greater distortion in the relative and absolute number of points available. Put simply, the scorekeeper has padded the score artificially, creating distortions due to the fact that debts are contracted in nominal terms.’

    The present recession was not created due to excess government spending. The conditions for the recession in the USA was due to the private sector, which both created and purchased speculative investments (actual housing among consumer/citizens and various fraudulent synthetic investments such as CDO among the institutions). It was the availability of ‘easy credit’ to the consumer and institutions, facillitated the growth of the bubble in speculative investments to reach a dangerous size and to entangle a large proportion of the productive capacity of the US economy (apparently in 2007, 20% of US GDP was housing related, and much of this was new housing construction, and home renovations )) which also caused consumers and institution to believe in a false sense of wealth. When the first mortgages started to default in ‘greater numbers than expected’ and various financial institutions were unable guareentee the synthetic investments (Ambac, AIG, Freddie Fannie), people realized that their hope in the home investments were badly misplaced and they cutback spending. Conversely when institutions realized the truth of their investment decisions, they either collapsed due to the losses on their balance sheet, or they rapidly cut back credit, causing major stress on any institutions that relied on them for funding, which became the ‘Credit Crisis’ of 2007-2008.
    I believe that Mike ‘Mish’ Shedlock provides a good generalization, that it is excessively ‘easy’ credit environment (in both evaluation standards and in the amount loaned relative to income) is the precondition for dangerous speculative bubbles.

  17. scraping_by

    While an abstract definition of money that can be fit into calculus has its place, many of our current problems flow from the irrational definitions of money.

    For example: the top 1% and their well off house servants are fighting, at least through their media and government lackeys, against any raise in taxes or other means of economic balancing. While the rest of us see an impersonal equation, how much do you need minus how much do your have, they see a deeply personal attack.

    And in their view, it’s indeed deeply personal: their money is not just a possession, or a means of getting material satisfaction, it’s their identity. They’re self-defined as their money. Not as people with money, but as money. That’s why when “those people” start pointing out the absurdity of wealth distribution, they hear threats akin to homicide.

    Good work on a general definition, but remember and avoid Descartes’ Error.

    1. scraping_by

      Whoops. Math error.

      Make that “how much you have minus how much you need.”

      Though, it makes a certain sense the other way.

    2. Nathanael

      Only one correction: you’re describing the top 0.1% (and their lackeys, many of whom are in the top 1%) rather than the top 1% as a whole.

      And, only most of them (there are a few rare exceptions, “self-made men” who don’t care about money). Let’s be fair here.

      The real nasties? I used to describe them as “the CEO class”, because most of them are CEOs or upper-level bank executives. Lately I call them “kleptocrats”, because they seem to have kleptomania (they can never steal enough much money to be satisfied) and are trying to run the world.

  18. tz

    What I don’t understand is why Greece can’t print its way out. Literally. (Add Ireland).
    They can get an intaglio press, the special inks and papers, and they can copy existing serial numbers if there is a concern that some euros wouldn’t be accepted.
    Greece is sovereign, and paper is paper. Print and pay off and ignore the electronic double book entry keeping.

    1. Ian Ollmann

      Greece does not have the legal right to print Euros. If they break from the Euro and reinstate the Drachma then they can print as much as they want. This is the inherent contradiction of the EU. The states basically surrender fiscal sovereignty without getting any guarantee of help from the EU in return to offset long term balance of payments deficits. In some ways, they are relearning the lessons learned by the US in the pre-federalist days under the Articles of Confederation, before our current constitution was drafted. When the average German is legally on the hook for the spend thrift ways of the Italian government, he will vote to pass federal laws that prevent the Italian government from spending itself into profligacy. Until then, the average German is happy to encourage the Italians to buy ever more German products and then insist on austerity to get paid back.

      1. Nathanael

        Greece does, however, have the physical *power* to print euros. As we’ve found out recently, legal “rights” are pretty unstable.

        The European Central Bank is destroying the euro through demented “tight money” policies. If four or five countries got together, declared that they were starting a competing New European Central Bank, with easy-money policies and financing it by printing euros… there’d be a big fight, but they’d probably win, because the “loose money” countries would have economic recovery, and the “tight money” countries would (a) not, and (b) waste a bundle trying to keep “Greek euros” out of Germany, unsuccessfully.

  19. Hugh

    None of this takes into account kleptocracy and the huge wealth inequality it has produced. You want to know why people are endebted and can’t pay. It is the mammoth looting perpetrated by our elites which has resulted in an enormous transfer of wealth from the 99% to the rich 1%. Recession doesn’t reset the system. It simply skews the system even more in favor of the rich as the events of the last 3 years have shown. You can’t understand our economic system if you don’t focus on the criminality that underlies it and destroys any attempt at reform, reset, recalibration, or whatever else you want to call it.

  20. Dan Kervick

    This is the inherent problem with fiat currency for me; the promise the government makes to repay in something it can create in unlimited amounts makes that promise somewhat irrelevant.

    Ed, Isn’t this a good reason for denying the thesis that money is debt after all? I don’t see what theoretical work is done by the idea that money is debt. I know some of the MMTer like the Innes account. But that account never really struck me as really essential to their core ideas. Innes’s account is just one version of a state theory of money.

    1. Calgacus

      Dan: I don’t see what theoretical work is done by the idea that money is debt. I know some of the MMTer like the Innes account. But that account never really struck me as really essential to their core ideas. Innes’s account is just one version of a state theory of money.

      Dan: That reverses things. A state theory of money is a type of credit theory of money. Credit/debt is the fundamental, truly ancient concept, not money, which is defined in terms of, as a type of, credit/debt. The theoretical work done by the idea that money is debt is that it makes it clear money is a (recognized, social) relationship, not a thing. This is absolutely essential to MMT, the most essential point of all, from which everything else flows, which makes everything else clear. Which is why Wray has said Mitchell-Innes’ papers are the best ever written on money.

  21. Frank Ashe

    I didn’t find this concentration on the scoreboard analogy very useful; indeed it seemed very confusing, especially when discussing recessions.

    Let’s get one point clear at least. Fiat money is backed by a government promise: when the government asks for a dollar of taxes or fees, then it promises that you can pay with a dollar of fiat money. This is inherent in every other discussion of MMT that I’ve seen.

  22. Nathanael

    Grossly ignorant. Please read my comment to learn.

    Not that most of what you said is *wrong* per se. But you’re missing the key characteristics of a recession *and* of money.

    Money does not merely have distributional qualities — it *enables transactions* which would not otherwise have happened. Failure to ensure equitable distribution of money means that poor people *fail to make transactions* which they would otherwise have made (for mutual benefit).

    The result of this is that the economy operates *below its productive capacity* — this is manifested by unemployment and idling factories.

    The connection between the prevalence of poverty and the economy operating below productive capacity is made through several mechanisms. One is duress: poor people have to try to work for food, and therefore cannot afford to plan long term, start businesses, spend the time to find a job most suitable for their skills, or do other productive things. An even bigger one is drop in standard of living: poor people cannot afford to buy ordinary things (like healthy food, good housing, a bicycle) which other people buy, and so the factories (etc) producing those things sit idle.

  23. dave

    Edward, as usual, the Austrian perspective presented here is nonsensical and fails to distinguish between government created debt and private sector created debt, despite the fact that you lay that out in the rest of the post. It’s mind boggling that you understand the machinations but continue to try to shove a square peg (Austrian school) into a round hole.

    Perhaps you could say the Government allowed the private sector to create too many points, but saying Government itself created them and caused the problem is misstating the issue. This recession was triggered by the creation of too much privately created debt which was unsupported by enough government created debt (savings) within the private sector. Had the government created too much debt we would have had an inflationary recession. As it stands, it was a deflationary recession…the debt to equity ratios within the private sector are imbalanced, which results in people & businesses making a mad rush to eliminate their privately created debt and try to obtain Government created debt.

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