Michael Hoexter: “Deficit” is the Wrong Word and Concept

By Michael Hoexter, a policy analyst and marketing consultant on green issues, climate change, clean and renewable energy, and energy efficiency. Cross posted from New Economic Perspectives

The hour is late and politicians on both sides of the Atlantic are attempting to shrink the social welfare state in the name of a lack of funds. Barack Obama has made it now abundantly clear that he is no friend to Medicare, Medicaid and Social Security, after years of signaling overtly and covertly that cutting social programs was his intention. Obama is as beholden as any right-wing politician, a group among which some might count him, to the notion that the government is running out of money, as if our money was still backed by a limited supply of gold bullion. According to Obama and his fiscal advisors, the government’s supposedly limited funds must be conserved by cutting the activities of government while also raising taxes to, in the “hard-money” telling of the story, “increase revenue” from the private sector for the remaining government programs. The former activity of cutting social welfare spending seems in Washington DC to take political precedence over the latter, in part because the wealthy in the private sector are a powerful lobby for their monetary holdings and income. Meanwhile the poor and middle class have not been, over the past 40 years, a powerful lobby for the social safety net which puts a “floor” under their standards of living.

The only economic school that has a plausible account of fiat-currency issuing governments’ monetary role in the economy and the flow of funds between the three main sectors of the economy, the Modern Money (MMT) school, has discovered that in fact government deficits are absolutely necessary for economic growth and they represent no strain on a monetarily sovereign government issuing a non-convertible floating currency, like the US, UK, Canadian, Australian, and Japanese national governments. In the era of fiat currencies, these governments cannot run out of their currency which they create via spending on goods and services available for sale in that currency. These governments with their central banks are the source of the US dollar, pound sterling, Canadian dollar, Australian dollar and yen, respectively without the intermediation of bond markets. Even in the era of the gold standard, a similar principle applied as government spending over taxes collected grew in order for economies to grow, limited by the availability of the element Au in metallic form, the supply of which grew in the “golden age” of the gold standard.

Monetary sovereign governments’ ability to create and spend their own currencies’ in any amount has a role in enabling economic growth to occur at all. A necessary though not sufficient component of economic growth is a net growth in the supply of money in circulation or in savings. Bank and other private sector-to-private sector loans have no net effect in the growth of money, even though they temporarily create money that is circulated in the economy before its repayment; bank lending is not the reuse of other people’s money but the creation of new money in the hope of making a profit in the form of interest. The repayment of the loan zeroes out the loan principle leaving only the sum of interest payments which, in aggregate across the entire economy, come from another source, ultimately government deficit spending. Through loan creation, banks can temporarily create money but not “mint” it.

Tax collections by a national currency-issuing government effectively destroy money/demand in the private sector, though local and regional governments, which do not issue their own currencies, use taxes as revenues to pay for expenses. Therefore, the only consistent source of overall growth in the monetary economy and in overall monetary wealth is the net “excess” spending of currency issuing national governments, the surplus of spending over federal taxes collected. To count as economic growth, the overall increase in monetary holdings must be accompanied by the creation of real goods and services but this observation does not alter or diminish the role of government spending above taxes collected, i.e. government deficits. Apologists for the ideal of a purely or largely private economy attempt to split off government’s role from the functioning of the economy, leaving in the minds of policy makers and the public the ideologically “desirable” but false image of a self-sufficient private sector.

Though it has theoretical and empirical justification for its attitude toward deficits, unlike other economic schools in this regard, the Modern Money school stands practically alone in its assertion that budget deficits are almost de facto desirable, if the goal of economic activity is considered to be economic growth,. To be consistent, if one, as a policymaker, citizen, or economist, endorses economic growth in a capitalist (monetary) economy, one must be “for” almost permanent government budget deficits of varying amounts. Because of a number of ideological factors, economic and political actors are either unaware of this fact or choose to run away from it. Austerity advocates/deficit hawks are in full flight away from economic policies that would result in economic growth even as they claim otherwise.

A few nations with large trade surpluses (unlike the US), which of necessity cannot be the majority of nations, can also experience economic growth without budget deficits, but this is not necessarily an economically virtuous condition. Running a large trade surplus requires other nations to run equally large trade deficits in net, and a willingness to therefore “finance” the trade surplus generating country by buying its output. Overall, for the world economy to grow, in aggregate the governments of the world must spend more than they tax, injecting more money into the world’s economies to represent in monetary terms the growing sum of real goods and services that have been bought and sold within and between nations. Net growth in the number of currency “markers” available for economic actors to account for their gains and losses in the economy must come from a net growth in government spending of the world’s various currencies.

Terminological Imprecision and Cognitive Dissonance

From the MMT account of monetarily sovereign government budget deficits, one can conclude that budget deficits are for the most part a critical, positive driving force in the world economy, at least if one endorses the idea, as is the common assumption of many, that economic growth is a good thing. However, the way the concept of “deficit” is handled by the rest of the economic profession, by the media and by the public, one gets exactly the opposition impression: “deficits” are to be avoided or, alternatively, temporarily indulged in only to be expunged later on. The former position can be stylized as the “deficit hawk” position while the latter is the “deficit dove” position to which left Neo-Keynesian economists like Paul Krugman and Robert Reich adhere. None of these actors would say that economic growth is “to be avoided” or “temporarily indulged in” even though this would be essentially a restatement of the same position.

MMT economists and writers have explained that the word “deficit” means something different when applied to a currency issuing government but these explanations have I believe tended to fail to make significant headway in the public sphere. Most often MMT economists draw a distinction between governments and households. In MMT treatments of this issue usually there is the explanation that of the three major sectors of each national economy (private sector, public sector, and “rest of the world”), the public sector is the only one that can remain untroubled by any given amount of “deficits”. Furthermore, in some public efforts to build bridges with “deficit doves”, I’ve noticed that sometimes the difference between the MMT position and that of those who abhor or just “tolerate” deficits” starts to be washed away. In the wish to create a united front with those economists who recognize the horror of the austerity drive, MMT’s contribution to our understanding of money and the macro-economy is lost.

The problem is that both in denotation and connotation the word “deficit” is not up to the job to describe the concepts it is supposed to describe as called upon by Modern Money Theory. The word “deficit” is a hold-over from conventional accounting and the era of the gold-standard when currencies were supposed to be fixed in their quantity by convertibility of the currency into a fixed quantity of precious metal. Deficit means primarily a “lack”, an “absence” and in conventional accounting it means being “in the red”, not having taken in enough income to cover expenditures. But currency-issuing governments don’t take in income in their own currency. “Deficit” can apply to the spending gaps of local governments and the Euro-Zone governments that cannot create their own currencies but a government that creates its own currency can never be in “deficit” within its own currency. Conventional accounting applies to “currency users” but not currency issuers. I have made the case elsewhere that we need to formulate a “macroeconomic accounting” or an “open systems” accounting methodology to understand and guide the workings of a currency-issuing government.

If the same word “deficit” is used to describe the very different accounting operations of currency users and currency issuers, too much of the “negative capabilities” of the listener/reader are required to keep separate the kind of deficit that a currency user runs (a real deficit) versus the spending output of the currency issuer over taxes collected. If the word “deficit” is used for the latter, many additional cognitive operations are required to remind oneself that this deficit is not one that requires intake of more funds from outside the government (i.e. taxes) to fill. While MMT economists have worked for years with these assumptions attached to the word “deficit”, it cannot be expected that those coming from the outside of the MMT community will be able to apply the entire MMT framework to “keep” the denotation of the word “deficit” separately.

Connotatively the picture is even clearer: deficit sounds “bad” and evokes fears of holes and things that are missing or lacking. MMT economists do not conceive of deficit spending as in fact a hole nor should it be viewed with trepidation or disgust. The connotative problem also points to political problems in continuing the use of the word “deficit” as applied to monetarily sovereign government accounting.

A Proposed Alternative: Government’s “Net Contribution”

Instead of a “deficit”, I would submit that the excess of spending over taxes collected represents the government’s “net contribution” to the economy. One can either expand or contract this phrase depending on the needs of the situation: it could be made more explicit by expanding it to “the government’s net monetary contribution to the growth of the economy” or shorten it to “the contribution”. “Contribution” denotes the adding of something without necessarily the subtracting of something else from someone else. The connotations would seem to apply much more accurately for work of the currency issuer in the “production” of additional monetary units. I think that it needs the word “net” for precision because spending below or at the level of taxes collected also is part of government’s “contribution” to the economy. Taxation would be the “removal of demand” from the economy by the currency issuer.

“Net contribution” also encourages us to look qualitatively at how and where government is spending and active in the economy not just to look at government spending as an amount in a ledger. Potentially the government could “contribute” to the economy in a way or at points within the economy that distorts it or undermines the public purpose as broadly defined. It could also “contribute” too much making private initiative less viable in areas where this is not desirable or spend in a way that inflated the value of critical goods and services.

Additionally, in connotation, “net contribution” is much, much more positive than “deficit” both in the sense of a positive evaluation as well as positive in terms of “something observable, present, existent”. The positive connotations and the more accurate denotations of the new term would, if usage was widespread enough would start to outweigh the inaccuracies and negatives associated with “deficit” and “deficit spending”. From my understanding of how economies work, that they are mixed economies in almost every modern case, the positive connotations of the word “net contribution” are completely warranted. Again, the negative potential of the possibility for excessive government spending is not banished or suppressed by using the term “net contribution” but it does allow for the critical role of government within the broader matrix of the mixed economy.

Not Simply a Re-Framing

Lately at New Economic Perspectives there has been discussion of framing and memes to help MMT ideas gain a wider diffusion. I would submit that this re-naming is not simply a re-framing, though it does introduce a more positive frame to discuss government spending and the excess spending of government over taxes collected. The use of this new term opens up new perspectives on how to view the accounting process of monetarily sovereign governments and also allows more precise explanations of the mechanisms of economic growth. The introduction of this term makes a distinction where previously there was not one (deficit spending by sovereigns versus deficit spending by currency issuers) and therefore represents a terminological advance. It is therefore both a change in terminology and a noticeable change in the conceptual framework, to which those terms refer .

While I believe what I am proposing here will lead to better social science in terms of more accurate descriptions of economic, political and social events, I also want to see real economic solutions proposed in political debates, which currently are conducted using largely false assumptions about economics and how to improve overall social welfare. With a new appreciation of what the excess spending of government does, there now exists the potential to overturn the entire premises of the political debate, a debate which in both Europe and North America is leading governments astray. With both better understanding and better arguments, based on a terminology that is no longer mired in misleading assumptions, I believe we stand a better chance of changing the terms of the debate, whether from within the halls of power or from without.

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  1. psychohistorian

    I will agree with the change of the term Deficit to Net Contribution if folks will also agree to change the term Growth to Net Change.

    Our insistence that a specific amount of Net Change/Growth is necessary is deluded. We need a “economic system” that provides for the needs of the public in terms of “jobs”, goods and services but not necessarily Net Change/Growth.

    I was less than thrilled to see this posting talk about sovereign monetary systems like they exist now instead of the private monetary systems we have….and so when and where do the MMT folks discuss moving from private to sovereign money?

    1. Rich

      I like this example of MMT. Let’s say I’m a carpenter and I go to the forest, fell a tree, saw it into appropriate lengths, cure it, and then build a desk and 5 chairs. After a successful bid on a gov’t contract I sell the desk and 5 chairs to the gov’t for 1000$. Only some govts’ can create money so the USG takes its’ pen out and writes down in the bebit (not debt) column the amount 1000$. Then it writes a check to me and deposits the money in my account for 1000$.
      Now the debit and the credit cancel each other out. No money is borrowed, therefore no interest, therefore no money is owed. All coinage is debt-free money. We do not borrow 10K$ to buy 10K$ worth of dimes. Nothing borrowed, no interest, nothing owed. The key is to completely seperate the three terms debit, deficit, debt. If it starts out as a debit on the govt’s books it must become a credit on someone else’s books (SS check, military equipment, state infrastructure) but it is still only a debit, not a defecit, NOT DEBT. It is only when the gov’t borrows from the wealthy that it becomes a debt with interest to be paid.

      1. stanley mulaik

        I’ve been trying to get confirmation for an idea I have discovered regarding deficit spending and the national debt, and I’d like the reaction of other MMTers.

        When Congress has deficit spending to do, Treasury must come up with money to cover the deficit. (It will ultimately cover it with created money). Treasury issues securities in the amount needed and these are sold at public auction to large banks. That creates a debt obligation between the United States and these banks equal to the value of the securities. (This is why almost everyone thinks the government is going into debt with this spending). But when the banks buy the loan by buying the securities, the Treasury is sent the needed funds while the banks’ reserves drop, and usually a lot. The Fed then comes along and buys these securities from the banks, using fiat money created out of nothing for the amount plus any additional interest to replenish the reserves at the banks.
        Question: Has the Fed redeemed the debt between the United States and the banks?
        Reasoning: (1) The Fed is an agency of government “independent within the government”. It is independent in the sense of being independent of political control. It is not independent of acting for the government. (2) The Fed’s creation of money out of nothing to purchase the securities is an act of government, because only our government under our Constitution in powers granted to Congress and delegated to the Fed can create money. (3) Consequently the Fed’s buying the securities redeems the debt for the government. There is no debt in the end.
        Although it is the banks that get the new money in their replenished reserves from the Fed, and the Treasury got old money already in circulation from the banks, if we regard money as fungible, we could say this is equivalent to the Fed creating the new money and giving it to the Treasury to spend, while the banks keep the old money. In this case it would be debt-free money.

        And since the so-called national debt consists of all those securities it has purchased from banks, the above argument concludes that there is no debt obligation of the United States to any banks it has borrowed from with these securities.

        This implies that taxpayers do not owe anything to the Fed for the created money. There is no need and no authorization then to use a $10 Trillion
        coin, say, to eliminate the debt. (If there is no debt, applying dollars obtained from the Fed for $10 Trillion platinum coins to buy back the securities is an act of buying a security for the government after it has already been bought by the government. The Fed is government just as much as Treasury or the US Forest Service. (The FAQ’s at the Fed say it is an independent governmental agency within the government. But the “independence” means independence of political control or influence). So created money (deficits) are debt free

        There are also Treasury bonds and securities being bought by not just banks but foreign and domestic private parties. I don’t think these fund Congressional spending. They are like CD’s at ordinary banks. They are time deposits with interest. Warren Mosler has said that the Fed returns this money all the time when parties come to withdraw their money, either at or before maturity, and the Fed does this with money it creates from nothing. Are there others who can confirm this? Another question where are these securities registered? Are they in special Treasury accounts at the Fed? The Treasury normally doesn’t pay these back with tax money, right? The presumption is that the owners of these securities have deposited their money, the Fed records the deposit, and then destroys the money, but recreates whatever is needed when the depositor comes back for the money. It also creates some interest.
        So, if you can, please confirm the correctness of my arguments here.

        Now, try getting the Fed to admit all that….
        Or the Treasury. Or the President. They don’t deny it. They just ignore you.
        They send you form letters thanking you for your interesting questions, and may refer you to certain general documents that don’t answer this specific question. That’s why I’m asking if this makes sense.

        But everything turns on the answer to this question. If Americans know this is the case, that there is no national debt between the United States and banks and other parties, then all this impasse over deficits, debt ceilings is meaningless. It’s a tempest in a teapot that may still sink us in an ocean of ignorance.

        1. joebhed

          I should probably only say that this is a very good question that obviously needs clarification and understanding from MMTers.

          “When Congress has deficit spending to do, Treasury must come up with money to cover the deficit. (It will ultimately cover it with created money).”

          “The Fed’s creation of money out of nothing to purchase the securities is an act of government, because only our government under our Constitution in powers granted to Congress and delegated to the Fed can create money.”

          First order of understanding – money is a legal, social construct and, as such, all money is, and must be, ‘created’ by someone. The implication in the first quote seems to be that ‘Treasury” will do the creating – which it never does.

          Second, the delegation of the power to create money is not to the “Fed” as we know the FRBNY, but to the Federal Reserve System of private bankers, who create the nation’s money supply.

          It was not a transfer of the government’s money creation-issuance powers to a federal – ‘independent within government’- agency, but to a private banking cartel. This is what makes it an abdication of sovereign authority and not an ‘agency-delegation’ that preserves the government’s benefit. If it were, we would not be paying interest on monies our GUV borrow from the private banks, as users and not issuers of the currency.

          As holders of public debt, the Fed can collect interest from the taxpaying public and repay them to Treasury as net-income. But it cannot create the ‘money’ needed to pay off the public indebtedness. The Fed does not create money – it only creates and issues ‘reserves’ to its account holders. While these reserves allow banks to create more debt-money by making loans, they are not themselves spendable by anyone, and thus are not money.

          This is why both ZIRP and QE can do nothing to increase aggregate demand. Only by having the Treasury issue real money can we have an increase of money that can increase demand.

          1. stanley mulaik

            Can you cite where in the Federal Reserve Act of 1913 it refers to these private banks? Regardless of whether there are private banks behind the Fed, the actions are of a government agency (check the FAQ’s on who owns the Fed at the Fed) using government money creating powers. It matters not then whether a private party has been delegated money creating powers; it acts as government in performing them. The Constitution does not grant these powers to private parties but to Congress, which delegates this power to a government agency. This agency’s actions are governed by law derived from the FRA of 1913 as
            amended. If you make a private individual a deputy US Marshall, he must act for the government under laws governing the office. I think the same applies here

          2. stanley mulaik

            Am I wrong in thinking that when the banks “buy” a Treasury bill or bond that they first create a deposit and then this deposit is withdrawn and sent to the Treasury. This reduces the reserves of the bank.

          3. joebhed

            This is to John at 7:02.
            You are correct that loans create deposits.
            But I did not say that reserves create loans. I said that “these reserves allow banks to create more debt-money by making loans..”.

          4. joebhed

            This is to Stanley at 7:04.

            I can refer you to the Fed’s own publication on Modern Moneyy Mechanics in which it specifically says that money is created by private banks creating loans.
            Why should there be any question about this – it is in every monetary economic textbook written for a hundred years and the Fed itself confirms.

            But, as you say, “Regardless”.

            Your political alchemy is quite marvelous.
            A governmental power is usurped via chicanery and the total public benefits from that power resort to private gain and you glibly create a reality that BECAUSE this is a governmental function, the FACT that it has become a totally private power, the outcome is AS IF it were done governmentally.

            It’s really quite marvelous.

            If you make a private citizen a deputy marshall and give that deputy the power to both collect the government’s fine and to keep the money, then you have corrupted the public function. Andd that’s what we have with the private Fed.

            It is not the Federal Reseve Board – a government policy-setting agency – that creates the nation’s money.
            It is not the Federal Reserve Banks – private corporations – that create the nation’s money.
            It is Members of the Federl Reserve Banks, and others – private corporations all – that create the nation’s money.
            They do so under the guidance of the Boards of Directors of the Reserve Banks – all private citizens with economic interests in the actions of the Member banks.

            In our national monetary system, all of the money is created by private bankers acting in their own behalf.

            You can spin it any way you want.
            But that is the reality.

          5. stanley mulaik

            This is to Joebhed, Dec. 24, 2012:

            >This is to Stanley at 7:04.
            >I can refer you to the Fed’s own publication on Modern Moneyy Mechanics
            >in which it specifically says that money is created by private banks
            >creating loans.
            >Why should there be any question about this – it is in every monetary
            >economic textbook written for a hundred years and the Fed itself

            I understand this to be about what MMTers call horizontal banking activities of private banks and not operations of the Federal Reserve dependent on its member banks. But maybe I am reading in a different place than you in Modern Money Mechanics. Could you quote some of the material you are referring to, and I’ll try to find it. Under this view, MMT does regard banks as capable of creating money through loans backed initially by nothing, but backed later with augmented reserves. But the case I was describing was not banks making loans to private parties, but cases involving where the United States goes into debt with “deficit spending” of Congress and the Treasury’s issuing securities to get money from banks to do the deficit spending–or spending with created money–which will eventually come as a final result of this action. Treasury does not directly create money (except coins and greenbacks, but they are not used now). But it initiates the creation of the money when it issues the securities that the banks will first buy and then the Fed will buy with fiat money it creates out of nothing, which in MMT is a vertical as opposed to horizontal operation. In various cases, once on a segment on PBS describing a room full of young bankers at the Fed doing QE2 purchases of toxic assets, the bankers themselves said they were just creating money out of thin air when they made digital entries into spread sheets to buy the assets. Ben Bernanke also says when asked what backs the money, that no one does. It is just a few keystrokes on a key board that produces the money. That is fiat money. Nowhere that I can see in the FRA 1913 as amended does it mention the member banks as other than subscribers who do not draw profits from the Feds activities other than a 6% dividend derived from their stock in the Federal Reserve.
            In other words I do not see the Fed being constrained by a fractional reserve requirement. It can create as much money as it needs to carry out whatever purchase or fulfillment of a debt it has. This is fiat money. Once taken off of gold, there is no limitation to the amount of money that may be created. The Constitution places no limitation of the power to create (coin) money. (I understand that in the last quarter of the 19th Century the Supreme Court declared that “coin” money allowed for all forms of money creation. Otherwise, the Federal Reserve notes are illegal. And they aren’t, obviously.

      2. tiebie66

        Exactly, and you’ll soon discover that the check has no utility other than for kindling. Of course, this is because the government didn’t actually produce anything, so there is nothing that you can use the check for. (Or did you conveniently assume that there was a whole other world out there?) You’ve given much but received nothing, except, perhaps, misdirection so you can visit (unwittingly) the swindle upon someone else.
        Consider that a counterfeiter could also produce the same outcome. Moreover, in the presence of an output gap, counterfeiting may be outright economically beneficial. I propose then that counterfeiting also be considered “contributing”.

        Every economic transaction is at heart a barter exchange. It has evolved to the point where it is difficult to recognize the “bartering”. But, if one loses sight of the underlying barter exchange, it will not be realized that every transaction has to be completed. Consequently, plenty of theoretical fancy footwork becomes necessary. If the government makes a “net contribution”, no barter exchange is completed. Granted, positive effects may ensue (as from counterfeiting), but I object to the use of deceit for that purpose.

        1. LifelongLib

          In most modern economies (say those of the advanced nations in the last 100 years or so) absent wars or other disasters economic activity has been limited by lack of money (i.e. demand) rather than lack of productive capacity. So injecting more money via currency issuance is indeed beneficial, if the money goes to people who will spend it to buy things (NOT the already wealthy, who just sit on it).

          And I’ve read (don’t have a link handy) that during the American Revolution when the Continental Congress was issuing paper money (“Continentals”) the British tried to sabotage the currency by counterfeiting. The result was actually beneficial to the Americans because the counterfeit currency acted like real money in an economy that was being limited by a money shortage.

          1. tiebie66

            I do not know if you intended this, but your mention of money shortage raised an interesting second issue: as the money supply contracts, the two ‘halves’ of the barter exchange have to occur more closely in time and space. In the limit, without money, we’re back at the original “double coincidence” limitation of primitive bartering. With more money, these halves can be separated further in time and/or in space. But this is different from pretending that money is actually ‘goods’.

            Money is like railroad cars. It permits goods, say textiles, to be sent from NYC to LA in exchange for goods, say oranges, that are then sent from LA to NYC. Note that the cars are -not- the goods; they merely permit long distance bartering, by necessity a bartering that is also not completed instantaneously. If the cars bunch up at LA, the exchange becomes hampered. Likewise, damage or destruction or theft of cars will cause a shortage of cars that will also limit the bartering exchanges. The government could provide cars, as necessary, to enable bartering up to the extent that NYC and LA wish to trade.

            IMO, providing cars as a service to facilitate bartering is conceptually quite different from providing cars pretending that goods (e.g. textiles) had been provided instead. In the first case, there is intermediation, in the second, the government actually is one of the parties to the barter, but provides no real good in exchange. Say, for example, that NYC sends three cars of textiles (along with two empty ones) to LA. The textiles are meant to be exchanged for five cars of oranges. Now the government, of the opinion that there is insufficient demand for oranges, appends an extra empty car to the train. This leads LA to perceive a demand for more oranges. There is consequently a difference when the government provides empty cars as a service and when the government provides empty cars pretending that it is partaking in the exchange and had provided goods and is now expecting oranges in return.

            It is still unclear to me how to inject cars into the system without defrauding NYC, or LA, or both because the cars function, not only to convey the goods, but also as ways to account for the amounts of goods exchanged.

            This and other replies are much appreciated. They spur me to continuously reconsider various perspectives on money and to formulate and articulate my own more carefully. But, for me, it’s a slow process – esculpe me!

          2. LifelongLib

            I’m not sure your analogies are accurate, but pushing them a little further, suppose you can only participate in the economy if you have (at least) a railway car of your own. Lots of people don’t so they’re naked and hungry. Meanwhile textiles and oranges aren’t being produced to the extent that they could be or sit around rotting (despite the nakedness and hunger), because there aren’t enough railway cars. This is the situation we’re in now. The immediate solution is more railway cars, as many as needed to move all the textiles and oranges we need to the people that need them.

        2. J Sterling

          you’ll soon discover the check has no use other than as kindling

          That’s just another way of saying hyperinflation is the inevitable result of increasing the money supply. But history shows it isn’t. If you need to think of it as a barter, the government is “bartering” a bit of everybody’s wealth. It’s like a flat tax on assets.

          Of course it hits the minority with most of the assets hardest in absolute terms, especially if the government then uses the check in a redistributary way, giving it to the majority with the least assets. That’s why they don’t like it, and spend money to spread horror stories about hyperinflation or bond vigilantes.

          1. tiebie66

            I did not have hyperinflation in mind, though. The bartering by the government is much closer to my view of it. This bartering seems to occur by stealth in that it is not realized that it amounts to a flat tax on assets. Indeed, it is interesting to consider a flat tax as being a “net contribution” to the economy. In fact, it is fascinating to realize that there is considerable clamor in some quarters for increasing this tax on themselves and others. But it does make sense: if the government increases the number of bushels of corn that has to be paid in tax, more corn has to be produced, thus alleviating ‘unemployment’.

            It also hits the majority with the fewest assets hardest in relative terms. One could argue that it has a bigger detrimental impact on the lower income groups because more of their income has to go to the satisfaction of needs. The yields are then redistributed to the wealthy and influential to help satisfy their wants. As you can see, I turned your argument around and remain skeptical about deficit spending, but hope that I did and do so within reason.

          2. J Sterling

            You haven’t explained why a check comes to have no utility other than as kindling. Would you turn down one of these checks, and why?

          3. J Sterling

            Also, your objection to money creation turns out to depend only on whether the money is redistributed to the people or given to the rich minority. You have stopped explaining why money creation is bad, and started explaining why giving rich people all our money is bad. Nobody is for the latter, so that’s just meaningless mom-and-apple-pie sentiment. It has nothing to do with whether it’s bad to create money.

        3. Calgacus

          Exactly, and you’ll soon discover that the check has no utility other than for kindling.

          Rich is misusing the word “debt” by distinguishing it from “debit”. The best usage is the basic meaning of debt, which he is using “debit” for. The basic meaning of “debt” has nothing to do with interest. Look at a general purpose dictionary, like the OED. I admit, I’ve seen special economics dictionaries that screw up this essential point.

          Of course, this is because the government didn’t actually produce anything, so there is nothing that you can use the check for. (Or did you conveniently assume that there was a whole other world out there?)
          Pretty obviously, he has made this convenient, realistic assumption. The dollars can be used to pay taxes or buy stuff from the government.

          Every economic transaction is at heart a barter exchange. It has evolved to the point where it is difficult to recognize the “bartering”. But, if one loses sight of the underlying barter exchange, it will not be realized that every transaction has to be completed. Consequently, plenty of theoretical fancy footwork becomes necessary. If the government makes a “net contribution”, no barter exchange is completed.

          It is absolutely, utterly WRONG that “Every economic transaction is at heart a barter exchange”. That’s the whole point of monetary economics. Barter economies are fabrications. They never existed, and the mainstream analysis of economies “as if” they were barter economies says there is no such thing as money essentially, which is frigging nuts. You can’t have an economy with any division of labor without having credit, deferred payment/settlement, “incomplete barter transactions”. (Which are not barter at all, by the standard definition.)

          If the government makes a “net contribution”, no barter exchange is completed. There are always going to be incompleted transactions – that’s what money is – a store of value for these incompleted transactions. Whether the government makes a “net contribution” is NOT up to the government. If someone wants to keep their government-paid money, and save it for another day, and not buy something with it from the government today – why on earth should they not be allowed to? That’s what deficit spending is.

          If you have an indefinitely-valid-for-one-showing theater ticket, why should you be forced to use it on any particular day? And why should the theater owner not get something valuable, like labor or whatever in return for selling “your” seat to someone else when you don’t show up? That’s all that stimulus spending like a JG would be – the theater spending another ticket to accomodate the patrons who didn’t show up. Airlines do the same thing.

          1. Calgacus

            Stanley: Yes. I was just trying to answer in terms of tiebie66’s vocabulary. But what you wrote makes clear that “debt-free money” is bad terminology. There can be no such thing. Freshly printed greenbacks should not be called “debt-free”.

            Hypothetical_Taxpayer: ? I have no idea what the “no such thing” is that your benjamins aren’t doing.

          2. joebhed

            Debt-free money is a term correctly describing a creation-and-issuance process for governmental money.
            It is the correct term to describe such creation and issuance, including Greenbacks.
            Greenbacks were printed (created) and spent (issued) into existence with ZERO debt associated with either act.
            Why do MMTers deny the existence of debt-free money by saying that money is used in a transaction in which payment is owed? Debt-free is only at issuance. Debt-free money can be lent.
            That has nothing to do with the monetary science behind both debt-free money in general, and Greenbacks in particular.
            Greenbacks circulated without associated issuance-debt for over 125 years, pretty much until they were worn out.
            Private bank money is created and destroyed whenever a loan is created and paid off.
            Which system seems needed right now when we are strangled with too much debt and too little moeny?

          3. tiebie66

            It does not really matter, per my point, whether the check is debt or debit. What does matter is that the government took goods in return for tokens, pretending to have created goods (or services). With deficit spending, this is all the more acute. By losing sight of the core process of barter, taking tokens in exchange for goods does not seem to be a problem. It is true that tokens specifically allow barter to be severed into sub-transactions that can be separated in space and time, that is why I call it “evolved barter”. But I do consider barter to be the core process, whether strictly conforming to the definition or not. Seen against the barter core process, the uncompleted transactions then attain more importance. With deficit spending a government generates a large number of -fake- uncompleted transactions. Not valid uncompleted transactions, but fake uncompleted transactions: the government does not intend to produce anything. If it did, and sold these products, these become valid uncompleted transactions. As J Sterling points out, deficit spending/fake uncompleted transactions amount(s) to a flat tax on everyone’s assets.

          4. Calgacus

            tiebie66 : It does not really matter, per my point, whether the check is debt or debit. What does matter is that the government took goods in return for tokens, pretending to have created goods (or services).

            The state did not pretend to have created goods or services. This is confused. The state gave the seller money, credit, just like any other buyer. Nobody would accept the state’s money if it were not good for buying something desirable from the state, and it is. A very simple but clarifying example is property taxes – which can and should be considered as rent paid to the state. If that is the only tax or thing the state is selling, than you can consider money as rental coupons. Everybody has to live somewhere, run their business somewhere, so this good the state sells is always in high demand.

            With deficit spending, this is all the more acute. By losing sight of the core process of barter, taking tokens in exchange for goods does not seem to be a problem. It is true that tokens specifically allow barter to be severed into sub-transactions that can be separated in space and time, that is why I call it “evolved barter”. But I do consider barter to be the core process, whether strictly conforming to the definition or not.
            Using standard terminology is usually a good idea. Granted, so much of economics is pure shit, especially the last few decades, that developing your own theory is more attractive, and I’m always all for people thinking for themselves. But then there is the pitfall of just making ancient errors in your own language, which you have. “Evolved barter” is terrible, because there never was barter in the first place for anything else to evolve from it. Money is just “evolved credit/debt”, and credit is so ancient you see it in nonhuman primates. What you’re calling barter is more often called the real economy – but never barter. What you call fake is something like Marx’s fictitious capital. Keynes, MMTers, Institutionalists NEVER lose sight of the real economy, the real barter transactions. All of their work is to make finance the servant of the real economy and everyone else, the 99.9% – not the master as it is nowadays.

            Seen against the barter core process, the uncompleted transactions then attain more importance. With deficit spending a government generates a large number of -fake- uncompleted transactions. Not valid uncompleted transactions, but fake uncompleted transactions: the government does not intend to produce anything. If it did, and sold these products, these become valid uncompleted transactions. As J Sterling points out, deficit spending/fake uncompleted transactions amount(s) to a flat tax on everyone’s assets.

            J Sterling is wrong. Deficit spending can be such a flat tax on everyone’s financial assets, not other assets. It need not be. In fact it hardly ever is. The state is not creating fake uncompleted transactions. In fact the opposite is true. Its money, representing these uncompleted transactions, is so real that it is the realest money, the most desirable, because the taxman is very, very much not fake. The state’s spending, whether deficit or not, except in extreme and extremely rare circumstances in the last few centuries is the least fake uncompleted transaction, the one that all the other uncompleted transaction specialists – the financial sector – value and trust above all others, far above the ones they generate themselves.

            The good/service the taxman is selling is so desirable, that people save up the state’s debt. They willingly sell their real goods and service to the state in return for state credit = money. It is the people who create government deficits, more than the state.

            The problem in depression economics, like right now, everywhere, is that everybody values the state’s very much NOT-fake- uncompleted transactions “tokens” that the real economy suffers because money is now so hard to obtain. This is self-perpetuating, because no private actor can afford to spend then, and the state, in the grip of confused theories makes its money impossibly hard to get. The cure is simple. The JG. Immediate full employment, always. And this would mean deficit spending right now. Who cares? Because the one thing the JG, the one thing good deficit spending, like the New Deal’s won’t do, is cause inflation.

          5. stanley mulaik

            As dollars are tokens of debt obligations between parties in the economy, they are not debt free. The term debt-free concerns whether the money created must be paid back to the one creating it. If not, it is debt-free. If, for example, the Fed creates money out of nothing and uses it to buy Treasury securities, it introduces new money into the economy. Do the people have to pay back the Fed the equivalent in dollars (by taxation) to clear the debt? That of course would take the same money to pay the debt and would drain all the money created out of circulation, causing depression and economic collapse. You don’t owe one who creates money out of nothing for its money. Why would it need it back if it could create whatever it needed? The same is not true if the dollar is backed by a specified quantity of gold. Gold backed money is finite and limited in quantity to the gold supply. New money cannot be created without gold to back it. So, if the one who creates money backed by gold creates it and spends it, it must get back an equivalent in gold. So creating the money backed by gold is a true loan of prior gold that must be repaid. Not true with fiat money created by the money creator.

          6. Calgacus

            Stanley Mulaik:As dollars are tokens of debt obligations between parties in the economy, they are not debt free. Dollar bills are tokens of debt obligations, “money-things”. Dollars are these debt obligations.

            The term debt-free concerns whether the money created must be paid back to the one creating it. If not, it is debt-free.
            The term “debt-free” creates massive confusion, and should basically never be used. It is about as useful as “square circle”. Joe has tied himself up in pointless confusion by it, with bad accounting. Been arguing with him for ages – has helped me clarify my thinking a bit, which is why I keep on. The money normally always is “paid back”, no matter who creates it or “how”- it does not distinguish between money “just printed” and money accompanied with bond-issuance, so the definition of “debt-free” above fails – see below. Bonds from this perspective are just reserve drains, so they don’t directly effect money-creation. They’re just a different kind of money, really, that the Treasury – and those people – prefers people with lots of money to have.

            If, for example, the Fed creates money out of nothing and uses it to buy Treasury securities, it introduces new money into the economy. Do the people have to pay back the Fed the equivalent in dollars (by taxation) to clear the debt?
            The Fed isn’t really the one “creating money out of nothing”. The Treasury is. The Fed’s main business is monetary, not fiscal. The Fed exchanges one type of security for another. Only the Treasury creates securities out of nothing and exchanges them for real goods and services or satisfaction of nonfinancial liabilities.

            Eventually, yes, essentially all the money or NFA created by the government, the Fed or the Treasury is “paid back” by the people. This is not at all the same thing as saying the government needs its money back. The government demands its money back in order for things it sells to the people, gold, government surplus, rental payments= property taxes, or remission of other tax liabilities.

            That of course would take the same money to pay the debt and would drain all the money created out of circulation, causing depression and economic collapse. What matters is the NFA, the National Debt, with base money included. Banks can borrow at will from the Fed or other banks on the basis of Treasury bonds as collateral, converting them to reserves as needed. What they can’t do is fiscal – create money/bonds/NFA out of nothing.

            You don’t owe one who creates money out of nothing for its money.
            Of course not. What you owe is taxes, which you pay with debts owed you = money.

            Why would it need it back if it could create whatever it needed? Of course it doesn’t need. It demands.

            The same is not true if the dollar is backed by a specified quantity of gold. Gold backed money is finite and limited in quantity to the gold supply. New money cannot be created without gold to back it. So, if the one who creates money backed by gold creates it and spends it, it must get back an equivalent in gold. So creating the money backed by gold is a true loan of prior gold that must be repaid. Not true with fiat money created by the money creator.

            The better way to look at a metallic standard is as it making gold or silver a currency-backed commodity, rather than backing the currency with gold or silver. All money is fiat money and always was. I’m a pretty rabid MMTer and have been for a long time – even learnt some back in the Keynesian era, before Economics went to nonsense, back when everybody knew MMT somewhat.

          7. stanley mulaik

            Calgacus: You indicate you are an old MMTer. Then maybe you’d comment on my assertion that there is no national debt of the US government at the Fed.
            To me this is the central issue of our time. If there is no debt, and this becomes generally known, then the whole infrastructure of the Tea Party GOP collapses in ruin.

            We all know what a debt is and when it is repaid, and who is owed it. But when it comes to the national debt, it seems that most Americans, including maybe a majority of economists think it is an existing thing.

            But I am a new student (since a year ago) to MMT and I’m trying to trace what happens when the government deficit spends to what people call the national debt. Publications of the Federal Reserve are not particularly clear or helpful.
            When I ask them the question of whether there really is a national debt they thank me for my interesting thoughts and refer me to their publications list to look for material on the subject. I haven’t found any.

            So, back to basic common law of debts and the obscure but still determinable process by which the Fed ends up with Treasury securities that the Treasury issued to acquire money for deficit spending by Congress.

            Treasury issues securities.
            Banks buy them at public auction through bidders who are brokers.
            When banks buy them, they effectively make a loan to the Treasury with a
            specified redemption date, printed on a security that they get from the
            Treasury. At first a deposit is created with the money created for the loan. This deposit is in the name of the Treasury. The Treasury withdraws the
            money at the bank and puts it into an account it has at the Fed. In the meantime the bank now takes a loss in its reserves as the money for the loan left the bank. The bank will want to build up its reserves to cover the loan. It’s a lot of money (usually on deficit spending), and they end up seeking
            help from the Fed.
            The Fed has a mandate to keep bank reserves up to cover their loans. So it agrees to add reserves to the bank’s reserves in return for the securities.
            The Fed creates the reserve money out of thin air. It is just a number of
            strokes on a spreadsheet at the Fed and at the bank. It is fiat money.

            Legal question: Does this mean that the Fed has redeemed the debt between
            the U.S. government and the bank, since the bank now has the money that went to the Treasury. The bank no longer holds the securities. So, that account should be closed at the bank. It has gotten paid for it.

            Does the fact that the Fed now holds the securities mean that the US government now owes the Fed for the securities?

            I claim that the Fed is an arm of the government, an agency of the US.
            Since it “bought” (paid for) the securities with fiat dollars it made up out of
            nothing, the government has through the Fed redeemed its debt. Creating fiat money out of thin air is a power of our government, delegated to the Fed.
            So the act of buying, augmenting reserves with new money, is an act of the government. And government in this case is redeeming a debt, just as a wife might redeem a husband’s debt by paying for it from their joint checking account. But even if it weren’t from the joint checking account but her own, as far as their being married is concerned, that makes the husband’s debt her debt. If he skips town, she is left holding the bag. So, it’s her debt as much as his and if she pays it back, that clears the debt. Treasury and Fed are like husband and wife as far as being different aspects of a common institution is concerned.

            So, except for the 6% of the interest transaction fee owed the Fed, the debt is redeemed between Treasury and banks by the Fed.

            Some documents say that to redeem the securities if they have become mature, the Treasury has to come up with tax money from the tax payers.
            Even so, if the Treasury buys back the security, the Fed returns all but
            6% of the interest on the security. So, there is an implicit awareness here that
            the Fed is arm of government, since it doesn’t keep the principal and interest in return for its investment in the reserves of the bank that got the security from the Treasury at the auction. But there is no need in that case for
            Treasury to buy the whole security. It just needs to give the Fed its due
            in the 6% of the interest. And perhaps the Treasury could just create securities to cover these transaction fees and the fee of these securities inclusive. So, taxpayer money wouldn’t be needed at all. The Fed should either destroy or give the redeemed security back to the Treasury, which will destroy it.

            So, there is no national debt at the Fed, since the debt is continually being
            redeemed by the Fed as it is created by the Treasury issuing securities.
            I agree that the money creation process causally begins with the Treasury
            issuing the security, and ends with the Fed buying the security from the bank.

            Nothing I have described here denies that private banks create money.
            I am concerned in the federal government’s so-called debt, which I think does not exist, since the securities the Fed has were obtained in a manner that redeemed the government’s debt on each of them. And it pays off those
            securities’ debt obligations of the government to those that bought them as time deposits for dollars they already had.

    2. Dan Kervick

      We don’t really have a private monetary system. It’s a hybrid and hierarchical system, with the state-run component at the apex of the pyramid.

      Private banks are permitted, within the bonds of government-established capital requirements, to create liabilities for dollars. These liabilities are claims against, and are convertible into, direct liabilities of the US government, which exist in the form of currency reserves and electronic reserve balances.

    3. Michael Hoexter

      I have no problem renaming “growth” and/or questioning the desirability of growth as a long-term economic strategy. However, in our current capitalist economic system with its unequal divide of the income from economic activity, ordinary people suffer under conditions of deflation and stagnant growth. Furthermore, we will not transform our fossil-based energy infrastructure without economic growth that is also constrained by strict anti-carbon emission rules and taxation system.

    4. stanley mulaik

      I like the idea that deficits are an addition to tax revenues to the spending. “net contribution” is sort of on track, but it doesn’t quite say exactly what is happening. To me it is “created money”. “net contribution’ would be consistent with the idea that the government has squirreled away money in a savings account somewhere and is adding that to the current tax revenues. By saying “created money” we describe exactly what happens. But maybe someone else could come up with some other expression or term that would convey what is going on. So when Congress spends more than Treasury has in tax revenues, then the spending consists of “taxes” or “tax revenues” and “created money” or “created revenues”. The Fed, which doesn’t like to reveal what it is doing might call it “new revenues” or something that tones down the fact that money is created ex nihilo.

      1. joebhed

        This is a great suggestion.
        It is ‘created money’ that we need to balance the budget.
        There would thus be no deficit.
        The revenue side balance is provided by ‘created money’.
        It is ‘created money’ that the Kucinich Bill calls for as government-issued exchange media.

        Unfortunately, today the government does not create the money. So there’s a slight deficit in the logic.
        But if we can get behind this idea of ‘created money’ as the essence of the GUV-monetary transactin and we can expand the conversation.
        For the Money System Common

  2. Chauncey Gardiner

    Creating and controlling the language used in the national conversation about policy is an integral part of framing it. “Deficits”, “Fiscal Cliff”, “Austerity”, “Privatization”, and even the clever labeling of their Super-PACs such as “The Club for Growth”, and other deceptive and fear-based language is being used in this campaign. This language is being disseminated thru intense media saturation and constant repetition through the corporate media, and combined with other psychological messaging intended to engender fear on the part of the viewers; i.e., “Failure to act is unacceptable, failure to act will leave our children in debt servitude”.

    WHY the proponents of this policy are pushing it so hard in the U.S. and Western Europe is the puzzle for me. It seems counter to their own interests. And as former VP Cheney so presciently observed, “You know, Paul, Reagan proved that deficits don’t matter.”

    But please, throw the “Government’s Net Contribution” pebble in the pond. Who knows where the ripples might lead us?

    1. brazza

      perhaps words and terms (particularly those requiring the reader to learn its definition to become comprehensible), are not as effective in communicating the real situation as visual images.

      For instance, wouldn’t you agree that this 2 minute video entitled (translated from the French) “Cure for Money”, sums up pretty well the austerity strategy being currently imposed in Southern Europe? And doesn’t it convey the motivations, costs, and likely effectiveness of the strategy, better than most treatises? http://www.youtube.com/watch?v=Tjlb4Ki8IFc

      1. Chauncey Gardiner

        Thank you for your linked video and thoughtful response. Although I was unable to view the clip in English, the message came through loud and clear. I would agree that visual images, particularly film, would be more effective in countering their propaganda, particularly among the low information segment of the population in our entertainment focused, time- and ADD-challenged culture.

        However, my question regarding their motivations remains: …Why?

        1. brazza

          Hi Chancey:

          I assume your question refers to your original “WHY the proponents of this policy (austerity) are pushing it so hard in the U.S. and Western Europe …”. I can think of 2 main reasons … and I won’t bother with the plethora of smaller corollaries:

          1. Because, to use the context in the video clip I posted, witch-doctors have a personal vested interest in this strategy. The sense of relative “privilege and achievement” for the 1% increases in direct proportion to the observable gap to the 99% – such is human nature. Even if the share of the overal pie should decrease. The psychological kickback to a weak ego requiring favorable comparison for its sense of well-being is related to how marked the perceived gap is between itself and others.

          2. Because they are caught up in a structure of belief that dictates it is so. Belief-Dependent Realism (see article http://www.scientificamerican.com/article.cfm?id=the-believing-brain). “After forming our beliefs, we then defend, justify and rationalize them with a host of intellectual reasons, cogent arguments and rational explanations.” I believe the system is currently simply acting out of self-rationalized responses triggered by a deeply ingrained belief system whose tenets are perceived as too holy and sacrosanct to be questioned objectively.

  3. John Hope

    Buried in this clumsily written article there is a nugget of truth which is about who has the power to control the creation of money in any economy. So long as that power remains in private hands there will be financial crises and false solutions as we see only too well in the US and Europe . I see this morning Iceland is considering a return to sovereign money endorsed indirectly by, of all people, the Deputy Divsion Chief of the Modelling Division in the IMF’s Research Department Michael Kumhof. Now who could have imagined that ?

    1. joebhed

      Kumhof’s own research has shown that actual public money administration (creation, issuance and regulation via governmental authority) can provide for debt-free solutions that circumvent all of the negative implications of counter-cyclical monetary policy, notably deficits.

      The actions underway in Iceland are ground-breaking and even if not fully successful will provide a foundation for more critical review of the private money and wealth creation system of fractional reserve banking.
      Unfortunately, MMT actually embraces fractional-reserve banking under the banner of ‘endogenous’ money.
      For a hundred years (soon up for renewal)we have had a private debt-based system of money creation, yet MMT wants us to ignore that fact, and accept without proof that it is the government that now creates money when it spends.
      Hyman Minsky, one of the burden bearers of critical financial and monetary history, in 1994 called for a new National Monetary Commision that would consider the Simons-Fisher proposals for full-reserve banking and public money administration.(Levy Institute wp No. 127)
      Why are we not talking about that?
      For the Money System Common.

      1. stanley mulaik

        My argument here earlier is that “created money” is debt free. When the Fed purchases securities from banks, that act of purchase with fiat money created out of nothing redeems the debt between the United States and the banks or whomever ultimately holds the securities from whom the Fed purchases them. There could be no other source of debt for the created money. The Fed didn’t borrow it; it created it.

        So deficits are “created money”. That explicitly reframes the issue in an accurate way.

        1. joebhed

          Actually, today the only thing the Fed can create is reserves and that is what it does. It does not create debt-free money.
          I agree that what SHOULD provide the balances for what we call deficits in a government budget IS debt-free money. But it should be created by the Congress who has the authority to do so, and who did so when it issued Greenbacks some 150 years ago.
          IOW, the whole charade should end, and the government should issue the debt-free money in place of issuing the debt.
          Unless there is new meaning to ‘redeeming’ the certificates of indebtedness issued by the government, all the Fed does is become the holder of the securities by virtue of its open-market transactions, an act which it is designed to reverse by re-selling those securities back on the market when its policy objectives are met. If they were ‘redeemed’ by the Fed’s purchase, then they could not be resold.

          1. stanley mulaik

            When I look to see what is in my wallet, I see Federal Reserve Notes. Are these not money? If it walks like a duck, quacks like a duck, looks like a duck, it’s a duck.

          2. stanley mulaik

            If the Treasury borrows money from banks, and the Fed redeems those debts by buying the Treasury’s IOU’s, the Treasury has debt-free money from the banks.

            Don’t confuse that with the concept that money is a token of debt obligations between parties, in a unit of account, in the economy. The debt is someting like, “if I give you the $100, you will give me the new iPhone8” . The debt obligation moves in both directions.

            I’ll work 8 hours a day on your project, and you will pay me $160 a day. Both parties have a debt obligation, expressed in dollars for 8 hours work.

    2. Dan Kervick

      100% reserve banking does not mean that private banks no longer play a role in the creation of money. It just means the banks’ reserve assets always have to equal or exceed their deposit liabilities. This may or may not inhibit the pace of credit expansion.

      1. joebhed

        Actually, Dan, it does mean that.
        I was hoping you woulld have gotten this reality from Ralph Musgrave’s explanations on Mike Norman’s posting of the Monetary Realism’s review on the Benes-Kumhof research paper.

        For some reason, MMTers seem to think that full-reserves is merely a percentage thing like there’s zero, ten and a hundred.
        In reality, Fisher’s exposition of Soddy’s real-money framework is always provided as a tandem piece with public money creation.

        While I could cite many textbook presentations by Fisher recommending a change to Central Bank full-reserve policy, rather I recommend a read of the Fisher, et al 1939 paper on A Program for Monetary Reform. I am aiming for a link to put here but I’m not home and on someone else’s computer.

        A PDF of the 1939 Program is available here.

        Here’s a video we did on that section of the paper.

        Please try to comprehend what Ralph has explained.
        Full-reserve banking is Fisher’s 100 Percent Money paradigm. It does require replacement of the private money-creation privilege which is properly a governmental function.

        100 Percent Money is achieved by ‘monetization’ of bank-credit balances so that on day 1 all commercial bank balances are ‘fully-reserved’, providing a basis for newly loanable balances. As such, financial intermediation would return as a banking operation.

        Too many otherwise learned MMT proponents have presumed that full-reserve banking is the same thing as 95 percent reserve banking, only 5 percent higher.
        It is not.
        Once full-reserve status is in play, all new money is created by public administration, giving banks that annual balance increase to turn into savings, and loans.
        So, there’s no ‘hunting’ for new reserves.
        With public money creation, deposits exceed loans as a matter of accounting identity.
        Deposit balances are converted to savings and lent, and we all live happily ever after.
        The Money System Common.

        1. Ben Johannson

          I’m sorry but I can’t agree. The paper you cite as a path toward monetary reform is replete with gold-standard thinking. In fact, it advocates moving to the equivalent of a gold standard by tying the quantity of dollars in circulation to consumer goods, or by requiring a certain number of dollars per-capita.

          In addition your desire to limit banks by requiring full reserves will not accomplish what you imply. The authors clearly confuse reserves as what banks are loaning out, when in reality reserves are used solely for clearing payments, not for making loans. A full reserve system will not change this dynamic, it will simply increase the costs of borrowing.

          1. joebhed

            Actually the paper is very specific to its purpose as monetary science. It is to propose reform of the money system with the specific aim to tame the conspicuous boom and bust cycle of monetary and economic activities that result in inflation and deflation.
            The reform proposals were based on the fact that the gold standatd had provided no stability to the boom-bust cycle as were on the gold standard throughout.
            The goal of the reforms was to establish by monetary rule for the stability of the money system, and the rule being proposed was the stability of the purchasing power of the currency.
            A read of the paper would show how several Scandanavian countries had moved to such a standard with great success.

            Once public administration of the money system by rule is established here must be a measurable standard within the rule, and that syandard was to expand money as necessary to meet the change in the economy.
            It had provisions for both expanding and diminishing the money supply.

            Any economic metric could be used to establish the supply of money and the growth required.
            Besides a normal economic measure like GDP growth another proposed measure was to increase the supply of money by the percent increase in population – as population growth drives economic growth.
            Milton Friedman once propsoed a Constitutional Amendment so as to have the money supply growth limited to a certain annual percentage by Constitutional fiat.
            Taking issue with the metric by which the supply of money would expand in achieving the stable purchasing power of the currency seems rather myopic at this point.
            The authors were among the most prominent monetary economists of their time – many with honorary chairs in academia today, all of inscrutable crdentials.
            Their proposal was publicly supported by over 400 economists at the tome.
            When was the last time something like that has happened?

            Any perspective that these reforms are somehow related to the gold standard lie in the eye of the beholder.
            For the Money System Common.

          2. joebhed

            To posit that these authors – all monetary economists of highest regard – do not understand how the central banking system actually works would be laughable were it not so egregiously wrong.

            They write the books for the students that study monetary economics and they teach it. And again their proposed reform was publicly supported by over 400 economists.
            Perhaps you are more learned than all.
            But perhaps they are right and you are wrong.
            You have an unsupported claim here.
            The most sophisticated macro-economic modeling of such a system has shown the exact results claimed by Fisher, etc.
            While small circles may strongly believe that the gentleman who defined debt-deflation and how it ultimately caused great depressions was proposing a deflationary reform, the claim is groundless.

        2. Dan Kervick

          I think my statement was very straightforward, and you have not really offered evidence against. With 100% reserve banking, banks can still create new deposit balances in the process of making loans. Since the broad money supply aggregates – such as M2 or M3 – include the sum of all of those balances, banks would still “create money” in the same way they do now. In might be that they are deficient in reserves after expanding their loan books and will then have to borrow more reserves. The 100% reserve requirement might increase the borrowing cost for those reserves, compared to current requirements, depending on what policy interest rate target the Fed sets. So it might have some impact. But it doesn’t alter the basic mechanisms.

          You guys are trying to solve 2012 problems with proposals tailored to the financial systems of 70 years ago.

          1. American Slave

            Or let me try to clarify the loans are already being made by institutions the have no customer bank accounts or deposits.

          2. American Slave

            I meant to say that instead of “the” both times but the stupid spell check is working its magic again.

          3. joebhed

            With great difficulty, at some point MMT will un-learn ‘money is debt’, and begin to differentiate between money and debt.
            Here the question revolves around whether another bank loan is, therefore, new money or new debt, or both.
            Any fully-reserved bank can make loans using the depositors money on which it is paying interest.
            In so doing, the bank creates a new deposit based on that loan. The bank expands its balance sheet using that money and when the loan is repaid it reduces its balance sheet.
            But the total amount of ‘money’ remains the same throughout.
            Government creation and issuance of debt-free money is an action that provides ‘permanent’ circulating media to the economy.
            You can create tons of new debt using old money – that’s what the circulating part is all about, and that’s what people think banks do right now.
            But, the bank’s loan is not new money.
            Continuous circulation is simply re-use of the same money rather than creating and destroying money via fractional-reserve bank lending, and the monetary economic effect is no different from a dollar bill circulating at velocity greater than 1.

            I am afraid that the ‘recession-fearing’ posture of full-reserve banking by MMT proponents is based upon a great misunderstanding – that it prevents private banks from issuing credit.
            Nothing is further from the truth.

          4. spooz

            Seems like a better model than the current can kicking, rule of law violating, market manipulating, zombie propping ZIRP forever dead end we have now. Sure its revolutionary, seems to me it would wipe out bank bondholders & shareholders. Maybe thats what we need. It appears Iceland is looking into it; maybe Iceland makes a better model for monetary reform than Japan, who we seem to be following.


            But what do I know, I’m a lowly beancounter. Thinking of sovereign debt as equity doesn’t seem so crazy to me.

          5. joebhed

            Dan I am going to remind you and all of the MMT proponents once again that your learned Hyman Minsky called exactly for a new national monetary commission and consideration of these very depression-era solutions to the problems of financial instability caused exactly by the institutions that MMT defends – fractional-reserve banking – and he did this WHILE the MMT construct was beginning to take shape – in late 1994.
            See Levy Institute Minsky Archive Working Paper No. 127.
            So, PLEASE stop the irrelevant hyperbole.
            The problems of money have been the same throughout the hundred years the Fed has been in existence.
            Which is why the new National Monetary Commission is just as needed now as when the honorable Mr. Minsky so declared.

  4. Jim Haygood

    ‘Modern Money (MMT) school, has discovered that in fact government deficits are absolutely necessary for economic growth.’

    Too bad about the 1920s, when the U.S. boomed while the war debt shrank every year owing to surpluses.

    Why don’t we invite the views of the great MMTer Gideon Gono on this subject, instead of Michael Hoaxter?

    1. j.grmwd

      With the Great Depression being the end result of trying to finance economic growth through a private credit boom rather than the deficit of the currency-issuing authority. Not unlike the economic pathology of today. Perhaps more precise would be “MMT has discovered that a government deficit is absolutely necessary for economic growth that doesn’t end in financial collapse”

      1. craazyman

        what about 1860s through 1910?

        you had 50 years of innovation and growth — railroads, electricity, streetcars, public transportation, telegraph, telephone, etc.

        No federal taxes or govt spending to speak of, not much anyway.

        I don’t diminish the provocative thinking contributed by MMT — but it embeds itself in a set of “normative” assumptions about the structures of social relations that are inherently political, as is everything “economic”, every bit as political, in fact, as those of its anti-thesis. It’s yin and yang. And neither is fully conscious of the energies that animate it. They are both incomplete as systems of thought.

        1. Sleeper

          Note that much of the westward expansion of the railways was financied by the federal government giving the railroads blocks of land – including mineral rights along the way.

          Fact is the world’s largest Trona mine is still making money for the railroad.

        2. skippy

          you had 50 years of innovation and growth — railroads, electricity, streetcars, public transportation, telegraph, telephone, etc.

          No federal taxes or govt spending to speak of, not much anyway. – craazyman

          Well that boat has sailed, repeating the past is a poor choice when the environment is completely different – globally. Cheap inputs are gone, the ramifications of activity = us and ever other living thing is soaking in it (increasing back ground toxicity), EROI, the increasing upwards transference of value in exchange for dubious – fluctuating price.

          Skippy… I’ve been reading a bit of the new forensic anthropological evidence, the fundamental shift that occurred around the neolithic to bronze age. The environmental changes, the social – foundation – myth[s change over… and well… its pretty epic. From 1,000 body’s in Germany cannibalized to feed a central powers population from the villages in the highlands, during a drought. To 1 cow can feed a 100 people and there was 10,000 present, a feast was had and then they buried the hole stone town, they lived in, and pissed off…. Don’t get me started on the South Papua New Guineans tribe that ate the dead… It was said that such good meat should not go to waste… but waste is what they got… mad peoples sickness… like mad cow… lol.

        3. j.s.nightingale

          what about 1860s through 1910? you had 50 years of innovation and growth — railroads, electricity, streetcars, public transportation, telegraph, telephone, etc. No federal taxes or govt spending to speak of, not much anyway.

          Don’t forget there was a Century of land giveaways, when the Federal Government ‘opened up the West’ – by redistributing to farmers and industrialists the land expropriated from the Indians. The farmers created food and the manufacturers built infrastructure into the liberated spaces. That might have had something to do with fuelling the “50 years of innovation and growth”.

          1. Haloeffect

            Amen. 19th century accounting hardly needed to consider what was taken away from Native Americans and faceless immigrants who died to create these wonders. The last two states to fill in the lower 48 Oklahoma and Arizona were established by 1912. By 1913 a new source of underpriced input was needed to produce the desired output and “profits” for investors.

          2. craazyman

            Dudes! I could not agree more! My profeser of contemporary analysis Delerious Tremens, NFL, GED at U. Magonia taught that money = property like wave = particle and we know wave functions have amplitudes and imagination waves have form in more than 3 dimensions and localize when observed all over the place. In fact, I said the same thing here:


            yeah skippy, it’s a slow crawl from the mud. Saturn eating his children, the way fish do — from animal man, to family to tribe to nation to “mankind” and geneology of morals. like the fetus with its gills after a few days, then lungs, then brain. all those psychic energies surging through the beast into an abstraction..

            economics knows none of this, and yet it swims inside it and calls it “money”. LOL.

            I have to go waste time and lay around now, it’s Saturday, too lazy for thinking hard. haha But it’s all so easy anyway if you just let it flow in your head.

          3. Hypothetical_Taxpayer

            take it easy craazy. didja get the word count on this post? that would tire anyone out. i jotted down the cliff notes version for future reference:

            government deficit = net contribution

            government deficit = unhappy thought = bad

            net contribution = happy thought = good!

            think happy thoughts today

            p.s. thinking of 72 virgins always cheers me up

          4. craazyman

            well HT, I’m a little to old for 72 virgins but if they’re over 35 I’ll take them.

            I keep thinking about that earthlike planet 18 light years away. I think building a probe to send out there to take pics and post them up on Flickr would be a good use of government money.

            My fear is they’d decide, instead, to make a fleet of tanks for assaulting pot smokers in apartment buildings and all hell would break loose. It would be an initial stimulus, for sure, and they could even build more jails. Some would say this advances public purpose. I’m skeptical. :)

            It’s hard to save morons from themselves, even with lots of money. But we can see that from the news every day. If you give a moron more money, they become more of a moron. Sometimes less is more.

    2. Dan Kervick

      This is stocks vs. flows issue. The private sector can finance growth during some period by spending from its stock of savings. But if the government runs a continuing surplus, then the non-government sectors are running a net deficit. Eventually, a point will be reached where the private sector is unwilling to continue to reduce its net savings. Unless the government runs deficits, private sector spending will contract.

    3. Michael Hoexter

      You don’t seem to have heard of the Crash of 1929 and the enormous private credit bubble that led to it. TEMPORARY growth can be spurred by private credit bubbles (as also happened in the 2000’s)but over the longer term, the net contributions of government spending (“deficits”) are a necessary but not sufficient condition for long term growth. Propagandists for private credit creation would like us to forget this.

      Your effort to link MMT to Zimbabwe would indicate that you are one of the hyperinflation hyperventilators. Zimbabwe experienced hyperinflation because too much money was chasing too few goods of foreign origin. Currently we are well below our productive capacity, so we are not in danger of demand-driven inflation.

      You are standing before a decision: are you for economic growth or for a stagnant or shrinking economy? If you are for the former, you must support the government spending more than it taxes… If you have an alternate theory of how the money supply grows in a growing economy, let us know…otherwise just flag yourself as “troll” before you post.

      1. Jim Haygood

        ‘TEMPORARY growth can be spurred by private credit bubbles (as also happened in the 2000′s) but over the longer term, the net contributions of government spending (“deficits”) are a necessary but not sufficient condition for long term growth.’

        Okay, let’s talk ‘longer term.’ Over the entire 19th century — a period of enormous economic growth in the US — national debt as a percentage of GDP actually fell from about 15% to 10%, as you can see in this chart:


        Government doesn’t produce economic growth — people do. And they do it best when there is a stable means of exchange.

        Interesting that you resort to insults (‘troll’) — have a problem defending your MMT ideology, do you?

        1. Michael Hoexter

          If you had paid attention while reading the article, I point out that the supply of gold was rapidly increasing in the 19th century so that the government could issue more gold-backed dollars without formally issuing bonds. It also issued debt-free greenbacks during the Civil War which was one of the boom periods of that century. Also there were in that period a number of banks that issued their own currencies. The ratio of debt to GDP in this context is not very illuminating, also if you think about the general accuracy of financial record keeping in the pre-Fed era.

          Which returns us to your theory about how economies grow…So do people print money in their backyards? Do banks produce currency that outlives the life of a loan? Tell me how do we account for economic growth in dollar terms? Where does that (more) money come from?

          Your apparently intentional misspelling of my name as well as the lazy reference to Zimbabwe looks like typical trollery.

        2. AmirS

          Debt as a % of GDP may have fallen, but real and nominal debt increased massively. From TreasuryDirect [1]:

          Debt 1/Jan/1800: USD 82,976,294.35 (~ 83 Million $)
          Debt 1/Jan/1900: USD 2,136,961,091.67 (~ 2.1 Billion $)

          So over the period you specify, the US government increased its ‘debt’ by approximately 2 billion dollars (or by a factor of 26 times), and there was massive economic growth in parallel such that the debt as a % of GDP actually fell.

          This is a similar situation to that after WWII, debt as a % of GDP fell from 110% in 1946 to about 30% in 1980, but actual nominal debt increased from to 269 billion USD to 907 billion USD over the same period.

          Both these facts easily support the hypothesis that government deficits are necessary for long term economic growth. (Though of course they do not prove it.)

          [1] http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt.htm

    4. MRW

      Jim Haygood,

      National Economy and the Banking System of the United States — An Exposition of the Principles of Modern Monetary Science in Their Relation to the National Economy and the Banking System of the United States

      76th Congress, 1st Session, Senate Document 23, Sent to Government Printing Office, January 24, 1939

      By Richard L Owen, Former Chairman, Committee on Banking and Currency, United States Senate. (Written to educate Congress how going off the gold standard benefited the USA. Who read it? WWII was coming.)

      Chapter XVI, “The Inflation Bogey”— Page 65

      “The old system is vigorously defended. Its advocates and defenders fill the American press with articles dealing with the question of our economic life in which they attribute the evils arising under the existing system to many other causes than the real fundamental cause. Modern monetary science exposes the real cause beyond the possibility of doubt or successful contradiction. But the advocates of the old order, minimize or denounce monetary causes as being responsible for our national distress. The purport of these various articles seems to be to warn the Members of the Senate and House of Representatives and the people against “tinkering with the currency,” against “fiat” money, against “printing press money,” and against the dangers of “inflation.” The experience of Germany following the World War is pointed out as a terrifying example, in which inflation resulted in the destruction of the value of bank deposits, bonds, insurance policies, mortgages, and other evidences of debt, by reducing the German mark to zero value-through the inflation of the German mark billions of times.

      The term “inflation” has thus been built up as a bogey warning the people against any necessary expansion by using the term as equivalent to a defensible and necessary expansion of the money supply.

      These advocates of the old system (which has continuously reproduced one depression after another) seem to rely upon the lack of an informed public opinion. They frighten the people by the bogey of “inflation” as if the advocates of modern monetary science proposed “inflation.” Modern monetary science vigorously opposes “inflation.” It vigorously opposes the “inflation” which has been employed by the sagacious few to profit and to acquire the wealth of the ignorant many.

      Modern monetary science proposes an adequate plan by which to prevent inflation for all time.”


      BTW, the volume of check money alone in the private sector in 1929 before the Crash was $1.23 trillion. (from the same congressional doc above, pg 5.) When the govt is in surplus, the private sector is in deficit.

  5. joebhed

    The fact that public spending is needed in times of private savings (given a debt-baased money system) is the easy part of the sale.
    A week or two ago Steve Keen showed at a Congressional briefing how a shortage of monies, due to governmental monetary policy and work program cutbacks, resulted in the deepening ’36 – ’38 recession, and why we are headed there if austerity again marks our political low water line.

    Being that we are in a ‘balance-sheet’ recession should be sufficient to show that it is the job of ‘public money’ to put people back to work again.

    The harder task is not to show the need for deficit spending; it is to show that we can fund the spending without further exacerbating either the people’s tax burden or public debt results.
    MMT does this with a claim that taxes do not pay for government services, but almost never showing how this means that any further government borrowing is therefore unnecessary.
    Rather than another MMT post on messaging the MMT construct, go directly to the sound-bite that solves it all.
    “Here is the proof that taxes do not pay for government spending, and that government creates real money whenever it spends.” (Note: Never venture into the reserve accounting rathole – people will not willingly go there.)
    If this is true, it is provable, understandable, acceptable and accepted.
    If it is not true, then another avenue is available for achieving the desired result. I laid out how in a video a couple of years ago titled: “They’re not deficits. They’re new money”.
    But, it required showing exactly how that ‘new money’ was created as a public asset – just like Greenbacks.
    The work of using the monetary system to democratize our national economy will not be won by re-defining accounting mechanisms, but rather by re-defining money as the people’s greatest benefit. It’s our money.
    We fought a War for Independence in order to have that benefit.
    For the Money System Common.

    1. stanley mulaik

      I am now going to reframe the “deficit spending => national debt” meme with “spending with taxes and created money”. That should get people to thinking.

      When Congress has to spend more money than it has in taxes, Treasury has to create new money to make up the difference.

      1. joebhed

        So close, yet so far.
        When Congress spending exceeds its tax revenues, then CONGRESS should issue the debt-free money directly into existence and the case is closed.

        1. stanley mulaik

          Well, doesn’t Congress just delegate the money creation to the Treasury and the Fed working in concert, using banks as intermediaries?

          Congressmen and women as a group seem to understand little of where money comes from or what and who creates it. So, they don’t think of that.

          But you are right, it would be easier if Congress simply said that Treasury will create the money and spend it as authorized by Congress. But in 1913 they created the Fed and made the Fed “independent” of the Treasury and the Congress and the President. They prohibited the Fed from buying securities directly from the Treasury. (I note that the Fed can swap mature securities for new, immature securities, which is a way to roll-over ‘debt’ or to make it possible for the Fed to have new securities to sell to drain money out of circulation. But I don’t think the US is liable to the Fed as a result. But maybe the practice began under the gold standard and has not changed since. I find things like that from time to time. )

    1. j.s.nightingale

      Well, no. If government is not issuing enough currency for the supply of goods, services, and labor deployment in the economy, then the system is undergoing deflation. Similarly, if the recipients of the money just stash it away to ‘defer demand’, that is a deflationary act too. and to the extent that the private sector over-saves, government can and should issue more currency to provide the catalyst that will liberate potential demand. Buying Treasuries is the most zero sum use of money: what it amounts to is that government issues a block of currency, because it wants to match up liquidity in circulation with goods, services and labor potential (effectively GPP – Gross Potential Product), savers buy Treasuries and reduce the liguidity in circulation.

      Government should only be issuing Treasuries when they want to dampen down demand in the system. They signal this by increasing the interest rate, making the deferred savings more desirable. The present situation of interest rates dangling around zero is the strongest indication that government wants the money in circulation to be deployed now.

      So why are people (like me) stacking away savings preferentially over consuming? Uncertainty about the future, and in particular whether or not the pension fund will last a full retirement – or even be there. So if governemnt guarantees pensions, that provides the security that enables people to consume now.

    2. Hypothetical_Taxpayer

      “MMT is inherently inflationary.”

      Not so. They just assume that the velocity of money is and always will be zero. :)

    3. stanley mulaik

      No, MMT is not “inherently inflationary”. It has a bias to inflation, but it is not necessary, if the budget is managed properly to avoid inflation.

      Dollars on the gold standard were inherently deflationary, because there would
      be a point at which economic growth surpassed the point at which new money could be created because the gold supply was not keeping up with economic growth.

      1. stanley mulaik

        Whether having balanced budgets is deflationary or inflationary depends on exports and imports. If there is an excess of exports, bringing in money from out of the country, then there can be inflation if the excess reaches a point where the means of production and employment cannot be increased to match the increase in the money supply at current prices. If there is an excess of imports, sending money out of the country (e.g. for oil, or manufactured goods), then this will be deflationary. Fiscal policy just concerns the budget from the point of view of taxes and government spending. But MMT says we must consider the wider view that includes savings, investments, taxes versus government spending, exports versus imports.

  6. JEHR

    It is amazing to me that there are thoughtful people like Hoexter trying to educate people about their own well-being. They have explained how money really works and now are trying to literally find the right words for explaining a new way to look at the economy. I admire their perseverence and look forward to more of their work.

    It is exciting to see a new theory being born!

    It is too bad that the creation of money now exists in the private shadow banking system where no one really seems to know how large the debt is–$67 trillion? $800 trillion? More? Who knows? That shadow system is full of all the debt created by the banks who have loaned to each other and borrowed from each other with a view to the common people eventually paying for their debts. Because the government is run by the lobbyists and bankers, the system cannot be changed and will continue to bring us financial crashes and bailouts.

    1. Dan Kervick

      Yes, this is a much more important issue than the commercial banking system. I don’t know why people are so fixated on commercial banking and the anachronistic 100% reserves business. We didn’t have a run on commercial banks in 2008. The “run” occurred in other parts of the sadly unregulated financial system.

  7. Sleeper

    I’m a little suprised –

    After all when we finance a car, a house isn’t this deficit spending ?

    Many of us are spending more than we make !!!And have debt extending out some 20 – 30 years.

    While there are limits, some level of deficit spending is healthy and enhances the economy.

    The “deficit” issue is just the most recent popular game in which an issue is defined to limit real disscussion and real problem solving. Easier to label than think.

    1. LifelongLib

      Private “deficit spending” (i.e. credit) creates a debt that must be re-payed (or defaulted on). A government that issues its own currency can simply spend it without creating a debt in the sense that the money is owed to someone.

      I admit to not being quite clear on how the “all money is debt” notion fits into this…

  8. ftm

    If we are going to change terms, I propose the following:

    Replace the meaningless MMT with say CSE (common sense economics).

    Replace “job guarantee” with “full employment”. Not everyone who wants a job can be productive in the workplace. Some people need more education, some people are sufficiently disabled they need to be supported by government or private charity.

    Replace “banks create money from thin air” with “banks create money”. This is trumpeted by some as a great insight of “MMT” but the thin air part is just unnecessary misleading nonsense.

    Please add to this list.

  9. james hogan

    Why not call it the “Add In”? Short for ‘additional income’, or ‘additional investment’.

    That’s what it really is.

  10. Paul Tioxon

    I think that this analysis, and MMT as well, is trying to get an accurate description of the economic process within the social order. We need to know what we are dealing with and how it works to try to make any policy decisions, much less radical overhauls. And, people taking the time to observe can corroborate each others fundamental over all description. The following is a excerpt from the New Left Review. Richard Duncan is a typical well educated MBA with finance experience and the power of observation. Here is his comment from a recent interview which confirms what Michael O. and MMT is driving at. Of course, naming phenomena is part of the scientific process. If many observers are measuring the same subject and begin to all see the same process the same way, the naming may cause undue competition and confusion, but then, as Wittgenstein says: “Philosophy is a battle against the bewitchment of our intelligence by means of language.”


    “In the U.S., at the biggest level, it’s not, because every major industry is subsidized one way or another, by the government—all the manufacturing that’s still there, much of it related to military spending. All the hospitals and pharmaceutical companies benefit from Medicare and Medicaid. The universities also get subsidies from the government in the medical and military industry. Farmers get subsidies from the government. Price levels are still generally determined by market forces, but government spending directs those market forces—at the bottom, they allow the price system to work, but at the top level it’s all directed and supported by government spending. I think that the biggest impediment to fixing this crisis is the misconception that we have a capitalist economy. Fox News watchers in America all think, red, white and blue, we’re a capitalist economy, the government is evil and there’s nothing it can do that would help the situation.

    They don’t understand what a large role the government plays—and that if government spending is reduced, the economy immediately collapses. I think it would help if they understood that we don’t have capitalism to begin with, we have a different kind of economy now. This is not a crisis of capitalism, it’s a crisis of creditism, and we have to work with the system that we have. And while it would be nice to rein in the bankers, if you rein them in too hard it’s going to blow up the whole system—the banks are so worthless that the losses would be enormous, if they were actually exposed; all the savings in the world would be destroyed as the banking sector failed. Creditism as a system requires credit growth to survive, and only the government can provide the credit growth now—the private sector can’t bear any more debt.

    So there’s a polemical character to the concept of creditism, in the sense that it’s targeted at a policy level?

    Right. And I would like to persuade not only policy-makers, but the general public as well. It’s not impossible to swing public opinion away from where it is now, which is stuck in a very boring debate between austerity and Keynesianism, neither of which, as it’s presented, makes any sense whatsoever. ”


    1. JTFaraday

      It’s a good interview to do. Nice to read something that isn’t overly pedantic, parochial, or overtly self promoting.

      However, I do wish the interviewer had pressed him more on this issue of “reigning in the banks,” which you cite. What does this mean to him? The claim that withdrawing credit would collapse the economy seems valid, given his claim that we’re in credit economy as distinct from a capitalistic one where growth is driven by profits from production, but it doesn’t necessarily follow that there is no need to prosecute those who attempted to “do business” based on things like mortgage and securities fraud, the end results of which roiled the private economies of all sorts of investors, including and especially large institutional investors serving the public and other cultural institutions who were not in on the con.

      When the government bails out this kind “business activity” and gives its perps a free pass, it is effectively engaging in what those on the other side of the con can only consider a criminal conspiracy that makes the government and its monetary system as fraudulent as the activity in which they are engaged.

      I also would have liked if the interviewer had pressed him on this statement, which the interviewer does not follow up at all:

      “And I would like to persuade not only policy-makers, but the general public as well. It’s not impossible to swing public opinion away from where it is now, which is stuck in a very boring debate between austerity and Keynesianism, neither of which, as it’s presented, makes any sense whatsoever.”

      In some ways, he’s already alluded to the effective impasse. To me, the reason this austerity/fiscal spending binary makes no sense whatsoever is related to something he alludes to earlier, where he’s talking about how American industry decided to do business overseas because that’s where those interests could make their fortunes.

      It seems to me that today, active political elements within the broader collection of business interests have determined that the way to make their fortunes now is by, in short, capturing revenues streams directly from the state through the privatization of public assets and the delivery of once public services.

      If that’s the case, then emphasizing the “stupidity” of said promoters of austerity is to miss the entire point. The general state of the economy is of little to no concern to currently politically active elements in the business community if the source of income in their business plans comes straight from the government and doesn’t have to be “laundered” through the spending of citizens at all.

      And if so, the real cleavage may be between industries that can capture revenue streams directly from the government and industries that still rely on the consumption of citizens…somewhere or other.

      I know I don’t need to elaborate why a society like the US that essentially and fundamentally constitutes its citizens as units of labor doesn’t really give a sh*t about the state of peoples’ lives apart from the question of how they may be made useful to those with the ability to deploy financial or other power, which is why the state of peoples’ lives and the moralizing rationales that people keep trying to construct about it will remain effectively a non-issue for the foreseeable future at the level of government policy by technocratic fiat.

      If the state of peoples’ lives didn’t matter during the deindustrialization phase—which, given its diminishment of organized labor, was also a form of popular political disenfranchisement—it’s not going to suddenly start to matter now, particularly when you consider the growing police state domestically, that undermines our civil rights daily, and US Fedgov’s genocidal program in the mideast that demonstrates no concern for the humanity of its targets whatsoever, but which pays its investors a nice dividend.

      Alas, the interviewer allows him to end the interview as a thoroughgoing big spender on steroids without compelling him to address public/private corruption apart from the banks—for which tangled black hole he admits he has no cure, and never considers the possibility of at least removing their fraud perpetrating managements– or the diminished power of US labor at all skill levels that will prevent that spending from ever trickling very far from the profit maximizing private sector partner that will receive it.

      He surely knows this is the case, given his other remarks about labor globally, but it would have been nice to see the acknowledgement in order to begin to push beyond the pedantic and parochial austerity/fiscal spending binary that “doesn’t make any sense whatsoever.”

      It is the New Left Review after all.

      1. Hypothetical_Taxpayer

        I read The Dollar Crisis back when Duncan published it in 2003. IIRC it was mainly about looking at sectorial balances and the growing trade deficit with you know who.

        It was sort of timely at the time because corporations were maxed out on debt at the time, so he cautioned that either the consumer or guv sector neede to take up the slack. He also pointed out that large trade deficits make non-reserve currency countries go poof in about 3-4 years.

        But I think they give him too much credit in this interview for “forcasting the financial crisis” because he didn’t forcast any of the banking sector abuses, regulatory failures (on purpose), or Fed bubble blowing – therefor did not properly characterize the true nature of the crisis.

        And it would have been better if he named his book “The Financial Crisis” or “The Credit Crisis” instead of “The Dollar Crisis” – because King Dollar himself survived it quite nicely so far. But after we get done exploiting the next sectorial balance, maybe the book name will be good again!

        p.s. If he thinks the government should spend trillions on scientists, I recommend we all become scientists!

        1. JTFaraday

          Yeah, I don’t know. Setting people to labor and paying them is a two part question, a question I am saying I expect something calling itself the “new left review” to ask, especially if it has an interview subject that already knows the answer to that 2 part question– which is that under the current semi-capitalist dispensation, those laborers that can be forcibly exploited by the public-private partnerships which are its defining feature globally will be.

          1. Hypothetical_Taxpayer

            I think you just crank up tarrifs, maybe on oil too, let the world scream protectionism and ignore ’em, then we are back on the road towards reality.

  11. James Shannon

    Follow the Money!
    Trust is the foundation upon which Government rests!
    It should be clear to all who can think that Governments around the World have intentionally breached the public’s TRUST!
    No Government has ever responded to the needs of MAIN STREET. Clearly Economic Justice or Equality never had a seat at the table!
    The People(the 47%)are now mocked by the ULTRA WEALTHY who arrogantly bite the hands that made their wealth possible! The arrogance of their Wealth is palpable!
    Governmental action and inaction has sponsored the Financial corruption used to manipulated the “Free Market” for the benefit of the Ultra Wealthy – the CentaMillionaire$ and Billionaire$. Government is clearly not about CHANGE that fact!
    Instead, orchestrated governmental inaction will complete the intended Depression, using the language of Deficits to shift what’s left of middle class wealth to the 0.1%.
    The ruling class always wins the people always pay the price of their greed!
    “Things are never so bad they can’t get worse cheer-up you’ll soon be dead”

  12. Hugh

    It is a good contribution. However, I think something snappier than “net contribution” is needed to get people to drop the “deficit” terminology. The other thing is that wealth inequality figures into taxing and the problem of interest in a big way but there is no mention of it, only a vague reference to examining the objects of taxing and spending.

      1. rps

        So true, and remove the maximum taxable earnings amount for Social Security (OASDI) taxes at $110,100. Remove the cap. Majority of taxpayers always pay, time to level the playing field.

  13. charles sereno

    I think many will agree how urgent it is to extend popular understanding of MMT ideas, e.g., even though that cannot presently compete with the MSM. The meme — “The Government is not like a Household” — is a good start.
    I’d also like to see a similar discussion about TBTF. The premise is always — “For sure, we’ll fall off the edge of the…ocean, cliff, whatever.” Now, I grant that a catastrophe as great as the relatively recent K-T asteroid is certainly worth worrying about. But that’s not what’s being bruited about. They tell us — “If we had let Lehman go down, that would’ve been the end of the world.” Funny, I’ve never seen an account of how that would exactly unfold. Would all of us and all our institutions be instantly frozen, paralyzed, unable to act as we fall headlong into the abyss? Not! I challenge those who disagree to point to a comparable historical event that stopped the sun from rising. Black Tuesday? Pearl Harbor? Some have argued that we got the New Deal and an American Economic Powerhouse as a result. I just think that imagining plausible scenarios following a TBTF event could be intellectually stimulating and, hopefully, educate our Chicken Littles.

    1. stanley mulaik

      Charles, are you familiar with the works of the cognitive linguist George Lakoff? He has developed new theory of metaphors and how they frame abstract thinking by being derived from perception and embodied action? He has in recent years gotten interested in the metaphors underlying conservative and liberal thought. We could also consider economic thought as something worthy of his kind of analysis. Your comments suggested you were aware of his theory.

  14. nothing but the truth

    the state of the “science” of economics is amazing.

    somehow, the fact that banks make loans first and get reserves later is a great discovery by the MMT, refuting the funds are loaned out model.

    maybe to economists who refused to read anything except their own books.

    obviously the economists who write books refuse to talk to bankers to understand how the system works. they come up with some understand of how the world “should” work.

    when someone discovers that it actually does not, that is considered nobel prize material. eg, the real world is not efficient market.

    as an engineer i can only say wow. these guys get paid to dream up things without once visiting the field and verifying. and get nobel prizes for proving false a theory that was never tested against reality in the first place.

    no wonder we have economic crises every seven years.

  15. joebhed

    “But currency-issuing governments don’t take in income in their own currency.”
    Actually, even IF there were a ‘currency-issuing’ government, still they would, and we do, collect income in that currency.
    That’s what legal tender laws require.

    Either through collection of tax revenues or proceeds from public indebtedness, the government must include currency-unit denominated sources of revenue in order to adopt a legal budget.

    The real problem with the above MMT pronouncement has to do with the WAN that the government issues the money of the nation, it’s approved legal currency.

    To be clear currency and money is what we use to buy things – IOW it has the identity of providing to the holder the purchasing power for economic exchange.

    As such, our governent creates and issues coins. It creates currency-notes but does not ‘issue’ them. The banks issue currency notes and create and issue the other 99 percent of all the money (legal dollar-denominated bank credits)in circulation.

    The private banks are the ‘money-currency’ issuers in this and every major nation, and the governments are the ‘users’ of the currency, thus requiring the government to borrow that currency from the banker-issuers whenever there is a budgetary shortfall known as a defiicit. Just like the Restofus currency users.

    MMT too often postulates what could be ( a currency issuing monetarily sovereign national government) as what IS. The problem with this approach is that it provides the alibi that reform is not needed to achieve the worthy goals of the MMT school.

    Reform is needed.
    We will never have the reality that MMT claims now exists until we reform the national monetary system and put it to work for the Restofus.
    For the Money System Common.

    1. John G

      Whilxt banks issue money as loans, that money is not nett financial assets. The cumulative federal govt deficit, aka the national debt, is the nett sum of private sector financial assets.

      1. joebhed

        Please understand that I am one who totally understands that the government’s debt, repaid with interest by we the public, enhances the private holding of monetary assets by the 1 percent among us.
        I am also aware that it is completely unnecessary to do so.
        So, while MMT champions this wealth transfer as the greatest thing since apple pie, the Restofus ponder austerity, deflation, decreasing incomes and wealth.
        With more of the same to come.
        Isn’t this just a great country?

  16. michel

    I do applaud the brilliance of the commenters on this thread who have realized, ahead of the rest of the world, the brilliant insight of Lewis Carrol, that the question is who is to be master, us or words.

    We need to change the names of many things. in the immortal words of Orwell, or some of them, deficits are surpluses, freedom is slavery, war is peace, and money is.. well, who knows, maybe it is debt. Or is debt actually savings?

    I’m tired now but if we can just change the words in the right way, we will never have a budget deficit again. Won’t that be good?

    1. Michael Hoexter

      Your assumption is that “deficit” is the right word and concept in the first place and my suggestion of changing the name and the concept is just “papering over” the “real” meaning. I don’t think you read the piece very carefully….

    2. rps

      So True. People often wonder what do English majors “Do” with their degrees other than teach? Really, reading literature such as Shakespeare,Chaucer,post-modernism, etc. is a harmless past-time. Ahem, lets set that notion aside for a moment and think….politics and advertising one and the same. They lead the cattle into the shoot through the manipulation of language. Those harmless english majors study the mechanics/expression of language theory such as: Post- Structuralism– a philosophy about how language works and Deconstruction– a rhetorical strategy—a particular “move” in an argument—that takes advantage of the qualities of language identified by post-structuralists.. Next, add a heavy dose of psychoanalytic theory such as Louis Althusser, Freud and Lacan and the ideological sheep willingly offer themselves up for the sacrifice against their own best interests. Baa Baa

      Althusser’s thesis, “Ideology and Ideological State Apparatuses” is well worth a read.

    3. Hypothetical_Taxpayer

      Speaking of funny words

      Treasury = something with a $16 trillion hole in it

      Austerity = $1.2 trillion deficit

      Economist = Expert at dealing with these issues

  17. craazyman

    would building a probe to send out to that earthlike planet 12 light years away be a reasonable thing for MMT?

    I think it would be. It wouldn’t cause inflation because there’d be no wide-scale demand for spaceship parts or spaceship manufacturing.

    second, it would take some of the quants away from wall street, for calculations that actually work.

    third, it wouldn’t use up a lot of “resources”, whatever they are, because the probe wouldn’t be that big. Maybe a few hundred yards wide. You could keep a lot of people busy making a deep space probe.

    Of course, somebody could say “What if it doesn’t work?” True. But it might be years (after you could launch it) before you’d know. You may never know, actually, if it just goes silent on you. On the other hand, it might bring back pictures of aliens. What would that be worth? It’s hard to do a discounted cash flow of that, but if you think movies, T-shirts, dinnerware, etc. I bet it would pay for itself.

    Of course, somebody might say “But what if the aliens that it finds track it back to earth and blow our planet up?” Whoa! That’s a sobering thought. But if they’re that close by and have the technology to make it here and blow us up, they probably know we’re here by now anyway. I’d say go for it. No pain, no gain. And I feel lucky when it comes to something like this, I think most people are optimists when it comes to aliens.

    1. Hypothetical_Taxpayer

      Sounds like just the ticket to me. They’ll probably need to dicuss how to create the money or debt for 12 years, but then I have no doubt they will have no difficulty quickly building and launching a near lightspeed craft and it would softly touch down on the planet 24 years from now – and 12 more years for us to hear back from it by radio wave.

      Unless it crashes into to some big mucky muck alien’s summer home. That would sorta set the tone for the alien response,methinks.

      But either way, you can still merchandise it. Just do the prequel when you launch. None of this stuff has to be true!

  18. stanley mulaik

    The reason my concern for showing that there is no national debt at the Fed is because in the current political impasse the belief that there is a national debt is the basis for the debt ceiling limitation, which prevents spending with created money (deficit spending). Created money is new money, and when spent it enters circulation and increases the money supply. We need to be able to spend with new created fiat money on things like the nation’s infrastructure because in that way we get an improvement in that structure and we also put that money in the hands of construction workers and others, who create new demand for goods and services, jump-starting the economy to spiral upward again toward full employment and production.

  19. Tom Usher

    “The repayment of the loan zeroes out the loan principle leaving only the sum of interest payments which, in aggregate across the entire economy, come from another source, ultimately government deficit spending.” This “net contribution,” as is, equals systemic inflation due to interest on bonds/Treasurys. We can do better. See the NEED Act as a starting place. We don’t need the government issuing bonds, period. The government issuing debt-free, interest-free currency exactly pegged to real-productivity growth would equal zero inflation/deflation. Imagine that! I have, and I’m not alone. Join us.

    1. stanley mulaik

      Tom Usher: You are right, the government owes the Fed a transaction fee equal to 6% of each securities interest. It is not owed the interest. And it doesn’t get the principal either. All that goes back to the Treasury less the 6% of the interest transaction fee to the Fed.

      Do I have this right?

  20. stanley mulaik

    Joebhed: I am sympathetic to the desirability to issue greenbacks again, that is, U.S. Treasury notes. That would be the simplest system. But right now, I think there is not much political support for a change that drastic by new legislation. I have read the Kucinich bill. It is another MMT proposal.

    I think it ultimately doesn’t matter whether we have greenbacks or Federal Reserve Notes, each system creates the same thing–if the end result is no national debt, and I think it is.

    Suppose the Treasury was able to order the Fed to create money for it by
    issuing a security with no promise to repay the Fed at any time for it, and have the Fed create the money required and give it to Treasury. Would that be the same as the Treasury ordering the mint to create Treasury Notes?
    To me it would be. That is “debt-free” money.

    But in my scenario that says there is no national debt because the Fed redeems it for the government in augmenting the reserves of banks with depeleted reserves in return for Treasury securities, the Treasury’s money from the banks becomes free of the debt to the banks. Although the Fed holds mature securities (which it likes to prefer buying), it would be like the Treasury holding securities to maturity and not selling them. Does it owe itself the money on its securities? No, obviously. And ditto for the other
    government agency with mature securities, the Fed. What the government owes the Fed are its transaction fees of 6% of the interest on each security that it buys.

    I understand that when a private bank makes a loan without consideration of its reserves (and they do all the time today, I am told), it still needs to get its reserves up to match the amount it had before the money for the loan left the bank. One account says that the Fed augments the reserves in return for the securities as collateral on the loan, which it keeps, allowing the bank to keep its augmented reserves. So, when the loan is to the Treasury the same
    procedure is followed by bank and Fed.

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