The Charade That Deters the Use of “Direct Spending” to Fund Federal Operations

By J. D. Alt, author of The Architect Who Couldn’t Sing, available at or iBooks. Originally published at New Economic Perspectives

My last essay, “A Perfect Example,” elicited six thoughtful and compelling questions from a reader with the moniker “MadcapMongoose.” They deserve an equally thoughtful response, which I’ve been trying to formulate, off and on, these past many weeks. Each formulation I come up with, however, seems to be missing a larger and deeper issue that I keep getting glimpses of. So, with apologizes to Mongoose, instead of answering him (or her) directly, I’m going to try to mine the topic obliquely to see if I can get at that deeper vein.

The essay in question dealt with a specific proposition for “direct sovereign spending,”—that is to say, spending by the federal government which is paid for by the issue of fiat dollars “out of thin air” rather than by the collection of “tax dollars.” Mongoose’s questions outlined a multitude of difficulties and issues that arise with the idea of doing that, and he (or she) wondered why MMT always seems to ignore or avoid them. I can only speak for myself here, but I believe the communicators of MMT, while they’re aware of these kinds of issues and difficulties, have been focused on a different task: trying to instill a larger awareness of the fact that “direct sovereign spending” is something that is practically and rationally even POSSIBLE.

Yes, of course, everyone realizes and acknowledges that sovereign nations which issue their own fiat currency can, technically, “print money” and spend it—but the vast majority of economic minds, especially in the western capitalist democracies, also view this possibility with something akin to a rational and moral horror, as they would view, say, the idea of burning down a house to get rid of the cockroaches. Part of the reason for this abhorrence is the myth that the practical result of “printing money” is, inevitably, the economic chaos of hyper-inflation. (This in spite of the fact that historical analysis demonstrates that the root causes of hyper-inflation—the infamous Weimar Republic or Zimbabwe, for example—have not been caused by “money printing” but, instead, by the collapse of the production capabilities creating things for the money to buy.)

Another—and substantial—part of the psychological-economic anathema to the idea of “direct sovereign spending” seems to be a residual brain-circuitry from the era of the gold-standard—when printed money had to stand for some fixed amount of actual gold and, if it didn’t, the “printed money” was a fake. This is a mind structure that requires there to be in the world, at any given moment, a fixed amount of “money” that everyone must compete to have a share of. The idea of creating actual, “real” money out of thin air is simply not a possible reality—just like the alchemist’s dream of making gold out of lead is an ephemeral fantasy.

So there are real cognitive disconnects involved here. But I think it goes deeper than that, and I believe if we are ever, as a society, going to take full advantage of the pure, sovereign, fiat money system we actually have been using for the past half century, we have to understand what that deeper issue is—and, most important, whether or not there is a way to overcome it. A possibility I’d like to explore here is that underlying our insistence that the federal government has to collect tax dollars (or borrow them) in order to have dollars to spend is an elaborate and elegant charade which has evolved to protect our bedrock values as individuals (private property and free-enterprise) against the coercive power of the state—a power we granted (with significant reluctance, no doubt) the day we signed our social contract.

This charade has evolved to become an intricate form of social cooperation, supported by a complex, institutionalized, set of operations, measurements, social norms, and code words specifically designed to accomplish one primary goal: to keep the federal government perpetually short of spending power and, therefore, perpetually constrained in what it can undertake to impose upon our individual freedoms. To acknowledge that the state, in fact, actually creates the money we use—and therefore has no need, for the purpose of spending, to collect it back from us as taxes—would potentially unleash a monster that we fear (with real, historical, justification) might put us in chains. Unfortunately, in a functioning democracy, that monster is ourselves, and what we lose in keeping it encumbered is our ability to undertake an enormous range of cooperative tasks—activities and projects which would not only provide us with huge collective and personal benefits, but would, by the acts of doing them, enable us to employ every able-bodied person (and many disabled persons, as well) in work that is useful, interesting and, most important, payable of a living wage.

But no, we cannot do anything so rational. To protect ourselves against possible enslavement we must carefully perpetuate The Charade. Specifically, to maintain the goal of keeping the state in the position of having to collect our tax dollars in order to have dollars to spend, it is necessary to view the workings of money, itself, in a very specific (and peculiar) way:  Dollars, we must believe, are created by the act of doing something that generates a profit—that is to say, the doing of something that is repaid, in return, with more dollars that were expended in the doing of it. Therefore, if you are to have a dollar to buy something with, you must earn that dollar by working for (or owning) some business venture that earns a profit. There is no other way a dollar can be created for you to earn. (“Non-profit” ventures are a confusing misnomer because they must, in fact, earn enough dollars to meet their expenses. In this sense they differ from a profit-oriented business only in the quantity of dollars they seek to earn.)

The consequence of this charade (in addition to making the collective government beholden to private business for its spending money) is that something which needs to be done, but which doesn’t earn enough profit to repay the dollar cost of doing it, cannot be undertaken—unless money which previously has been earned through a profitable effort is “given” to it (either in the form of taxes or charity). The idea of “direct sovereign spending” to undertake the task is a non-starter because, in order to protect our individual freedoms, it cannot be permitted that dollars are created anywhere but in the private sector through the profit-making actions of business ventures. (The fact that dollars “arise” in the private sector through the direct actions of the Federal Reserve—a collective institution appointed by the federal government—is ambiguously “hidden” by the institutional complexities of the money-creating transactions. In other words, ambiguity aside, it is the SOVEREIGN NATIONAL GOVERNMENT which creates the dollars, as they are needed, to make good the profits of private enterprise.)

The necessity of having to maintain—or at least not spoil—this charade is what prevented Bernie Sanders from actually launching his revolution. How could the federal government pay for all the things Bernie said he wanted to make happen? How could it collect enough taxes? How much would it have to borrow from the private sector economy to undertake his laudable projects for the collective good? More to the point, how could Bernie persuasively tell the American people that, in actual fact, the federal government could just CREATE the dollars as needed—WITHOUT collecting more taxes or borrowing a single penny? And how could he make the case that doing so would NOT have to endanger personal freedoms by unleashing a massive government take-over of society—but that , in fact, the very process could transfer federal power to local communities?

Last October, as Bernie’s presidential campaign was starting to catch on, to amuse myself, I wrote a speech that I thought he might find useful to give. Here are some excerpts:


If I’m a “social democrat” then I have to be able to tell you what a “social democracy” is. Does “social democracy” mean having a huge federal bureaucracy that regulates, manages and controls everything we do? That promulgates reams of stipulations and rules about how we do our business? I believe not. I believe, in fact, that a true and effective social democracy means the exact opposite: a SMALL federal bureaucracy and a LARGE network of local communities that spend federal dollars to build the community services and infrastructure THEY decide they need. Anyone who claims or implies that Bernie Sanders is advocating that America become a socialist state that owns all the industries—and rules, regulates, and employs all the people—has it exactly backwards. I, Bernie Sanders, believe the primary purpose of the state, the strategic mission of the federal government, is to empower the basic units of our social fabric: our households, communities, and local economies. Big businesses and corporations can take care of themselves, and have much to offer and contribute—but it is only by nurturing the health and vigor of the basic units of our society that we can, in fact, create a more perfect union. And this is not a task that big business, pursuing corporate profits, is disposed or interested in undertaking.

Is this position anti-corporate? Am I anti-big business? Only a fool would think or say so. American corporations and businesses which are producing real goods and services—and more power to them—require for their success, above all else, customers with the means to buy those goods and services. And who are those customers? They cannot be any other than the basic units of the social fabric we’ve been talking about: our households, communities, and local economies. This is why we are fooling ourselves if we believe that we, as a sovereign nation, cannot or should not pay our households and communities to undertake the things they need to accomplish. And why should we severely limit that support because politicians and economic pundits tell us there isn’t “enough money”—when, in fact, our Federal Reserve system creates, out of thin air, trillions of dollars every year to make good the profits of our capitalist system? Yes! It’s true! Where do you think the dollars come from when, at the end of every business day, America’s bank accounts are bigger than the day before? Why should we not use that same ability to create money for the “social profits” that will come if we pay our local communities to create the services and infrastructures they need? If we create dollars, at the bat of an eye, to pay for the profits of the car industry, why shouldn’t we create dollars to pay towns and neighborhoods to provide their children with pre-school learning and day-care centers? If we create dollars to pay for the profits of a middle and upper-class house-building industry, why shouldn’t we create dollars to pay local communities to build the affordable housing needed by families still trying to climb the economic ladder? All of these payments—profit-making AND not profit-making— accomplish the same thing: they pay people wages to produce particular goods and services that other people need. Why, then, do we say that one is good and the other bad? One is possible and the other is not? Why do we limit ourselves, as a sovereign democracy, to creating money ONLY for those goods and services that generate a profit?

Maybe it’s not too late for Bernie to make this kind of speech. People are still listening, and Hillary can’t seem to think of any way to get voters interested or excited. If Bernie did, and people started to listen seriously to the message (i.e. “direct sovereign spending” is not only possible, but is actually a rational thing to embrace and plan for) then the kinds of questions raised by MadcapMongoose, I’m certain, will eventually get worked out.

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  1. Dick Burkhart

    A good book on this subject is “Debt or Democracy – Public Money for Sustainability and Social Justice”
    by Mary Mellor (2016) a recently retired activist professor from the UK.. Here’s my Amazon review:

    Title: “A Persuasive Case for Debt-Free Public Money, Not Privatized Bank Money”

    This intriguing book out of the UK traces how capitalists have hijacked the control of public money, using this power to force austerity on the people by extracting trillions of unearned wealth for bankers and speculators. Historically money has gone through three epochs: “traditional, autocratic, and capitalist”. The merchants, then capitalists wrested control of money from the autocratic kings. Mellor’s clarion call is for a fourth epoch: “the socialization of money through democratic control” (p. 191).

    This would be money just spent into existence by government (not dependent on tax collections or treasury bonds) to meet at least the basic needs of the population (called “provisioning”). Then taxes and fees would be levied as needed to prevent inflation by returning this spent money to the government, except that some of the money would be kept in circulation to accommodate economic growth (or more would be returned than spent in a degrowth scenario).

    No private financial institution would be allowed to create money, as they do today when they make a loan. Instead the government would create money to be loaned to banks for specific purposes, according to democratically developed policy. This money could then be combined with investor supplied money to make the kinds of bank loans that are common today (except that democratic policy would likely guide new public money toward sustainable development and prohibit it from being loaned for speculative purposes or for luxuries for the rich).

    Mellor proposes “an independent monetary authority to assess the overall amount of money to be retrieved” by taxes or fees (p.86). But this authority would specify only the level of the budget surplus or deficit (presumably over a period of years), not the composition of the expenditures or taxes. One thing that Mellor does not address is the need for certain expenditures or taxes that would change automatically as the monetary authority adjusts the “pubic circuit” of money according to economic growth, business cycles, etc., in order to avoid paralyzing political battles. She contrasts this public circuit of money with the now dominant “commercial circuit” of money, which would become secondary under her proposal.

    Mellor anticipates that government expenditure of money without debt or fixed budgeted requirements would be used for a guaranteed minimum income for all. The essential meaning of this would be that a unit of currency would be like a share, or equity stake, but in the nation, instead of in a corporation. However, she acknowledges that fixing money would not fix all the ills of capitalism – a more egalitarian ownership structure of society is needed as well (a subject not addressed by this book).

    ….Mellor also has a chapter on the need for a something like a global currency to prevent destabilizing speculative attacks on national currencies when there are floating exchange rates, as advocated by Modern Monetary Theory. Yet this is clearly a difficult subject for her, since a pure global currency would seem to usurp the national power to spend money into existence. Instead she cites Keynes’ “bancor” proposal and other concepts for “buffer currencies” like the IMF “Special Drawing Rights”. The difficulties are already evident even within the Eurozone, as the European Union lacks a mechanism to handle the past financial mismanagement of a country like Greece, leaving only austerity and worsening debt.

    This conversation about money also has a long history in the US, popularized recently by Ellen Brown (“Web of Debt”). Mellor’s discourse in more academic and British in flavor but gives a more in depth appraisal with its many historical citations. It’s long past time to bring this discussion into the political mainstream, so that we’re ready for real financial reform when the next crisis hits.

    1. Skippy

      Ellen Brown should be viewed with a mountain of salt, as well, as Green ™ Economics [neoclassical with brand embellishment] and the Positive Money aka AMI crowd.

      Yes the dramas wrt Bancor have a historical impact due to certain political [ideological] parties flexing their power, but the larger dramas have to do with special interests availing themselves of currant systems capacity to make their dreams come true, and not intrinsic to the system its self.

      Disheveled Marsupial… the currant system is completely capable of redressing all the ills without having to rewire the circuits, positive money just re-positions the authority from a dual system to a singular case without dealing with the fundamental problems of neoclassical or neoliberal agency driving events.

    2. Yves Smith Post author

      I hate sounding mean-spirited, but the “debt free money” construct is bunk. Anyone can issue credit, which is a form of money. It’s long been common for merchants to extend credits to their customers. I had a fishmonger who would bill his customers monthly, as does my dry cleaner. You can’t stop it and it would destroy commerce if the government were to put in place draconian enough punishments to attempt it.

      The worst is that they do take some ideas from MMT and thus succeed in confusing people about MMT and use its growing legitimacy to promote their intellectually incoherent program.

      And I have to second Skippy on Ellen Brown. She means well but she does not understand the Fed or money at all, and her grip on banking operations and regulations isn’t so hot either.

      1. diptherio

        A few yeah-buts over here :-)

        Given that the “debt-free money” crowd has a large following, I do think it’s important that we make attempts at communicating, in a respectful way, what we think they’re missing. Some MMT people (not everyone) tend to take the “they’re all just a bunch of crazies!” approach, which doesn’t help matters any. We largely, if not entirely, share a set of goals, so as a matter of strategy I think we’d do well to try to work together.

        Fortunately, they do share a number of concepts with MMT . I’d say that’s the place to start. In critical conversations, it’s always good to mention something positive first, to reduce natural defensive reactions to having your ideas challenged, and then to only focus on one part of their overall construct that you think is off. Baby steps and goodwill is what I think it comes down to…and keeping our eye on the prize and not getting overly worked up about small differences, when we’d likely all support the same policy proposals in practice (like a directly funded JG).

        1. Skippy


          I get your point, but sadly, I must report from a perspective many years in the making that “debt-free” sorts are akin to libertarian gold bugs and I don’t say that as an emotive slur. The bloody word – Debt – is a key mental anguish point used as a cornerstone in selling its product with the embellishment of – social – money when the Chicago plan was anything but….

          Low level practitioners sadly suffer from low information both from an accurate historical and system architectural reality, as such it is a bit frustrating when pointing out errors because of perspectives and accompanying baggage. High level practitioners on the other hand have a tendency to engage in perfection of rhetorical argument in a vacuum contra to all the information their aware of, this has, in my experience elevated to blatant deception in order to push their agenda.

          I think it boils down to the potential to inform, would one have more luck with a low level member which has not irrevocably driven stakes into the ground vs endless too and fro with high level members that have a bad case of path dependence due to cognitive and emotive investment.

          Yves makes a fundamental point in the whole debate – attempting to return to a quasi gold standard with a central authority controlling quantity of money is intellectually incoherent from both an operational and historical perspective, as well, as the massive trade shock and its inevitable outcomes. You might as well attempt to stop people from having sex. So much of it revolves around antiquarian beliefs about interest rates and behavioral expectations which belong in another century, if not longer, where now we have one foot in the past and one in the present, but the foot in the past is refusing to move.

          Disheveled Marsupial… its as bad as the advent of the OCC derivatives debacle, where ill informed philosophical views did not square with the reality, nor did the ideologues even have an operational knowlage of it, those that did, at the time, were as rare as hens teeth. It was only after catastrophic failure that the mad scramble to broaden the knowlage base was undertaken, hell their just starting to examine the shadow sector and its broader ramifications. But yeah… Debt…

      2. Michael Warhurst

        Debt free money is money which can be spent not only *without interest charge (*which money is never created in any case) but in the case of sovereign governments without having to repay the principal, thereby eliminating the need for government loans, income or other taxes, to fund government expenditures. If inflation becomes a problem no need to increase the rates of interest on personal and commercial loans, the excess money can be simply taxed out of the economy instead of being transferred to corporate and offshore accounts through higher consumer interest rates. At the time consumer and commercial loans are made the interest money is not created. This means we have an economy which eats itself. When governments spend debt and interest free money into the economy this can create money enough in the economy for consumers to feasibly repay both principal and interest. Otherwise it will necessarily be bankruptcy, foreclosure, loss of assets; all of which depress the economy and reverse growth. As I understand it Ellen Brown seems to wants to ditch the Fed and have the Treasury create money for the government to spend into the economy. The Fed needs to be liquidated and its books opened to public scrutiny. Of course putting the exposed criminals in jail would greatly reduce the future incidents of the kind of plutocrat criminality that has characterized the last four or five decades. If Ellen Brown gets every other aspect of the economy wrong …. who cares? Eliminating The Fed will liberate 99% of Americans from the economic death trap which has elaborately been constructed over the last four and a half decades by Wall Street and international corporate criminals.

        1. Skippy

          The Fed is not your problem, its the ideological practitioners that have been running it, that also includes a wide swath of politicians in DC e.g. folding the Fed back into the Treasury does not change that state of affairs anymore than changing political party’s changes their economic advisors, of which, its largely been a linear progression, largely due to ideological funding.

          Ellen Brown unfortunately, well meaning or not, falls under the “The Creature from Jekyll Island” club – where history and aliens collide. Were she to take the time and educate herself on the deeper fundamentals wrt economic schools of thought and their resultant philosophical bents, she might have a more granular perspective to base her thoughts and theory’s on.

          The monetary system in its self has zero agency, not unlike the case with Bancor referenced above thread. It took bargaining power to effect that outcome, as much, as the change in how the Fed has functioned during its entire history.

          Disheveled Marsupial… I understand its much easier to consider fiddling around with money from a soverign perspective, than it is to delve into the deep end of the pond wrt the fundamental agency behind economics. Money is a tool… economics informs on how to used that tool… don’t blame the tool… but the tradesman… eh…

      3. Rodger Malcolm Mitchell

        You are correct. It is functionally impossible for any form of money to be “debt free.” Every form of money, by necessity, is debt, because for money to have any value, it must be backed by (i.e. collateralized by) the full faith and credit of someone or something.

        All debt has collateral, which is what gives the debt value. The dollar has value because its collateral is the full faith and credit of the United States government.

        This is why gold is not, and never has been money (although gold COINS) have been money. Gold is not debt and is not collateralized by anything. It simply is an ore with exchange value.

        Gold coins are (were) money, because the had collateral. Note that the exchange value of gold coins differed from the money value.

        Bottom line: All money is debt, so the notion of “debt-free” money is as logical as “dry water.”

        1. Spydermaster

          “Every form of money is debt”

          Is that really true? I think you mean every form of credit is debt. If you watch Ray Dalio’s “the economic machine” on YouTube, he clarifies the distinction between money and credit quite nicely. Money settles a transaction immediately, it doesn’t create debt. On the other hand defering the settlement of the transaction creates the credit/IOU. “Money” or more accurately “credit” is created out of thin air. And it is extinguished when it is repaid.

      1. Yves Smith Post author

        Ad hominem attack, which is a bad faith form of argumentation and as we point out in our written site policies, gets you troll points. And some types of “alternative medicine” like chiropractic and acupuncture, which were regarded about as dimly as faith healing as of the 1990s are now recognized as useful treatments for inflammation and certain orthopedic issues.

        1. Alex Hanin

          When you write books about curing cancer with quack remedies, you’re probably not a rational, reliable person in any field.

          Chiropractic and acupuncture are based on scientifically obsolete concepts. They *might* have some positive effects for some reason in certain circumstances, that’s about it.

          1. Yves Smith Post author

            You greatly overestimate the underpinnings of orthodox medicine, such as the fixation on cholesterol, which is also based on “scientifically obsolete concepts”. A colleague who is a biomedical engineer who worked with the National Institutes of Health before working for a Big Pharma co you’ve heard of and comes from a family of MDs says that medicine is a medieval art.

    3. Rodger Malcolm Mitchell

      “No private financial institution would be allowed to create money, as they do today when they make a loan.”

      A massive misunderstanding of money. The very act of lending creates money, whether the lending is done by banks or by Aunt Susie.

      That is the fundamental difference between a loan and a gift.

      With a gift, money is transferred from “A” to “B.” The total quantity of money remains the same.

      With a loan, money also is transferred from “A” to “B,” but “A” also retains rights to the money — rights it can sell or use for trade. So after the loan is consummated, two entities have rights to the money and can spend the money.

      Thus, all lending creates money.

      There are two ways money is created, and two ways money is destroyed:

      1. Federal deficit spending
      2. Lending

      1. Federal taxation
      2. Loans being repaid.

      There is no way to lend without creating money.

      1. James Kroeger

        There is no way to lend without creating money.

        Really? If I, as an individual, decide to lend money that I have accumulated to someone I feel I can trust, and she goes out and spends it, how will money be created? I cannot spend the money I have given her, for I no longer possess it.

        Apologies in advance for being so uninformed…

        1. John Zelnicker

          @James Kroeger – It’s a matter of double entry bookkeeping. You have an asset called cash. When you lend it you create an offsetting liability, but you still have an asset, now in the form of an IOU. You can sell the IOU to some one else and regain your money. Now you have your original cash, but so does the borrower. When the borrower repays the money to the holder of the IOU, the liability is extinguished, destroying those dollars, and the IOU is retired leaving the buyer of your IOU with cash.

          Hope this helps.

          1. Spydermaster

            Just to be clear, credit was created and extinguished as part of the loan being issued and repayed. Money was not created via the transaction from the first lender’s sale of the IOU to the second, that is only a transfer of money, not new money. In the end, no new money is created, as all parties have exactly what they started with. The original lender has his money back, the buyer of the IOU has received repayment of the loan and has his money back and the borrow has no money. The deck was shuffled, but the cards end up back in the same place. Double entry book keeping still means that the entries equal zero.

      2. kev4321

        Why do you say “Federal deficit spending”? Is there something special about a deficit? If the money is destroyed by taxation, then government spending, deficit or not, would be the creation side, it seems. Also, could we not say “issued” and “returned” instead of created and destroyed?

        1. Spydermaster

          By federal deficit spending Mitchell is implying that the government is acting with the central bank to “create money”, it’s actually a loan in the form of the federal reserve buying US bonds on the open market. The fed gets the bond (plus interest; which is later paid back to the treasury) and the treasury gets new money. Taxation and spending by themselves are only a transfer of money from the private to the public sector and back, but it is not new money. It is only new money if more money is added to the economy then taken out. For instance if the government spends more money than it takes in in taxes, the additional spending is money created by the central banks loan to the government in the form of the Fed buying US bonds. You could say issued and returned, but it is more accurate to say extinguished. Returned implies the money is still in existence somewhere and that is not the case. A fixed money supply does not exist. It is flexible. That flexibility is what allows the economy to grow. No flexibility means no growth.

    4. Praedor

      Yeah, I’d have to oppose a supranational money supply on the very basis of it destroying sovereign spending authority. You’d end up with some sort of IMF/ECB cabal dictating austerity when it isn’t necessary AND restricting each country’s right to spend money on whatever that democratic society deemed necessary or desireable.

      No cabals. No supranational overlord. Pure, democratic, NATIONAL sovereign currency to be spent as WE see fit, not how some overlord sees fit.

      1. Spydermaster

        Yes, and the reason the EU is a disaster is because it is not effective to have singular monetary policy with diverse fiscal policies across different sovereign nations with such diverse cultures and values (e.g., preferences for leisure vs work which changes levels of productivity and GDP). How can a country control its economy through taxation and spending when it’s money supply is centralized? It can’t. But I would go further. I say decentralize and distribute all the control via the blockchain or another more advanced distributive network system. Think starfish instead of spider. We need to stop centralizing everything as the only means of social organizational structure. The collectivist and egalitarians need to stop centralizing power as their underlying solution set. All social organizational arrangements of people eventually are corrupted. We need distributive systems with lots of checks and balances. The founding fathers had the right idea. We just need to break everything into more pieces to prevent corruption and cronyism.

  2. ewmayer

    I am currently putting together a proposal for a GoFundMe campaign to fund a feasibility study for a major U.S. green-tech infrastructure initiative emphasizing creation of many long-term well-paying domestic jobs. Here the portion of that which discusses MMT – comments welcome:

    Let us begin by dispelling one major myth about such initiatives – the “who will pay for it?” canard. The U.S. and **** are both monetarily sovereign nations – that means that they can conjure up their own fiat (literally Latin for “let there be”, as in the biblical Genesis story, where “let there be light” in Latin is “fiat lux”) currency in any quantity they like, to support whatever national initiatives they choose. The budget of a monetary sovereign is *not* like that of a household budget, which must balance. If I want to buy a new car and lack sufficient savings, I must borrow the difference and pay it back over time. If the U.S. as a nation wants to spend money to do X but there is not sufficient tax revenue in the budget, it can simply print money into existence to cover the shortfall. In technical terms, tax revenues help “sterilize” government spending, but they do not *limit* such spending. There is a burgeoning body of economic work in this area, which goes by the rubric of Modern Monetary Theory (MMT) .

    While there are of course adverse consequences to out-of-control deficit spending, especially when such spending goes to negative things like propping up asset-price bubbles (hello, Wall Street!) and warmongering (hello, Military-Industrial-Surveillance complex!), using such spending to stimulate the domestic economy – especially one mired in a low-to-no-growth mode as the U.S. and much of the developed world have been since the 2008 global financial crisis – in a way which puts money in the hands of “the little people”, i.e. the folks who will spend it back into the real domestic economy rather than the already-much-too-rich and their global yield-chasing financial speculations, is widely seen as a good thing, especially if it can be done in a way which provides lasting economic benefits. The financial-market-captured folks at the U.S. Fed and most of the other major central banks (CBs) are perpetually nattering about “inflation targeting”, but the only place their now-pervasive market interventions has stoked inflation is in the prices of financial assets – that is, making the rich richer – and the cost of things us “little people” cannot do without, such as housing, food, healthcare and education. Any forms of “wage inflation” over the past 3-4 decades have been ruthlessly stamped out by deliberate policy choices of the central bankers and the “economic experts” who are with few exceptions little more than credentialed cheerleaders for the so-called “free markets” (a.k.a. rigged casinos for the looter elite) and the resulting explosion in wealth inequality. What the world needs more than anything these days is a healthy long-term dose in wage inflation for people working in the real productive economy. MMT-style stimulus spending which goes overwhelmingly to that crucial but government-brutalized economic sector is the best way to achieve this, and depression-style megaprojects are a far better way to deploy such spending that spreading money around to “fill in a pothole, tear it up, and fill it in again.” Put spending money resulting from genuine productive work into the pockets of the lower 90% and the resulting boost in spending and the associated tax revenues will allow states and municipalities to fix and maintain their own infrastructure. Think Hoover Dam (but an eco-friendlier version thereof) – its building provided many thousands of good-paying construction jobs, and once completed the electricity it generated helped propel a huge amount of economic growth in the American southwest.

    1. Chris Williams

      Got the gist of it, but this

      In technical terms, tax revenues help “sterilize” government spending, but they do not *limit* such spending.

      not quite. Taxation provides the mechanism by which dollars spent into an economy are destroyed. Don’t think of burning the notes… Also, taxation means that people must acquire a sovereign nation’s currency to pay their taxes, and this is one of the factors that creates demand for people to hold the currency in the first place.

      More and more MMT is becoming something that people have heard of, which is a good thing.

      1. Praedor

        Taxes are also valuable (necessary) to DISCOURAGE socially harmful activities as well as ENCOURAGE beneficial activities.

        I’d like taxes to be used to simply reduce income inequality (yes, taxes with the sole purpose to seize from those with way too much, not even to redistribute, much, but to eliminate that money from circulation), discourage profligate breeding (2 to 2.5 children per family is enough – after we get world population DOWN below about 6 billion or so), discourage buying of polluting vehicles, gas guzzlers, etc, to discourage fossil fuel use, to ENCOURAGE biodiversity, creation of wildlife habitat, discourage McMansions, discourage the rentier economy, etc.

        1. Spydermaster

          I am more in favor of not using taxation as a form of encouragement or discouragement, as you say. I don’t believe the government should be making sweeping judgments about every nook and cranny of our social and economic lives through laws or taxation. If I had to choose, I would rather behavior be encouraged through laws than taxation. However I think, we also need to rethink the use of laws as a means of behavior modification. “Good” people don’t need laws and “bad” people don’t follow them. Instead, “bad” people find ways around the laws, and thus society is left with a less free people with the same problems now intensified by the unintended consequences of the new legislation. I think people also need to stop universalizing their values onto everyone else. Everyone has different values, and if we truly respect the dignity of people, we need to see that we can’t force everyone to live the same exact way. We need to embrace the flexibility to allow everyone to live their own values. It’s not money and capitalism that are the problem, it is corruption and cronyism that are. And they are evident in all systems, organizations, and ideologies. We need to figure out better ways to deal head on with corruption and cronyism and the fascism that leads to tyranny. And I think we need to consider other ways besides taxation and laws to modify behavior. Real education is certainly a start, however that doesn’t mean public education from the state.

    2. Spydermaster

      Money that is created cannot necessarily be created just to spend it. Even if the spending is on well intentioned ends. Please look into investing more so that you understand the difference between assets, liabilities, income and spending. Money flows to assets. Assets produce a return on investment. Liabilities are the opposite (think mortgage or student loan). Expenses are simply an outflow of money. While you are correct that there is a lot of speculation with money by Wall Street, I think it is worth noting that part of the reason why the rich get richer and the poor get poorer is because the rich buy assets. They buy things which grow in value and produce a positive return on their money. Poor people by contrast typically don’t buy assets, they instead incur liabilities/debt and spend money on things, in the form of expenses. Thus they have outflowing cash plus interest.

      It doesn’t take much return to create a lot more money. 10% on $1000 is $100. The same 10% on $10,000,000 is $1,000,000. That’s partly the reason why the reach get richer. They own assets. And assets typically retain their value or appreciate.

      Money can’t just be spent. It needs to be spent on assets that appreciate in value. Spending money on things that do not appreciate in value is malinvestment and this misallocation of resources is a huge problem. It is part of the reason the economy is in such bad shape. People are not properly valuing assets. This is in part due to the Feds manipulation of the money supply and interest rate which affects all assets and loans. This distorts prices up and down. While the free market does not actually seek equilibrium like neoclassic economics indicates, it is a far better determiner of price then a central planning body.

      I think what people don’t understand about class differences is that in a capitalistic market, people are not “supposed to” stayin their station in life. The unemployed are supposed to move into employment, the employed are supposed to move into entrepreneurship, entrepreneurs and business owners are supposed to move into investors. I think we have been miseducated and ill-informed into believing that we are supposed to remain in our allotted station in life. We are supposed to move upwards so that we create more and more value for ourselves and others and in the process become wealthy in all dimensions. Instead, people stay in their station in life and adopt the values of the class they started in and then knowingly or unknowingly perpetuate the values and politics that support their very station in life.

      I would much rather see money being distributed in the form of open competition for people to create/invent solutions to social problems, with the best solution getting the money. These could be pure for profit businesses or social enterprises. Space x is a decent example. The team that built the private space shuttle that worked received the prize money.

      Having the government provide some kind of debt repayment may also be a viable use of money such that individuals could pay down their debt, (keep their house or car, etc) and the bank still gets their loan repaid. I think there are numerous details that would need to be worked out to ensure this was done properly and prudently and didn’t cause other moral hazard issues. Some means of debt restructuring would likely need to occur, as the asset prices likely could not stay at their current level and would need to come down to more appropriate levels.

      Moving the poor into the working class is a bit more difficult. Purely giving money is well intended but I think more innovative ways need to be created where by the money is given for work. And it would be best if that work produced demonstrable return.

      Pure public works projects are well intended, but they are supposed to be occurring already as part of the general day to day functioning of the government. Instead that money has been diverted in countless ways. Roads, bridges and other infrastructure projects have been neglected for years. But I don’t necessarily think they are the best way to spur the economy. They need to be wisely chosen, and in the past the record for TARP spending doesn’t show that it was spent wisely. If these efforts could be turned into social enterprises I think that would be far better. The more that a demonstrable return can be created on the money spent, the better.

      You also must understand that we are in a debt based economy, what drives the growth of the economy is debt. And that debt should be spent on creating productive value, so that it produces value for people and the capital owners. The economy can not run on purely demand side economics where everyone just spends ( the government spends and consumers spend). We actually have to produce goods and services that are of value.

      1. Skippy

        “The unemployed are supposed to move into employment, the employed are supposed to move into entrepreneurship, entrepreneurs and business owners are supposed to move into investors.”

        And what canon might that have been read from – ??????

  3. James McFadden

    “Taxes only payable in dollars” are what makes dollars valuable. You always need to collect taxes to create a demand for dollars. But you need not collect as many dollars in taxes as are spent by the government – as is demonstrated each year. The Fed just supplies the smoke and mirrors to perpetuate the myth that dollars spent by the government will be repaid someday – a someday that will never come, and need not come. But this is only the sideshow for the Fed. The real purpose of the Fed was to enhance banking profits for the bank investors by helping banks charge us interest for money created out of nothing — as opposed to money created by government spending — and to keep this secret hidden behind a smokescreen of economic technobabble. To keep the scam going, they needed to keep the most obvious frauds from bringing down the system – as they did during the Great Depression. So new rules were made to keep the system stable, and the host alive (nod to M. Hudson), so money could be once again sucked from the system. After WWII, the parasites were not killing the host, merely weakening it. But come neoliberalism and deregulation, the sucking got stronger. The host was further weakened by a series of banking frauds – which required bailouts to prevent another depression. And Greenspan came to believe that money creation to bailout his rich friends wasn’t so bad – he discovered the Midas touch. He also decided that asset inflation wasn’t really inflation since it didn’t impact the peasants’ wages which could be suppressed by keeping unemployment high. Wow – he really thought he found the goose that lays the golden eggs — the rich get richer and the poor – well they just work harder. And it worked for a while — drugs really do make you feel good — and QE was the choice drug of bankers. Unfortunately, drug addicts are not very productive – and pretty soon they care about no one — just their next fix. And that is where we are today. And the Fed, the pusher on the corner, just keeps supplying the drugs in ever larger amounts — at least until there is an overdose.

    1. Rodger Malcolm Mitchell

      Taxes are part of it. Interest also creates Demand. In fact, because raising interest rates increases the Demand for dollars (makes them “strong”), that is the method used by the Fed to fight inflation.

      Value = Demand/Supply

  4. Benedict@Large

    Some questions, not for the economists among you, who have an intense aversion to thinking in accounting terms, in spite of the fact that all you essentially do is count money, but for the accountants among you.

    How exactly does the federal government borrow its own IOUs? What fiscal space does it gain by doing so? Since borrowing involves the incurrence of liabilities, what liabilities are incurred when an entity borrows its own IOUs? And finally, what is the difference in incurred liabilities between the federal government’s borrowing its own IOUs and then spending them, and simply creating new IOUs and spending them?

    The point of this little exercise if you’ve been following along is that there’s really no difference (except for interest payments) between the federal government’s borrowing its own IOUs and then spending them, and simply creating new IOUs and spending them. The net change to liabilities (other than interest payments) between the two is the same, and therefore, the amount of new money created in both cases is identical. The interest payments, which are ostensibly incurred because no new money is created, are therefore incurred for no reason, because new money is created, and in an identical amount under both scenarios.

    I’m sure by now if any of you economists have tried to follow along, you are completely baffled. But here’s a suggestion. If you don’t understand the accounting involved in creating new money, do you really belong around the process at all?

      1. James McFadden

        The above IOUs that it borrows are non- interest bearing IOUs — i.e. Money. It borrows non-interest bearing IOUs by selling interest bearing IOU –i.e. Treasuries.

    1. Alex Hanin

      Well there is not much to understand, really. It’s just that if the government borrows (event its own IOUs), you can start scaring people about the public debt and the interests to be paid, even if these things are in fact anecdotal.

    2. Rodger Malcolm Mitchell

      “How exactly does the federal government borrow its own IOUs? What fiscal space does it gain by doing so? Since borrowing involves the incurrence of liabilities, what liabilities are incurred when an entity borrows its own IOUs? And finally, what is the difference in incurred liabilities between the federal government’s borrowing its own IOUs and then spending them, and simply creating new IOUs and spending them?”

      That was an explanation of Monetary Sovereignty

  5. John Zelnicker

    @Benedict@Large – The concept of taxation or borrowing by the federal government to create fiscal space is relevant at the level of full employment. At that point, any spending beyond what is necessary to purchase all goods and services currently produced will create inflation, regardless of who does the spending. In order for the government to continue provisioning itself at this point and providing whatever services we have assigned to it, someone else’s spending power must be limited to avoid inflation. By reducing the spending power of the non-government sector by taxing it or borrowing from it, the fiscal space is created for the government to continue its necessary spending without creating inflation. Along with understanding that the government creates money by the act of paying its bills, we need to remember that it is the spending of that money that can create inflation, not the act of creating it. This is why the level of government deficit or surplus is not something that can be effectively targeted or directly controlled. Too much spending by the non-government sector at full employment will create inflation just as much as government spending will.

    The continuing interest payments incurred by borrowing the already existing dollars in the non-government sector is, at this point, simply a form of welfare for the rich. You are correct that there is no difference in the liabilities created by direct spending or by borrowing, other than interest. In fact, the federal government could pay off all Treasury securities today and the real economy (not Wall Street) would continue on its current path, until and unless the now unborrowed dollars are actually spent into the real economy.

    1. John Zelnicker

      My comment above, which is currently in moderation, was intended as a response to Benedict@Large at September 13, 2016 at 6:54 am and I misplaced it.

  6. Richard H Caldwell

    I would have preferred a set of succinct answers to the six questions; I think I’ve had enough generalizing and philosophizing, important as that is. As an MMT believer I am ready to see MMT leave the “pure science” phase and roll up its metaphorical sleeves to begin to address the detailed engineering of an MMT-based economy. IE, I’m sold on the basic principal (thank you Randy) but not clear on the practical implementation and how technical and political questions and problems should be addressed.

    Perhaps a first step would be to create an engineering manual purely for applying MMT itself, separate from any specific programs and policies that are derivative of or implied by it, such as employer of last resort. Focusing on specific policies and programs at this stage may have a polarizing effect which closes minds that might be otherwise receptive to comprehending MMT itself, even if one may be opposed to some of the policies implied by it.

    As MMT is already counterintuitive to our innate household paradigm of the larger economy, it is important to ease the cognitive dissonance that accompanies letting go of an accepted paradigm in order to create a mental and emotional space where people feel safe to consider how MMT may be seen as true for them. Moralizing about and labeling people’s closely-held beliefs is a sure-fire way to get them to hang on to them more tightly, and concomitantly, to label one as a crank. Since understanding should be our goal, smoothing the path to that state should be our method.

    That and repetition, endless repetition of the basic tenets. How have neoliberal ideas like efficient markets become accepted, even when no close inspection supports this idea? 50+ years of dogmatic repetition. My favorite teacher says “I’m only going to tell you this 1,000 times” — we should follow his method, and not expect instant acceptance of MMT.

    And simplicity and consistency of messaging. I hope you will answer those six questions as if you were a structural engineer designing a bridge who was responding to questions raised by a client. I look forward to learning from your answers.

    1. JEHR

      I, too, would like to hear the answers to the six questions by MadcapMongoose because they seem to be pointing to the future that will be ours when unemployment increases because of technical and robotic inventions. Part of the answer might be a basic income for necessities.

    2. Left in Wisconsin

      Don’t disagree with the desire for explication, but I think it is wrong to assume MMT is out of the question until a significant portion of the population has changed fundamentally how it thinks about money. For the most part, the public doesn’t give a sh1t about the details, or the fundamentals, as long as the program “works.”

      Why couldn’t a willing government, for example, just create a special purpose entity whose role was to buy special 0% T-bills and then distribute the proceeds through some kind of domestic development agency? Not advocating for any set of particulars. Just saying that the way it will happen, if it happens, is that the deed will be done through slight of hand and popular acceptance will be after the fact.

    3. Jim Haygood

      “create an engineering manual purely for applying MMT itself”

      Love it. It’s like creating an operating manual for faster-than-light travel: assume a warp drive (and some space cadets to operate it).

        1. Ptolemy Philopater

          Answer: Quantitative Easing! Re-inflating the value of worthless assets using the Fed’s money creating power. MMT for the .001%, austerity for the rest of us. I thought Jeremy Corbin’s slogan “Quantitative easing for the rest of us” is so apt and explains his hatred by the ruling classes. I’m afraid the assassin’s bullet awaits ole Jeremy if he is ever successfully elected and implements MMT, just as it waited for Huey Long, the last popular politician who advocated for quantitative easing for the people. Does anyone remember who his assassin was? Likewise control fraud on loans as per Bill Black doubles the pleasure for the .001%.

    4. Brian Lindholm

      Aye. The questions by MadcapMongoose were relevant enough to warrant explicit answers. And I’d add a seventh and eighth:

      vii.) Would all direct sovereign ventures (DSVs) be initiated directly by the sovereign government? Or would lower level sub-governments (i.e., state and local) also be able to directly create money for more targeted efforts? After all, the smaller governments often have better knowledge of where the true needs are.

      viii.) And if we’re going to directly create money for purposes of economic growth, should we also make money-creation capabilities available to large corporations, mid-sized businesses, small businesses, and/or individual citizens? Channeling all new money-creation efforts through federal government programs gives the federal government an awful lot of power, and the amount of whiplash we’d see when control of the White House and/or Capital Hill changed hands would be enormous. The process would be less susceptible to political influence if it were more widely distributed.

      1. Spydermaster

        Interesting. I am not sure what the best answer is. I’d like to see more thought around this topic and whether more competition in the money supply space might be a viable alternative to centralized banking. I am in favor of exploring distributive networks like the blockchain to accommodate a more decentralized approach to money. Certainly there would need to be some manner of security and limitation on this extremes entities “good”. I wonder too if regulation helps or hinders things. And I am curious whether it is better to be in the private sector, public sector, or some combination as a check and balance. Certainly more different kinds of money in the private sector would create more competition and innovation.

  7. jfleni

    Make a deal to build a tunnel from Anchorage to Siberia, making our own silk road with the Russians; create all the “platinum pennies” you need to pay for it; fix our wrecked infrastructure; create thousands of good jobs, etc.,etc.

    The alternative: get our nukes ready for China and Russia, watching them do
    the same thing; watch our special, habitual criminals, like Jimbo and his bank continuing to sabotage and swindle the whole country; stand by while really
    SICK politicians complete the destruction, etc., etc.

    Despite the moans from the plutocrats, the choice should be obvious.

  8. jeff

    This seems to be a particular form of the general “sovereign government spending is like household (or business) or even local government spending” fallacy. It isn’t surprising that people don’t recognize it, because the overwhelming number of entities with which we come in contact don’t have the power to print.

    I suspect it is this simple lack of familiarity which causes most of the objection to MMT.

    1. Jeremy Grimm

      I largely agree with your assessment of the role of the “household” fallacy but I believe much more than a lack of familiarity drives objections to Modern Monetary Theory. I have trouble reconciling Modern Monetary Theory with the explanations for the stagflation of the 70’s. My early 70’s Macro Econ 101 and the Economist magazine and Time and US News blamed the stagflation on spending for Johnson’s Great Society and spending on the Vietnam War unsupported by taxes. The story went: we were at or near full employment and the government made its expenditures increasing aggregate demand without offsetting the increase in government demand by a decrease in Industry or Consumer demand. The Keynesian economics of the time didn’t seem to have a problem with what the post calls “direct sovereign spending” or “deficit spending” as the Keynesians called it. I’m not sure how Keynsian theory and Modern Monetary Theory differ and I am surprised at the extent that Modern Monetary Theory wrestles with demonstrating what had been a widely accepted truth not so many years ago. I suspect the devil must be in the details somewhere.

  9. gratefulreader

    As someone who has become educated about MMT through NC (and its links to helpful primers), many thanks for this post. I can attest that even for those of us for whom MMT immediately makes sense (and validates years of head-scratching over the typical platitudes fed to us by conventional economists!), it still requires a good deal of effort to re-route the brain around these deeply entrenched “truisms.” So I can offer the following from my own struggling head: I understand (or think I understand) the way money is “created” now as a sort of direct sovereign spending by proxy (or planned obfuscation) — the Fed induces or incentivizes private banks to make a loan and new “money” appears in the private economy, instantly generating income for a bank that “generously” has loaned it out or used it to speculate. So, from there I can understand that there is no theoretical or logical difference between how things work now and creating money to pay directly for things like infrastructure, jobs, healthcare, education, or to pay directly to citizens, etc. In simple terms, money already isn’t created by “earnings” — or generated by some sort of natural “demand.” The Fed decides at its own discretion to funnel money to the private sphere via private banks. (Ironically, for all the worry that it would cause runaway inflation or economic chaos to hand out money directly to real people, or to pay for actual things — isn’t that what’s already happening by enabling banks to “create” and play with money with the implicit promise that MORE money will be generated to cover all the losses that were obvious (if not structurally inevitable) from the beginning?)

    But the concept of “earning” is hard to shake loose. Perhaps attachment to the idea that money can only be “earned” is a conceptual replacement for the idea that money must be backed by gold or some other store of “real” value — in either case, there seems to be a strong need to view “real” money as money with an inherent store of value. Linking money to “earning” seems to preserve that idea — money-as-substitute-for-commodity (e.g., gold) becomes money-as-fruit-of-productive “real” economic activity. I think that a belief in the necessity of this causal relationship is why it is very difficult to shake the notion that the financial sector (however craven) must somehow have “earned” all its money — because, as the thinking goes, money only exists to the extent it has been earned. Relatedly, people seem to need to think that money comes into existence, derives value, and gets distributed according to natural laws or forces, e.g., the supply and demand of markets — or at least that it can and should be — and but for fallen humanity, would not need to be “manipulated” by the arbitrary whims or self-interest of the State (goes to the fear-of-state rationale suggested in the post). Wrapped up in the platonic ideal of an economy as a force or entity unto itself (and the corollary belief that the State functions only be taking from it or borrowing from elsewhere), at least I think, is the power of the concept of “earning” in individual psyches — a deep-seated American/Western equation of “earning” and one’s personal value or worth (Protestant Work Ethic and the Spirit of Capitalism is alive and well!) and from a moral perspective that “earning” is an appropriate distributional principle (e.g., the visceral aversion to the idea of the government “printing money” to pay for things for people instead of them having to “earn” it).

    I have a question about the relevance/operation of supply and demand (and apologies if this is confused or obvious, but at least you’ll see what you’re dealing with!). It seems inherent to the concept of an economy (or at least our modern economy) that the level of money in circulation must be tied to some dynamic of supply and demand. So it seems one way to think of “earning” is that it functions as the “demand” for generating more money (increasing supply). As it is, it seems that if the financial sector were not permitted to transfer and defer its lending and investing risks ad infinitum (or until a bailout), the current system, in principle, could work according to a logic of supply and demand — demand for loans from the real economy would prompt banks to generate money, prompting new accounts to arise at the reserve (or no?). This may not be ideal policy — but it at least seems to follow a logic of how supply and demand operate. So I guess my question is — does this dynamic that my brain gravitates toward come into play, or is another instance of clinging to misguided economic “truisms”? Is there a necessary or desirable supply/demand circuit between money and activity in the real economy? How does this dynamic play in the type of direct sovereign spending described in the post? Would it be correct to think of direct spending on public goods (or to individual citizens) as money being created to spark activity in the real economy (i.e., supply [of money] spurring demand [for goods and services, i.e., economic activity]) — in other words, the supply/demand circuit I’m envisioning here between the real economy and the level of money in circulation can work either way, economic activity “earns” money, and on the flipside, an increase in money can drive economic activity/earnings, and it’s only a limitation in our thinking (perhaps ingrained prejudice about human nature) that prevents us from seeing the latter as valid or sustainable? Or, does this mischaracterize the dynamic? If this view is generally right — then it seems not even so much a need to convince us that “earning” doesn’t create money, but to convince us that the causal chain can be reversed without adverse consequences. Conceptually, it becomes easy to see (or not, if I’ve F–ed it up!): Direct sovereign spending to provide individual or collective benefits is both direct economic activity (through the goods and services provided) and generative of economic activity by liberating individual resources to be put to use elsewhere. At least logically, there would be no more risk factors of “economic chaos” associated with money-supply–generates-economic-activity than with economic-activity-generates-money-supply. Increased downsides from the former would seem to be a matter of a flawed model or execution and not theoretical necessity. So the resistance then is purely a matter of principle or psychology. Just speaking personally, I think the visceral force is the notion that we don’t “deserve” money that we haven’t earned and that is “given” to us, and that it is just not how the world works — and that therefore, there must be a design flaw.

    1. Jeremy Grimm

      I think your right about the ‘concept of “earning”’ and the ideas of the work ethic. My sister worked at a state agency qualifying people to receive welfare. She empathized with the people coming in but I still had arguments with her about “paying people not to work” — as she put it. Even after I pointed out how little they received and reminded her of the many hoops they had to jump through to get their pittance she often grudged that she had to work to earn only slightly more than the pittance the welfare recipients received.

      She also complained about the large amount of money the state pays to place the homeless into housing — much of it sub-standard. For reasons I don’t comprehend she isn’t able to get as upset about the landlords who gouge outrageous amounts of money from the state to pay for the housing they provide — housing only the homeless would accept.

      There seems to be some peculiar glorification of work in-itself deeply embedded in our culture. So little of the work which remains in our borders is of intrinsic value. Strangely the genuinely valuable and productive work is often poorly paid. Dirty, nasty back-breaking — but necessary work is paid the worst! Even so every discussion of what to do about the unemployed seems to come back to the remedies like those proposed by madcapMongoose: ” … job retraining/education, relocation assistance and at least a partial basic income are well worth considering as adjuncts to direct job creation.” How about early retirement instead? That’s seldom mentioned except by employers hoping to shed older staff at a discount.

      I think the notion you identify that we feel we don’t “deserve” money we haven’t earned is most curious given the extent that so many people overlook the question of “deserving” when applied to remunerations with which our wealthy so richly reward themselves. While I was employed I was well though not richly paid. I would be hard pressed to point to any accomplishment I might point to justify deserving the money I was paid. I suppose I could claim — setting aside questions about the amount — that I earned my money through long hours of boredom, worry about the uncertainty of remaining employed and lack of creating any useful or satisfying product.

      1. Will Richardson

        Which is why Living Wage Job Guarantee is such a good idea. It gives people good jobs to do to earn their living income.

        There are plenty of jobs that need doing but income wealth and spending is maldistributed so it doesn’t reach the parts where it’s most needed.

        JG fixes this missing link on the circuit or plumbing.

        1. Spydermaster

          Gauranteed living wages creates an enormous distortion in labor rates, just like if you price fixed any other good or service in an economy. While not perfect, it would generally be better to let a highly competitive free market set labor rates. Voluntary work and employment is better than coersion from the government. This distortion in labor rates while well intentioned has many unintended consequences such as reduced labor hours, lower employment, more efficient solutions for labor such as robotics and automation being created, outsourcing to other countries where labor rates are lower. Capital will always look to flow towards value (one form of value is lower cost labor).

          If you listen to Steve Keen of debunking economics, he shows that it is the banks that have siphoned the money from the labor class and not so much the capitalists. The capitalists do so only to pay the banks. But the banks also eventually get the capitalists too. They get both the labor sand the capitalists, and that’s why labor rates have been stagnant for the past thirty years.

          Jobs need to produce demonstrable value. They cannot be purely financed through new money without a return on investment. That is malinvestment. At the very least a social enterprise needs to be utilized, if not a for-profit enterprise.

          Also, you will create inflation through pure spending on jobs. The reason why we haven’t seen inflation go crazy is because the banks are not lending the money that the fed has given them through the bailouts and other mortgage backed security buyouts.

  10. Robert Coutinho

    I have, for quite some time now, believed (and still do) that “the powers that be” do, in fact, understand MMT. They keep the knowledge in the “fringe thinking” category to prevent the general populace from insisting one expenditures that they fear would cause hyperinflation.

    A while back, the chairman of the FED (forget which one, sorry) was asked what he would do if the Federal Reserve ran out of money for its QE project. His answer was that they would just go to the computer and put more in.

    1. José

      It was Chairman Bernanke, when he was on “60 minutes“:

      Asked if it’s tax money the Fed is spending, Bernanke said, “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.”

    2. NotoriousJ

      LOL, TPTB don’t fear hyperinflation dear boy. The purpose of maintaining the fiction can be illustrated by puppy training: it’s about establishing and maintaining a hierarchy and vast inequality via artificial scarcity, AKA “resource control”.

  11. Michael Warhurst

    “The only function of economic forecasting is to make astrology look respectable.” – J.K. Galbraith

    “We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.” – Louis D. Brandeis

    “The society that separates its scholars from its warriors will have its thinking done by cowards and its fighting by fools” – Hucydide

    The issuing power of money should be taken from the banks and restored to the people – Thomas Jefferson

    The ‘lend it into the economy’ crowd here is missing a huge problem with private for profit corporations ‘loaning money into existence’ by creating deposits.
    Folks, the interest money is never created!
    That bears repeating…. the interest money is never created!! – so there is never enough money in the economy to pay all the debt plus the interest!
    This means that the economically weakest will inevitably be plagued with bankruptcy and loss of assets at pennies on the dollar to corporate owners, bankers and the wealthy few; which puts on the afterburners for the transfer of wealth from workers to bankers and the impoverishment of the vast majority and vastly increasing the financial burden on governments – as the one tenth of one percent of wealthiest individuals just keeps on SUCKING UP ALL THE MONEY.
    This is the enslavement of the vast majority and the death of democracy and the ascent of the plutocracy – the very precipice which is now confronting us.
    Why should the wealthiest few percent and their flunky bankers and paid off or dumbed down politicians be allowed to bankrupt the vast majority and cripple democratic governments through debt?!? The real problem for the wealthy elites and their owned flunky bankers is that their preferred business form is the ‘corporation’ which is given life by way of government granted corporate charter, which the government can rescind at any time 24/7/52 – thereby instantly ending the corporation’s existence. This gives the democratic governments the grip of death on corporations and allows democratic governments to stop corporations from screwing the vast majority into debt slavery, and actually destroying whole communities and eventually even nations – WHICH IS EXACTLY WHAT THEY AIM TO DO!! This whole conversation has not identified the reason for corporate owners financially crippling democratic governments – democratic governments can end a corporation’s existence and stop the 1% from impoverishing the 90% of actual workers, their families and their communities!!!
    Ellen Brown has a very clear understanding of the danger to democratic governance through the artificial imposition of extreme debt on the vast majority of families and on national governments (the only actor capable of stopping the financial rape of the majority by tiny elites) by tiny elites.
    Tesla said ” there are many who think deeply but precious few who think clearly”. This is obviously the case concerning this discussion and money creation and elites destroying democracy worldwide and instead instituting a world wide elitist fascist government or governments.
    Thinking deeply is simply not enough to suss out what is going on here!!
    Think clearly people!!!!!

    1. Ptolemy Philopater

      There is also the mathematical fact that compound interest is a geometrical progression and grows exponential, (as does the population), but the GDP is linear and limited by resource scarcity etc. Interest payments will eventually consume the entire economy as we see rapidly happening to our own.

        1. Skippy

          Einstein had the same dramas that Soddy had…. they imposed Newtonian optics on it…

          Disheveled Marsupial…. its as bad as the bastardization some are want to use wrt Einsteins “Everything should be made as simple as possible, but not simpler.” – when he was talking about music, same goes for the Uncertainty Principal, the author has publicly asked for a cease and desist order…. don’t mangle your aphorisms…

  12. Jeremy Grimm

    Your oblique approach to addressing the madcapMongoose questions doesn’t seem to approach that “deeper vein” you’re seeking. And sorry but to me your discussion around asserting “direct sovereign spending” is something that is practically and rationally even POSSIBLE” also fall short. I believed in the possibility, practicality, rationality even the criticality of “direct sovereign spending” as of an early 70’s course in Macro Econ 101. I think I get confused by what I perceive as a desire by Modern Monetary Theorists to distinguish Modern Monetary Theory from 1936 Keynesian Macro Economic theory. I can accept that there must be some differences but what are those differences?

    I am also growing in my perception that Modern Monetary Theory popular explanations become overly facile in their efforts to make their concepts more easily understood. Money seems to come out of the air and pay for whatever good things make for a better society — just another something from nothing theory a new form of perpetual motion. Somewhere I lost the understanding that there had to be some under use of capacity — particularly unemployment to enable the positive impact of “direct sovereign spending”. Am I wrong to think that “direct sovereign spending” at a time of full employment might cause a little inflation unless the sovereign taxed Industry and/or Consumption to claim some of their demand? This unused capacity — the unemployed are the something the “direct sovereign spending” — the money from the air — brings back into the economy. So we don’t really get something from nothing and I don’t believe the magic trick suffers by letting us know what both hands are doing. Direct sovereign spending (an acronym or a creating a new word construct is very tempting) solves the problem of targeting the spending to our unemployed as opposed to giving employment and spending power to some foreign outsource.

    The madcapMongoose questions presuppose the concept of “direct sovereign spending” and ask about some of the “how” and especially “why” of the spending. That brings the political back into the discussion of political economy — which I believe is the parent of economics. It also introduces questions about the philosophy of the good life and the responsibility and authority of the state among other questions. I can easily understand and admire your difficulty giving quick answers to questions of these kinds.

    As I recall Stephanie Kelton served as the economics advisor for Bernie Sanders. I remain steadfast in admiration for Sanders and trust the wisdom of his judgment in avoiding discussions of Modern Monetary Theories in association with his campaign and the spending programs he advocated. I can’t think of any politician who hasn’t advocated spending on programs without coming up with revenues to match. Opponents to a specific spending plan argue there must be matching revenues and faux proponents use arguments for spending on A to shut down spending on B. We find plenty of money for our endless wars, money for tax-cuts for the wealthy and money to pump into to Wall Street while we make harsh cuts in social spending — cuts which couldn’t begin to offset the spending. Sanders is wiser to leave proving the value of “direct sovereign spending” to the pudding. Confronting that issue head-on in a campaign at this juncture would be stepping into a minefield.

  13. Jim

    In J.D. Alt’s hypothetical speech on what he considers to be a true and effective social democracy, he argues that what is, in fact, needed is a small federal bureaucracy and a large network of local communities and local economies who are empowered by direct sovereign spending.

    The issue of whether real empowerment can take place in such an apparently decentralized political structure with, presumably, centralized direct sovereign spending is certainly worth pursuing.

    And answering directly each of madcapMongoose’s 7 pointed questions (like what happens when the bioremediation work is completed? Does the Sovereign let the community go under of does it come up with something else to pay the miners turned remediators to do?– hopefully begins to get at issues of potential empowerment and dis-empowerment that need to more directly addressed under a concept of direct sovereign spending.

  14. Norb

    The concepts of MMT are so difficult for working class people to understand simply because they have no experience being on the positive receiving end of a Monetary Sovereign. Cooporation and promise of effective work could be planned and rewarded with guaranteed forms of compensation that improve life prospects. Isn’t that the deal the elite share among themselves every day? It is the foundation for TBTF. The power of the state, and now the power of corporations determines how resources and opportunity shall be distributed throughout the population. Some entity must determine who has access to natural resources and guarantee safety for that use. Corporations have become that dominant force.
    A benevolent power is exercised every minute of every day, however, it is not directed toward working people. It is effected by the elite to protect their own. Every society must decide how to distribute first the bounty of nature at their disposal and secondly the fruits of their collective labors. Its as simple as that. The trust in every society is based on how its members will work together to expand their resource base in a perceived equitable manner. When that trust breaks down, the society stops functioning effectively.

    Those in power will never use monetary tools to relieve the burden of working people. They will not do so because if they do, the whole charade of monetary value will come crashing down. The elite lay claim to the natural world and all its bounty. Nature, provides free, all the resources that are the root of all wealth and life. By owning, laying claim and exercising control over these resources, the elite effectively close off the future prospects for the multitude. They retain access for themselves the free bounty of nature. They use the power of the state to legitimize their personal confiscation of all the worlds wealth.

    No one has been able to counter this notion of “FREE” because the elite know by experience how to exploit the understanding for their own well being and the working poor express bitterness because their experience is that nothing is free in this world- closing their eyes to the bounty of nature and in the process enslaving themselves.

    By cutting ourselves off from nature, and trying to be its master instead of striving to live in harmony within it, we continue to make the same social mistakes that will lead to our demise. The evidence is all around us. The elite, caught up in the euphoria of getting something for nothing through the exploitation of nature, cannot help themselves but drive for more. This madness leads them to seek other ventures related to exploiting what is “FREE”. Exploit the sick. Exploit the law. Exploit the need for a livelihood. Exploit the need for survival.

    Money is only a tool. It can be used for either hope or oppression. It can function in a positive or negative manner. To move forward we need money, labor, and a conception of good works, working in conjunction with one another to achieve designed predictable results. You need all three working together if you are concerned about society as a whole.

    1. Lambert Strether

      > The concepts of MMT are so difficult for working class people to understand simply because they have no experience being on the positive receiving end of a Monetary Sovereign.

      I struggle with the proper metaphor. Government is not like a household, but what IS it like?

      1. Norb

        The cultural problem is how to deal with complexity. Conflicting forces must somehow be kept in balance. Yin/Yang- Two sides of the same coin. Life and Death.The intellectual challenges are many and expand as social complexity increases. Breaking through the complexity to a simpler foundational truth seems to be natures way. Finding balance- equilibrium.

        Government is the super-organism structure that holds human society together and is the connection point of humans to the natural environment. It is not a physical thing, it is like gravity. A force that holds and defines the relationships of people and the natural world.

        We need to stop talking about government as if it is a thing but as a force for directing the future. Trust and common cause are the building blocks.

      2. gratefulreader

        I don’t think the issue is that MMT concepts are so difficult — or that an appropriate metaphor would help them break through, at least right now. I think you have to think of it (metaphor coming!) like presenting a new Origin Story to folks who’ve known nothing but the Bible their whole lives, or offering the proposition that the United States wasn’t formed by a revolution but by some other foundational event or series of events… in other words, MMT goes to core notions about how people understand and interpret the world. That means it has to sink in. The essays and commentary on NC are (IMO!) essential in that regard — explaining and reinforcing MMT principles and implications by applying them as a filter for real world developments.

        One way to know that MMT challenges “facts” and “beliefs” that operate in the way we often think of religion operating (or occupy the space that religious “facts” and “beliefs” occupy) is when you realize that (1) most people have no idea how money actually comes into existence — I didn’t (even if you realize it all can’t literally be “printed” in paper form, there is still a vague notion that it’s “issued” according to the demands or working of “the market”; (2) policy “experts” and leaders who should (and probably do) know better continue to explain the economy in a way that isn’t true and (3) the “household” metaphor continues to be embraced as a factual description of reality, with powerful, implicit moral force — even as everyone knows it is literally false, and that money can be “created”; without noticing, we collectively set aside our knowledge that limitations on spending are fictitious and believe the explanation as inevitably or naturally (if not literally) true. I don’t think you can undo that by replacing the metaphor — or at least not until the underlying assumptions start to be dismantled.

        Speaking personally (as someone without accounting or economic training), the first step is understanding how money “comes into existence,” and, relatedly, understanding how it functions as or through a balance sheet (i.e., corresponding asset and liability entries). A lot of common assumptions start to unravel from here. It’s not that the concept is terribly difficult — it’s that it is fundamental, (here comes another metaphor!), like replacing the foundation of your house. The whole thing comes down …. but it’s not quick or easy. A lot of the beams don’t want to move. So you take your hammer and start knocking through it — that’s what reading NC is like.

        I also have the sense — and I’m not sure if this is true, or if I just haven’t gotten there yet — that there is something inherently “meta” about MMT … meaning that it assumes or repeats certain classical economic assumptions even as it deconstructs them. That’s not a criticism so much as an observation (to the extent it’s even true). The explanatory power of MMT lays bare the artifices and fictions of our current monetary and economic thinking …. but I don’t discern necessarily an alternative framework, a fundamentally different way to understand the dynamics of supply and demand, capital and production, distribution of resources … I think it may seem hard to distinguish MMT from Keynes because the upshot often tends to be the same or very similar (e.g., spend on the demand side), even if the underlying critique is more fundamental. Maybe that’s the point — MMT functions as a mode of critique of hardened or fixed theories of money by breaking them into their structural or functional elements or dynamics (similar to how the critical mode of “deconstruction” functions with respect to truth and language). If there’s truth in this sense, it would add to the explanation of why MMT is difficult to grasp — it is to be used more than it is to be grasped. It is a tool for understanding, as much as it is to be understood itself.

  15. Steven Greenberg

    The issue that needs to be addressed is whether or not there is too much money chasing too few goods. The Fed created trillions of dollars to bail out the banks, so why didn’t that create inflation. It did not create consumer inflation, but it did create asset inflation, particularly in the stock market, With no consumer demand and all the money going to the rich, there was no call for investment in more production. A lot of the money just got socked away in Government Bonds and in secret bank accounts because there was no place else to invest the money. The consumers didn’t get any of the money so they could not cause inflation. The truth is that if there were ever good places to invest, all this hidden money could come rushing into the market. At that point the Fed or the Tax authorities would have to suck it out of the hands in the private sector that could use it to cause inflation.

    If MMT proponents can not address this issue, then the public who does not understand this will remain skeptical.

  16. Oguk

    I am always playing catch-up reading this site (WHICH I LOVE), so this will probably be lost, but two observations:
    1) I always LOVE reading J.D. Alt! Please link his stuff!!
    2) This is a thought-in-progress, so forgive me. It strikes me that one impact of not having an MMT-oriented economics, is that we are culturally oriented to only use “spending” to regulate inflation, when we could be using “taxing” to regulate inflation. It works, but it limits us as a society. All our levers (at least that we think about) are around spending: if inflation happens, we must rein in spending . I think some of the questions around “how would MMT actually work? are real questions that are saying “how do you switch to control inflation with taxation instead of spending?”. Taxation is tricky stuff because it does burden someone. I know, i’m all for taxing away the rich, but to make this real it has to fly publicly. We have automatic countercyclical spending mechanisms, like unemployment insurance. What would a countercyclical taxation mechanism look like? Or do I have this wrong – does the Fed just raise the interest rate and – done?

    1. Robert Coutinho

      In answer to your question, a modest (aka HUGE AND DIFFICULT) proposal

      Congress gets to decide how much it wants to spend. Congress gets to decide how taxes will be apportioned out, with ranges going from zero (no taxes) to all of the money. Congress gets to decide what inflation target they want. Meanwhile, a separate entity (presumably of financial geniuses) will determine how much money needs to be taxed out of existence in order to hit the target.

      For example: for the first 5% of GDP (in taxation) it might all come from taxing people who have income more than $1 million (at a set rate that Congress has approved). The next 25% might be on a schedule (again approved by Congress) that takes the money from people who make $100,000 or more (remember–these are all funny figures, only meant to give an example). After the first 30% of GDP has been taxed out of the system, the next 10 % might start including corporations as well. It goes on and on until the government taxes 100% of everyone’s money. Also, Congress could decide to tax real estate, sales, excessive pubic hair or really anything else they choose. They are the peoples’ representatives. However, wherever the inflation level (again set by Congress; presumably because we peons are okay with it) is set, the independent agency would set the tax levels (based on the priority taxing from Congress).

      This would mean that when inflation is very low, taxes will get lowered. When inflation gets high, more and more tax money will be taken out of the system. It would also determine who gets taxes and when, based on the schedules approved by the legislature. Congress gets to decide (with approval from the president, of course) what economic level we, the people, are willing to accept. Congress can approve any spending project, but they do not get to decide if that project will increase taxes. The independent agency decides that (based on inflation calculations due to extra money being created for the goods and services purchased by the federal government).

      Since the Fed setting interest rates also has significant impact on inflation (at least when inflation is actually going on), the new agency would need to have some sort of coordination with the Federal Reserve. Meanwhile, the fiction that we need to issue bonds to cover expenses would be thrown out with the gold-standard. We would still honor any bonds currently issued, but we would only need to issue new bonds if we wanted to ensure that banks were holding them as cash reserves.

      I hope this helps.

      1. Norb

        Whenever the discussion turns to inflation and taxes, I am left with the feeling that the wool is being pulled over my eyes. The mechanism that has been totally distorted in todays society is the determination of value for the goods and services we all use and need to survive. What is the “Fair” market price for goods and services?

        Corruption, greed, and fraud have been given enough leeway to make any rational assessment impossible. Taxes and inflation cannot be monitored and assessed with any sense of justice because the underlying principles of the system prevent it. How much something costs is rigged to extract the most out of consumers or debtors hides. End of story- that is the capitalist endpoint- use the power of government to ensure and coerce extraction of wealth- in any form available.

        These discussions have such a benign feeling to them- the ho hum- what can you do- throw hands in the air feeling. It is not the deer in the headlights stare before experiencing violent death by impact. It is the realization of being left behind in a desert as the train pulls away, leaving you behind destitute, as the passengers laugh and sneer, yelling sucker out the window as they pull away.

        Inflation is effected more by the desire for profit than by any real human over demand for goods and services. People can live, have lived, very frugally in order to afford the necessities of life. It is unrestrained capitalist forces that distort that frugality that make the current system untenable for most citizens.

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