Monetary Mental Illness

Yves here. To address the core issue J.D. Alt raises, as to why is it so difficult to get people to unlearn their fundamental understanding of how a fiat currency issuer like the US government works, the reasons include:

1. People do not like to admit they were wrong

2. Many people won’t even consider ideas that are not widely endorsed by Recognized Authorities

3. Understanding Modern Monetary Theory if you’ve been conventionally trained, takes some doing. It’s almost like trying to learn to write with your non-dominant hand

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

It is literally painful to watch our political leaders’ efforts to rethink and restructure how we are going levy taxes on ourselves as a collective society. It is like watching a family member struggling with mental illness: the demons being wrestled with are imaginary—yet they have the palpable force somehow of a granite wall. And as the struggle with this palpable monolith unfolds, even we—the clear observers of reality—forget that it is imaginary; when we do remember, the pain becomes excruciating for the simple reason that we know it is completely unnecessary.

Why does our political system choose to believe and struggle with the imaginary constraint that taxes must pay for sovereign spending? How can we explain to ourselves, in the face of this rock-solid demon, that the simple logic of fiat money demonstrates that sovereign spending must occur first, with taxes collected after? How can we reassure our terrified and confused representatives in congress that if our sovereign government collects back fewer dollars than it issues and spends, the difference is not our collective “debt”—it is, in fact, our collective savings? But the demon will not allow us these explanations.

As is the case with every mental illness, the cruelest aspect to observe is how vulnerable our delusion is to being manipulated and taken advantage of by those who are self-serving and greedy. We actually believe the rich fat-cat when he tells us that if we choose to make him richer we, the poor strugglers, will be better off! How, we are told, can the rich fat-cat give us a new job if he is not made richer and fatter? We cannot, after all, give ourselves jobs—can we? Our sovereign government—which we cannot seem to understand represents our collective selves—can (and must) issue and spend fiat-currency. True! But that currency (our demons are whispering) cannot be spent by our collective selves to pay our individual selves wages to accomplish useful things for our families and local communities. The currency, instead (whisper, whisper) must be spent to fatten the fat-cat so that he can pay us wages to accomplish useful things for him. The pain of this logic makes you numb.

Our case is made all the more desperate by the fact that our “therapists”—the economic pundits and budget analyzers—are actively in collusion with the rich fat-cat. We lie down on the couch and are told that we have a deficit. The deficit we have arises from the fact that our sovereign government—which (whisper, whisper) is not really us but, instead, is a conspiring other who wishes nothing more than to confiscate our tax dollars—insists on spending more of those dollars than it can confiscate. So we therefore have a deficit which, even though it is not our fault, we will be forced to somehow make up and repay. Our simple hope that perhaps our tax dollars might provide us with beneficial public goods and services are dashed and trampled by mathematical calculations demonstrating there can never be enough tax dollars to pay for all the public goods we clearly need. Our only hope (whisper, whisper) is to further fatten the fat-cat so he can accomplish everything for us. If we fatten the fat-cat, he will educate us; he will grow our food; he will build our houses; he will cure our aches and pains; he will put gasoline in our fuel tank. All we have to do is give him everything we have: our farmland, our national parks and forests, our wildlife preserves, our streams and estuaries, our mountain tops. All we have to do is give him our air and our water to do with as he needs. All we have to do is make sure he is rich, because only if he is rich can we hope that he’ll give us a job and pay us to do something. We cannot expect him to hire us if he is not rich, can we? No. And we cannot expect him to hire even more of us if we do not make him fatter and richer still. This is all very logical, we are told, as we lie on the couch.

Finally, our prognosis is greatly diminished by the fact that there are influential people—leaders—who know very well that we are delusional, that taxes do not pay for federal spending, that our fiat-money deficit is not a “debt” that we owe to anyone, that fattening the profits of global corporations neither creates meaningful jobs or causes anything useful to be accomplished for our local communities. They know all these things, yet they are required (by what?) to remain silent or, at the very least, dissembling in their objections. They cannot come straight out and say, “Look here, this tax and deficit calculation is sheer nonsense. It is delusional gobbledygook! The sovereign government has to issue and spend its fiat money before it can collect it back in taxes. And that issuing and spending of fiat money is precisely how the sovereign government can pay us to accomplish everything we agree needs to be collectively accomplished.” The fat-cat needs to be put in his place. He just gets one vote, like all the rest of us. He doesn’t get to run the whole show. Unless we let him. Which we surely will as long as we suffer our monetary mental illness.

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  1. Vatch

    I’ll try to explain my problem with the notion that taxes do not pay for federal spending. I know that taxes do not pay for all federal spending, and I know that taxes do not create money. I also know that the government does not need to borrow money to support federal spending In the scenarios that I will describe, I am not taking into account the oddities of fractional reserve banking, and the way that the money supply can be increased by loans that exceed deposits in the banks.

    What follows is an oversimplification.

    1. The government is authorized by Congress to create $1000, so the government’s account in one of the 12 Federal Reserve banks is credited $1000.
    2. The government spends $1000, and its account in the Federal Reserve bank is debited by $1000. The federal government now has $0 available for spending, unless the Congress authorizes an additional deficit.
    3. Private individuals and corporations spend the money that the government spent. A pays B, B pays C, C pays D, etc. Much of this income is taxable.
    4. The government receives $500 in tax payments, and its account is credited by $500.
    5. The government spends $500, and its account is debited by $500. It is back to $0.
    6. Private individuals continue spending money, including the $500 in tax revenues that the government just spent.
    7. The government receives $500 in tax payments, and its account is credited by $500.
    8. The government spends $500, and its account is debited by $500. It is back to $0.
    9. The process continues.

    The first $1000 that the government spends is completely unrelated to taxes. The subsequent spending of $500 (twice) is the result of tax revenues. This subsequent spending of tax revenues will continue. So a large portion of federal government spending depends on taxes. The Congress could authorize the government to spend without taxation, but this is not what is actually happening.

    What have I misunderstood?

    1. aj

      A better way to think of taxes is that when they are collected they just disappear into thin air, similar to how the money was created in the first place. On paper, the gov now shows a balance of $500, but they still need congressional approval to spend it. So in essence you put yourself back at step one. If congress approves $500 in spending again, you just create that money from scratch.

      It might be more helpful to think in terms of money sitting in gov coffers as being “out of circulation.” This is the way several of the MMTers explain it. The gov spends money into circulation and taxes it back out. Since they can can create (and destroy) money at will, it doesn’t really matter how much is in their bank account to the rest of the economy.

      1. Vatch

        Then what’s the point of crediting and debiting the government’s account? Numerous people have included debits and credits of the government’s account in their explanations of MMT to me. If the money just disappears, then it’s not really in the government’s account.

        Congressional appropriations are needed to spend the $500, but there’s no need for a Congressional approval of a new deficit ceiling to spend the $500. Both are needed to spend the initial $1000. The difference between the initial $1000 and the subsequent $500s is that the $500s are the result of tax revenues.

        1. WobblyTelomeres

          They seem to gloss over all the rent seeking middlemen in the whole process. Makes it simpler to grok, I suppose, but ignores the malign beast.

          1. jsn

            As currently configured the system is about making money managers of various sorts rich off the governments seigniorage power. This is a wonderful history of the use of fiat to finance the American Civil War, much of it taken directly from the Congressional Register. The venal arguments by the money men about how the US couldn’t afford to fight the war are identical to the arguments now as to why we can’t afford a decent society in peace.

            1. Wukchumni

              The Civil War started us on the long march to fiat currency, as no Federal banknotes existed previous to the conflict, owing pretty much to the Continental Currency mess in the 1780’s, that so frightened our leadership, but it only took them a lifetime to forget.

              1. jsn

                A centralize monetary system is a powerful tool of centralized control. The free, white property holders who made themselves the first citizen here were loath to offer up that coercive power one another!

          2. some lurker

            They seem to gloss over all the rent seeking middlemen in the whole process. Makes it simpler to grok, I suppose, but ignores the malign beast.

            This doesn’t get nearly enough attention. Labor/wages/taxes are all pretty easy to understand but then you add in rent seeking — and I include telecom monopolies, patents, and all manner of passive/non-“sweat of the brow” income in that — it gets complicated quickly.

        2. Disturbed Voter

          Money can be credit, debit or just a messaging device. We presently operate with debit money, but MMT proposes … it is just a messaging device.

          When messaging, one can be fraudulent or not. With government, you get control fraud. Babylon had messaging money, not credit or debit money. MMT is 4000 years old. Credit or debit money are the innovations, with debit money being very new.

          So Congress can order the government to go do something, and the policy + budget is a two phase commit to doing something as a government. If they approve a policy, but don’t fund it, then they were just fooling around. Similarly, if the executive branch refuses to enforce the law, then they are just fooling around. Really no different than ancient Egypt or ancient Babylon.

          Certain things need to be done. Authority decides what, when and where. And provides the why, who and how. So … you are ordered to build a pyramid or a ziggurat … and you do it, provided for mere practical reasons, your bodily needs are provided for (food and water).

          In Babylon, there were clay chits, for accounting, that specified who could withdraw resources from the granary, when, and how much. That is how people got fed … and to keep them from being bored, they were made to dig ditches for irrigation. Command economy with socialism.

          With society, you get some kind of socialism … the independent person is … deluded. They always depend more or less on public resources. The question remains, how autonomous should we allow different parts of society be? And capitalism really just says, make the power as distributed as possible, and make the decisions based on business not politics.

          1. Wukchumni

            “This note is legal tender for all debts public and private”

            That’s what it says on each and every Federal Reserve banknote.

            But it used to say this in 1950:

            “This note is legal tender for all debts public and private, and is redeemable in lawful money at the United States Treasury or any Federal Reserve Bank”

            Money is strictly a debt instrument, and nothing more now.

            1. Summer

              Any changes to or reform of the monetary system should be preceded by a debt jubilee – internationally.

              1. Scott

                Summer, I believe you to be correct. However same as did Rome operate its banking differently than had become traditional with the 7 & 50 year Jubilee’s, the US & Western world refused unless the money was owed to Nazi’s.
                It is the Industrial Service Banks as Utilities where to Sovernign Wealth fiat Currency
                ought go.
                The neo feudalists & rentiers are to become the Nazi’s?

        3. lyman alpha blob

          The way I like to think of it, the point of collecting tax from an MMT standpoint is essentially for wealth (re)distribution.

          The amount of money in circulation needs to have some correlation to the amount of goods and services being produced in the overall economy, otherwise things get way out of whack. Put too much money in circulation and you get massive inflation which isn’t good.

          As wobbly mentions below, there are also rent seeking middlemen in the process. One example is Facebook which generates billions of dollars in revenue, much of which winds up in the hands of a few top executives and specifically Zuckerberg. I would argue that the amount of rent they have found a way to collect is way out of proportion to the goods and services they provide. Taxing them is a way of saying ‘you took too much money out of circulation and kept it for yourselves, and to square things away, the rest of us (ie the government) are taking it back’.

          1. Pat

            I also think of it as a stick for good behavior, although our corporate whore overlords (owners and their fully paid for elected representatives) have not chosen to use it that way.
            In a sensible society for instance, a corporation doesn’t want to pay taxes. There are only select means of lowering their taxes. They can invest in infrastructure – upgrade their equipment or build factories. They can hire more people at a living wage with real benefits. They can increase health or retirement benefits for at least 90% of their employees (and in a manner that cannot be accessed for cash by the company or any company that might buy them). They can invest in research and development of new products. They can actively benefit the communities they live in (parks, public schools, after school programs, day care, building affordable housing etc). What they do not get any benefit from but are actually taxed more for are buying their own shares, paying their top management more than 200 percent their lowest paid hourly rate employee would make at 40 hours a week/52 weeks a year, and any bonus(es) that are more than the yearly wages for the employee who gets them.

            IOW, use the same stick they use for regular folk – you don’t get the tax ‘credit’ unless…
            But that is probably an even bigger pipe dream than the widespread acceptance of MMT among our corporate whore overlords.

          2. citizendave

            Confiscatory taxation could move some of the wealth being collected by a few wealthy families back into the economy from whence it came. But in a consumer-based economy, increased flow of money at the bottom tiers would surely increase the “burn rate” of extraction and consumption of natural resources. From this point of view, the hoarding of wealth at the top of the pyramid is providing a kind of damper on the burn rate, by denying the flow of liquidity among the unwashed masses.

            If Nature could have a say, there are important matters which need attention, such as health, for the planet and its inhabitants, and gaining scientific knowledge and understanding of the universe in which we live. If we could shift the economy to health and science, the burn rate might decrease. Then Nature might allow us to enjoy prosperity at all levels of the economy, knowing we would no longer carelessly consume the planet while providing crappy jobs for the many, while the few demand payment for the cost of living.

            From the point of view of MMT, a sovereign nation can ignore those who cry out that we cannot afford to do the right thing. We could finance a rapid shift to a new economy. The cost to make a better world? Priceless!

          3. lyman alpha blob

            And I’d add that this idea jives with the idea that according to MMT, taxation is what gives money value.

            Not enough or no taxes and the few become squillionaires. They have so much money in relation to the vast majority of people that the pittance everyone else has is in comparison relatively worthless. The few have so much that even though the value of their money has also decreased, they still have more than enough for themselves.

            1. animalogic

              In a mmt economy, tax – that is the right tax – becomes a means of reducing income/wealth inequity. Such inequity is an “evil” in itself (& a means of creating a multitude of further evils)
              Two types of taxes come to mind:
              An inheritance tax (cutting in sufficiently high up the wealth ladder to reduce the risks of an (informal) heredity aristocracy.
              Second, a small transaction tax – a tax on ALL transactions, especially financial transactions over a determined amount.
              Government needs flexible devices to get money in & out of the economy quickly in response to arising economic issues.

        4. Afrikaan

          The problem, as far as I can see it, is that double-entry bookkeeping is used to keep track of the money of the US Federal Government, when it shouldn’t be.

          The whole point of double-entry bookkeeping is that money cannot just appear or disappear: there has to be an account for it. In MMT, money appears out if thin air when it is created, and disappears when it received as taxes.

          This means that thinking of the currency-issuer’s accounting in terms of double-entry bookkeeping is bound to lead to major confusion.

            1. Afrikaan

              I use double-entry bookkeeping.

              I am not a sovereign government and cannot issue fiat money.

              States, cities, corporations, NGOs etc, cannot create money, and for them it makes sense to use double-entry bookkeeping.

              1. nonsense factory

                This is a very good point. There’s the fundamental difference between central banks printing fiat money and everyone else who has to manage their books.

                What I see being missed here is the reason some countries can print fiat money and others cannot. First, let’s look at how the value of the dollar has been propped up:

                Foreign war spending: In the past 30 years, America has had 13 wars, at a cost of $14.2 trillion dollars, creating huge profits for weapons corporations and their Wall Street shareholders – and also ensuring that the U.S. controls a lot of global resources, such as oil and minerals.

                Wall Steet losses and bailouts: Then in 2008, the financial crisis wiped out $19.2 trillion dollars off the balance sheets – evaporated into thin air, it was just numbers on the books. The ‘recovery program’ – a huge Fed bailout of multi-trillion dollar proportions – all went to Wall Street, via ‘quantitative easing’ – aka ‘printing money out of thin air.’

                But here’s the rub: the only reason we can ‘create the dollars out of thin air’ is that the above expenditures maintain a global military and financial empire. If a country like Argentina or Venezuela tried to print a load of its currency to satisfy its foreign debts (or if a student loan holder did the same), not only would it not be accepted by anyone in the world, it would devalue the currency itself. You couldn’t buy a slice of bread for $100. The reason the U.S. is not in this bind goes by various names, ‘finanical imperialism’ or ‘petrodollar hegemony’, etc.

                It’s no surprise that the architects of global empire use this system to enrich themselves and their cronies, while claiming wealth ‘trickles down’ – this is how empires have always behaved, they never serve the general public interest in the ‘homeland’.

                1. animalogic

                  There’s clearly something in what you say,Nonsense Factory. However, some questions: would US military force alone what enables dollar imperialism ? Isn’t the dollar’s reserve currency status the primary means of enabling consequence free $$ printing ? (Not to suggest the US military is not a vital element in this colossal scam)
                  If Argentina tried MMT would not the quantity & quality of the printing be an important factor in internal/external attitudes ?
                  Could Moran Argentina use a combo of barter, foreign currency & gold to deal with external creditors etc ?

          1. todde

            No, money appears when two entries are made in the Banks general ledger.

            I credit a liability putting the money in the bank account, I debit an asset for the value of the loan.

            When the loan is paid off, the process reverses and the money that was created, is destroyed.

        5. todde

          It is in the governments account, but it is not in circulation.

          The money ‘disappears’ from the private banking sectors balance sheets.

          It is not part of the money supply.

          The government account, along with bank’s reserves, is not part of the money supply.

    2. Mel

      unless the Congress authorizes an additional deficit

      I don’t think “misunderstood” is the word. I think we’re all clear on this. Congress can always do that. The bad joke about the debt limit is that Congress agonizes about the debt in public as a form of “Responsibility Signalling”. To me it’s just as irresponsible to vote in programs as Virtue Signalling, with the fingers crossed behind the backs, and the full intention of saying “Oh! If only we could pay for that! Sorry!” later.

      1. voteforno6

        If they were really that concerned with debt, they could just stop issuing it. Of course, that would be kind of a disaster, but it is at least theoretically possible.

        1. animalogic

          Even easier, they could stop handing out multi-trillion tax breaks to Corps & the wealthy & stop the shameful wars of the last 15 odd years. Restraint in just these two areas would go a long way to wiping the deficit out.

    3. WobblyTelomeres

      But, the money conjuring is not performed by the govt, but via the “open market” through treasury bond offerings. So your step one is a bit more convoluted.

      1a. congress authorizes the executing branch to issue more debt (debt ceiling authorization)
      1b. congress authorizes the executive branch to pay for stuff
      1c. executive branch pays for stuff out of fed account
      1d. out of money? issue bonds.
      1e. treasury auction results in money in fed account

      Randy Wray goes into this process very well in his MMT primer. I gave my copy to one of my sons to read, otherwise you’d be reading it here. :)

      That, and you need to have a declining revenue cycle as not all money gets spent in a taxable way.


      and so forth.

      Is that right?

      1. Vatch

        In my over simplified example, what you say is correct. But I started out by stating that I was not considering the way that bank reserves in fractional reserve banking increase the money supply. Also, when the government pays A, A’s income is taxable. A pays B, and B’s income is taxable. B pays C, and C’s income is taxable. Eventually, there will be far more than the initial $1000 in tax liabilities.

        1. WobblyTelomeres`

          Hmmm. Depends upon how it gets spent, I think. Acceleration factors differ. Military spending has a far smaller acceleration than food stamps, for example.

          I tend to think of it in terms of harmonic decay, where the total (in tax liabilities here) asymptotically approaches an upper bound of, say, 2*original dollars created dependent upon acceleration factor.

          But peoples eyes glaze over when discussing asymptotes. :)

      2. curlydan

        Thanks for adding the parts to #1. But what happens if the government really wants to spend, needs to issue a lot of bonds, but there’s not much demand. Then interest rates on those auctioned bonds spike, right?

        1. WobblyTelomeres

          Took me a bit to understand, but the interest rates are controlled by the Federal Reserve (the FOMC). Higher rates are used to control inflation (see Volcker, Reaganomics). Lower rates help sell treasury bills.

          Easy to see, I suppose, for when the Federal Funds Rate is below the Treasury rate, all the treasury bond offerings get bought. Here’s a chart from wikipedia:

          Translation: Free money for banksters.

          Lately it appears it doesn’t really matter as there is so much cash circulating that everything offered by the US Treasury gets bought right away. Elsewhere, negative yields are being offered and even THAT gets bought up, presumably because of fear. Wild.

    4. paulmeli

      If the government spends the funds, followed by some entity earning income which then accrues taxes…

      Then on the Arrow of Time (see the Wikipedia entry):

      Spending –> Income –> Taxes . As a point of logic the taxes were funded by the spending. Spending is the necessary condition for taxes to accrue. The reverse is not true.

      The order of events determines what causes what.

      This isn’t MMT logic, its cause and effect. Any accounting that takes place after that is just a record of the events that occurred, a picture if you will. Taking a picture of an accident doesn’t cause the accident.

      1. Vatch

        Spending –> Income –> Taxes

        Yes, this is true, but that’s only the beginning of the cycle. This representation is more complete:

        Spending –> Income –> Taxes –> Spending –> Income –> Taxes –> Spending –> Income –> Taxes –> Spending –> Income –> Taxes –> . . . .

        The initial spending does not depend on taxes, but the subsequent spending does depend on taxes. I understand that some of the subsequent spending might not depend on taxes, because the government might authorize a deficit increase. But most of the subsequent spending is tax dependent. Or we could just say that everything depends on the big bang 14 billion years ago. :-)

        1. Adam1

          If “subsequent spending” was dependent on tax revenues than you would find that governments tend to run balanced budgets, but nearly all sovereign governments run deficits. Private citizens have a natural tendency to net save money because the future is always at least somewhat uncertain and we don’t live forever. This savings is a perpetual drain on spending which means it is a perpetual drain on tax revenues where the causation is spending/income delivers taxes. That gap must be made up by some other entities net deficit spending or you end up looking like Greece where everyone’s income continues to decline as savings continually drains more and more spending/income from the economy.

        2. lyman alpha blob

          Maybe the way to think of it is that unlike matter and energy (sorry economists with physics envy), money is not conserved and can be created and destroyed at will. In a fiat system, every year the government creates money and later destroys some of it on tax day. Those taxes don’t fund the next year’s budget at all – the government just creates more new money to replace what was destroyed, plus some more.

          Running a deficit is good because it means the private sector is making money. Running too big of a deficit though knocks the system off kilter and it likely means someone made too much money compared to the goods and services they actually provided, and thus we tax it (or at least we should) to keep gross inequality from running rampant.

        3. paulmeli

          The initial spending does not depend on taxes, but the subsequent spending does depend on taxes.

          How? What happens if tax revenue isn’t collected? As in a recession where tax revenue suddenly contracts. Does that constrain spending? No, spending increases, the deficit rises. Why? why is that spending not tax-dependent?

          Since your assertion fails that test it fails generally.

          Define initial spending. The first $1? That fits your logic just as well as the first $1000.

          Define subsequent spending. Everything after the 1st dollar or the 1st $1000?

          In your scenario once a $ (or some amount) is spent no more spending is necessary… the system becomes self-sustaining. Everything that follows after that is driven by tax revenue which drives all further spending.

          I think not. That looks a lot like perpetual motion to me. Circular reasoning.

          Take away tax revenue…would federal spending decrease? No. Take away federal spending…would tax revenue decrease? Yes.

          It’s obvious what funds what.

          1. Vatch

            How? What happens if tax revenue isn’t collected? As in a recession where tax revenue suddenly contracts. Does that constrain spending?

            Yes, spending is constrained. The government will partially shut down. Eventually (sometimes rather quickly) the Congress will increase the deficit ceiling, but until that happens, spending is definitely constrained. The spending does not occur automatically if tax revenues are inadequate. This week or next week we will have an example of this phenomenon.

          2. Vatch

            See my comment at December 7, 2017 at 10:37 am in reply to Paul Boisvert. I agree that the government creates money.

            In your scenario once a $ (or some amount) is spent no more spending is necessary… the system becomes self-sustaining. Everything that follows after that is driven by tax revenue which drives all further spending.

            My example is a highly simplified model of the real world, and I explained that explicitly. Sometimes the government creates new money while taxation is also funding most federal spending.

    5. paulmeli

      What have I misunderstood?

      Deficits are accounted for in the current budget…the funds have already been appropriated, save unforeseen expense. The budget is an estimate. The funds will therefore be spent irregardless of tax revenue.

      1. Vatch

        No, the funds won’t be spent regardless of tax revenue. In the next few days, there might be a shutdown of many government functions (not all). Many government employees might be furloughed. Why? Because tax revenues are less than planned spending. I believe this has happened twelve times since 1981, but my memory could be faulty.

        1. Mel

          But that’s a political decision. It’s what I’ve called “Responsibility Signalling”. It has nothing to do with essential operations of modern government finance.

          1. Vatch

            It’s what does happen. When an MMT enthusiast says that taxes don’t fund federal spending, that is an incorrect statement. What they should say is that taxes don’t fund all federal spending, and that taxes don’t have to fund any federal spending. But in the world in which we live, taxes do fund the majority of federal spending. As the reader pslebow pointed out in September, the difference between “can” and “does” is crucial. The government can fund itself without taxes, but that is not what does happen.

            1. Jeff W

              When an MMT enthusiast says that taxes don’t fund federal spending, that is an incorrect statement. What they should say is that taxes don’t fund all federal spending, and that taxes don’t have to fund any federal spending.

              Thanks, Vatch, I’m really glad you made this point because any time I read that claim “taxes don’t fund spending” I wonder if I am completely misunderstanding the federal budgetary process. It’s seems entirely possible to me that you can have a fiat money system with an overlay of fiscal constraints imposed by statute that are tied to tax revenues and that’s what we have (unless I am completely wrong). Those are artificial and unnecessary constraints, just like the debt ceiling is an artificial constraint, but they exist, as far as I understand.

            2. Paul Boisvert

              Vatch, in one limited sense you are correct. But the MMT folks are using the word “fund” in a broader sense than you are. If someone asks me “what funded your purchase of a turkey”, I might say, “my bank account did–I used my debit card”.

              But if they say “what funds your Trump-like lavish lifestyle, since you don’t work and seem to have no income”, they are not going to be satisfied with the answer, “my bank account funded it”. Instead, they want to hear the ultimate source from which the funds I spend emanates, no matter how I choose to put them into particular nominal storage forms for temporary convenience.

              If I then tell them “I can make money appear in my hand out of thin air (then deposit it where I choose)”, they will then correctly say “Oh, I see–what funds your lavish lifestyle is your ability to make money out of thin air! I need to work to get income to fund my lifestyle, but you don’t need anything to fund yours except your magic hands! Cool!” That is the intended sense in which MMT makes its arguments about what “funds” what, and you seem to agree that in that sense it is correct–right?

              What they would not say after hearing about your magic money powers is “yeah, yeah, so you can make money appear by magic–who cares; the only thing I want to know is what SPECIFIC checking account or credit card you use to buy each one of those yachts and private jets!” So I suggest that worrying about whether MMT specifies this broader sense of “fund” in any individual argument is not important–it is always the intended context. What’s crucial is that people understand that the Gov’t has magic money hands!

              1. jsn

                Minsky said, “anyone can make money, the trick is getting it accepted.” Credit is a social relationship. Money is the embodiment of credit. States get credit at the point of a gun and we socially give them the power to do so. What MMT is describing is the modern states power to create fiat money simply by requiring that taxes be paid, at the point of a gun when necessary. In having done so they have created a demand for money that only they can make which they then provide by first spending it.

                Money is a social fact and nothing else, if you don’t believe in it and can live outside of society, it has no value. Once in society, to accrue the benefits, such as they may be, of civilization/society, one participates in the social agreement that is money. When you pay your taxes, if you do it in cash, that cash may be recycled, but the cash is just a representation of the social obligation you owe the state which is what the tax is about. The payments now are typically digital entries on a digital ledger and nothing more. Are electronic digits from the state useful to you? Only if they take a form that gives you an asset or a liability, which to say only if they represent money, the social, power relationship.

                When MMT says that taxes don’t fund anything, this is what they are talking about: a sovereign issuer of a fiat currency, a state, creates money whenever it spends and destroys it whenever it collects taxes. The thing the state is interested in is not the electrons in the digital ledger or the paper you carry around, but your social obligation to it. All the Congressional rules and budget structures are after the fact representations of the political stories we tell ourselves about what we imagine is or should be going on in the political economy, but the reality is much much simpler. All the constraints exist, just like money, exactly to the degree we agree they do. The simple facts of MMT are the boiled down power relationship that makes us all accept the states money and what the state can do with money should it choose to.

                1. jsn

                  The first paragraph should have ended,”by first spending it to get people to do what it wants them to do, to exercise its power.”

              2. Vatch

                That is the intended sense in which MMT makes its arguments about what “funds” what, and you seem to agree that in that sense it is correct–right?

                If by funding the federal government, one means that the federal government creates the money that is used for federal government spending, I agree completely. But most federal government spending does not occur until the federal government created money has circulated through the economy and returned to the federal government in the form of taxes.

                1. jsn

                  Where did it come from to be paid in taxes? And where before that? That’s the basic point: the Govt. has to spend it first or it can’t be collected in taxes and if the Govt. collected back all it spent, there’d be no money left.

                  The human reality is messy, but the underlying mathematical logic is very simple.

    6. FreshOH


      When government creates the first $1000. To issue into the system.
      The physical currency needed to issue that $1000 requires the government to
      spend $1350 and as the government is borrowing from a non-government entity
      the borrowed money of $1350 has an attach interest rate and time to repayment.
      A basic P=IRT.
      P = 1350
      I = interest
      R= %
      T= days/months/years/decades

      The straight forward fix to this systemic problem is to have Congress and the Treasury establish a currency without the Federal Reserve.
      Then the government can issue this currency to human citizens via a UBI.
      Eventually the debt to the Federal Reserve will be repaid and the financial system will only be partially straightened out.
      Issues will include inflation, labor, investments, public & private debt and acceptance of the new financial system.

      It won’t solve the “idea of money” or taxes.
      Taxes then would be on all purchases/movements of that capital.
      Investment tax, spending tax, etc.

      The final problem to understand in this scenario is how government programs are financed.
      Does the government issue bonds/treasury notes to the public as an investment into a specific program or part of the total cost of government programs.
      OR does the government just create the money into these programs as needed.

      Cause NASA could really use that kind of funding to put man on mars.

    7. MyLessThanPrimeBeef

      #4 government receives $500 in tax payments.

      Taxation destroys money.

      The government’s account at the Federal Reserve Bank should not be changed?

    8. Jonf

      I suppose the multiplier effect – the extra money- would also be available if the government never collected the taxes?

    9. xeric

      The key thing to recognize is that when the government creates money through spending, the currency or reserves are entered as a liability on its balance sheet. A liability for what? Fundamentally, a promise to accept the monetary instrument as payment for taxes and other obligations. For every financial liability, there is a balancing asset on someone else’s balance sheet. In this case, the private sector. When money is returned to the gov’t through taxation, the asset and liability are simultaneously extinguished.

      An analogous situation occurs when banks lend money. A loan creates deposits that to the bank are liabilities and to the account holder are assets. The deposit is a liability to the bank because it has to convert it to cash on the demand of the account holder. Why does the bank create this liability? Because the person who took out the loan gave the bank a matching liability (e.g., the promissory note for a mortgage). As the principal of the loan is paid off, the deposits that were created by the loan are extinguished.

      I agree it’s not obvious. Eric Tymoigne’s long series of posts on this were a great help in making this clear to me.

    10. Yves Smith Post author

      No, the Federal government pays its bills by telling the Fed to debit its account. Period. All that stuff with Congress is self-imposed political constraints.

      1. Vatch

        And the federal government will stop debiting their account at the Fed this week or next, because of inadequate tax revenue. They will increase the deficit ceiling, and then they will be able to debit their account again. They will only be able to do this for a short period of time unless their account is also credited by the deposit of tax revenues over the coming months.

        1. jsn

          The causality runs the other way in money creation, first Govt. spends, only then can it collect some of what it spent back as taxes.

          The Debt Ceiling law passed by congress doesn’t affect the digital spreadsheets the Fed and Treasury use to create money. It prevents the people by penalty of executive enforcement from using the money creation tool without authorization.

          It’s not that they’re about to run out of the money they create with the ledger, that’s like imagining a scoreboard at a basketball game can run out of points. The Congressional law simply states the you can’t run up the scoreboard beyond a certain point without prior approval, thus proposing to stop the game at that point pending authorization.

          That looks a lot like what actually happens and they try to use that stoppage to default on their prior obligations to public pensions etc.

    11. Nell

      As I understand it the liability and asset columns are made up of the tax and spending values (you seem to have an extra column). So when the tax comes in it reduces the amount in the government spending column and government ‘debt’ is the difference. So paying tax is like paying off a loan. And in the same way a loan works – taking out the loan involves spending money into circulation, paying off the loan takes money out of circulation – government spending puts money into circulation, and taxes take money out of circulation. Also, remember there is more than one account. So in the case of a loan there is the banks’ account – your loan amount is in their asset column, and the money they give to you is in their liability column. It is the opposite in your account – the asset is the loaned amount, and liability is the amount you pay back. The treasury and the central bank have separate accounts and one lends to the other, and visa versa. It took me forever to learn this – perhaps we all need to do a double-entry bookkeeping course? Because this is where the operational logic behind MMT description of our monetary system resides.

    12. Gayle Weber

      I completely agree with your statement:

      …issuing and spending of fiat money is precisely how the sovereign government can pay us to accomplish everything we agree needs to be collectively accomplished.

      Skeptics like myself simply wonder what happens when the mutual agreement is lost and there’s a general loss of confidence in our government-backed economy. With MMT, the government can spend money on any program and subsidize any business sector. I’ve seen two state-of-the-art hospitals built in my smallish town, only to be abandoned after two or three years and left vacant. Meanwhile the town’s infrastructure deteriorates. Easy money will always go to the influential, and MMT creates a lot of easy money. Replacing the business fat-cats with fat-cat politicians won’t fix things.

    13. todde

      “So a large portion of federal government spending depends on taxes. The Congress could authorize the government to spend without taxation, but this is not what is actually happening.

      What have I misunderstood?”

      If Congress can authorize federal spending without taxation as you assert then federal spending does not depend on taxation, but Congressional authorization.

      Which, oddly enough, the ability to collect taxes also depends on.

    14. John Hermann

      What you have misunderstood is that the government’s account with the central bank does not contain money, according to any meaningful definition of the word “money”. It is an operating account, an after-the-fact record of the government’s fiscal operations, and it exists entirely for accounting reasons. The credits in that account are not transferred anywhere when government spends. Unlike banking reserves and bank credit money and currency, these credits are not accessible to anyone operating within the real economy. Any meaningful or useful definition of money recognizes (either explicitly or implicitly) the existence of a marketplace players who have access to that money and use it in transactions. Some orthodox economists have referred to Treasury’s central bank credits as a form of state fiat money, however that designation is an exercise in obfuscation and is entirely unproductive. The term state fiat money (often referred to as base money) is in reality nothing more than the conjunction of banking reserves and currency on issue. These forms of money are created and destroyed as required, during the fiscal operations of government and the monetary operations of the central bank.

  2. Effem

    This is not that hard: because no one trusts governments to take inflation constraints seriously. But they will take budget constraints semi-seriously. In life, you have to make do with what works.

    1. Fibblewocky

      But it’s a completely erroneous fear. If inflation is as unpleasant and damaging to a plurality of a governments citizen’s as we are to assume, then any government who manages to produce such inflation would be chucked out and replaced with a government who will take care to manage inflationary pressures accordingly.

      Governments around the world have pursued crushing austerity policies in the name of debt reduction. They’ve more than shown that they’re prepared to do incredible damage if they think it’s the “right” thing to do. I see no reason to assume they wouldn’t be prepared to do the dirty work to manage inflation as well.

        1. Wukchumni

          As things economic lurched towards hyperinflation in South America in the 1980’s, the powers that be in each country figured out how to stop it in it’s tracks…

          …they renamed all the currencies

          It didn’t work~

          1. DonW

            Disclaimer: I am not an economist. And, I don’t know the situation of every example of South American inflation.

            Most South America examples of high inflation are not sovereign currencies under the MMT definition. In particular where the currency is non-convertible and government debt is only issued in that currency.

            The common denominator in the cases I have checked on seems to be dollar denominated government debt and a trade/current account deficit. So, a country has debt that has to be paid in dollars and net flow of dollars is out of the country via a trade deficit where necessities must be imported and there are not sufficient exports to balance out. Basically, it leaves the country with no way to get the dollars to pay its debt other than capital controls or issuing fiat currency to try to buy dollars on the open market thus depressing the currency. Neoliberal policies tend to make this worse by imposing “free markets”, so local industry gets put out of business by imports making the trade deficits worse. Austerity makes it impossible to help local industries to increase exports. The only solution neoliberals allow is crippling austerity to destroy the economy to the point that wages are as low as possible in the hopes that low labor costs increase exports.

            Venezuela has this issue with dollar denominated debt and the need to import pharmaceuticals for dollars, although they should not because oil export dollars should balance things out. Which is where Venezuela’s corruption problem comes into play.

            The point is that few countries seem to have the potential to have a sovereign currency and fewer actually have a sovereign currency. So, a lot of counter-examples to MMT recommendations for countries with sovereign currencies are actually countries without sovereign currencies for which different recommendations must be applied.

            1. nonsense factory

              Yes, the MMT notion is only applicable to countries which dominate the global system, which can claim to be a ‘global reserve currency.’ That’s enforced via requiring oil sales to be denominated in dollars (among other methods), but ultimately is enforced by military means. Iraqi decisions to switch oil sales from dollars to euros in 2001 played a large role in the US decision to invade, for example.

              1. Nell

                No – the UK has a sovereign currency and is not a ‘global reserve currency’. (although it did use to be). Many countries have their own currency but because policiticans and civil servants do not understand how a fiat currency operates they borrow in other countries currencies, peg their currencies to other countries currencies, or, like EU nations give up their currencies. The EU is now on the list of a major reserve currency – but this doesn’t help European countries as they are essentially like states in the US and have no control over their currency.

    2. Martin Finnucane

      Right – kinda like how those imaginary budgetary constraints “worked” to keep us from recklessly pursuing serial military adventurism worldwide?

      1. Effem

        Not saying it works well, just that it may work better than the alternative. Go ahead and convince government that the budget constraint doesn’t matter and I bet you get lower taxes on the rich AND more wars.

        1. Martin Finnucane

          I bet you get lower taxes on the rich AND more wars.

          Is that irony or sarcasm? Always get those mixed up. Pretty funny in any case, in light of the last 40 some-odd years of budget constraint politics.

        2. EricT

          The government already knows this. GWB and Congress initially kept the Iraq war off the books until Obama came into office and demanded that it be put back and accounted for in the deficit. And GWB lowered taxes on the rich, so you are right about war and tax breaks, its just that regular people don’t have a complete understanding of the system and only know what they are told, “We’re going broke!”, “SS has to be cut because it is unsustainable!”. If the citizens knew it was a conscious choice of the government that people go hungry, or have no employment prospects, or their government pensions are cut, or that post secondary education is too expensive, they would be storming the capital. Instead they die of misery from drugs, alcohol, overwork and suicide.

          1. jrs

            People KNOW it’s a conscious choice even if they think taxes fund spending, because they see the conscious choice to cut taxes for the rich.

    3. Jim Thomson

      Except—what we have now does not work.
      Using unemployment to control inflation is seriously degrading the national welfare.
      Millions of people are impoverished, all in the name of currency stability.
      It is ignorance of the tools that we, as people, have created.
      Put very simply, it does not have to be this way.
      There is an alternative.

      1. Effem

        Any economic historian will tell you inflation constraints are often and quickly tossed by the wayside. History is littered with failed currencies.

        1. jsn

          All human systems fail eventually, in my lifetime several moneys have had problems. Bad government is bad government. That’s a distinct issue from money. Condemning money for the sins of bad government has historically been central to private bankers claim that only they have the “character” to preserve the value of the money.

          I’ve read lots of economic history and if by quickly you mean within several hundred to a thousand years, then yes, inflation constraints do get thrown out. I suggest you try Michael Hudson for your monetary history.

          Private banking “character” is currently burning the world on a fire of interest driven real wealth destruction to “sustain” unsustainable private debts.

  3. Wukchumni

    Trying to make sense of the chimera ruse of how money functions currently, is a role best suited for a mental patient, but please make sure they are heavily sedated.

    1. Susan the other

      Well, I’m a patient mental so I almost qualify – and gold is still a cyclops after all these aeons so why not? A good way to understand money is to begin by accepting the First Law of Money (acc’d to me): Money must be fiat in order to be money; if it is not fiat it is meaningless because its value can only be realized by spending it – hopefully on good and necessary things. I know Prof. Wray thinks money is a store of value but that confuses the issue bec. “store of value” and “medium of exchange” come to an impasse over the weirdness of “inflation”. And the only authority that can fiat money is a sovereign. By contrast, cryptocurrencies cannot incorporate all their users into a borderles sovereignty and thereby give cryptos some intrinsic value – because there is no cooperation between users to accomplish something. It’s all just a blob of isolated obsessive delusional selfishness and thus cryptos are always valued against other currencies. It’s almost the perfect counterfeit operation.

      So money is sovereign fiat only. And it is used to create value every time it is spent. Maybe that’s why balance sheets don’t really even make sense. They never account for real value, only the outstanding fiat which is considered to be debt. In that sense financial time does not move faster than political time at all – political time is way ahead in terms of getting things accomplished, which does take time and prolly should be accounted for in a better way. And blablablah.

  4. Steven

    Let’s start with where we agree:
    1. “the simple logic of fiat money demonstrates that sovereign spending must occur first, with taxes collected after”
    2. (NOT) “Our simple hope that perhaps our tax dollars might provide us with beneficial public goods and services are dashed and trampled by mathematical calculations demonstrating there can never be enough tax dollars to pay for all the public goods we clearly need.”
    3. Lots more NOT’s but this one segues into possible areas of disagreement: “here are influential people—leaders—who know very well that we are delusional, that taxes do not pay for federal spending, that our fiat-money deficit is not a “debt” that we owe to anyone, that fattening the profits of global corporations neither creates meaningful jobs or causes anything useful to be accomplished for our local communities.”
    Let’s call the following questions rather than disagreements:
    1. “our fiat-money deficit is not a “debt” – from the perspective of the community at large by definition ALL fiat money, deficit or not, is a debt. It is a claim on the community’s real wealth, a claim which must sooner or later be redeemable.
    2. “influential people—leaders”, especially the ones who really understand money, probably don’t have to be coerced into remaining silent or dissembling because they are in on the take. For people like Trump and his 0.001% buddies it is all about using the savings of foreign and domestic ‘laboring cattle’ to give themselves tax cuts and other goodies from the government trough – eventually ruining its credit in the process.
    3. perhaps the biggest disagreement is the author seems to equate the fiat money created by government spending with the whole national money supply. Pretty much every Naked Capitalism reader knows this isn’t the case.
    The bottom line here is that a nation (like the United States) can’t create money without creating wealth (like China and other developing nations) for that money to purchase.

    1. jsn

      “The bottom line here is that a nation (like the United States) can’t create money without creating wealth (like China and other developing nations) for that money to purchase.”

      Much of your comment is about semantic usage, I agree with you and Alt as you are using the same words to mean different things, but the last claim I can’t seem to bend words to fit. For the last decade the US has been creating money hand over fist through QE and stuffing it onto the balance sheets of people who already have way to much without creating any meaningful new real wealth at all.

      A strong environmental argument can be made that the last decade has destroyed more real wealth than its created.

      At the same time, there’s been massive inflation for those things the already too rich want more of and the assets that underly those assorted bubbles are in fact being created but its hard to see them as anything but mal-investment: there is no way future income will support current valuations for stocks, bonds, real estate etc.

      1. Steven

        Much of your comment is about semantic usage,

        It is pretty much all about semantics. Have you read Michael Hudson’s J IS FOR JUNK ECONOMICS: A Guide To Reality In An Age Of Deception

        the last claim I can’t seem to bend words to fit.

        Probably because you are unable to prostitute the meaning of language like a good establishment economist. U.S. Treasury debt isn’t ‘wealth’, it’s, uh, DEBT. And we are at one with much of that ‘wealth’ China has been creating, all the while running up an even larger environmental DEBT. But I’ll bet I can Trump (so to speak) your argument by simply pointing to the unarguable destruction of two world wars in the last century.

        1. jsn

          Words have multiple legitimate meanings. In my experience, many misunderstandings between people who would mostly agree have to do with using the same words differently and assuming agreement on meanings.

          I’ve read all I can find of Hudson, so I suspect you and I agree on much, but from embedded assumptions in this thread, probably both mine and yours, I’m having trouble parsing your meaning.

          A debt a society owes itself is just real wealth waiting to be redeemed, savings.

          1. Steven

            A debt a society owes itself is just real wealth waiting to be redeemed, savings.

            Not if it is “a debt that can’t be repaid (and) won’t be.” And that’s what all the money the U.S. Fed and other Western central banks have been creating is – debts they have no intention of repaying “…dollar credit of depreciating international value in payment for local assets.” Hudson doesn’t say it but the West’s 1% and their wholly owned politicians are practising monetary imperialism against its own people (AKA ‘savers’, Social Security tax payers, etc).

            1. jsn

              Conflating private debt and the debt embodied by the US federal deficit confuses your argument for me. Every dollar the US spends is its liability while it remains in circulation, it is the asset of whoever holds it at the moment. Within the dollar denominated global trading system, that dollar will entitle its holder to a dollars worth of whatever is available. It is only a “debt” for the US government in the sense that it is accounted for on the liability side of the ledger: the US owes no one anything for that dollar other than an economic system in which to spend it.

              There is a finite world of real wealth and a more or less defined portion of it is within the dollar denominated portion of the world economy, this is what Hudson was talking about in your link, how the US uses the power of money to colonize more and more of the worlds real wealth. To the extent the US economic sphere expands or contracts, there is more or less real stuff available to purchase with that dollar. As the real wealth contained in the system expands or declines, so does the value of each outstanding dollar.

              That dollar liability for the US disappears when it collects that dollar back in taxes. The real wealth remains the same. The treasury bills people buy and trade, like cash, will always be salable for cash dollars able to purchase whatever is available for purchase so long as the US Treasury functions. The US can’t run out of the stuff.

              Separately, Hudson’s debts that cannot be repaid are the layers upon layers of private debts built up over the basic monetary edifice described above. There is no constellation of human and fixed capital production efficient enough to produce enough real wealth to support the required cash flows of these multiple layers of private debt. A very different beast from what we call the National Debt which, while it can be inflated away to lesser values, can always be paid so long as the political structure that creates it continues to function.

              Seems to me that last line is the nub of the problem, it’s functioning less well by the day.

              1. BadTrader

                The problem with the path of functioning less well is the grab for power becomes more extreme which makes things function even less well.

              2. Steven

                Within the dollar denominated global trading system, that dollar will entitle its holder to a dollars worth of whatever is available. It is only a “debt” for the US government in the sense that it is accounted for on the liability side of the ledger: the US owes no one anything for that dollar other than an economic system in which to spend it.

                I interpret Hudson’s monetary imperialism a little differently than you. That “dollars worth of whatever is available” was not produced by the United States so its government has no right to entitle anyone to it by simply ‘printing money’. And it really doesn’t matter whether that dollar was produced by deficit spending or the country’s banks. The way the international monetary system works public and private debt are conflated anyway when foreign central banks ‘recycle’ all the dollars they receive into US Treasury debt.

                1. jsn

                  We’re not disagreeing here: Hudson’s monetary imperialism is about how the US uses access to the dollar clearing mechanisms at the Fed to engage all of our trading partners into imperial arrangements that benefit certain constituencies here at the expense of populations, resources and the environment abroad.

                  Whether it is fair or just or criminally insane, a dollar will command a dollars worth of whatever can be purchased with a dollar, anywhere: where that happens, by whatever mechanism legal or illegal, defines the frontier of the US monetary Empire.

  5. Tyler

    In a recent Twitter interaction, I asked Bruce Bartlett, “Are you really suggesting that the federal government, the creator of dollars, can run out of dollars?”

    He didn’t reply. I suspect it’s because he realized how stupid it would sound to say yes.

    1. Wisdom Seeker

      “Are you really suggesting that the federal government, the creator of dollars, can run out of dollars?”

      The answer to that question really is YES, however. The U.S. government CAN run out of dollars. When people refuse to accept endlessly-devalued dollars as currency any longer, the dollar has no value and it won’t matter how many buttons on the computer the Feds push, their dollars won’t be of any use. Okay, so maybe they don’t run out of “dollars” but they do run out of purchasing power, which is the true intent of the question.

      One way to see this is to consider the alternative example: If the government can print as much money as it wants, why can’t it buy anything it wants, whenever it wants? The Spanish learned the hard way that owning all the gold and silver of the Americas didn’t make them any wealthier. Sure, they spent all the gold, and imported all kinds of stuff, but that made them poorer in the long run because the inflation priced away prosperity, and the spending wasn’t on productive capability (“investment”), but mere consumption.

      Similarly, the Continental Congress had a fiat printing press, but they did run out of money. The American Revolution wasn’t won with Continental Congress’ fiat promises, it was won with donated gold and goods that actually kept the army on the battlefield.

      1. Wukchumni

        For what it’s worth dept:

        The Confederate States never ran out of money that they were printing up until Appomattox, just credibility.

      2. cnchal

        The federal government can buy pretty well anything it want’s. Sometimes it doesn’t buy and takes instead.

        Printing money isn’t the same as a gold based economy, so I view the Spanish example cited as a cautionary tale.

        1. Steven

          It really isn’t “printing money”. It is ‘borrowing’ (with no real intention or ability to repay) it. Most of the money US bankers, politicians and consumers send abroad ends up as US Treasury debt on the books of foreign central banks.

  6. mistah charley, ph.d.

    It’s almost like trying to learn to write with your non-dominant hand

    i did that in fifth grade at the friendly urging of mrs adams – she never punished me for using my left hand, but seemed to think there would be some advantage in behaving like most people – i could do it some, but it was slower and harder, and after a while i yielded to my own sinister tendencies

    i think MMT is hard to understand because contradicts one’s experience – money is something that has objective existence, is scarce, is obtained from someone else – shifting perspective to the actual creation of money (as opposed to making coins or printing currency) is too big a leap for most – what do you mean money is an idea, a social agreement, the sum of collective behavior? that’s crazy talk

    1. Nell

      Very good point. For your average person money has tangible stored value. When my boss pays my salary, I have money to spend on food and a roof over my head. If I don’t work hard, and my boss cuts my pay, I have less money, and thus less food and have to move to cheaper accommodation. Because this is my experience, it is easy for me to believe that the government suffers the same constraints. Hence the power of the ‘household budget’ analogy. For us, users of currency, money comes from somewhere and is tangible. Imagining that there is a societal entity that can create money simply by spending it is hard to grasp. But once you do grasp it and you follow the ‘money’ as laid out by JD Alt in is diagram of dollars post (and booklet) the logic and power of our monetary system becomes much clearer.

  7. Bill Carson

    I know this is somewhat off-topic, but can someone please explain to me how the government’s target of 2% inflation is not stealing? (I’ve oversimplified the question for the purpose of simplicity, but I think you understand what I am getting at.)

      1. Bill Carson

        I would agree, if “stability” means an inflation rate of ZERO, but that’s not what we have.

      2. jsn

        I believe that statement is context dependent: by the time creditors have everything, it might be useful to steal from them, no?

        For society to be sustainable, equitable distribution of resources must ultimately prevail. I favor wealth as an incentive for pro-social behavior, but when the wealth incentive becomes anti-social, for society to sustain itself, the distributional mechanisms need to be adjusted. If you don’t want to manage inflation pro-socially, you’ll need to engineer a different distributional tool to solve the same macro problem: people aren’t necessarily born rich, but require resources anyhow.

        This is the central problem of the Euro zone at present, a hard money, low inflation model without any other distributional mechanism will, like Ouroboros, consume itself.

        1. Vatch

          I believe that statement is context dependent: by the time creditors have everything, it might be useful to steal from them, no?

          Yes, you are certainly correct. Resources are not fairly distributed, so much needs to be done to rectify this. But the definition of “creditor” is more than just a banker. In a sense, it refers to anyone who owns dollars. So a lot of people who haven’t loaned anything to anyone are actually creditors, and can be hurt by inflation.

          Instead of inflation, I would prefer that we implement a fair minimum wage and higher taxation of high incomes.

          1. jsn

            I agree with everything you’ve said here.

            Well managed, low level inflation has been a very effective tool to address the problem of “sticky wages”. Which is that over our working lives we all develop our own unique set of contract and interest obligations and these obligations prevent us from being able to take downward wage adjustments, contractually. Modest inflation allows time to take the sting out of these relationships, it is a way of discounting past obligations which is in the present context exactly what you object to, if I’m reading you right.

            In an effective interest rate, inflation management system, the interest rates for premium bonds is always greater than inflation. It is the epic miss-management of employment and wage policy that has left us with near 0 interest rates, well below the actual inflation experienced independent of CPI by real humans, as if we don’t have to pay for food, housing, education and all the other discounts in official CPI estimates.

          2. rps

            Resources are not fairly distributed

            Its a feature not a bug. Restriction of resources is the primary goal of our hereditary class who’ve groomed our [s]elected politicians accordingly.

    1. Mel

      There is a feeling, which is not obviously false, that if people have too much money, they will be easier about spending it, thereby keeping commerce rolling along. If people generally fear deflation enough to start hoarding their money against the risk of running out someday, they can shut commerce down and bring on the deflation they’re afraid of.

  8. Darius

    Also, I understand the purpose of money is to make people pay taxes to tie them to the capitalist economy. Another purpose of taxes is to control inflation. Excessive inflation being the principal problem when expenditures exceed taxes too much for too long.

    1. Bill Carson

      I’m pretty sure our debt is bigger than ever, yet the inflation rate is relatively low and stable.

      1. Vatch

        Inflation is relatively low, but it’s not stable. And inflation is typically understated by official figures. People here often refer to “crapification”, which is in effect a type of inflation. When quality drops, and the price remains stable, then the effective price has really gone up. I recently replaced a microwave oven that was more than 20 years old. I don’t think I’ll be able to do that with my new microwave — I’ll be lucky if it lasts more than 5 years.

        1. Bill Carson

          I’m not discussing crapification or the fact that a one-pound can of coffee is only 11 ounces. (or whatever).

          I’m talking about the official Fed target of 2% inflation. Government policies, not corporations trying to enhance earnings at the expense of consumers.

          1. JBird

            Crapification is a form of inflation. The stuff I can buy today is not as good as the stuff of even ten years ago, but the prices often remains the same, or decrease at a rate slower than the degradation of quality. It like the Roman Empire’s slow crapification of its stuff. You can kind of peg when something was made by good, or poor, its quality is. There comes a level of crappiness where you can not buy what you use to anymore, unless, maybe you are very wealthy. The ancient world lost its ability to make something like the Antikythera Mechanism long before Rome fell.

            1. WobblyTelomeres

              Crapification is a form of inflation.

              Wasn’t that Greenspan’s solution to inflation? If, because of inflation in the price of steak, someone eats cat food instead of steak, then there was no inflation as they “substituted” cat food for steak.

              1. Wukchumni

                When I was a kid the material used to produce Levi’s 501 jeans was quite thick and in our family, my mom made us take a bath with them on after purchase, to get the pants to form fit to our legs…

                …was in the mall last week and now the material used to produce 501’s is closer to handi-wipes

                1. JBird

                  Jeans use to last forever. Buy the pants and use them for years doing anything. Now, not so much. You just have to buy again in a year if you do heavy work. They are now much like what cord pants use to be.

                2. BadTrader

                  Can any model account for the breakthroughs that occur from too many $s sloshing around. For instance Level 3 communications layed way too much fiber during the dot bomb bubble which accelerated Google and info sharing which accelerated or led to Crispr and other biotech which will create new products the Rich fat cats will pay thousands for like stem cell and longevity solutions which eventually will trickle down to that kid raised in poverty with numerous vitamin deficiencies.

                  I know a lot of developments would happen on the same timeline but anything that accelerates the timeline without causing too much instability isn’t the worst thing to happen. Creating disincentives for smart people to not create or an environment that doesn’t nurture their abilities is far more important than any econ model can account for.

      2. Darius

        I was speaking generically. If anything, the past 10 years are an argument for a crash spending program.

  9. rc

    It all really comes down to force. You have to be willing to admit that the kleptocracy will ever let MMT theory into a policy implementation that benefits the broad citizenry. There is too much power and wealth at risk from doing so. Controlling who gets the money first (healthcare complex, defense contractors…) and charging a vig (primary dealers and large banks) to the taxpayers is quite rewarding to the kleptocrats. Tax, financial and regulatory systems are designed to be massive barriers of entry to talented and hardworking citizens.

    If people do wake up to its validity, the government will use force against MMT advocates. There is a reason the Fed retains so many economists on its payroll and why there is a one party system or wars against those who drop the dollar for trade. They can never be allowed to truly question the legitimacy of the system. Anyone who still believes they live or have ever lived in a constitutional republic is deluding themselves. Our rulers are just as despotic as the Roman ruling class.

    1. Wukchumni

      I’ve mentioned before the first instance of currency going through hyperinflation, namely the previously 95% pure silver denarius of ancient Rome, that through high technology was replaced by a silver-washed copper coin.

      Previously it was 25 silver denarii equaling 1 gold aureus, but everybody knew what was going on, and eventually it went to nearly 3,000 denaii equaling 1 aureus.

      Amazingly, the empire kept going for a couple of centuries afterwards.

      The same thing happened here in 1965, for what it’s worth~

      1. Wisdom Seeker


        The same thing happened here in 1965, for what it’s worth~

        Yes, and yet somehow the econ profession didn’t clue in that there had been a fundamental change in the nature of money. Even Nobel winners like Krugman didn’t appreciate until very recently that banks don’t lend from reserves, (just as governments don’t exactly spend from tax revenue), they both literally create money as they are willing and able.

      1. Wukchumni

        The Romans could only dream of double entry bookkeeping, or the potential of so many layers of obfuscation that it rivaled Mr Everest in height.

        1. HotFlash

          To be fair, they were hampered by those dammy dammy Roman numerals. Ever try to calculate percents with those things?

          1. Wukchumni

            You’ve no doubt heard of al’ Gebra, the trrrrrssss group including numbers of Arabic, they have zero credibility.

            1. Vatch

              Arabic numerals originated in India. The Europeans learned them from the Arabs, so they called them “Arabic” numerals.

              1. Wukchumni

                Indians originated here, it’s a profoundly mixed up world, but I wouldn’t have it any other way.

    2. JEHR

      MMT just describes how money really works (federally) without the mumbo-jumbo of “debt ceilings,”paying interest on the debt,” “balanced budgets,” “debt burden,” etc. What I would like to see is the re-writing in MMT terms of this article which purports to explain federal revenues and debt, etc. By comparing the two, a person could see how the language is misused to hoodwink the public into believing that there is not enough money to provide the nice things of life like universal health care.

      1. jsn

        It’s easy, whenever you read “national debt” just substitute “balance of private savings”, it changes the meaning of everything: no debt, no savings.

        Everything that sounds bad when you are talking debt sounds good when you talk savings.

    3. rps

      Agreed. “How to unlearn their fundamental understanding of how a fiat currency issuer like the US Government works” is to unravel the master plan of the highly-effective cattle in the chute conveyor belt. The government’s primary directive is to maintain the status quo of resource restriction for the Restivus. Redistribution of resources via government embracing MMT- i.e., sharing is the ultimate nightmare of the hereditary class

  10. JBird

    Whatever economic world view you are using to explain how it works, all the wealth today goes to a very few people, and this causes economic problems for most, and social unrest for everyone eventually. Even if trickle down economics worked, and it doesn’t, even under that theory, there would be a point we’re there would be a point were the lack of money in circulation would cause a crisis.

    Almost everyone agrees that the current wealth, and income disparity, is unhealthy and cannot continue, but too many economists, politicians, and pundits, want to continue with the same economic doctrines of the last forty years that has caused this mess. A “Beatings will continue until morale improves” policy. Which is insane. However, I do not think insanity is the problem. Perhaps it is not that too many don’t understand MMT, and there are plenty of people who honestly don’t, but that too many want to keep serving their patrons for a ride on their money train. For the them, in the short term, greed is good.

  11. Jean

    May I add #4?

    Most non-financial industry people are intimidated by math above the arithmetic level and they do not understand things like fractions times interest rate spreads, tails, calculus etc.

    To top it off, most people will not admit that they don’t understand such things or they will just dismiss the entire subject.

    One can always imagine someone smarter than you in a specific subject but it is impossible to put your mind in the place of someone who does not know what you do.

    1. HotFlash

      Well, maybe so, but the concepts involved do not require much math, let alone calculus. I would submit that saying to people, “Well, you just don’t understand calculus,” is a way of getting them to not believe their lying eyes. You know, as in, you can’t possibly understand God’s Plan for You unless you are a trained and ordained whatnot (FD, I am basically an atheist).

      Appeal to lived experience: Fiat money is a bunch of IOU’s from the government, *without interest* which they pay out for goods and services related to ‘governing’**. To soldiers, nurses, school teachers, road-builders, congresscritters, park rangers, whatever. That ‘money’ then rolls along to grocers, landlords, banks and other creditors, hairdressers, shoemakers, babysitters, etc, etc. When the govt eventually gets the ‘money’ back, whether taxes, fines, fees or services performed, they just tear up the IOU(s) — debt extinguished. Easy to understand.

      ** Note: services that the govt pays for are, or should be, the ones that the taxed want. I tell Libertarians, “Well, the govt i just a big buying club, so we can get stuff we want and need cheaper and better.” Another lived example that I find works well is, “Whaddya mean, ‘private enterprise can do it better’? You want your life run by *Rogers????*” (USians, substitute ‘*Comcast?????*’.) Generally gives pause for thought…

  12. joe defiant

    “MMT’s fundamental flaw is its assumption that the capitalist economy is geared to meeting paying needs – that, as Warren Mosler, the founder of MMT, has put it, ‘capitalism runs on sales’. Capitalism does of course need sales but profitable ones. It is not simply a system of production for sale, but of production for sale with a view to profit. It runs on profits and is driven by investment for profit, not people’s consumption nor government spending.

    This is something governments have to recognise and, on pain of provoking an economic downturn, give priority to profits and conditions for profit-making. It’s why governments have to dance to capitalism’s tune. No government can make capitalism work for the benefit of all. The ending of any link with gold has not given governments any more control over the economy than they had before. Pouring newly-minted money onto one side of the scales is not a magic way to balance the books, no matter what the MMT gurus say, and governments will resort to it at their peril.”

    1. lyman alpha blob

      The problem with that article is that it assumes MMT would be used to prop up a capitalist system.

      I see no reason why that would be the case. One way to look at MMT is that it isn’t really just a theory, but that it describes the way money already works, whether anyone wants to admit it or not. And as such, money is simply a tool we can use to produce the results that we as a society want. MMT describes how money works, which is something even socialists use, and not just capitalism.

      1. joe defiant

        But the reason money works that way is because we live in a capitalist society. In a non-capitalist society money would not work this way.

        Why would it not prop up a capitalist system if it is implemented under that capitalist system? How would implementing MMT remove capitalism?

        I would argue it assumes that MMT needs a powerful central government and for that reason opposes it.

        1. lyman alpha blob

          Implementing MMT won’t remove capitalism because it’s already here and we still have capitalism in some form. But the system in the US, despite the conventional wisdom of the free marketeers, is far from pure capitalism. How many billions does Uncle Sugar hand out in subsidies to the corn industry every year? To the oil industry, etc? Billions in government largesse turned to profit for private companies is hardly free market capitalism.

          So if these industries can’t turn a profit without subsidies, why require that they turn a profit at all? Some people (like me) would argue that industries that provide necessities people need to survive such as food and energy shouldn’t be run for profit at all. And since they really aren’t profitable already, why not nationalize them?

          To your last point regarding a powerful central government, that’s sort of a separate issue, but if we want a civil society and not some libertarian dystopia, we’re going to need a fairly strong government. But as the article reminds us, the government is us, for all the good and bad that implies. Clearly human nature doesn’t always act for the greater good, but fixing that gets more into philosophy than economics so I’ll leave it at that for now.

          1. cnchal

            So if these industries can’t turn a profit without subsidies . . .

            Not always true. They can turn a profit without subsidies. Subsidies are political decisions.

        2. rps

          Do we live in a capitalist society? Miriam Webster defines capitalism: an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.

          In 2008 Hank Paulson along with Ben Bernanke with the blessing of Greenspan decreed The Emergency Economic Stabilization Act. Taxpayer dollars bailed out private financial institutions- tbtf banks, Wall St., AIG, General Motors, investment houses, etc…. That’s the definition of Socialism.

          Government changes the rules for the benefit of their profiteering revolving door buddies. Its a matter of political will to do the right thing or not….

      2. nonsense factory

        The problem has to be viewed internationally; MMT as presented seems to ignore the reality of a wide variety of different global currencies. The only reason the US can engage in quantitative easing or liquidity injection or printing money is because other countries have no choice but to accept US dollars. If all other countries dumped U.S. securities at once then MMT would collapse and the dollar would be devalued.

        Other countries accept US dollars because the US runs a global financial empire backed by a very large aggressive military. People who run empires are not known to be interested in the welfare of the average citizen, it is always a game of enriching aristocrats and elites. So MMT will never be used to provide any such social goods.

        1. financial matters

          Unfortunately, there is truth here.

          Mary Mellor has raised some important issues relative to flexible exchange rates.

          One of the important concepts of MMT is the importance of having a flexible exchange rate to have full power over your currency. This is fine as far as it goes but tends to put hard currencies against soft currencies where a hard currency can be defined as one that has international authority/acceptance. Having flexible exchange rates also opens up massive amounts of financial speculation relative to fluctuations of these currencies against each other and trying to protect against these fluctuations.

          “”Keynes’ proposal of the bancor was to put a barrier between national currencies, that is to have a currency of account at the global level. Keynes warned that free trade, flexible exchange rates and free movement of capital globally were incompatible with maintaining full employment at the local level””

          “”Sufficiency provisioning also means that trade would be discouraged rather than encouraged.””

          Local currencies can work very well locally to promote employment but can have trouble when they reach out to get resources outside of their currency space especially if they have a soft currency. Global sustainability programs need to take a closer look at how to overcome this sort of social injustice.


          I think this can also apply to policing and military power. The US is currently strong in these areas which could be considered a ‘hard currency’. But just like with monetary policy in general they are using this power very irresponsibly and therefore probably not in a sustainable manner.

          The Sino-Soviet cooperation could be seen as a type of bancor.

    1. jsn

      Money is a simple social relationship that, because it is social, impacts everything else in our social lives. It’s as complicated as we are.

      MMT is just a description of the balance sheet realities of integrating a mathematical relationship with a growing majority of the activities of a social animal.

      That mathematical force has been more consistent over the last 5000 years than any other human artifice.

  13. joe defiant

    Let’s pretend another country, let’s say Bolivia goes all in with MMT theory and runs its economy based on it. How long before the USA destroys this government? Would it even get to implement it before being destroyed?

    1. Summer

      The USA has plans to blow up the world if it doesn’t get its way.
      That’s what thousands of nukes are for. A few are deterrents, thousands are holding the world hostage.
      The deal on the table is rule by a few or no world.

    2. HotFlash

      Hi Joe. You are correct, I think. What do you suggest? Do you recommend that we continue to pretend to believe that we must have austerity? ‘Scuse me, but that’s a hell of a way to run a revolution. Although I am sure that the PTB would prefer it.

  14. Summer

    Whatever the monetary theory or currency or “ism”, it’s been said that budgets are about priorities.

    The bigger question is how to prioritize people over profits and well-being over war – then how to deal with people who stand in the way of that.

  15. Samuel Conner

    It is not hard to do simple two-party thought experiments to prove to an interlocutor that the government’s deficit is identical to the non-government’s surplus — the sectoral balance identity.

    And I think it’s not too hard from there to show people that it is the private sector’s savings preferences more than the public sector’s spending preferences that determine where the deficit/surplus balance settles in any time period.

    I’m somewhat hopeful that in the long run the argument against a priori public austerity preference will be won.

    If nothing else, the climate emergency will probably require significant public deficits in all nations to mitigate or adapt to the changes, and perhaps that will settle the question for a longer period than the post-GD/WWII Keynesian consensus lasted.

    1. Samuel Conner

      I will note that it is possible for really smart people to be confused about this. I had a memorable conversation 25 years ago in grad school with a finance major who explained to me that the US government’s deficit was equal to the US current account deficit. I didn’t understand why this should be and his explanation was incomprehensible. He didn’t understand it well enough to be able to help me understand it.

      15 years later I started reading the NC weblog and from there encountered the New Economic Perspectives weblog and its MMT Primer. There the 3-sector balance was described and it was noted that during the period I had been in grad school, the US non-government sector had been roughly in balance, so that the US government deficit closely tracked the external sector surplus. Not hard at all to understand, but my top-tier B-school finance student interlocutor from 20 years before had not been able to put it in terms I could grasp.

    2. Wisdom Seeker

      I don’t see how the second paragraph is correct:

      And I think it’s not too hard from there to show people that it is the private sector’s savings preferences more than the public sector’s spending preferences that determine where the deficit/surplus balance settles in any time period.

      This seems wrong for two reasons. First, the non-fiat-government sector is not just the private sector. There’s also the rest of the world (overseas dollars), state and local government behavior, and the multinationals that have wider scope than any single government and aren’t simply domestic private sector entities. Because of the number of participants, private sector savings preferences don’t have a direct impact on fiat-sector deficit/surplus. The flows can wash in other directions instead.

      Second, and perhaps more importantly, none of the non-fiat-sector entities can force the fiat-sector government to run a deficit or surplus, other than by taking over the government and changing laws. The government’s policy might create adverse changes in the economy that would lead to such a takeover, but that’s a political not monetary/financial response.

      The government, however, can strongly incentivize the private sector to change its preferences, by setting interest rates, changing the fiscal/fiat balance (taxes, spending), and/or changing laws impacting savings preferences. Or by printing money to the point where the private sector no longer considers the fiat currency a reasonable store of value or medium of exchange.

      1. Grebo

        Sectoral Balances 101 starts with two sectors to get the idea over. The external sector is ignored, you have a ‘closed’ economy. But once that is understood the external sector is introduced. Most MMTers seem to stop there but you can split the economy into as many sectors as you find useful.

        I like Steve Keen’s four sector split, he divides the private sector into financial and non-financial or Real. This allows for a simple explanation of where the Real economy’s money comes from and goes to, the effects of trade, why private credit is the source of booms and busts and why the government should run deficits most of the time.

        The government can be forced to run a deficit by the action of the ‘automatic stabilisers’: as the economy shrinks tax receipts fall and welfare payments rise. If it attempts to resist this it will merely make things worse.

      2. Samuel Conner

        Thanks, Grebo.

        I’ll add, within the 2-sector simplification that I did adopt, the following that I think is unarguable:

        Transactions within the non-government sector have implications for where the public (domestic government)/non-public balance settles, because these generate taxes which reduce the public deficit.

        So, for example, if I, a non-public (NP) actor, spend my paycheck, my surplus declines, some other NP actors’ surpluses increase, but the total NP surplus declines (and the P deficit also declines) within the time frame of this transaction because of the generated taxes that go to the P sector.

        Sum this up over all NP actors, and throw in the P sector/NP sector interactions, and what you find is that what the NP actors decide to not spend within a given period of time (ie, to “save” within that time period) will exactly equal the P sector’s deficit within that time period. The sectoral balance identity is, after all, an identity.

        This was the point of the assertion, which I am confident is valid, that NP savings preferences have more influence over where the P deficit/NP surplus settles than the P sector’s spending preferences.

        Individual NP actors have more real-time discretion over whether to accumulate or de-accumulate financial assets than the P sector has, given that the P sector’s decisions are taken by unwieldy processes and a lot of them are “coded in” in the form of automatic stabilizers. In the end, it is NP savings preferences that are more influential in determining the P deficit.

        And this leads to the MMT policy suggestion that P deficits should be embraced philosophically and policy designed to accommodate (by P spending up to the point of full employment) NP savings preferences.

        The current neoliberal mindset is that NP savings preferences should be frustrated by austerity bias in P sector policies. And that is supposed to promote investment in growth. It’s a head-scratcher.

        The Modern Monetary Theory Primer at the New Economic Perspectives website goes to greater length to argue the direction of causality of public sector deficits, and I find the argument persuasive.

    1. Wisdom Seeker

      And calling everyone else mentally ill won’t help persuade them to change their minds, either.

    2. ChiGal in Carolina

      But provided a springboard for this excellent thread, much food for thought for someone like me who is challenged regarding understanding matters of finance and economics.

      Thanks, Vatch!

  16. ChrisPacific

    Anecdotal, but I suspect that people don’t pay attention to MMT (even though it’s a better description of reality than the models we currently use) is that it lacks a champion who is able to explain it to laypeople in plain English. It’s the same reason why Keynes ended up being misinterpreted so badly for such a long time. For want of a better term, we need an Al Gore of MMT.

  17. RMore

    My suggestion for a #4 to Yves’ list is: All those vested in the status quo of “understanding.” Recall the Upton Sinclair quote “It is difficult to get a man to understand something when his salary depends upon his not understanding it”. There is a corollary here as well.

    1. Wisdom Seeker

      Reminds one of the Henry Ford quote:

      It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

      I suspect that if the MMT view of fiat money creation ever became mainstream, it would lead enough people to distrust the system that today’s fiat dollar would not last much longer. At least with today’s crony-elite governments, there’s not a lot of reason to trust that those freshly-printed dollars are being well-spent. (Assuming that the taxes are being used to cover Social Security and the printed-up deficit funds are being spent on the other stuff…)

  18. Afrikaan

    According to MMT corporations need income to fund expenses, unlike currency-issuing governments.

    But corporations do issue some kinds of currency, in the form of frequent flier miles and loyalty points. These get created at the moment of issue, and are destroyed when redeemed.

    I would love to see an exposition or exploration of MMT in terms of loyalty points by someone with a deeper understanding of MMT than me.

    1. Grebo

      Airmiles and Green Shield Stamps are a limited kind of money. See also the buckeroos they use at UMKC.
      None of them are likely to gain the same sort of broad appeal that paying your taxes has.

    2. JEHR

      Loyalty points which “are created at the moment of issue and destroyed when redeemed” sound a lot like taxes which are paid by people and corporations but when they arrive at the government are destroyed.

      See here:

      “Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.”

      “And what happens if you were to go to your local IRS office to pay your taxes with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room, he’d take that hard-earned cash you just forked over and throw it in a shredder.”

    3. todde

      Anybody can issue money, the problem is getting someone to accept it.

      In your specific case, the airlines are NOT creating money to fund expenses, they are creating money to stimulate demand for their services.

      The airlines do NOT pay payroll or vendors with frequent flier miles or loyalty points, they use it to entice consumers to give them income they can spend.

      (FFM are also not shown on the P&L as income, they are shown as a reduction of income.)

  19. Jer Bear

    the third paragraph in the article perfectly answers the question posed in the second paragraph. our representatives aren’t wrestling with anything. they are doing as they are told, plain and simple.

  20. Wade Riddick

    I’ll borrow an observation Paul Krugman made in a column many years ago when he explained Ron Paul’s obsession with low interest rates.

    Take a look at public opinion surveys. Do voters think this is “our” government or “theirs?”

    1) You have racists who think (incorrectly) that government spending is all about oppressing white people and helping minorities. You heard the more acceptable version when Chuck Grassley accused non-billionaires of wasting their money on “”booze and broads.” These are the intellectual inheritors of the Confederacy – and back then, states and even banks could print their own “money.” They want to impose austerity on the rest of us so that they can hijack the supply of public goods and extort the rest of us into worshipping them like the aristocracy they think they deserve to be. You can’t ressurect the myth of the Southern Cavaliers saving us all if Uncle Sam is already saving us with government health care. Therefore they must recast public health as Obamacare from “that Kenyan Muslim” when, in truth, the most dangerous enemies of the constitution are domestic and not foreign.

    2) You have sane people who observe that, in fact, the Neoconfederate oligarchs (see #1) control our government. Uncle Sam does what the wealthy want and not what we want and therefore any monetary “printing” would go right into their pockets and not ours. Which it has. Much of the Fed’s easing has been recycled into insider trading and asset inflation for the wealthy (e.g., stock buybacks).

    Whether you believe #1 or #2, you don’t want the government running up debts for somebody else at your expense.

    We don’t see the government as ours anymore, so talking about modern monetary theory is only going to drive citizen paranoia. Until that changes, you can’t fix the budget.

    Looking at the “tax cut,” the problem with Steve Bannon’s nationalism is that there’s no actual nation involved.

  21. skippy

    ZOMG….. the thread above… sigh…

    Mingling hard currency and fiat optics which is acerbated by monetarists and quasi monetarists running the show, not to mention, neoliberalism as the bench mark underpinning the entire system.

    Bloodly hell we could be talking about Marginalism hence when value is realized and its social function… but… rabid nut gathers… sigh…

    disheveled… confusion ensues….

  22. Rodger Malcolm Mitchell

    J.D. Alt wrote, ” . . . sovereign spending must occur first, with taxes collected after . . . ”

    Not quite. Actually, sovereign spending must occur first with taxes collected never. For a Monetarily Sovereign government, taxes are unnecessary.

    Yes, I know the MMT (false) belief that taxes are necessary to give value (acceptance) to money. Tell that to the bitcoin users. Who collects bitcoin taxes?

    There are hundreds of forms of money that are widely accepted, have value, and do not involve taxes. Bitcoin is one. Every retail coupon you use is another. Poker chips are another. Even Professor Randy Wray issues a form of money at his school, and collects no taxes. But the students accept the money.

    This even should be obvious to anyone who has played the Monopoly game, where the Monopoly dollars are accepted by all players, and no taxes necessary.

    For a Monetarily Sovereign government, taxes are an anachronism, having zero value and zero use.

    (And don’t get me started on the false belief that taxes help prevent inflation. That one is laughably wrong.)

    1. Vatch

      Very few people use Bitcoin, and poker chips are cashed in for regular money after the gambling session is completed. If a retail coupon is offered by the retailer where the purchase is made, it simply reduces the price of the item sold. Taxes still apply on whatever money is paid. If the retail coupon is offered by a third party, the retailer will typically charge the buyer sales taxes on the full price. Later, when the retailer is reimbursed by the issuer of the coupon, taxes will be paid on that income.

  23. Steve Ruis

    The author makes the unforgivable sin of assuming that those people have given it any thought at all in the first place. Commenting on struggles not made is specious at best.

    How about this: the politicians know how to manipulate the current system, so why would they want to risk that edge for a hypothetical one they basically do not understand.

    This is akin to the aversion to learn a new version or different software that does nothing more than the old version did. Why would you do that? (I am still using MS Word 2003, btw, and am a professional writer and editor.)

    1. JEHR

      It has taken me a couple of years at least to just understand Mosler‘s “Seven Deadly Innocent Frauds of Economic Policy” and I am still learning new things. Once a person becomes convinced that understanding money is as simple as understanding their own spending, then the die is cast and re-learning will take a lot of time to un-learn the old and learn the new.

  24. Vatch

    After having read a lot of comments, and written (too many) of my own, I have a short conclusion (I hope it’s a conclusion):

    If MMT advocates were to say that loans are not needed to finance government spending by a monetarily sovereign government, I would readily agree. Nobody believes that the loans to the U.S. government will be paid back — their resemblance to real loans is purely illusory. But taxes are different, and most U.S. federal spending is financed by taxes. Taxes have nothing at all to do with the creation of money, but they are needed for spending. And I certainly agree that some federal spending is not financed by taxes.

    I think that some MMT advocates let themselves be confused by the process of money creation and the process of government spending. There’s overlap, but they are not the same.

    1. financial matters

      I would phrase it somewhat different.

      MMT does consider the use of taxes as a way to redistribute resources. It forces people to sell their goods to get money to pay taxes and the government can use this command of the resources for redistribution.

      1. Vatch

        I partially agree and disagree. Currently taxes are used to finance some (but not all) federal government spending, and they are also used to do what you describe.

    2. todde

      taxes and loans are both used to create demand for money.

      I have to pay my taxes or bad things happen.
      I have to pay my loan or bad things happen.

      Banks don’t need deposits to fund loans.
      Sovereign currency governments don’t need taxes to fund spending.

    3. todde

      Federal gov’t loans are guaranteed by the 14th Amendment.

      I would say everybody believes they will be paid back, or why would people be lending the money?

      1. todde

        Here’s the thing about debt. If Mike Tyson owes you a million dollars and the only way you can get it from him is to beat him him a boxing match, Mike Tyson doesn’t have a problem, you do.

        Politically speaking, the bond holders are 1st in line, and they will be paid.

      2. Vatch

        I would say everybody believes they will be paid back, or why would people be lending the money?

        What people care about is whether the interest payments continue to be paid, and that it is rolled over after bonds come due. U.S. government debt resembles a British consol, a perpetual bond.

    4. bob

      “Taxes have nothing at all to do with the creation of money, but they are needed for spending”

      Tell that to the military.

      Did you hear of a funding drive for the 2nd Iraq war? Afganistan? A sudden tax hike? A bake sale?

      Where did all the tax money come from? If it was intra-gov tax money relocation, what operating costs were trimmed, if taxes didn’t suddenly go up?.

      1. Vatch

        Some of the commenters here seem to think that I said that ONLY taxes fund US government operations. I never said that. And I also acknowledge that it is possible for the government to fund operations without taxes (although inflation would inevitably worsen over the years). But currently, taxes fund the majority of US government operations. That’s the way it is.

        When the deficit limit is reached, there is a partial government shutdown, unless the Congress raises the limit. In the next few days, the Congress will almost certainly raise the deficit limit, because the dominant Republican party wants to pass their tax bill, and a government shutdown, even for only a day or two, would be a huge distraction, and would impede the final passage of their tax bill.

  25. Patrick Donnelly

    “Money” is many things like the elephant being examined by the six Indian Sages. It is mostly power in the economy.

    Power in Electro-Magnetic terms is speed times amount. Voltage times Current.
    VxA= Watts. Gold and Silver, Copper and Iron are real items of value and can be exchanged for anything we desire in a modern economy, less the rent seeker charges… But that means the Current is very small, so the Voltage has to be much faster. That slows the economy, especially as the rent costs are transaction based. Eventually, we decide to trust someone. Fiat! Details matter but overall rent seeker costs fall. But only if there is a true market. We know there are none. Just look at Enron. So money/power leaks out to those whom we trust.

    Automate that! Full transparency…. Make adjustments annually, according to refenda results of citizens. Do away with those we trust as a permanent career. Make it democratic: persons take charge, under full transparency, for one year, based on random selection or ballot as the Greeks did.

  26. Unfettered Fire

    The US Government issues all US dollars, period. When the US Government hands out $70 billion in food stamps to poor people, not a penny of that $70 billion is coming from anybody’s pockets. It isn’t your hard earned money being taken from you in the form of federal taxes and then handed to lazy, irresponsible poor people who refuse to get a job. Those US dollars are issued 100% out of thin air by the federal government.

    Further, I might add, that when the US Government spends $100 billion on the military, not a penny of that $100 billion is coming from anybody’s pockets. Those US dollars are issued 100% out of thin air by the federal government.

    Subsidies for the rich are the same thing. When the US Government hands $90 billion in subsidies to Walmart, the US taxpayer isn’t “footing the bill”.

    The real question is not rich vs. poor, but one of stability. Is the federal government doing its job as a currency issuer by handing dollars to the rich and cutting food stamp programs? No, it is not. Similarly, is the federal government doing its job as a currency issuer if it hands every poor person $1 million and taxes the rich into the ground while defunding the military? No, it is not.

    Yes, some poor people are poor because they’re lazy and some rich people are rich, because they steal. In a modern monetary economy, poverty is a creation of the federal government. The US Government determines the unemployment rate. If its deficit is too low, unemployment results – period. If maintained on a long enough time line, poverty results. The more the US Government skews its fiscal policy to the extreme rich and unworkable “free market solutions”, then the more poverty it creates.

    So, the US Government is the centerpiece in a modern monetary economy, because it is the currency issuing and regulatory authority. It is what we unite around and its job as that currency issuing and regulatory authority is to spend for the public purpose. When it does this, it creates stability. This is reality and regardless of your political feelings about the federal government, there is simply nothing you can do about it but deal with that reality.

    Stability benefits both rich and poor. The US economy is our economy, not “the” economy. It belongs to every single US citizen. All must derive good benefit from our economy or our economy is useless and unstable. This does not imply that all should be rich, but rather, all must derive good benefit. All must be able to obtain the basic necessities; all must be able to find sufficient work.

    Again, it is not “your” money; it is not “your” tax dollars going to the poor or the rich.

    It is US dollars spent into existence by the federal government that are going to the poor and the rich alike. A nation is a team; a group of people, rich and poor alike, united. So, let’s act like a nation for once. Let’s take the macroeconomic view instead of participating in these ridiculous, demeaning rich vs. poor arguments peddled by Republicans and Democrats. If we can do that, we can find real solutions that benefit everyone. – Eric Anderson

  27. IndieRafael

    This post is timely for me. (I won’t pretend I’ve read this whole thread or that I understand MMT.) Of all the ideas discussed reguarly on Naked Capitalism (which has taught me a lot over the years), I find MMT the most problematic. Perhaps that’s because I spent years working in around around budget issues as a congressional staffer and later public interest lobbyist. That no doubt left me biased, but hopefully not “mentally ill” as mentioned in the original post.

    Nonetheless, dutifully trying to research MMT, a few days ago I googled critiques of MMT and read a few, which seemed to argue that MMT breaks down where it matters, at the limit. (I’m not capable of explaining it more than that right now.)

    Beyond the strict economics, realistic budgeting helps organizations observe facts and think through priorities. Also, MMT will probably never be good politics, and can actually drive sympathetic readers away if presented too starkly.

    Anyway, my main point is that MMT is not easy, and to ask a bit of patience and tolerance for those of us who don’t (and may never) get it. We are not mentally ill, at least not in this way. But we still read Naked Capitalism and agree with much of it.

  28. Altandmain

    The rich will always try to co-opt the government and other professions to enrich their already insane profits. As NC notes, it is largely a pseudoscience of propaganda value to the rich.

    We will not have a honest discussion about economics so long as the rich play a hand in it. Behind pretty much every conservative, neoliberal, or libertarian think tank, you’ll find a very rich person who wants to get richer. You’ll find politicians who get money in campaign contributions, which are effectively legalized bribery. You’ll find the media completely doing the bidding of their owners.

    A big challenge is that the general public has been shaped by the plutocrat’s discourse and largely accepts it, even though the polls show that the majority of the public is more left wing than the politicians think. Another problem is that the public has a very poor education on history and economics. Perhaps an even bigger problem still is the rich shape economics. Note that mainstream economics today uses the Gregory Mankiw textbooks (hint: former Bush economist – Mankiw was the 21st Chair of the Council of Economic Advisers during the Bush administration), as an example.

    If you think about it, the real limits of our society are natural resources and by extension, energy. Energy and natural resource economics deserve much greater scrutiny than they get. Some areas such as limited metals, soil (which is renewable but we are depleting it with industrial agriculture, etc), are crises that need a lot more addressing.

  29. Wukchumni

    “The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.”~ JK Galbraith

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