Yves here. To clarify Richard Murphy’s headline, he is not referring to all levels of government in the UK, but “Government” which in US-speak would be “Administration”. His point is that the UK and US national governments will never run out of currency and do not need bond markets to fund budget deficits. Bond issuance is a political holdover from the gold standard era as opposed to an operational necessity. Looks at how Japan ran absolutely ginormous government deficits for decades.
Too much net spending that does not sufficiently (or at all) boost productive capacity generates inflation. That is the constraint on spending. Or in MMT-speak, “real resources”. Increasing demand (which is what net spending does) in the absence of there being enough slack in the economy will raise prices. But investors really do not like inflation beyond modest levels (2% to 4%). So the likely level of inflation will depress asset prices, particularly risky ones like stocks and private equity, as well as investment, as the 1970s stagflation demonstrated.
Note that the US will not default involuntarily. But it can always stiff its creditors, such as by forced extension of Treasury bond maturities.
By Richard Murphy, Professor of Accounting Practice at Sheffield University Management School and a director of the Corporate Accountability Network. Originally published at Funding the Future.
There’s a persistent myth that our government is somehow at the mercy of the financial markets and that it has to dance to their tune. This is most definitely doing the rounds this week, mainly as a result of Labour’s mismanagement of its own party, and Rachel Reeves’ subsequent very public tears.
It’s a myth I have been challenging for years, so let me summarise why.
1. The government creates the money
The UK government is the monopoly issuer of the pound. It spends all of that money into existence. Every pound of government spending creates a matching financial asset for someone else. It is only afterwards that the government issues bonds, not because it needs the money, but to provide a safe place for savers to deposit their funds when banks cannot provide this service.
This point is critical. The government does not need the markets to ‘fund’ its spending. It is simply swapping one form of money (reserves) for another (gilts). Bizarrely, it pays interest to those to whom it provides this service.
2. Gilts are a choice, not a necessity
The sale of government bonds, gilts in the UK, is presented as if the government is dependent on the markets to keep spending. This is nonsense. The government issues gilts largely because:
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It wants to drain reserves from the banking system to help the Bank of England hit its (currently too high) interest rate target.
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It wants to give pension funds and insurance companies a safe deposit facility to underpin their promises to those who use their services.
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It believes it must maintain an outdated and now unnecessary City-based financial architecture.
None of this means it needs the markets to spend. If no one bought gilts, the government could continue to spend. In fact, as quantitative easing and now quantitative tightening prove, there is no relationship between bond issues and Bank of England market interventions and the capacity of the government to spend: the evidence is all there for anyone to see.
3. The central bank is always the buyer of last resort
When financial markets are in turmoil, as happened in the mini-budget fiasco under Liz Truss, the Bank of England steps in. Its role is to stabilise prices and yields. This is not optional. It is a fundamental part of having a sovereign currency and a central bank that acts as the lender of last resort. This means the financial markets are, in fact, dependent on the government and its central bank. Not the other way around.
4. Interest rates are a policy choice
People say, “but the markets set interest rates, and so they can discipline the government.” Again, this misunderstands monetary operations. The Bank of England sets the base rate. It can cap or control longer-term rates by buying or selling bonds as it chooses. The so-called market rates are policy-contingent.When push comes to shove, the central bank can always enforce the interest rate it wants.
5. What markets really influence is ideology
So why the obsession with ‘market confidence’? The reality is, politicians and economists often invoke markets to justify austerity. It is easier to say “the markets demand it” than to admit their own ideological choice, which would otherwise be unpalatable to the electorate. Financial markets do, in that case, play a political role, but they do not hold the government hostage. They operate within the monetary framework that the government and its central bank set. We could just as easily choose to run the economy with other priorities, but it does not suit neoliberal politicians to do so. That is because they view politics as the City does, at cost to us all.
Summary
I keep returning to this issue because it is so fundamental: the UK government is a currency creator, not a currency user. It is not like a household. It does not need to beg or borrow from the markets to spend. Financial markets are accommodated by the government, not the other way around.
Understanding this changes everything. It means that economic policy decisions — on public services, investment, climate action, and inequality — are political choices, not technical constraints imposed by bond traders. That is why misinformation on this issue matters so much, and the fact that it is so widespread shows just how strong are the forces that wish to deny that democratic choices can still be made in the UK.
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In recent weeks, Alexander Mercouris has been forecasting that Keir Starmer’s tenure as Prime Minister is approaching its end, with the proximate cause of his troubles being a fiscal crisis. Mercouris (and also Alex Christoforou; this was also discussed in a recent The Duran episode; both of the Alexes appear to discount MMT) embraces the “UK government is income-constrained” myth, but I can’t believe that no-one in the Labour Party does not know better.
It would be in the political interest of the Labour Party, and in Keir Starmer’s interest in prolonging his tenure as Prime Minister, to have the Bank of England fund a deficit sufficient to maintain social services (they could even throw in money for Ukraine; huzzah!).
I have the impression that Bank of England governors understand MMT.
What is constraining the Labour government to pursue self-injuring policies that it doesn’t have to pursue, and that are damaging its relationship with its mass constituency? I ‘get’ that there is also a smaller moneyed constituency; are Labour Party “leaders” merely agency-less pawns of moneyed interests?
Oh, I believe it. Starmer and the Blair heirs are neoliberals. The only people in Labour who might buy MMT would be Corbyn and his allies, and they were stomped on even more ferociously than Sanders.
And remember, Sanders has Stephanie Kelton as the Chief Economist of the Senate Budget Committee, and he acts like he does NOT believe in MMT. These guys are badly indoctrinated and/or not willing to buck orthodoxy.
It’s not limited to the west, either. Putin and his inner-circle are still very orthodox in their thinking about economic policy. Look how high they insist on keeping interest rates!
I think for lefty-inclined thinkers, they feel like MMT takes away their argument for raising taxes on high earners and corporations, and recoil at that.
The reason for raising rates on those top earners should be more straight-forward: they have too much money and power and need to be constrained, not because we have “budgetary realities”.
Most leftists are still far too fond of Marxist economics, which is of course Classical Economics, which has no room for MMT.
The only area where MMT type ideas seem to be acceptable within the mainstream is in some sections of financial economics, where they are more tied to real analyses of money flows without the underlying assumptions of classical, neoclassical or ordoliberal economics. Even then, they rarely say the words, they just dance around the concepts. As Yves suggests, those who have made a deep study of Japan in the last few years knows the whole notion that spending is funded by bonds plus taxes is an easily falsifiable hypothesis, but MMT is so far outside the Overton window, its just not something that can be talked about in polite company.
I see your overall point but: Leftists? I don’t see very many of those in the Anglosphere. It depends on how one defines “left” or “leftists” of course. Many figures who pose as “leftists” are right-wing, anti-labor authoritarians thinly disguised with identity politics and virtue-signalling hypocrisy.
“3. The central bank is always the buyer of last resort”?
How long is “ALWAYS”?
Until the next Carrington Event knocks out the electrical grid?
We’re Overdue For The 150-year Carrington Event
https://www.gaia.com/article/carrington-event
If the electrical grid is knocked out, there will be a suspension of all trading, as after 9/11. If no one is trading, there is no harm from no Fed mopping up. The buying will resume when markets reopen.
The most common objection to MMT I’ve heard is specifically the hegemonic issue, second to that is self sufficiency, unless you are fully self sufficient you need to be producing something other countries want to buy in order for you in turn to be able to buy what you can’t produce. It also makes a big difference what percentage of your debts are foreign held (Japan has around 10% UK had around 30%). The UK does not compare favourably to Japan in nearly all these matters.
Granted the UK doesn’t have to be Japan to begin implementing MMT aligned policy, it would be a wonderful thing to see as the UK does appear to be heading down a very grim path in the absence of something like this.
Though I remember a few years ago attempting to debate with some British people on Facebook that May’s “There is no magic money tree” mantra, was economically illiterate pointing to Mark Carney’s Bank of England paper (who incidentally doesn’t apparat to be operating MMT align policy in Canada) and it was absolutely hopeless, might as well jave tried to argue the sky is green and grass is blue.
Those most in the know often write off what to me makes sense. When charging for whatever, my general feeling is at present the dollar buys too little bread, beans, greens eggs; but, in terms of SUVs for medium sized families, or the mean usage folks get out of their trucks these days…the dollar buys too much of a V6. If you’re not hauling heavy stuff, or if you live in flatland, and you’re paying 30K for a V6, in that instance current dollars buy too much? So, make the currency rational, and I guess I’m arguing for a kind of rationing.
If we need to pay folks something they can wire home, then the export thing makes sense to me. Rum, cigars, grass fed beef. Forget about phones…except for maybe the dial-up kind? (there was a photo of a dial-up cell phone here in NC? or at least a mention of such)
I used to read or hear about more than one academician that didn’t like flow charts like this one. But I think, say in a class, you could go over it some and from there proceed to its errors.
Possibly our “full faith” [or half faith, or .10 faith] rests on the hope that most have a money philosophy making more sense than this DOGE crapola. The thing with Bolsonaro makes DT look like the Riddler.
Make things understandable. It would be cool I think to have a couple Michael Hudson talks illustrated by “the story of” lady.
I agree, and it is a real shame that Sanders has proved himself as a “sheepdog” for the Ds. He talks a good game, but then does the old bait-and-switch to tell us to vote for warmongers, corruption, genocide and the status-quo.
He and AOC may be among the most cynical and manipulative poli-tricksters in Congress, and there is stiff competition. They are part of a corrupted institution, after all.
JonnyJ,
Honest question.
I follow your commentary, but regularly fail to understand it. It would seem that no member of Congress meets your standard. Am I wrong? If Sanders cannot meet your standard, who in US politics does? I simply wish to understand your arguments more clearly.
Thanks for any insight you might provide.
Thanks for asking. I’m not alone in my opinion, mind you. Look around and you will find others here. Of course I am told by some that I have “unrealistic expectations”, I am “cynical” and overly pessimistic, however the evidence is crystal clear to me.
Don’t take it personal, the corruption is institutionalized.
Long story short:
The perverse and now infamous Citizens United decision by SCOTUS formalized unlimited political bribery, yet the naive and gullible still WANT to believe in fairy-tales.
IMO, we have had decades of in-your-face rot and corruption. How can anyone still believe in the charades?
Google: Jimmy Carter “The US is an oligarchy with unlimited political bribery”
The late Bruce Dixon wrote an article back in 2015 that sums it up brilliantly, it first appeared on The Black Agenda Report website. Others picked up on it.
https://mltoday.com/bernie-and-aoc-sheepdog-for-the-democrats/
Also W.E.B DuBois wrote an article back in the 1950s explaining why he didn’t vote and that our “democracy” is a sham.
http://www.hartford-hwp.com/archives/45a/298.html
Then of course George Carlin did a whole skit on why he didn’t vote. And he put it in four-letter words that are unambigous
My take is that the entire top layer of the US government is simply an organized crime syndicate, powerful, ruthless, and extremely violent. The syndicate has two factions that struggle against one another only so their faction can get a better percentage of the massive grift. It is not a matter of who is or isn’t corrupt in Congress, because one needs to already be corrupt to run and win, and if not, you need to become so quickly or you won’t last very long. See Dennis Kucinich.
I am also one of those who don’t “like” any of the people in congress, or senate.
My criteria for a politician I do like is one that is generally on the right page.
Find a dennis Kucinich
maybe a paul wellstone
How about anyone who is consistently on the right side of history. Not someone who is vocal when their party isn’t in power… and quiet when they are/ Find me someone who isn’t a hypocrite.
And yes… I would be a “leftie” …. There are people in this country who are leftists. There are no politicians who are, that I know of. Hell, now being a friggin adult is enough to make you stand out against the scum which really do fill almost all the seats. And the few who can be counted to at least ask questions… can’t be counted on to buck the trend of whatever crime THEIR party is committing at any given time.
Someone like aoc, who is cementing her run for pelosi’s spot…. is an opportunist.
Bernie…. has spent decades in the other world ecosystem of vermont…. knowing full well he can spout leftish stuff…. and it never offend his establishment enablers, but when push comes to shove he shuts the hell up.. and says vote for the party….
Now the democratic and the republican party only let people in who will cave . and if they don’t cave… everyone goes after them. friend and foe , alike.
Vote Green, if for no other reason, because it isn’t democratic party or republican party. And Libertarians are just republican led faux choice candidates.
Reeves has a highly conventional Oxford PPE then an LSE Masters, plus relatively minor BoE career, and is totally welded to this economic orthodoxy.
Her ‘fiscal rules’, though an unecessary artifice, are her security blanket in retaining crediblity with the finance sector.
Starmer, lacking any interest or experience in economics, has mostly entrusted UK macroeconomics policy and practice to his Chancellor.
Bailey at the BoE is a down the line bankster, and owes his allegiance to the City, not the country.
That is why Labour are pursuing this version of quasi-neoliberal dogma.
Reeves does want to avoid an austerity tag, but has had an endorsement from Cameron’s erstwhile financial capo Osborne, which tells where her policy instincts are.
Of course Blairism and his 3rd Way is/was centre right corporate liberalism in the Clinton mould, and Starmer’s inner circle are heavily Blairite.
So UK Labour are almost on a parallel course to your Corporate Dems – which many on the left in the UK would classify as veering increasingly to the right of centre-right in serving corporate and especially financial interests, but most certainly not the working class.
Starmer purged the Left in the Labour party after his election, so there are few or no countervailing voices within the party – they’ve all been expelled or deselected, or are too fearful to stick their heads above the parapet.
“Old” centre left Labour would never have cut the social safety net in terms of benefits as both Blair and now Starmer have done.
Nicely covered in yesterday’s Links
Remuneration of Reserves: The Planned End of Government Securities? MMT France
Soooo, I skipped that yesterday but read it now. Amazing clarification on prior readings of Mosler, Mitchell, Norman, Neil W and the many who wrote at New Economic Perspectives. Thank you pmp.
And from the French yet. Deconstruction you can use. Here is another fine bit of deconstruction that I keep around as a reminder.
Yes of course money is created by debt, not the other way round. But in a fiat currency mechanism government spending will always increase debt to overcome increases in savings and/or debt repayment as long as economic growth is the target. So national debt increases, always ,irrespective of the hue of the government.
The downside is the interest repayment on that debt and the devaluation of the currency due to inflation, which is the same as an increasing tax on the populace.
Eventually this engine will splutter and stop , its not an endless virtuous circuit.
What happens after that is anyone’s guess, but its not likely to be pleasant.
…as long as economic growth is the target. What is economic growth is not the target? What if the aim is equilibrium? Would that mean an economic system other than capitalist? Would it men just enough growth to accommodate population increase? What about population decrease? I have other questions. I have no answers. The article seems to me to call into question most of the rhetoric surrounding what I shall characterize as “government and market talk.” One last thing: I fully realize my ignorance of these matters.
If you have time, you may find Randall Wray’s “MMT Primer” to be helpful.
To JMH’s statement:
> “government spending will always increase debt to overcome increases in savings and/or debt repayment as long as economic growth is the target.”,
I think the connection is more fundamental than that. The government deficit is the mirror image of the non-government surplus, regardless of whether the policy goal is “growth” or something else. Prof. Wray’s Primer argues, persuasively IMO, that the direction of causation is more nearly “non-government savings determines the size of the government deficit” than “government deficit permits non-government savings”.
Non-government savings preferences will compel a government deficit (in the absence of a sufficiently large trade surplus; of course that vanished for US long ago); the policy concern ought to be not “how large is the resulting deficit?” but “what real world things are being funded by the resulting deficit?” The policy debate in UK seems to be (taking my lead from the Alexes) along the lines of the necessity of defunding domestic population well-being in the interest of funding the prolongation of Ukraine’s resistance in its conflict with Russian Federation.
#TYVM … It’s amazing to me that we’re a dozen or so years since Professor Wray essentially used that blog at NEP to lay out the contents and framework of his book, and yet we’re still having to explain … :) But it’s good to see these points being reiterated and still relevant!
This seems to suggests that the Federal government has limited fiscal agency. I may be wrong but I have seen nothing in the political wrangling around budget negotiations that the CBO or anyone else considers the surplus/ deficit appetite of the non-government sectors in determining budget targets. I suspect it is a given within the halls of Congress that all all non-government sectors desire to be in “surplus”, and therefore supposes it is wise politically to err on the side of higher deficits to avoid constricting the global economy. Beyond this, I suspect the budget is arrived at in a very crude and impressionistic way. If I’m correct, this might also suggest that Congress engages in “austerity theater” like hammering SNAP and Medicaid so they don’t completely give the game away that fiat currency budgeting has only an inflation constraint. Money needs to remain dear and scarce in the public mind.
“Triffin’s Dilemma” says the holder of the global reserve currency (the U.S.) has an obligation to fund domestic budget deficits so there is enough liquidity to fund a trade deficit. Moreover, a structural trade deficit is necessary for reserve currency expansion for global economic growth. I think Triffin thought the direction of causality was Budget Deficits –>> Trade Deficits–>> Global trade growth –>> U.S. economic growth. In non-recession years since the 1990’s there was a rough correspondence between the two. Then the Ryan tax cut of 2017 and the subsequent Covid-19 stimulus measures came along, and in the last ten years the Federal budget deficits have gone crazy.
Maybe the Congress has let the deficit go crazy because Congress knows the global economy is in much worse shape than we commoners are led to believe? The thing is, when does the craziness stop? When we’ve reached the interest payments singularity?
In regards to Triffin’s dilemma. Wasn’t there a period where countries demanded US dollars in order to buy US industrial output? And since the US economy was the world’s factory, this led the USD to become the world’s global reserve currency. That was a much different situation to know where the US pays for its imports with USD as a promissory note because it has a structural trade deficit with the world.
How much would an economy actually grow if it had a budget deficit that is 6% of GDP when the Real GDP is growing at 2%? I would say that since the debt is growing faster than the economy and the economy is financially worse off at the end of the period than the beginning, that there wasn’t any growth at all.
When a government spends more than it takes in, it creates debt and whoever holds that spending/debt has a claim on the country’s assets. This is especially true when the spending it used to keep the lights on through things like payments to pensioners, repairing roads, maintaining policing or the military. It is less true when the money is spent on in ways that increase the country’s productive capacity. People who hold the claims, won’t hold it for free and they can go anywhere in the world seeking a return on their holdings.
Does the MMT primer mention how a country like the US, could go from a high growth – 4%+ real GDP growth and a national debt that was declining as a percent of GDP to a country averages debt that is growing at more than 6% of GDP with real GDP growth of close to 2%?
Re: your concluding question, I think the combination of deindustrialization and the interaction of the Triffin Dilemma with the Sectoral Balances Identity is probably enough to account for the shape of the trends you note.
The Sectoral Balances Identity is especially useful — the government deficit is numerically equal to the sum of the domestic non-government surplus and the external sector (ie, rest-of-world) surplus.
US non-government sector cannot support prolonged deficits (they use the currency rather than issue it and so face a solvency constraint), so over time, the US government deficit will tend to be as large as or larger than the external sector surplus — and the external sector will be in surplus because of the Triffin Dilemma.
No need to reference MMT for this analysis (though MMT does pay close attention to the Sectoral Balances Identity; I had never heard of that prior to encountering it in the Wray Primer). MMT is simply a (accurate) description of how government finances work — it’s basically careful accounting.
I’m not sure whether the Primer presents this analysis, but I learned how to do it by reading the Primer, so perhaps that is enough.
I don’t see MMT as presenting an accurate description of how government finances work, nor does it accurately describe how economies work. When the US deindustrialized, it imported more than it sold to the world and this led to slower economic growth and more of a need for governments to pump up the economy. This led to the government cutting taxes and fees, along with deficit spending in order to stimulate the economy. Lower revenues and higher spending led to increased debt. MMT ignores the structural changes to the economy that has led situation and builds a logical structure around the false premises of taxes not funding governments and that a monetary sovereign can create all the money it wants. I know that MMT has backed off from these positions – but it still accepts fhe false premises.
“the false premises of taxes not funding governments and that a monetary sovereign can create all the money it wants”
Those premises are not false. The only constraint is real resources, including labour. As Keynes put it, “anything we can do we can afford.”
Like Minsky says, anyone can create all the debt they want, the trick is getting someone to hold it. MMT now argues that it is limited by resources, recognizing that there are limits. As more reality sinks in to MMT, it will find that there are other limits such as international competitiveness, relations with trading partners, lack of long-term planning.
Keynes had an implicit assumption in all his work that required countries to have balanced trade, once that is no longer in place – like the 50 years of US trade deficits, his theories don’t provide the expected results. MMT has no concept of how the US could go from a country with over 4% real GDP growth and a national debt that was shrinking as a portion of GDP, to a country where growth is halved and the debt is climbing at three times the rate of GDP growth. Mainly because, theoretically, they can create and spend as much as they want.
I heard a doctor say that “theoretically” they could keep a person who is suffering from numerous wounds alive by pumping blood into them. Okay, good to know but most doctors would want to treat the wounds too so there was no need for perpetual pumping.
I want to mention three things here for a discussion to see if this make sense.
“Yes of course money is created by debt” — Isn’t this a consequence of private money — the congress/treasury and the fed (except in extraordinary circumstances like COVID) can not ‘print’ money (by law), the treasury can only borrow, in which act money come to existence for the first time. Then the Fed buys the gov debt (paper) from the private banking — money come in existence the second time. Then the banks keep the money with the Fed as excess reserves, and the Fed creates money in the third round to pay interest on the reserves (econbrowser explains this). The alternative would be to issue money by the treasury, a public institution, direct as a utility without debt. Certain US public banks had the authority to create money until Eisenhower, when the last of those was eliminated. But the argument has always been that the public is too profligate in comparison to the private sector that would never do anything to wrack the country (Italian city states and their ruling families are mentioned here).
The second thing is money circulation. The decreasing money velocity suggests that money settles somewhere. This settled money as a store of value can not perform the function of the medium of exchange (or inflation creation) and new money need to be continuously made. That’s a major problem with gold — more of it can’t be readily made to compensate for saving.
Third and related to the above — all $ debt = $ in existence, that would 36 trillion in federal debt + state + corporate + personal, with the federal debt is the largest. More debt, more money -> more ‘wealth’. When a corporate share is sold, $ are not destroyed, only change hands. So, it may be that there are private institutions out there with billions of cash in their accounts — more money than could ever be spent buying things at the current prices.
When do Federal deficits cause new money to be created? Good question. I’ll give my best guess and hope others can give theirs.
It is my understanding that Federal budget deficits create new money when the Fed “monetizes” Treasury debt, as the Japan Central Bank typically does in Japan, and when the Fed buys securities for cash via QE. Right now the Fed is engaging in QT, which reduces money in circulation (all else equal).
When Congress authorizes more borrowing, the U.S. Treasury and the Fed decide how that is marketed to the public as T-Notes and T Bonds with various maturities. These are then sold in the Fed’s Open Market Operations (auctions, which then determines interest rates). This is a transfer of cash from one account (investor) to another (Treasury). I don’t think new money is yet created (or needs to be) at this point. It’s just M2 from one account to another. The investor’s money is typically money that is sitting in a relatively dormant pool of cash, one that the investor wants to put to work. In this way the U.S. deficit has the effect of activating dormant pools of wealth by pumping them into circulation. The physiocrats and the MMT “stock vs. flow” economists understand that this is an inherently valuable function, especially when so much of the stock in a highly financialized economy is kept in cold storage by the top .01%, and the body needs the supply (e.g. due to a major wound that never heals, like a big trade deficit).
So, as I understand it, the U.S. debt does not create money per see, just activates it into circulation. The key is not to activate (transfuse) so much into the body as to cause overload (inflation).
When banks invest in Treasury securities due to an excess of “cash” on hand, and some of it is from loans the banks have created ex-nihilo, then this portion of cash is new money, but doesn’t need to be.
Thank you for the discussion. That’s a good point that “the U.S. debt does not create money per see, just activates it into circulation.” and the first step need not create M2. And selling treasuries is a way to recover $ from abroad. So, then basically the Treasury needs to ask the Fed (since Fed has all the data) what is the amount of in the “cold storage” + foreign demand and then increase the debt by that amount. So, then perhaps the increase in federal debt passed in the BBB equals that ‘cold storage’. The step-wise increase in debt is a way to keep debt in line with the ‘savings’. Still, this does not seem to be the most productive way to manage private savings (although may be I am wrong) — it merely spins out private fortunes and indebts the public to private individuals.
Looking at Fred, M2 Money Stock began to increase, while its velocity hints at a decrease.
What is happening in the UK is crazy. They are actually cannibalizing the whole county so it seems that the government is wrapped up in its Neoliberal ideology. Being sovereign, they could print the money needed as they never signed up for the Euro when they were in the EU. But instead they have to cut pensions and healthcare while at the same time they decide to send off $5 billion to the Ukraine each and every year because There Is No Alternative.
Labour certainly are following some neoliberal principles, though not with quite the same zealotry as 47.
The proposed benefit cuts, shelved this last week, were going to be about £5.5bn for disabled social benefits and you can add in £2.5bn for the 2 child benefit cap which Labour are keeping. These are actually tiny given total UK government spending at £1.25 trillion+. It is about 0.6%.
Yet this is enough to send our right wing MSM into paroxysms over meaningless discussions on ‘budget headroom’ and debt levels.
We’ve also had the usual shite from several economics correspondents that the Bond market limits government.
And then, if you govern by making Pavlovian responses to adverse media, you are not going to react cannily.
Rather than a decent sized hill, it’s a very small pimple to die on for a party supposedly committed to supporting the most deprived in society. Child poverty is 35% in London. No wonder over 100 back bench MPs rebelled. The lasting damage to Starmer’s and Reeves’ credibility is still unknowable.
Actually English and Welsh healthcare budgets are increasing in real terms, but just not by a sufficiently large % to compensate for some of the infrastructure cuts and structural weaknesses created 10-15 years ago by the Tories, given demographic trends.
Here in Scotland we have a real terms health budget increase of about 2.5% and better social care provision than down south, but it is still not really enough to improve Primary care.
Good point, but why print to fund social programs when the kleptocracy can asset-strip and cannibalize everything that has not already been stolen? A debt-strapped, and desperate working class will be more likely to work for low wages and less likely to engage in strikes etc.
Yep…. That’s certainly the way the managerial political elite think.
Under neoliberalism government debt and monetary policy exists to sustain asset values through interest rate manipulation instead of the previous Keynesian target of full employment.
Here, that conventional wisdom is perpetuated by such as the Oxford PPE which both aspiring Labour and Conservative politicians seem to need as a tick box. (The classic next step is then either as a Special Adviser – SPAD – to some politician, or work in an ‘independent’ think tank)
Both Bill Mitchell and Steve Keen, as heterodox economists, and involved with MMT, have been highly critical of the economic theories peddled by PPE types of course, so the academic background of the political class is classic Gramscian hegemony.
The only thing that drove 1980s UK growth during the Thatcherite era de-industrialisation (which also intentionally created downward pressure on wages) was credit debt after finance de-regulation, which also caused a massive housing price spike.
They even had mortgages of up to 120% of property values !!!
So the consumer generated two parcels of profit – one from buying goods and services, and the second from credit interest profit. Nice deal if you can get it…
Didn’t the Ford Motor Company end up making more profit from its credit arm than actual car sales by 2000 ?
Yeah, the de-industrialization and financialization of the economy, pushed by the ivory-tower, Oxbridge-indoctrinated sycophants, benefits their bribe-masters. Quite cosy and convenient for them… that reminds me:
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” (U. Sinclair)
There seems to be a fondness for Murphy, which I do not particularly share. Of course, he’s correct but it’s also bog-standard MMT. So check out the real deal – Kelton and Wray – also Dirk Ehnts. And many others, including, of course, Mosler.
As Murphy points out, fiat governments create our money. Taxes do not fund spending, spending funds taxes. It’s one of those MMT inversions that is so counter intuitive it blocks understanding. And it is at work, today, as we fuss about ‘finding’ the money for increased defence spending. The extra money does not ‘come’ from anywhere. Consider what happens if you pay a soldier more (or hire more of them) – they pay more in income tax, then sales taxes. They’re not wealthy so tend to spend all of what they’re given so it flows into the economy and returns as it is taxed at various stages. In other words spending comes back (re venu s) as taxes in the future – much like loan repayments come back as loan repayments in the future.
But surely something has to give? Yes, in a fully functioning economy with no unemployment or junk jobs you would have to displace or conscript people into the services. But not if people working gig jobs with no benefits can be diverted by better pay, better benefits and a better life experience. In which case the ‘cost’ of increased defence spending is not in social services but loss of Uber-eats. Bring it on…
Buying US hardware is a different story – now we’re into balance of payments issues and, potentially debt in a foreign currency (USD). It is the path to becoming a ‘developing’ economy – all assets in hock to US financial interests and no social services let alone a safety net. Much like Argentina is, today.
Back to fiat government spending – it can only go in one of two directions – into the productive economy or into savings. Today, the flow into savings is extraordinary. Fiat governments are creating money right into the pockets of the wealthy who are diverting it out of regulated banking into unregulated private-equity. At the same time Trump is establishing a crypto savings mechanism. What can possibly go wrong is a very good question.
Mosler’s answer (among others) is a zero interest rate, ie, stop issuing bonds and let saving sit in reserves. And stop paying interest on reserves. At issue, then, is today’s financialized economy – cutting interest payments to the financial sector (surely a big, beautiful form of socialism) would gut the system. Again, bring it on…
Of course, dreaming in technicolour…
No one but Murphy allows us to cross post their work. And we don’t require perfection. Getting some key points right is enough to be useful. My offering quibbles at the top and readers offering objections, nuance, and questions sharpens critical thinking skills. Promoting that is the overarching mission of this site.
It gives me the opportunity to say many thanks for NC.
My comment was so long in limbo that I thought it had been rejected and was a bit regretful I had been negative towards Murphy.
But to be honest, getting a reply from you kinda made my day. And thanks for the clarification about cross-posting. Of course! And credit where it’s due – to Murphy – for allowing it.
I do not understand Murphy. He seems to contradict himself. Let me give a simple sequence of events to explain what I find confusing.
From 1. The government spends too much money causing inflation. From 2. The BoE sets too low an interest rate on the gilts. This causes turmoil in the markets because pension funds and insurance companies are unable to meet their commitments. From 3. When financial markets are in turmoil, the Bank of England steps in. Its role is to stabilise prices and yields. This is not optional.
Thus it seems that contrary to 5 – Financial markets do not hold the government hostage – financial markets do force the government to act via forcing the BoE to step in. I’d imagine that things might not or could not unfold as I suggested in 1 and 2, but I’d think that the principle still holds if through different channels or different sequences.
This seems to focus on some idea of a ‘national currency’, that somehow the BoE prints money that is used within the UK, there is no international market in existence, that the UK bonds aren’t bought internationally or any of the above aren’t dumped internationally – which is where the finance comes from and ends up. Yes, the UK can print its money and the rules have been changed for ‘fiscal stability’ which is neolibreal dictatorship but if the US and other markets refuse to trade with the UK, there will be some effect and this is not discussed.
What happened after 2008 was not contrary to international or banking policy but carried out at the behest of Goldmansachs et al, who heartily approved of being given $3Tn to finance their debts, so his argument that the UK acted ‘independently’ and could do so again is nonsense. He must explain what measures he plans to counter corporate dominance of the UK and the BoE, which now acts as treasury for the banks not for the UK govt
I am wondering what is underlying in all this issue. My hunch is that there is a profound desire to not only maintain but enhance the existing social structures. The blip that occured after WWII, with sooo many people dying and with the threat of communism looming over, plus technological advancements (many led by gov spending and organization) created a vast middle class.
I think there is a desire to return to the good old days, with some more profound immiseration paired by militarization of police.
With the dissapearance of any Christian ethos, I will be waiting to see the first legal case of a person in the west selling himself/herself into slavery… Bill Gates, with his landholdings in the US will maybe buy some nubile girls sold by their parents, to warm his nonagerian, death smelling body…
Everything else is just means to an end.
Hudson says the issue is not the Federal Bank buying up the debt, but treasury sales failures on the secondary market. The other big issue is the quantity of derivatives underlying all the debt, both public & private. IIRC this is what caused the GFC.
The derivatives that cause the GFC were on risky tranches of subprime mortgage debt, and had nada to do with the Treasury bond market.
Hudson is not a Treasury dealer. He seems to assure all Treasuries are highly liquid. That is a myth when you get past one year. In Treasuries, only the current run at any big maturity (all the bills, one year, three year, five year, seven year, ten year) is actively traded. When a new issue in made in these maturities is made, the trading shifts away from the now-non-fresh issue to the new one.
Greg Ip (the Wall Street Journal’s chief economics editor, and long-standing Fed whisperer) points out that long-term yields did not rise when Big
MMT works fine, as long as your national currency is trusted internationally. The UK and USA can create pounds and dollars more-or-less at will, because they are trusted to pay their debts.
Likewise, a completely independent nation (on some imaginary island) with a growing economy could create money as needed (or desired) to sustain the needs of its citizens. As long as the citizens remained content with the price of eggs, milk, carrots, and potatoes; i.e., as long as their income was adequate, there would be no friction.
It is when a nation borrows from other nations (e.g., from the IMF or World Bank) that the indigenous creation of money becomes an issue. Because at that point enters the issue of the exchange value between currencies. If Mexico were to double the volume of pesos, a peso would still be a peso in Mexico but it would be half a peso internationally.
The US and UK may be able to operate under the assumptions of MMT, at least for a time. While Argentina and Peru and Albania and Zimbabwe, among many others, plainly cannot.
And I see little interest among the MMT clique for making any attempt to reconcile that contradiction.
In his MMT Primer, Randall Wray discusses the issues you raise. There is indeed, as you say, less fiscal policy freedom for smaller nations, and even less for nations that need to defend the value of their currencies relative to other nations’ currencies because of foreign-denominated debt obligations.
MMT is not a set of policy prescriptions; it’s an accurate description of how government finance works in fiat currency systems. That MMT-aware people focus their attention more on nations where there is some fiscal policy freedom is due, I suspect, precisely to the fact that it is these nations that have some fiscal policy freedom, so that more population-friendly policies could be pursued, if the rulers were not wedded to austerian thinking. Nations with little or no fiscal policy freedom have their fiscal and monetary policies substantially dictated to them by the constraints they face.
I don’t think there is a contradiction or anything to be reconciled.
Think of it as two separate loops. The first is creation of fiat money by the government. A fiat government can always ‘afford’ to buy everything that is for sale in its own currency.
The second loop is international trade. As you say, a fiat government can only create its own currency not foreign currencies. If its economy is insufficiently developed to provide what is needed then it must trade or borrow.
The answer is to develop your economy as best you can – check out Fadhel Kaboub.
Our current trading system – in USD – gives one country a huge advantage. The US can create as many USD to buy whatever it likes anywhere – or to run 800 plus military bases around the world. And you don’t have to dig very deep to uncover the suggestion that it goes out of its way to prevent development in perennially ‘developing’ nations.
As for ‘debts’ and credits – they are nothing more than numbers in a spreadsheet at the FED. And if you run your spreadsheet on the basis that you can create as many USD as you like but restrict other countries from trading (tariffs) and reserve the right to delete any credits you don’t approve of (Russia but I believe a third of countries are under one form of sanction or another) then it might not be a surprise that countries are looking for an alternative – BRICS.
In fact Keynes argued against adopting the USD for international trade having seen the consequences of using the GBP.
In fact, there is no real answer to real international trade imbalances (vs trading speculation). It’s not a question of being trusted to pay your debts but of maintaining the fiction that you have a store of credits you can call on at some point in the future. The Saudis have huge credits at the FED but are not allowed to buy anything substantive with them. So they sit there as Treasuries – bits of paper – and become not a store of value but a means for blackmail – follow US policy or we can confiscate yours as we did Russia’s.
As Hudson points out, there was a guy about 2000 years ago who pointed out the absurdity of our debt paradigm. Counting your credits and punishing those who can’t pay back is no way to live. “Forgive us our debts as we forgive our debtors.”
And we all know what the Romans thought about that.
I tried for very long time to understand how a government can create money according to MMT but it simply does not make sense. At least in the USA and EU the central bank is the only entity allowed to legally create money. If that is correct and the government manages somehow to create money, then the government is a criminal organization that belongs in jail. To stress again: for money to be spent it must exist first (high powered money, not credit). People like William Mitchell, Steve Keen and the current author somehow presume that a government can spend money into existence.
The US Treasury is legally authorized to create physical fiat money in the form of bank notes and coins. This authority long predates the existence of the Federal Reserve Bank system.
> a government can spend money into existence.
This is a somewhat arcane issue, and perhaps I have it wrong. My understanding of what I have read is that when US Treasury wants to pay for something purchased from the non-government sector, it instructs the Federal Reserve to issue the payment, which results in the creation of new reserves in the Federal Reserve account of the bank at which the payment recipient has its bank account — new money is thereby created.
If the Treasury doesn’t request payment (spending), the reserves (which are what MMT calls “vertical money”, distinguished from the “horizontal money” that private banks can create) don’t get created. In this sense, “the US government spends money into existence.”
The issuance of Treasury debt, long term bonds or short-term bills, to “fund” the spending occurs subsequently, and it is not a logical requirement (in principle, the Fed creation of reserves is enough to make the payment the Treasury requested) ; current practices call for this debt issuance, and it does serve some useful purposes, such as draining reserves from the banking system (which allows the Fed to control short term interest rates through open market operations), and providing the non-government sector with low-risk income-generating assets.
I believe this only occurs when the Fed monetizes the debt by “buying” Treasury debt directly. This would be an internal transfer from the Fed to Treasury accounts or via QE. If anything, the Fed is rendering money out of existence via its current QT operations.
Until the GFC it was unusual for the Fed to do monetize Treasury debt, although it is common in Japan (Abenomics). Japan may be pointing the way?
The central bank is part of the government.
This is the critical point, notwithstanding ‘independence’ of the Central Bank.
And it’s not the Treasury that instructs the FED to create money – by marking up deposit accounts within the private sector banking system – it is Congress. It is the will of the people.
Enter Trump. It didn’t take long for him to attack the system. DOGE was simply a mechanism to say that the people can say what they want but I don’t have to execute. It’s not all the way to the King deciding how money should be created but it’s half a step and a warning. With a suitably bowed and supplicant Congress Trump has no need to push further. And disenfranchising the majority of voters will be a more subtle way to achieve full Tyranny before the midterms.
And the US will have become an abomination – a Putinesque dictatorship. And what of Americans? They will have the government they deserve.
That is false. No one asked Congress to pay for the bombing runs in Iraq during the Gulf War, and that pattern continues. The Pentagon has enormous black budgets, to the degree that it is totally unable to explain where a lot of its money went.
Agreed, they already have the government they deserve…
@Yves
“That is false. No one asked Congress to pay for the bombing runs…”
I disagree – the funds expended have already been approved by Congress.
All Federal expenditure must be authorised by a money bill passing Congress.
Treasury can only issue new unencumbered money as instructed by Congress.
Congress approves the Defense Appropriations Bill which authorises Treasury provide a total discretionary allocation to Dept of Defense up to the limit approved by Congress.
The Dept of Defense is entrusted to spend those current funds as/when it deems appropriate. It does not need seek approval for each action – indeed it doesn’t provide sufficient detail even when asked at audit.
My understanding of the ‘spend into existence’ point (it’s been a while since I read wrays primer so I might be off here).
The dollar from the point of view of the government issuing it is a debt. Historically with bullion backed paper you could take your dollar to the government bank and demand a dollar worth of bullion (gold/whatever). With fiat currency you go and demand to exchange your dollar and they’ll give you a new dollar. It’s no longer backed by anything but people’s desire to have those dollars.
Everyone else (non issuer) sees the dollar as an asset.
If the government owed no money (and held no assets) then there would be no currency in circulation. The government is required to create a debt it owes to make dollars. A million dollars ‘out there ‘ means it owes a million dollars. How do you get those dollars out to the people who want them? The government spends/buys things from people.
So from very basic principles, and accounting identifies (every asset has a mirror image liability someone else holds) you can arrive at the idea that fiat issuing goverents MUST spend in order to get currency out to the private sector (and therefore increase/create the amount of money in rotation).
When Bill Clinton ran a budget surplus you could look at private debt levels (individuals and companies) go up rapidly as the government stopped being in deficit.
Not quite. Domestic commercial U.S. banks create money when they make loans. As soon as the loan comes into existence, the borrower has an account in dollars for the amount of the loan, made possible by keystrokes.
The total amount of loans banks can have on its balance sheet is limited by capital requirements, not idle reserves or cash. If you ever apply for a loan, you’ll never hear a bank say “we can’t loan you ‘X’ right now because we don’t have the money on hand, but we can loan you ‘1/2 X.'”
I believe it was John Kenneth Galbraith who said “If people really knew how banks make loans they would be appalled.”
An important implication of this is that growth of bank credit is expansionary and a decrease of bank credit is contractionary. This is contrary to the assumption in loanable funds theory that the role of banks in the economy is neutral (and conveniently, can be ignored in their macro models).
Steve Keen (for one) has modeled the role of banks and has determined that bank lending behavior and time lags can contribute non-linearities and volatility in the macro economy.
Richard Murphy politely requested that his biography be updated back in March but it seems it hasn’t been yet.
He has not sent me an update. I updated his bio based on what he has on his site of them. The onus is on him to send new copy if he does not like what I made of what he has on his site.
According to what I can find, the Treasury is responsible for printing the physical cash, but it must be given to FED. I.e. the government can not use this money at its discretion. The FED is obliged to exchange this money against bank reserves, i.e the physical cash can enter the economy only against bank reserves, which get created by the FED only. So it comes back to FED again. The FED does not create new money without buying government debt or without getting some other monetary asset. I do not know what else the FED is allowed to do per law, but this is what it is does in fact, so the government can not by itself introduce new money into circulation. It requires the active FED assistance, i.e. debt monetization. In short, at present the government does not and can not create money ( introduce money into circulation) by itself. It is irrelevant if the law allowed it to introduce money into circulation somehow if this never happened. So, again, the author of the article seems to be in the position to believe that Santa places the gifts under the Christmas tree. The fact that something is theoretically possible does not mean that it happens in reality!
No, the Fed spends first by crediting Treasury’s account. The Treasury cleans this up later by issuing bonds. The Treasury bond sale is a political holdover from the gold standard days.
I do not see how this sequence of events changes anything. The government still has to borrow money from somewhere.
And there is a reason for this “political holdover” to exist. If you let the government issue money just like that, it will inevitably abuse it.
Agreed. The Fed and Treasury undoubtedly improvise as needed but ultimately (probably in a matter of days) Fed spending in behalf of Treasury will be offset in the accounts by Fed selling of securities.
The exception is when the FED monetizes the debt, e.g. when it does QE. It does not do this in normal times. Right now the FED is doing QT. We’ll see how long this lasts.
If you agree, then the government does not create money (introduce new money in the spending stream) by itself and MMT is simply wrong.
This is current practice, but MMT says (and I agree) that the sovereign has the discretion to depart from this practice and “spend money into existence”. The idea of borrowing and paying interest is a matter of sovereign choice, and it increasingly appears to be an arbitrary (but very expensive) choice that now costs the U.S. $1 trillion/yr in interest charges.
If you have an exclusive right to the issuance of the only universal reserve currency, and pay zero interest, other Sovereigns will still choose to hold it as a “reserve” up to a point — but not excessively so. In this way countries with trade surpluses will have every incentive to let their currencies appreciate once they have the “rainy day” reserves they need to keep the IMF off their backs. It is our outmoded legacy system from the days of the gold standard that maintains the fiction that we must “bribe” the world with interest to hold dollars, and therefore the interest-bearing debts keep piling up and the trade deficits continue.
If the U.S. government were to announce, tomorrow, that it would henceforth monetize all deficits; cease selling debt securities; and let all bonds expire at maturity, eventually the interest charges on the entire U.S. debt will go to zero.
When will such a policy be instituted? When interest charges go to $2 trillion? $10 trillion? The total keeps growing faster than GDP, so it seems the “debt singularity” will happen eventually.
The gold standard is not dead. We just adhere to the same rituals as if the dollar had to be as precious as gold, more precious than health care or other safety nets. Republicans today think, a la Grover Norquist in years past, that all this social spending is like so many unwanted kittens, and deserve to be drowned in the fiscal (blood) bath. Republicans can see the day of reckoning coming when we’ll drown those kittens so we can keep paying those interest charges. They are patient.
We have to start discussing the alternatives. Japan has shown the way. All we have to lose is our chains to a bygone era.
I do not contend that the government can not theoretically create money if allowed. I just claim, that the results will be bad ( hyperinflation typically).
QTM is a joke … Hyperinflation is more complex than notions about money supply.
Productivity is the underlining cause in classical cases pre and post gold standard. This has been unpacked more than a few times on this blog alone, as bad as currency has to be backed by a commodity and if not gold – oil.
Yes, hyperinflation is a complex phenomenon. Still, it typically starts with government money printing getting out of hand. The latter is what would almost surely happen if the government gets direct access to the printing press. The requirement to issue debt against deficits was not accidental or as is claimed in this blog : a remnant of the gold standard. Basically, the government has learned from experience, that it has to protect itself from itself. Politicians do not have limits when it comes to money. Even now, despite all laws and regulations they rack up huge debts ( see e.g. how nobody cares about the Eurozone stability criteria any more).
Sorry the so called money printing[tm], comes after political/elite decisions which impair productivity, which then destroy a nations ability to pay debt denoted in foreign currency or accrue it to fend off pressure on its own currency.
Politicians these days are beholden to their funders, hence the latter should be the focus of ones ire and not the sales staff. Yet some still bang on about hyperinflation [loss of personal wealth] and politicians aka Government. Nada about the real nodes of power shaping human events and its effect on society at large.
Personally I would be more concerned about the ludicrous valuations of the stnok market and due to hyper financialization of the economy rolling 4 to 7 year shocks occur. Of which as Talab points out can really get out of hand.
No. Hyperinflations reliably follow state failure of one sort or other — usually as a result of losses in war (civil or otherwise). The “money printing” comes as a result of the failure — it is a result, NOT a cause
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102
My answer was misplaced. See later in the comment sequence (under Karl’s comments).
Hyperinflation is one scenario of the approaching “interest payments singularity”. It is the equivalent of universal “Jubilee” i.e. the write-off of all dollar debts for all practical purposes.
I, for one, need dollar debt instruments to keep their value in my retirement until I die, so Jubilee would not bring me joy!
But consider that Japan’s Central Bank has been monetizing its Yen-denominated government budget deficits for about fifteen years, and inflation remains low. Of course, someday hyperinflation may come to Japan also. But why hasn’t it happened yet? I suspect the fear of hyperinflation forces the JCB and the government to manage their budgets and finances smartly and responsibly.
Might the U.S. be incapable of being smart and responsible? Maybe, so you may be right….
So let’s consider the implications of hyper-inflation. Individuals and institutions with non-variable-interest debts or cash savings in dollars could be wiped out. Those hedged with real assets like houses, farms and equities might do OK. But one shouldn’t under-estimate the trauma, as in Germany in the ’20’s. So we should all hedge for this possibility now.
The alternative is extreme budget-cutting, slashed spending, lost safety nets, lost jobs, banks wiped out, and depression. Pick your poison. Something will have to give at some point if we continue on this path. My guess that this time the top 0.1% would suffer the biggest losses, going from super-rich to just rich.
My preferred scenario is that the Fed starts to follow MMT principles with restraint the Japan Central Bank. It could start spending money into existence, stop paying interest on government debts to the private sector, and protect safety nets BUT doing this smartly and responsibly.
Hasn’t Japan shown the way?
Read the paper about hyperinflation listed below. I wonder if people notice what stays in the conclusion.Quote: ” The excessive and incompetent monetary response is generally the result of severe exogenous forces at work such as war, regime change, corruption, output collapse or a ceding of monetary sovereignity”. So the author, despite all his claims, admits, that it is the monetary response that matters! And the latter is obvious, since not all economic shocks result in hyperinflation. Some result in austerity ( Greece for example). But then the shock by itself is not a necessary condition for hyperinflation to occur. This is a “Blaming the messenger” fallacy.
Poking around the archives of early MMT publications, I think I have found the meaning of “spending money into existence”. The argument ends up being about the definition of what money is.
Here is an old paper by Stephanie Kelton (then Bell).
(This article goes into considerable detail about management of the overall level of reserves in the banking system; there is about 20 pages of that before getting to the section that is relevant to its citation here)
Go to the pdf, and read down to pages 20-21 where Kelton shows that taxes and bond sales to the non-government sectors do not finance spending.
The meaning of “government spends money into existence” has to do with the fact that the Treasury’s account balance at the Federal Reserve is not included in the monetary aggregates (the “M#” statistics). When the Treasury writes a check to a recipient (spending to purchase a good or service, or a transfer payment) and that check is deposited into the bank at which the recipient has an account, the Treasury’s account balance at the Fed is debited and the recipient’s bank’s account balance is credited. This crediting of a private bank’s Fed reserve balance causes the relevant M aggregate to increase by the amount credited, but the debiting of the Treasury’s reserve account balance does not decrease the M aggregate, because Treasury balances are not part of the aggregates. Thus, “spending by the government creates money” by changing the monetary aggregates. Correspondingly, payment of taxes reduces private bank reserve balances, reducing the M aggregate and increasing the Treasury’s reserve balance (which does not change the M aggregate), so that M declines when taxes are paid. Taxation destroys money. Similarly, bond sales to the non-government sector reduce monetary aggregates (destroy money)
If the Fed directly purchases assets from the Treasury, crediting the Treasury’s reserve account at the Fed, this is not money creation in the definitional sense that Treasury reserve balances do not count as “money”. “High powered money” or “vertical money” does not come into existence until government spending results in a transfer of reserves from the Treasury’s reserve account to the account of the bank at which the payment recipient deposits the Treasury payment.
The short answer to the disagreement is that, given the definition of ‘money” used in the accounting of Treasury and Federal Reserve operations, Treasury’s reserves, held in its account(s) in the Federal Reserve Bank System, don’t become money until they are spent.
It’s a definitional issue. If one wants to call the Treasury’s Fed reserve account balance “money”, one is free to do that, but it isn’t called that by economists and accountants, both orthodox and heterodox.
I should add that the point of the paper is that taxes and bond sales to the non-government sectors are not for the purpose of creating Treasury reserve balances out of which new money can be created by spending, but for the purpose of controlling the level of reserves in the private banking system,
Treasury could get all the reserves it needs by direct asset swaps (bonds/bills for reserves) with the Federal Reserve Bank. But this would have the effect of flooding the banking system with reserves, with undesirable effects. Bond sales to the non-government sector and taxation are tools for draining excessive reserve levels from the banking system.
By this logic when the Fed does QE, and buys Treasury bonds from the private sector (mostly banks I believe), it adds this asset to its own balance sheet, and the cash it creates ex-nihilo to buy the bonds gets added to the monetary aggregate in the banking system. The Treasury pays interest on those bonds, as usual, and then the Fed credits that interest payment back to Treasury. In this way the net interest payment is zero.
When the Fed monetizes Government spending by buying all Treasury debt directly, no interest is paid external to the government sector. It’s the governmnent paying interest to itself.
Consider the extreme case when all U.S. Government spending is monetized by the Fed henceforth. When the legacy bonds mature and roll off the books, there will no longer be a primary or secondary U.S. government bond market setting a risk-free term structure for interest rates. The nearest equivalent would be AAA+ corporate bonds. I would guess there would be a healthy market for such bonds, and therefore rewards for achieving AAA+ ratings beyond what are given today. The point here is that financial markets don’t need Treasury debt markets to function perfectly well. However, middle men (banks, etc.) who make fees serving these markets will certainly lose out.
Here’s a mini anecdotal report on the reception to MMT among seniors at what’s called an “Osher” class in a midwest city with a greater population of slightly under 2 million. The class had 14 enrolled, about average for these classes. I used S. Kelton’s book to explain MMT over a four session period. The first class went well, lots of questions and a couple of open-minded standard economic thinking savants who were eager to hear new ideas. After the first class I got a call from a staff member of the Osher program. He said he’d gotten “feedback” that I was going too fast and not explaining concepts. He suggested I slow down and use Power Point. I told him I’d informed the class that they should be a bit to a lot confused by the first lecture -MMT does that to people. I told the class they would have to exert themselves to grasp MMT ideas, which I told them were akin to the Copernican Revolution. Two student dropped the class and we then settled into three more lively sessions with numerous positive commented from the students, save two students who were distancing themselves as if to see how much economic and fiscal lunacy I would present to them. I announced that the final session, the fifth, would cover the real constraints on government spending, with a focus on the concept the limits to growth. One student became haughty and quipped there were no limits for America (she did not return for the final session). The other said he’d heard of peak oil and it was a lot of BS. He did not return for the final session. The final session went very well with members of the class saying, “This is the best class I’ve had at Osher,” and “You’ve given us a new way to look at how the government works.” A few days later I got an email from the people who run the program informing me that “overall things aren’t working out,” and they were canceling the class I had scheduled to teach in the fall. As a sociologist I interpreted this reaction as institutional enforcement of received status quo ideas. Clearly, the students’ reactions were bimodal, with the majority finding MMT of value. However, the status quo carried the day -for now.
Thanks for sharing your experience. I’ve taught Osher classes too (different subject). Please keep up the good work! This is the way things will change for the better, one conversion at a time….
In the Mirror and the Light, Hillary Mantel describes Henry VIII sending his gold vessels from the palace to the mint to be melted down to pay the cost of containing the rebellion in York. Money creation in the 16th century.
Per Wikipedia, tally sticks as a means of payment for purchased goods (ie, a form of money; as I understand it, tallies issued by the sovereign were redeemable at tax payment time as a valid means of payment of taxes due; presumably they were tradable, too) were introduced in the 12th century.