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Firstly, your humble writer, who was distracted first by untimely (though much enjoyed) reserve duty, and then quite a heavy workload, failed to convey his profound and (at the time) prophetic commentary on important recent events; Putin and Ukraine, the capture of El Chapo, and so forth.

Though we shall hopefully revisit some of these in any event, a good way to get back into rhythm is write about a subject less pressing on the clock. And what better field than the “Voodo” mysteries on the attempts at making a science out of economics.

In recent years, an imaginative group often going by “MMTers”, and usually finding the amiable and articulate Mr. Warren Mosler leading their charge, have caused quite a stir, at least among the more thoughtful part of the electorate. Firstly, we must point out that for the most part, proponents of MMT insist that it is not an ideology or even a proponent of any specific economic policy, but rather merely aims to describe the way money works in the modern world; hence Modern Monetary Theory. Specifically, they refer to a fiat currency regime (with the fiat as legal tender, and taxes) with a free-floating exchange rate.

It is in some part derived from earlier theories known as chartalism stating that a completely inherently worthless currency can derive value from its sole acceptability to extinguish tax liabilities (my favorite example of that is Tally sticks, should write on those on another occasion). All is well and good there.

In many respects, it (MMT) has gained popularity as a strikingly counter-intuitive backlash against the current emphasis on deficits and national debt. The US and Europe, among others, have reached enormous levels of government deficits and debt that an ever-increasing number of people (beyond the traditional conservatives, deficit hawks, and anti-statists/libertarians) are convinced is unsustainable.

Though it is preferable to read what MMTers say in their own words, the message for what they see as the ever-growing, doomsaying, alarmist well-intentioned simpletons is “Hello… Governments are not Households, and  Dollars (or whatever other fiat currency) are not Spanish pieces of eight”.

Treating a government, who issues its own currency, as a household is simplistic and misleading they claim. The US cannot run out of dollars, it creates them at whim. The idea of fear of default and bankruptcy (at least unintentional default and bankruptcy) is absurd. A nation can pay any bill denominated in its own currency regardless of how large. Furthermore, MMTers are convinced mainstream economists are also victims of this intellectual fallacy, not so much due to oversimplification and their treatment of governments like households (who must balance their monthly budgets) as they believe the majority of the electorate does, but rather due to being stuck in classical and older theories of economics developed under a different set of circumstances.

From left to right, be it mercantilism, Marxism, Maoism, Meynard Keynes, Adam Smith or Austrian economics, none existed under fiat free floating exchange systems. The great bulk of economic thought was developed during the gold standard, similar commodity money systems, or at least under fixed exchange systems. We must remember, the US dollar was not truly off the gold standard and floating until the Nixon Shock and the end of the Bretton Woods Era (1971-1973); hardly 40 years of this modern fiat period. The great economic thinkers on all sides, overwhelmingly lived and wrote before this period.

So MMTers will tell us, economists and laymen alike are missing the point… a nation does not have to balance its budget every week, month or year like a family; it’s a different animal. A nation whose national debt is payable by its own floating fiat currency cannot (unintentionally at least) default on it. They go much further and claim that the only reason people can have any money at all, is because the government has run a deficit!

Without too much further elaboration, some key points that MMT generally supports can be best shown by Mr. Warren Mosler’s “Seven Deadly Innocent Frauds of Economic Policy

 

  • #1 The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.

As explained above, Warren and MMT explain that a country can “make up” as much of its own currency as it wants. It does not have to tax you to get money it created itself to begin with. As he puts it:

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.

  • #2 With government deficits, we are leaving our debt burden to our children.

Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.

 

  • #3 Federal Government budget deficits take away savings.

Federal Government budget deficits ADD to savings.

 

  • #4 “Social Security is broken.”

Federal Government Checks Don’t Bounce.

 

  • #5 The trade deficit is an unsustainable imbalance that takes away jobs and output.

Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.

 

  •  #6 We need savings to provide the funds for investment.

Investment adds to savings.

 

  • #7 It’s a bad thing that higher deficits today mean higher taxes tomorrow.

I agree – the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!!

 

Warren Mosler – Leading advocate of MMT

As you can see, the main theme here is that a country can make as much money, at least its own money, as it wants and deficits are not the nightmare we are all led to believe. Though MMTers generally state that they are simply explaining “operational realities” of our current system, and not (at least not in the same breadth) advocating certain policy measures or ideology, in reality there is a very fine line if it exists at all between that and the type of policies they advocate. Firstly, what MMT states, and specifically the way it states it, leads anyone who believes it to realize deficits are not only not bad, but necessary, and that massive government spending is imperative for a healthy economy.

In fact, most leading members of the MMT camp, frequently support policy measures (usually quite progressive) that are often quite unorthodox if not radical, and it is easily seen that they rest on a foundation of not being concerned with government spending levels or deficits. For example, Mosler proposes (or has proposed) a national 30 mile per hour speed limit, to stop worrying about solvency (deficits and debt), increase government spending or lower taxes (ie increase deficits) to fill the output gap, eliminate tax advantages encouraging savings and retirement plans, legalize all recreational drugs, government funded health care for all and of course a guaranteed federally funded job for anyone willing to work (pretty sure the USSSR had that one!).

To be fair, MMTers, at least the more intelligent ones (Mr. Mosler included) never actually say that “deficits don’t matter” and in fact usually explicitly state the opposite (though while giving it little importance). They recognize that if a government spends or “prints” money without limit, this can lead to hyperinflation. They recognize that deficits can be too large for reaching a certain set of goals, but more importantly too small, and they contend that they are in fact too small today as countries attempt “austerity” measures, instead of maximizing output by deficit spending (spending and/or tax cuts). They believe that the attempts countries make to balance their budgets, translate into real “pain” felt by the population and output shortfalls.

My favorite illustrative point that Mosler makes is explaining that the government shreds the cash it receives from fees, taxes or the sale of securities. The government regularly shreds old bills and prints new ones for example. This could be shocking to many people, as obviously we do not know of businesses that would shred those precious 20 or 100 dollar bills it collects from consumers. The idea is that if the government can shred these, obviously there is something else going on here… it really does not “need” you to pay in the first place if it will just shred the cash you just paid with, and it must be true that the government as an issuer of currency, does not or should not behave by the rules of households and businesses who are the users of this currency.

The Typical Critics

All of this has generated plenty of critics on the right and left; mostly because the implications of MMT seem counterintuitive and following them it seems, would lead a country to financial ruin. However, I have not seen anyone been able to refute MMT on its own grounds. “True”, some Austrian economists (like Robert Murhpy) say, what MMT says is “technically” right, but so what… there’s more to economics than that.

On the left and Keynesian side, criticism has been particularly amusing and ironic, since what MMT says should bolster their demands for more government spending and intrusion in the economy. However, they are so used to defending against charges that their policies would lead to huge deficits, debt and inflation, and countering with their own versions of fiscal and monetary “responsibility” that they simply cannot believe or support the “irresponsible” extremism of the theory, even though it’s on their side and attempts to use powerful tools such as logic and facts (things often unfamiliar to the left) to back its claims up.

Historic US Debt held by the Public

The situation reminds of an episode many years ago with Fox’s Sean Hannity, that paired two officials or spokesmen, a “palestinian” vs an Israeli for debate . The Israeli was taken aback by the intensity of Hannity’s pro-Israel stance (ie “palestine” is made up, they should go back to Jordan, the West Bank is Jewish land and the like), and the debate quickly (and embarrassingly) turned into the Arab and Israeli together arguing for the palestinian side against Hannity supporting Israel.

The criticism by the left of MMT resembles this situation, and is typified by economist Paul Krugman. From the right, the criticism has been more substantive, usually highlighting the negative effects of government spending, inflation and unsustainable debt, but likewise has failed to point out anything technically wrong with what MMT claims.

It’s all well and good to say that of course anyone with any basic knowledge of modern economics can understand fiat money is not backed by anything, and a country can “print” as much as it wants of it. The point is, we are told by intelligent economists criticizing MMT, that if a government does attempt to print too much of it, the currency can collapse or suffer hyperinflation. This is why deficits can be very dangerous.

However, the real crux of MMT, what really sets it apart from simply being a theory that recognizes the fiat currency can be issued at will by its issuer, is (similar to Mosler’s #3 innocent Fraud) that government deficits add to savings. In fact, MMTers claim that the sum of those deficits, the total government debt, equals the money that the private sector has. Without deficits and debt, there would be no money.

This is the “operational reality” that critics of MMT have completely avoided because they do not know how to address it. If this is true, then much of modern economics (in a broad spectrum from right to left) is very wrong, as are pretty much all world leaders and central banks. If this is true, any attempt at paying off the national debt would result in there being no more money! Forget your qualms about inflation, government spending and deficits, if it is black and white that there is no money without government deficits and debt, than Mosler really is on to something. And deficits might not only be ok, but necessary, and quite large ones at that.

This is the heart of MMT that must be addressed, and the Lighthouse Keeper will gladly do so (in the section “The Bread and Butter”).

But first, having briefly described MMT and the thus far criticism of it, let us address it in some order.

Analyzing MMT

The main base for all of MMT of course is that a sovereign nation can always issue as much of its own currency as it wants. It has no solvency risk as long as debt is denominated in its own currency.

There are two issues already present here at this seemingly correct and normally undisputed base of MMT; and once this base is shaky, so is everything else built on top of it. As MMT itself indicates, the above is true only in a fiat currency regime that has a free floating exchange rate.

MMTers also continuously state that they are simply explaining the modern realities, not necessarily advocating this system but explaining its “operational realities”. They grant (without much sincerity) that there may be better systems, but given the current system (let’s say in the US), this is how it works, and thus this is what we should probably do.

Well the fiat system is not so fiat, and the free float is not so free-floating. Today, Canada is the closest nation to a true free floating exchange rate, becoming so in 1998 when it stopped interfering with it. The UK and others intervene much more frequently, and the US has (openly) intervened 8 times in 1995, only twice from then until 2007, and who knows how many times or to what extent since then as the worldwide financial crisis took hold, and subsequent massive Obama deficits unfolded. Though a bit dated due to these recent events, Reinhart provides a great look at how saying you are a free floating exchange rate is different than being one.

So, apparently to many countries, a true float still seems very scary, and thus caring about their exchange rate, the limitless ability to issue fiat currency that MMT believe countries have is not really there.

To make the point even stronger, one must ask, why do they (MMT people) care if a debt is denominated in its own currency or not? Whatever the exchange rate is, surely a country can print whatever amount of their own currency is needed to buy the foreign currency required to pay back the debt. Admittedly, it’s an extra step, and as the exchange rate rises, it can be an ever increasing amount of your own currency that is needed, but so what? Since a country has no solvency risk on its own currency, it has no limit on how much it produces in order to buy the foreign currency. Right?

Mosler himself writes:

MMT does point out, however, that debt denominated in a foreign currency certainly is a fiscal risk to governments, since the indebted government cannot create foreign currency. In this case the only way the government can sustainably repay its foreign debt is to ensure that its currency is continually and highly demanded by foreigners over the period that it wishes to repay the debt – an exchange rate collapse would potentially multiply the debt many times over asymptotically, making it impossible to repay.

For almost the same reasons, domestic debt is a fiscal risk as well. Or put another away, the cash that the government needs is always for some purpose, usually to buy goods and services from the real economy, or even if it is to give to a sector of the population (take welfare payments, or benefits to the elderly, etc for example), you want the people of that sector to be able to buy real goods and services with the money from the economy. If your money is not worth anything, it cannot perform that task any better than it can buy foreign currency to pay back your foreign denominated debt. You always need your currency to buy other things…otherwise it has no use as a currency, so if MMT recognizes that buying foreign capital with your currency can be an issue (if you owe too much of it), likewise buying anything else with it can be an issue as well. If you want federal workers to to be willing to work for salaries in your currency (the value of which are inescapably linked to foreign exchange rates as people need and want to import things), your currency has to be worth something.

MMT might respond to this that domestically, there will always be a demand for the currency due to taxes (which you can raise), and though this certainly has an effect, it also has its limits. No one will work at a 100% tax rate, and at any rate less than that, they will work only if that difference holds enough value to them to be worthwhile.

In any event, modern countries are currently far from truly free-floating. Besides actively intervening in foreign exchange markets, since central banks constantly intervene in other ways by creating and removing currency from the system (whether their goals are price stability, interest rates,stimulus, etc), this also naturally affects currency exchange rates.

As far as the fiatness of the modern fiat systems, MMT also glosses over some real important caveats. If one notices, MMT always talks about the “government”, or the “sovereign” issuer of currency. There is hardly ever a mention of the “Fed” or the “Treasury”, or anything more specific like that, and its imperative for their theory to hold any water.

Countries do not Simply print Money

Modern countries today to not simply “print” money, physically nor electronically as Mosler would have us believe. The Federal Reserve, which is not even an agency of the government, but rather a quasi private banking cartel, is the entity that can do much of the magic MMT touts. Creating and destroying money out of and into thin air. But the Federal Reserve is not the same as the federal government, the Treasury, nor the same as the Treasury’s account at the Federal Reserve.

And whether one considers the federal reserve part of the federal government or not, its much hailed cornerstone is its independence. Across the world, countries have enshrined into law and believe as a holy tenant of sound economic policy, the need for an “independent” monetary policy. The idea is that upcoming election or not, recession or boom,  the sitting administration cannot force the hand of the central bank and use its monetary tools for its short term political goals. Put simply, it cannot spend as much as it wants, nor can it create any money at all.

As the Fed’s own page on the subject states:

No. The term “printing money” often refers to a situation in which the central bank is effectively financing the deficit of the federal government on a permanent basis by issuing large amounts of currency. This situation does not exist in the United States. Global demand for Treasury securities has remained strong, and the Treasury has been able to finance large deficits without difficulty.

And this is why the US must borrow in order to have deficits. The Treasury does not simply print money to spend, nor does the Fed directly lend to the Treasury. The Treasury must sell Treasury securities to the public in order to finance its deficits. If the public stops wanting dollars or those Treasury securities, that would be a real problem.

Of course, the Fed does lend to the Treasury indirectly, by creating more money as it purchases Treasuries from the public in efforts to keep the interest rates low (and in a dirty little secret the Treasury much prefers the Fed holding this debt rather than the public, since the Fed refunds the Treasury for interest earned on these holdings unlike the public (so the more securities the Fed holds rather than the public or foreign governments, then the cheaper to finance the debt is)), and one of the reasons that the public appetite for US securities has remained strong is because all countries continue monetary expansion and to run large historically large deficits (in other words, there are few good places to put money nowadays).

In any event, the point is that in theory governments could change their constitution and laws to simply be this monolithic limitless issuer of fiat currency that MMT envisions, but that is not the current system in most countries. There are the infamous debt ceilings, spending limits, separation of powers, various federal agencies, and an “independent” central bank. Sure, those limits MMTers might say, are “self-imposed” but they exist, and if they want to talk about the current system and “operational realities” than they are glossing over a few important ones.

I must note that its important to not confuse any of my description of the current modern systems for my support for them. Since MMT makes a similar claim, in saying they are simply describing the modern systems, I am pointing out the differences.

Self imposed limits

Another important point is that many of these self-imposed limitations on spending, printing and borrowing, have come about due to experience with animals closer to what MMT believes exists currently. As a very US-based movement, MMT does not seem to understand the realities of what happens when a government truly has uninhibited spending and printing power. The 3rd world throughout much of the 20th century was plagued by this power, and its results, hyperinflation, defaults and poverty. So though I point out that the current systems are not really like how MMT describes them, if they were the results would be far worse.

It does not have to be this way technically, it happens due to human nature. Certainly, people without this broader experience can see that it seems absurd to go through this borrowing and even taxing, for a government to fund itself with its own currency; both inefficient and costly. A government could simply print (not borrow) all the money it needs interest-free, and have no debt whatsoever. The population would be automatically “taxed” proportionately by inflation. The more money the government prints, the more the value of the currency would drop. A responsible government, would not print too much, and one can get rid of taxes, the IRS, tax evasion, courts and jails that deal with evaders, the need to borrow to fund government operations and incur interest, etc.

This would be along the lines of Lincoln’s “Greenbacks” during the civil war, debt-free money. Though it sounds nice, and there is truly theoretically nothing wrong with this approach, in reality it will always lead to too much government spending (as the electorate demands more free things paid by the govt, which having no debt and being able to print whatever it wants can hardly refuse), hyperinflation and the destruction of the currency along with the economy. But in any event, a nation more like that is what MMT not only envisions but claims exists now, despite the very different “operational realities”.

The limits, the having to borrow money to use it, the alert that large deficits and debt cause among the public (which Mosler scoffs at), the penalty of having to pay interest on the debt, all these self imposed limits sometimes keep a government from going over the brink. As we see across the world today, be it Greece, Italy or the US, they are not nearly enough, but better than nothing. In fact, one of the reasons for the previous success of the US as a nation, was its deep rooted system of federalism and state rights.

Federalism and State Rights Limited Spending and Inflation

While the federal government was small and remote, much of the business of government that in many other western countries falls in the hands of the national government, was in the hands of the states (and other local jurisdictions). US States often have budgets far larger than most countries. But the limits on their tax and spend tendencies is much more real; California cannot print any dollars whatsoever. States must tax or borrow what they spend, and not once, have investors stopped lending to them.

US cities and counties can and often go bankrupt (Detroit in the news today), and while states cannot go bankrupt due to legal sovereign issues (bankruptcy court is a federal court), they do so in every way but name. Of course, in the age of bailouts (whether its federal or state money bailing out cities and counties, or federal money bailing out states), the moral hazard has increased and these bankruptcies are less frequent though more needed, but the risk is always real. California and Illinois are fresh examples, with California paying with IOUs instead of cash (that it can’t print) and furloughing employees.

So hopefully the bedrock of MMT, that it describes realities in “today’s world” of unconstrained fiat issuers of floating exchange currencies is at least worthy of some doubt.

Dealing with Mosler’s Deadly Innocent Frauds

So as for Mosler’s first “deadly innocent fraud”

The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.

Countries today are in fact limited in this manner. The Federal Reserve, itself not really part of the Federal government, cannot lend to the Treasury directly (this was not always the case, but today, it is usually illegal), and the Treasury must find willing buyers of its securities to finance its spending. Besides this fact, there are legal limits and regulations of various kinds that limit the US’s ability to tax, borrow and spend.

True, theoretically these are “self imposed” as a government can simply make up new laws where this is literally the case.

Having said that, though the statement may not be 100% accurate, I should grant that it is at least indirectly true to a large degree. The Fed, in trying to reach its various goals, has an enormous ability to expand the monetary base and makes it easy for the Treasury to borrow. Indirectly, it does lend to the Treasury. Furthermore, I also realize that the Fed’s independence is not that absolute (the President for example nominates the Chairman of the Fed), and it works hand in hand with the Treasury and the administration.

So yes, the government can spend a lot, and run gigantic if not infinite deficits… so what? There MMT has told us nothing more than realizing that the government has a printing press… we all already knew that, but it seems to fascinate MMTers with the accounting realities that this phenomena presents. The government can print dollars, but not wealth.

We can turn the innocent fraud into non fraud by restating:

The government does not have to raise funds through taxation or borrowing in order to spend (ie it could change laws and just print money). But the government’s real spending power (at least in a longer term) is limited by its ability to tax and borrow real wealth.

Social Security

Skipping down to Mosler’s social security innocent but deadly frauds:

“Social Security is broken.”

and his counter:

Federal Government Checks Don’t Bounce.

No perhaps they don’t (as long as the Treasury’s account still has money, or it is able to raise more funds by selling Treasury securities to willing investors but details aside…), not bouncing but having no real value is pretty close to the same thing if not worse. Ironically, Mosler chooses Social Security as an example of the unlimited money creation powers of the government; it’s a pretty bad example.

Why you ask?

Well, the idea is that whatever dollar commitment the US government made to its seniors, it can always keep it regardless of how astronomical the sums needed may be, since the US can create dollars out of thin air. Firstly of course, we can say ok… but so what?

If inflation makes these dollars worth very little or nothing, what good are they to the seniors who will not be able to buy food or shelter with them. Even if you accept the premise at face value, and say fine, we will be able to honor the dollar commitments simply by “printing” the dollars, that says nothing about achieving the purpose of those commitments.

The seniors don’t want accounting identities, they want real wealth to buy goods and services they need, and they gave up real wealth throughout their lives by paying into social security (back when dollars were worth something). But it gets much better than that….

Social Security benefits are adjusted for inflation; called COLA (Cost of Living Adjustments). For example, benefits are increasing for 63 million Americans in 2014 by 1.5%. Mosler’s claim that the government can always meet these liabilities, regardless of anything else, is in stark contradiction to his own admission that foreign denominated debt is a fiscal risk because an exchange rate collapse could “potentially multiply the debt many times over asymptotically, making it impossible to repay”. Replace “exchange rate collapse” with “hyperinflation” for example.

You see, the framers of Social Security (at least its amenders in 1972 who enacted COLA – before that, Congress would authorize increases at an ad hoc basis), understood that the point of Social Security benefits was to guarantee a certain living standard for contributors in their retirement. They understood that simply guaranteeing an arbitrary number of fiat currency of unknowable worth many years in the future would be pretty meaningless.

So Mosler here, in an understandable mistake since he meant only to show that the government can pay any large bill in dollars, overlooked that though Social Security is a liability denominated in dollars, it is inflation adjusted and so cannot simply be met the magic wand of the government; for the very same reasons that he recognizes a foreign denominated debt likewise cannot despite that there too, one can print as many dollars as is theoretically necessary to purchase the foreign currency, regardless of the exchange rate. Eventually, you run into the “many times over asymptotically” issue.

Sovereign Debt Defaults and Solvency Risk

Another major aspect of the current MMT train of thought, is that solvency and default fears for modern nations (fiat currency, floating exchange as usual.. etc etc) is laughable and idiotic. They never cease to reiterate this and go nuts when politicians or economists mention fears of default, unsustainable debt etc.

The fact of the matter is that nations default incredibly frequently. Again, MMTers tend to have a US-centric experience, which is what allows them to even consider their beliefs since the US with its dollar as a world reserve currency, can and does get away with things many other nations can’t dream of fiscally or monetarily. There has been at least 13 major sovereign debt defaults since 1999 (Ecuador, Argentina, Russia, Ukraine, El Salvador, Peru, Pakistan, Moldova, Uruguay etc), and other smaller or less document cases. Most of these included foreign and domestic debt.

In fact, since 1800 there has been over 300 cases of overt sovereign default, and many more not so overt. Granted, most are cases of external debt (250), but 68 cases are clear cases of overt domestic debt defaults. This is a low estimate since domestic debt defaults are even more difficult to uncover in the historical record. In any event, foreign denominated debt defaults are certainly more prevalent, but there are plenty of cases of domestic currency debt defaults.

Now, MMT might rightly retort back that these aren’t really domestic debts, because they could either be inflation adjusted bonds (kind of like social security benefits, haha), or from a country that maintained a fixed or somewhat fixed exchange rate. Thus, for them, printing money could not be the answer since exchange rates would fall and inflation rise. Well, certainly this is true for the vast majority of cases, as I pointed out at the beginning of this paper (which seems like quite a while ago), few if any countries are really under a free floating exchange rate. To find cases of sovereign domestic currency denominated debt defaults from a fiat issuer under a floating exchange rate is a task I did not set myself to (and welcome feedback from anyone who did or does), but the point is less than critical.

There are dozens and dozens of examples of defaults, both of foreign debt and domestic debt. Then MMT will cry out, but then “it’s voluntary”. Sticking to their “accounting realities”, they will say if a country can issue any amount of their own currency that they want, and they still default, well then that is simply voluntary; but if they didn’t want to, they wouldn’t have to.

Again we hit the limit of what MMT can truly explain to us; their above assertion may be true but all defaults, certainly the vast majority, are in some ways voluntary. The country that chooses not to honor its debt does just that.. chooses to. There are most often alternatives to this, which may include massive tax increases, invading your neighbor and seizing his wealth, borrowing at higher interest rates, or yes indeed…. printing lots of money that would cause inflation or hyperinflation. Again, issuing currency is not the same thing as creating wealth, and if in order to pay back a debt, a country needs to print so much of its currency that it will impoverish all of its citizens, it may chose not to do it.

An interesting point here is that the very caveat that MMTers claim about not applying to fixed exchange regimes is telling about this inconsistent relationship MMT has with defining what is voluntary and what isn’t. The truth is that fixed exchange currency regimes may not be able to print as much money as they want IF they wish to stay at their fixed exchange rate. But again, just like MMTers disregard many other points, this is “self-imposed”. If they don’t mind letting their exchange rate fall, they too, can print as much money as they want. But they may very well chose not to.

Being on a fixed exchange rate is self imposed, just as much as the debt ceiling that they disregard is self imposed,and just as much as any other law or system a country abides by.

The Bread and Butter

Now let’s get to the crux of MMT that I was referring to before. All of the above believe it or not still leaves MMT tethering debatably on the “technically correct” tightrope. And though we perhaps have shown that while what MMT says may not very useful to us (ok… so the government can print money.. so what?), much of it can still be protected under the guise of simply describing “operating realities” that they love to remind mere mortals of. But what really gives credence to their love of deficits and national debts is their “realization” that the only way people can have any money is by the governments running deficits.

Mosler’s innocent deadly fraud #3 states

Government budget deficits take away savings.

he refutes this and says:

Federal Government budget deficits ADD to savings.

First let me paraphrase the best way I think MMT  describes this concept. If you have a dollar in your pocket, where did it come from? Ultimately, unless its counterfeit, it had to come from the government. And if you have it, then it must mean the government spent it and has not taxed it back yet; in essence a deficit.

So let’s start this from a theoretical beginning. The US spends $100 dollars into existence so now the people have 100 dollars, and the government is at a deficit of 100 dollars. Then it taxes for that year and taxes all 100 dollars back, as a responsible non deficit spending government should right? Well, now the people have 0 dollars left, no money. What if the government only taxed back 50 dollars? Then the deficit for that year would be 50 dollars, and the people would have 50 dollars.

If in the next year, the government runs the same 50 dollar deficit, then the people will now have 100 dollars, and the government’s running total of deficits (often known as the national debt), would also be at $100. So the money that people have, can only come from government deficit spending.

And thus, attempts to reduce the debt, and similar austerity measures, take away savings from people and cause unemployment, recession etc.

This is a very powerful statement, and I have not heard anyone be able to refute it on its own grounds. The way to do so, however is simple. Just like MMTers gloss over the differences between the Fed and the treasury, they also very often gloss over the difference between “printing” money (which we don’t believe they literally take as printing but rather any sort of electronic issuing which is what I mean as well by it), borrowing money, and literally printing it. They are all somewhat different.

If you have a non counterfeit dollar in your pocket, then yes… it must mean the government printed it (literally), spent it, and has not taxed it back. But that does not mean that they have not taxed back (or spent for that matter) billions or trillions more or less electronically. As we all know, hard currency (like dollar bills) today represent a tiny percent of the money supply which is mostly bank balances, and transferred electronically or by check.

To simplify, if we pretend only hard cash existed, and the government literally printed money for its own use like MMT thinks it does (as opposed to borrowing it from the public like the Treasury really does), then there would be a “deficit” in the number of dollars the government has spent compared to how many it has taxed back; but no debt! If the US simply prints US dollars (Lincoln era “Greenback: style (or Colonial script style if you prefer), then it does not owe them to anyone!

Sure, the same laws of physics apply here as everywhere else, you can print money, but not real wealth, so the more of these dollars you’d print, the less they’d be worth, but there still would be no national debt, nor interest to pay. Nothing was borrowed.

And in this theoretical case, MMT would be correct, if you taxed all those dollars back, then there would eventually be non left for the public. Not that the public would not have any real wealth, but it would not have any dollars, and if you wanted them to continue paying taxes in these same dollars, then yes there would be a problem (namely the public laughing at your tax and the collapse of said government long before you ever removed the last dollars from circulation).

But in reality the US government borrows dollars by selling Treasury securities to the public to finance its operations. And this “borrowing” is why there is a debt to begin with. And when you pay this debt back, money does not disappear; how could it disappear when you just “paid it” to the people you owed it to. When you pay back the national debt, you can only pay it back either by existing dollars (for example taxing them from someone else), in which case there is no more or less dollars in the system, or the non-literal “printing” of new dollars to pay the debt (thus paying it by inflation) in which case there is now even more dollars in the private sector. Either way, by paying the debt, money does not disappear as MMTers claim.

And this is why in 1835 when Andrew Jackson did pay off the debt, Americans still had US dollars in their pockets (yes yes… not a fiat free floating exchange system).

A great example of how MMTers and their fearless leader often gloss over the very technicalities they claim to highlight can be seen in the following by Mosler as he seemingly explains (besides making a point on the trade deficit) how little government spending matters:

Suppose that the U.S. Army wanted to buy $1 billion worth of uniforms from China, and China wanted to sell $1 billion worth of uniforms to the U.S. Army at that price. So the Army buys $1 billion worth of uniforms from China. First, understand that both parties are happy. There is no “imbalance.” China would rather have the 1 billion U.S. dollars than the uniforms or they wouldn’t have sold them, and the U.S. Army would rather have the uniforms than the money or it wouldn’t have bought them. The transactions are all voluntary, and all in U.S. dollars. But back to our point – how does China get paid?

China has a reserve account at the Federal Reserve Bank…To pay China, the Fed adds 1 billion U.S. dollars to China’s checking account at the Fed. It does this by changing the numbers in China’s checking account up by 1 billion U.S. dollars. The numbers don’t come from anywhere any more than the numbers on a scoreboard at a football come from anywhere. China then has some choices. It can do nothing and keep the $1 billion in its checking account at the Fed, or it can buy U.S. Treasury securities.

Here Mosler, unless I am grossly mistaken, greatly misleads his readers. The Fed does not simply credit China’s account with $1 billion out of nowhere. At least not directly. The Fed does not buy Chinese uniforms. The Fed debits the Treasury’s account and then credits China’s account maybe… which is what happens whenever someone writes a check to someone else. The $1 billion is deducted from the Treasury’s account, which comes from taxes and when not enough (as when we have deficits), from the sale of Treasury securities. So the Treasury has to sell $1 billion of securities to the American public (or the Chinese or whoever) to raise the money to then buy the uniforms. True, afterwards, the Chinese may feel like buying more securities with their $1 billion, so (if a new issue) the US will now owe $2 billion; 1 for buying the uniforms, and a second one for the loan it took from china by getting the billion back (to spend on whatever else).

On top of this basic issue there is of course that the government under the current system does not really control the money supply fully in either case since the banks, as part of the federal reserve system, can create money by lending. The money supply is multiplied by this many times over, and people, institutions and government alike, accept this bank checkbook money as US dollars; and you could pay your taxes with it. This fact makes the MMT position even more inaccurate, but I won’t get into it here for the sake of maintaining any semblance of brevity.

More Technically

When Mosler discusses this issue a bit more sophisticatedly, he states:

Simply put, government deficits ADD to our savings (to the penny). This is an accounting fact, not theory or philosophy. There is no dispute.

You will forgive me then sir, as I dispute. Firstly, what is an accounting fact may not necessarily be of any use as accounting rules are created sometimes arbitrarily by us. For example, as innate as it may sound that velocity is distance over time, we measure it in say.. miles per hour. Of course we do! We decided that velocity was distance/time and so we must measure it in our unit of distance / our unit of time. That is why defining equations for a true physicist are not the same as theorems.

In any event, having stated that things being an accounting fact is not necessarily meaningful in economics (by using a strange physics example), let us analyze this “accounting fact” for validity.

In order to not unfairly dissect the purposely short statement above (“government deficits ADD to our savings”), let us have Mosler define further as he does elsewhere:

It is basic national income accounting. For example, if the government deficit last year was $1 trillion, it means that the net increase in savings of financial assets for everyone else combined was exactly, to the penny, $1 trillion. (For those who took some economics courses, you might remember that net savings of financial assets is held as some combination of actual cash, Treasury securities and member bank deposits at the Federal Reserve.) This is Economics 101 and first year money banking. It is beyond dispute. It’s an accounting identity. Yet it’s misrepresented continuously, and at the highest levels of political authority. They are just plain wrong.

So, having defined savings of financial assets as cash, bank deposits, and Treasury securities, he is saying that a government deficit adds (by an equal amount to the penny) to the private sector’s savings of financial assets.

Well, in reality we know that if the government borrowed money from Pete, to then spend and pay Paul, no new money was really introduced into the system (which is the very reason the government is supposed to borrow, and not simply print money, and thus avoid inflation). Same thing with taxing and spending, government takes from someone and gives to someone else (not that they are same in any other way); no new money.

So how is it that Mr. Mosler says this increased the money in the hands of the public? Well, by defining savings of financial assets as cash AND treasury securities. He goes on to explain it as follows.

1. If Joe buys 100 dollars of Treasury securities (T-bills, government bonds, etc), he now has $100 less cash, but 100 dollars more in Treasury securities so he is unchanged.

Note: Mosler makes this important point buying these securities: “this sale is voluntary, which means that the buyer buys the securities because he wants to. Presumably, he believes that he is better off buying them than not buying them. No one is ever forced to buy government securities. They get sold at auction to the highest bidder who is willing to accept the lowest yield”.

2. The government then takes his 100 dollars and spends them, giving them to Bobby, who now has 100 new dollars. (the government now being in deficit 100 dollars).

3. The private sector now has a total of 200 dollars, so 100 more than previously, equaling the government deficit.

When explained like this, the ruse is easy to spot. If you count treasury securities the same as cash, then of course there is new cash. But this is a bit absurd (or at least not meaningful). All transactions have a debit and credit column; just because you do not immediately burn your IOU (the Treasury security) into ashes upon purchase doesn’t mean you still have your 100 dollars; I could say that when the government paid Bobby 100 dollars, it was not in deficit because it bought from him a chair. It used to have 100 dollars, now it has a chair worth 100 dollars, so its even. And worse, Bobby doesn’t really have an additional new $100 dollars, because he used to have a chair, and now it’s gone. Everyone is unchanged.

By that logic all spending isn’t really spending because some asset is acquired, be it a massage or a treasury security. The point is that a Treasury security is not cash, it is a bond or loan. However liquid it is, I cannot buy groceries with it, and Joe, the original purchaser of the security, has to forgo the use of 100 dollars of cash in order to invest and purchase it. If he wants to be able to use these dollars again, he can sell the security to someone else who then must forego 100 real dollars to purchase it.

So as the government borrows, money is deducted from the system as the public invests in this government debt. Accounting identity or not, this is not a real net savings increase to the public. Of course in reality, new money does come into the equation because as the government borrows, the Fed buys more government treasuries back from the public (with true “new money”) to keep its target interest rate. But this is not always a necessity and not “to the penny”.

If the Fed did not do this, as the government kept borrowing, it would be harder and harder to find buyers for Treasury securities, and the value of the dollar would rise as it would become more dear. The government would have to offer higher and higher interest rates in order to attract more lenders.  But since the Fed does keep adding money into the system, it’s not so much that private savings increase along with the federal deficit, but rather inflation increases as the Fed monetizes the debt. Inflation wears down all savings, as they are now worth less than previously.

Saving without Government Deficits

Furthermore, the implication is that the public cannot save without government deficits. This not only ignores what real wealth is (a person on a stranded island without banks, currency or anything else could save by putting real wealth (ie coconuts) aside for future use), but also the presence of banks which expand and supply the money supply in our fractional reserve world (which I don’t like as is).

Let’s say you have no savings, and you build a house all by yourself, you somehow cut down legally available timber, worked hard and built a house. You and the market value it at 100 dollars. You now sell it to someone who only has the 1 dollar bill that came from the government, and the government stands at 1 dollar deficit.  But he goes to the bank, and gets a 100 dollar loan, backed by the wealth you created in the form of a house, and pays you with it. Now you have a brand new 100 dollars of savings.  Did these 100 dollars come from someone else who now does not have them? Nope… no depositor in that bank now sees 100 dollars less in his balance because they loaned your buyer the 100 dollars. Of course, fractional reserve banking is a topic onto itself, but the point is that the people’s real savings can increase and decrease without any input from the government (what MMT calls vertical transactions).

In fact, the opposite is true, the government cannot increase people’s real net savings, but only increase it nominally and thus lower its real value by inflation. The government produces no wealth, and so cannot make anyone richer (on a net basis). If it could, then it should just print enough money to make us all rich. It can make individuals richer by taking wealth from other individuals and making them poorer, but it cannot make everyone richer.

Accounting is not economics.

When Mosler tries to describe the opposite effect, that surpluses decrease savings, he either really got confused for a second or is intentionally being misleading:

No, when we run a surplus, we have to sell our securities to the Fed (cash in our savings accounts at the Fed) to get the money to pay our taxes, and our net financial assets and savings go down by the amount of the surplus.

If he defined net financial assets as cash and treasury securities, why would they go down when we sell them? If you trade your 100 dollars for a 100 dollar Treasury security, he considers you going from 100 to 100, but if you sell that security back for 100 dollars, he considers your savings having gone down by 100 (the size of the surplus?). Here Mosler really surprised me.

Especially since he introduces this quote in a discussion with Robert Rubin, as a reply to Rubin telling him that surpluses increase savings and investment (as the  government buys back Treasury securities with cash). Doesn’t really follow, which is probably why he quotes Mr. Rubin as simply answering “No, I think you’re wrong.”

Notice that Mosler introduces the irrelevant taxes here (as if in the previous example there was no taxes). Now, I will agree, your savings will go down by the amount of the taxes you had to pay, but certainly not by the amount of money you got by selling your treasury security! (unless there was an unmentioned 100% sales tax on selling T securities in the example).

Perhaps the thinks your savings has been lost because it was previously in your “savings” account (as a Treasury security) and as cash you have it in your “checking” account. MMT does love its accounting identities.

MMT leads to Deficit and Spend Policies

These views lead Mr. Mosler to endorse the government always increasing deficits in order to keep the economy at full production

If people want to work and earn money but don’t want to spend it, fine! Government can either keep cutting taxes until we decide to spend and buy our own output, and/or buy the output (award contracts for infrastructure repairs, national security, medical research, and the like).

The problem here is that you have interfered with the market, and the price mechanism that guides it. Nothing is free. As we have seen, you can print money but not wealth, and the gap must come from somewhere. When governments buy things, they do not indicate a real demand for these things, and so such methods are ultimately unsustainable. For example, we could ease the pain of the American consumer and the economy as a whole by subsidizing oil prices.

The US can deficit away as MMT states, so let’s subsidize gas prices down to $.50 a gallon where they belong, this will really jump start the economy. But the question is, should gas really be at .50 a gallon? We will be furthering a dependence on an ever more rare and expensive (not to mention not so clean) nonrenewable resource. The economy that will be built on that will be “fake”, because when the subsidy stops, as stop it must due to the realities of economics as opposed to accounting, the lie will be in the open. Instead, the rising gasoline prices indicate to the market that it may be more worthwhile to adapt to and innovate other alternatives.

Any time the government artificially stimulates demand or supply, it is either pushing on a string or giving a one legged man a job at the 50th floor of a building (no elevator).

A final point to note on this issue, is that even with accepting MMT’s accounting principles, and that the government deficit equals the net savings of financial assets of all other sectors, keep in mind that this includes foreign investors (we have all heard how much Japan and China hold of the US’s debt). And so, while the government deficit may mean that the Fed owns lots of securities which is bought by issuing new dollars, and so everyone suffered the inflationary pressure of this, these dollars and the rest of publicly held securities may be held by foreigners. So foreign entities can own more savings in US dollars (which they previously held in other forms), and more US dollars (which were created by the fed to buy their securities), but this hardly means that the US public increased their savings by the deficit’s amount.

Note that MMT  severely overrates the importance of “vertical” transactions (those between the government and the private sector) and underrates those within the private sector (that ironically are the only thing that matter). This comes from overly focusing on the phenomena of fiat currency as opposed to real value and wealth.

A discussion about privatizing Social Security with Steve Moore of the Cato Institute that Mr. Mosler quotes is very telling. Forgive me for reproducing it here in full

Warren: “Steve, giving the government your money now in the form of Social Security taxes and getting it back later, is functionally the same as buying a government bond, where you give the government money now, and it gives it back to you later. The only difference is the return that seniors will get.”

Steve: “OK, but with government bonds, you get a higher return than with Social Security, which only pays your money back at 2% interest. Social Security is a bad investment for individuals.”

Warren: “OK, I’ll get to the investment aspect later, but let me continue. Under your privatization proposal, the government would reduce Social Security payments and the employees would put that money into the stock market.”

Steve: “Yes, about $100 per month, and only into approved, high quality stocks.”

Warren: “OK and the U.S. Treasury would have to issue and sell additional securities to cover the reduced revenues.”

Steve: “Yes, and it would also be reducing Social Security payments down the road.”

Warren: “Right. So to continue with my point, the employees buying the stock buy them from someone else, so all the stocks do is change hands. No new money goes into the economy.”

Steve: “Right.”

Warren: “And the people who sold the stock then have the money from the sale which is the money that buys the government bonds.”

Steve: “Yes, you can think of it that way.”

Warren: “So what has happened is that the employees stopped buying into Social Security, which we agree was functionally the same as buying a government bond, and instead they bought stocks. And other people sold their stocks and bought the newly-issued government bonds. So looking at it from the macro level, all that happened is that some stocks changed hands and some bonds changed hands. Total stocks outstanding and total bonds outstanding, if you count Social Security as a bond, remained about the same. And so this should have no influence on the economy or total savings, or anything else apart from generating transactions costs?”

Steve: “Yes, I suppose you can look at it that way, but I look at it as privatizing, and I believe people can invest their money better than government can.”

Warren: “Ok, but you agree that the amount of stocks held by the public hasn’t changed, so with this proposal, nothing changes for the economy as a whole.”

Steve: “But it does change things for Social Security participants.”

Warren: “Yes, with exactly the opposite change for others. And none of this has even been discussed by Congress or any mainstream economist? It seems you have an ideological bias toward privatization rhetoric, rather than the substance of the proposal.”

Steve: “I like it because I believe in privatization. I believe that you can invest your money better than government can.”

Mosler sums up with:

With that I’ll let Steve have the last word here. The proposal in no way changes the number of shares of stock or which stocks the American public would hold for investment. So at the macro level, it is not the case of allowing the nation to “invest better than the government can.”And Steve knows that, but it doesn’t matter – he continues to peddle the same illogical story he knows is illogical.

Even with Steve Moore being quoted here by Warren Mosler from memory, I think he wins the argument hands down. Again if Mosler does not see a net transaction between the private sector and the government, he assumes nothing has happened. First of all, Mosler goes technically wrong with “And the people who sold the stock then have the money from the sale which is the money that buys the government bonds.”

The people that sold the stocks and got money from the sale, can take their money and do any number of things, including simply buy other stocks (as stock traders tend to do), and not by any means simply buy the matching government bond Mosler imagines. They can if they want to… but don’t have to, which is Steve’s whole point about investing better than the government can. Remember when Mosler stated it best about sales of Treasury securities (quoted earlier):

this sale is voluntary, which means that the buyer buys the securities because he wants to. Presumably, he believes that he is better off buying them than not buying them. No one is ever forced to buy government securities. They get sold at auction to the highest bidder who is willing to accept the lowest yield

So no, the previously stock-owning investor does not have to buy the Treasury bills, Treasury bonds, Treasury Notes, Treasury Inflation protected securities (TIPS) nor anything else the Treasury is offering. And the Treasury and US government must maintain a certain attractiveness (by fiscal and monetary responsibility at least in relation to other currencies) to these investments in order to find buyers; a tenant MMT seems to ignore.

When Warren says “Ok, but you agree that the amount of stocks held by the public hasn’t changed, so with this proposal, nothing changes for the economy as a whole.” we see his strong bias on the issue. The fact that the number of stocks held by the public as a whole hasn’t changed, doesn’t really mean much of anything. Mr. Moore was proposing how to fix social security, not the economy.

Secondly, this is not necessarily true, since as we mentioned, the investors could purchase more stocks instead of government bonds, and this would either lead to higher stock prices (means the pensioners higher return was pretty immediate), or investment in new companies and innovations, and perhaps new stocks in newly IPO companies. It could also mean higher consumption if they simply spend their money instead of invest it, or any number of things, certainly they do not have to buy government bonds.

Perhaps more importantly, and it was Steve’s point,  just because something does not change things at the macroeconomic level (which really does not exist as all things tend to affect all sorts of others), it does not mean it did not change things for individuals. The social security participants have more choice in how to invest their own money. The people they buy their stocks from, also then have the same freedom of what to do next with their money (for better or worse). Why this is of absolutely no concern for those in the MMT world I do not know.

I hardly think Steve Moore continues to peddle the same story he knows is illogical.

The Bottom Line

At the macro level, MMTers should realize it’s government that really can’t do anything, at least nothing positive. Government can tax people’s money away, spend it unproductively, it can inflate the currency, but it can’t do anything productive because the very essence of productivity is based on supply and demand and market pricing mechanisms which the government does not abide by.

Not to deviate into that much, but for example, if people want pet rocks, then producing them is a productive endeavor because consumers want them and derive satisfaction from having them. On the other hand, if the government mandates that more pet rocks should be produced, and taxes or prints money in order to achieve this goal, then precious resources are simply being wasted on dressing up rocks for no good purpose. Not only do the taxes (and or inflation) impoverish the people and keep them from having done other productive things with these resources, but rocks and labor become more expensive for market participants who want to do things that consumers actually desire. There are few and special exceptions to this, but it is generally true.

Ultimately, MMTers seem to be bright people (I focused on Mosler because he is not only the leading MMTer, but seems to be the brightest and most challenging to tackle) who are fascinated by the fact that the government can create money out of thin air. True, for most people this would be a revelation (as most other things would be to them since they are not covered regularly on MTV), and MMT has taken positive and illuminating steps into the nuts and bolts of how our modern financial system works, but for serious economists this is not news. How to improve this fiat system with our current federal reserve and fractional reserve system would be of great interest, and such keen minds could do well there. But Neither the laws of nature nor physics cease to function under fiat systems, be them floating or fixed exchange regimes, and though issuers of currency can issue away, on this side of Eden, wealth must still be made only in toil, and bread eaten only by man’s sweat upon his brow.

Mosler Right On

Interestingly, Mosler being an intelligent, inquisitive and articulate person, often is quite correct in his findings, though after pointing them out, he tends to ignore them when they do not fit his larger theme (as we all tend to do).

Let’s look at it this way: 50 years from now when there is one person left working and 300 million retired people (I exaggerate to make the point), that guy is going to be pretty busy since he’ll have to grow all the food, build and maintain all the buildings, do the laundry, take care of all medical needs, produce the TV shows, etc. etc. etc. What we need to do is make sure that those 300 million retired people have the funds to pay him??? I don’t think so! This problem obviously isn’t about money

Right! Amazingly he continues:

More “money to spend” will only drive up prices and not somehow create more goods and services.

This can be extrapolated to everything MMTers espouse. It’s not about money, and the fact that we can theoretically print endless amounts of it. It’s about real goods and services.

Like I said, Mosler’s musings often lead him to correct conclusion, much to the desperation of his fellow progressives. His attention to the technical mechanics and lack of inhibition for supporting what may be considered unconventional often leaf him to fertile grounds. For example, Mosler correctly realizes that income tax is quite illogical. He also supports getting rid of sales tax and other wasteful and harmful transaction taxes, and replacing it with a real estate tax (property tax). This is very similar to the wealth tax that I proposed. When he scoffs at people’s concern for trade deficits, I find myself right along with him:

  • #5 The trade deficit is an unsustainable imbalance that takes away jobs and output.

Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.

Sure, if the Chinese want to send over a lot of goodies and then burn their fiat dollars they got in return, nothing could be better (for the US). Unfortunately, they will eventually want to buy something or invest in something with the US dollars, and thus helping the US economy directly or indirectly. As long as trades are voluntary, they are mutually beneficial.

Of course, high taxes, regulations and other factors make the US an ever more hostile place to produce goods, and it behooves the US to change that, but given a certain set of conditions, free trade and whatever trade deficits come along with it help remedy the situation and not worsen it. Here Mosler again points to the fact that he realizes fiat money is not the same as real wealth and value; though he often may forget it.

Comments

50 Responses to Debunking Modern Monetary Theory (MMT) & Understanding it First

  1. AndyMMT says:

    Ok not going to go all over it. US centric? I am a Brit MMTer so lets use UK, here is a link to UK Whole of Government Accounts WGA https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/221560/whole_of_government_accounts_31-03-2011.pdf
    What is interesting in the WGA is that it consolidates Treasury & Bank of England just as MMT does.

  2. AndyMMT says:

    Sorry forgot paragraphs as no need to slog through it para 7.75 pp76, 3.80 pp28, 3.85 pp29.
    In actual fact the Fed are the odd one out worldwide although need I remind you of Bernankes words “it is our job to do what treasury tells us to”
    Separation between CB & Treasuries worldwide is a myth.

  3. Pedro says:

    Hi Erik,

    You clearly investigated mmt with the intention of writing a “debunking” article. As such, this piece is riddled with confirmation bias.

    I won’t refute all of your points but just a few key ones:

    1) The fed, can effectively set whatever rate it wants on national debt via the Feds open market operations. Consequently, we run zero risk of going into default a la Greece et al. Case in point, Japan, another fiat country, has been able to run up its national debt to over 250% while maintaining rock bottom rates. How would you account for this seeming paradox?

    In the same vein, the notion that there will ever be a shortage of demand for t bills/notes/bonds is hard to imagine. The primary dealers and the fed routinely cooperate with one another. It’s hard to imagine the primary dealers refusing to buy a new issue when the fed guaramtees their immediate re purchase.

    2) You harp on mmt conflating the fed and the treasury. This is just wrong. A quick browse through the mmt literature will show otherwise.

    3) MMT Is very concerned with inflation. It supports deficits when the economy has much excess capacity (as measured in industrial output and unemployment/underemployment). Then, when conditions improve cut back.

    I suggest you read L. Randall Wray’s “a primer on modern money theory.” Then, come back and write anger “debunking” piece.

    • Hello Pedro, thanks for your input.

      Your assumption that I investigated MMT with the intention of writing a “debunking” piece is quite off the mark. On the contrary, when first hearing MMT’s arguments, I found them to be very interesting and often quite compelling as well, and continued to investigate it without any intention of writing anything at all. As is mentioned in the article, what actually drove me to write the piece was my disappointment with the existing critiques (that I saw), from the left and the right.

      So the article may indeed be flawed, perhaps exceedingly so, but that would not stem from me investigating MMT in order to debunk it.

      To address the 3 key points you referred to, in general I would say that some of these issues are dealt with in the article including the points that you make, and also that in large part, the article dealt with Mosler, and specifically his “7 Innocent Deadly Myths…” which I quote pretty extensively. So, while Mosler and specifically that work do not “equal” MMT across the board and in all respects, my critique of certain claims in that work was in fact specific to it.

      So more specifically:

      1) About Japan specifically, which is a very interesting example you raise, I will hold off addressing as I intend to address it in a different piece. But in general, of course the Fed is normally able to set this rate, and of course the government, self-imposed limits aside, can meet any obligation denominated in its own fiat currency. That is a cornerstone of MMT, and the article recognizes it is basically true.

      As far as it being hard to imagine a lack of demand for T securities; well I agree, at least as things stand currently. But as Mosler points out over and over, almost no one in the government, who decide spending anyway, understands or agrees with what MMT states. The US does not act, as if it can meet any dollar denominated obligation, regardless of how large… or to put it another way, congress does not spend without any regard whatsoever to the amount it is spending. Quite the contrary, to MMTer’s frustration, politicians are constantly worried about deficits, and even solvency.

      So yes, clearly the US is not Greece, in that Greece can’t independently simply print Euros. And of course currently, and under most normal circumstances, the US Fed has no trouble keeping a target rate, and the Treasury has no trouble selling securities; but that does not mean this would be the case with any limitless amount. And even if it could, this is a relatively minor point, since ultimately the government could theoretically change its laws to make sure it could issue any limitless amount.

      2) On conflating the fed and treasury, this was specifically leveled at Mosler’s work, where it’s rampant, and quoted as evidence. It may very well be that other MMTers do not do this, though Andy here (on a previous comment) has stated that MMT does (and his agreement with that). More generally, as the article points out, it was meant to show that while MMT stresses that a government with fiat currency can spend and print as much as it wants of it, this is not exactly how governments have set up their systems. Warren always speaks about the “government” being able to print any amount of dollars it wishes, meet any dollar obligation it has, and print as many dollars as it wants; pointing out how this technically works in the US currently, paints a slightly different picture. The interplay between the nominally independent Fed, the quasi private fractional reserve bank system, the US Treasury-security investing public, the Treasury, and the Mint (who actually does a little real printing) is important.

      3) The article agrees with this. MMTers constantly argue that they didn’t say “deficits don’t matter”.. against less careful critics. So I even quoted them as saying it (that they don’t say that they don’t matter). The article argues that a government or a nation that believes in the tenants and policy recommendations of MMTers will run into terrible inflation and other problems, but recognizes that MMT does not dismiss the existence or possibility of inflation if too much money is produced (at least at the wrong times).

      But it is also important not to reduce what MMT states to mere Keynesian economics (hence the myriad of Keynesian critics), deficits with excess capacity and cutting back as conditions improve. I believe one of the core differences is the belief that private savings must equal government deficits (in short), and the article attempts to address this.

      I will look into Randall Wray’s work, thanks for pointing it out. I may very well come back and write either about my newly changed opinion, or my more informed previous one, but assuredly, at least when it comes to intricate economic issues, without any anger whatsoever.

  4. AndyMMT says:

    Pedro
    MMT certainly does consolidate treasury & central bank but as my link to UK whole of government accounts show that is no problem.

  5. stanislaus2 says:

    You say: “The Federal Reserve, which is not even an agency of the government, but rather a quasi private banking cartel, is the entity that can do much of the magic MMT touts. Creating and destroying money out of and into thin air. But the Federal Reserve is not the same as the federal government, the Treasury, nor the same as the Treasury’s account at the Federal Reserve.”

    The Fed is a creation of the Federal government. It did not exist until Congress created it in 1913. It’s powers are derived by law by Congress from the Constitution. However, the Treasury also is not the Federal Government, but an agency of the government. The Fed similarly is an agency, albeit “independent,” within the government. The independence is not absolute but prescribed. As an agency it is an agent that does things for the Federal government which are acts of the government. The government is a larger entity than these agencies. It’s like your hands are not you as a person. Thus when the Fed buys securities from banks, it buys them for the government. It cannot give these securities away to private banks to do with as they please. It will buy them to counter deflation and also to have on hand securities to sell to banks later during inflations–open market operations sanctioned by federal law. By buying the securities from the banks and taking possession of them it redeems the government’s debt to the banks. It buys with government money it creates out of nothing and deposits in the banks’ reserve accounts at the Fed. It is government money because it exercises a Constitutional power granted to Congress and delegated to the Fed to create (coin) money. It is not private bank money. In taking possession of the securities from the banks it releases the government’s obligation to repay them since they no longer have them, and to be paid for them, you have to hold them. If the securities bought funded deficit spending, the deficit money thus spent becomes debt free when the Fed buys the securities. By the fungibility of money the deficit spending money when it becomes debt free also is equivalent to the newly created money restored to the banks reserves in place of the loss taken by the banks in buying the securities from the Treasury. So deficit spending becomes equivalent to what would be accomplished if the Treasury instead created the money as Treasury notes and spent it. It is debt free and equivalent to newly created money. The Treasury was required to borrow money instead of create it by law in 1917. The private banks ultimately got what they wanted, interest on required loans to the government. But aside from the lobbying for this by the banks, there was no intrinsic need for the Treasury to have lost this power to create money, apart from coins and securities. The Fed ultimately is the redeemer of Federal debt. The Treasury can only roll over debt by swapping new securities for old plus interest with the banks. But Treasury can get government money created out of thin air to fund this interest by selling additional securities for this purpose to banks and the Fed’s buying them. Immaculate conception.
    The Fed can honestly and truthfully say that it does not fund directly deficit spending, since it never buys these securities from the Treasury. And there may not be any clear connection in time between the deficit spending and the Fed’s purchase of the associated securities.

  6. stanislaus2 says:

    Erik: “But in reality the US government borrows dollars by selling Treasury securities to the public to finance its operations. And this “borrowing” is why there is a debt to begin with. And when you pay this debt back, money does not disappear; how could it disappear when you just “paid it” to the people you owed it to. When you pay back the national debt, you can only pay it back either by existing dollars (for example taxing them from someone else), in which case there is no more or less dollars in the system, or the non-literal “printing” of new dollars to pay the debt (thus paying it by inflation) in which case there is now even more dollars in the private sector. Either way, by paying the debt, money does not disappear as MMTers claim.”

    Suppose Treasury had the power to issue Treasury Notes (as opposed to having to defer to the Fed, which creates and issues Federal Reserve Notes). Then instead of borrowing money to deficit spend, the Treasury would instead spend new Treasury Notes to cover the deficit. These dollars would be debt-free and would be new additions to the money supply in *circulation* (because it was spent and not saved somewhere).

    But now let us consider our actual system in which the Treasury has to borrow (because bank lobbyists got a law passed in 1917 preventing the Treasury from creating new money and issuing Treasury Notes and requiring the Treasury to borrow the money instead and pay the banks interest. Already the Federal Reserve Bank was in existence since 1913. And it could create new money as long as it could get back that money from the taxpayers which was backed by gold, and thereby restore that gold to the government’s possession.

    At that time gold was brought to the Treasury and the Treasury paid the monetary equivalent in dollars to the gold bearer according to an exchange rate. Roosevelt set the exchange rate to $35 an ounce. But since 1971, the dollar was taken off gold, and we had a fiat money system, with the Fed being able to simply create dollars out of thin air when it purchased securities. The war in Viet Nam, the War on Poverty, and the Great Society program were demanding growth in the money supply beyond what gold we had. Furthermore, the French were exchanging their dollars for our gold, causing a reduction in our gold supply. (Nations could trade in gold, but after Roosevelt individual Americans could not demand gold back in exchange for dollars). But the expectation that the taxpayers had to pay the Fed for the dollars it created in buying the securities somehow remained (very little discussion occurred after Nixon took the dollar off gold of the implications of the new fiat money system).

    OK, so now when the Treasury deficit spends, it has to issue US Treasury securities and sell these at public auction to American banks to obtain money to cover the deficit. That creates a debt between the government and the banks. Furthermore, at this point there is no change in the money supply, since there is just a shift in money from the banks to the Treasury and then back into circulation when the Treasury spends it. But the national debt in the debt-ceiling law originally passed in World War I is counted in terms of the value of all the US Treasury securities in possession of private and foreign banks and investors, including the Federal Reserve bank, as well as those government series securities held by the various government Trust funds, like for Social Security. Keep this in mind, because it will turn out that most of the securities are not real debts of the government because of borrowing to fund government operations. Some are for debts that have already been redeemed, but the corresponding securities have not been extinguished since they do not represent active government debt.

    The Treasury manages the national debts by rolling them over by swapping new securities for the banks’ mature securities. This can go on forever, in principle, and the only problem is the need to pay interest. Some of the securities are for time deposits, like taking out a bank certificate of deposit, at the Fed. These are not for borrowing, since the funds in the time deposit are not used to fund government operations and just sit idle in the Fed in spreadsheets kept digitally and electronically until the security in question matures. So, the only issue that remains is the interest, but the principal is easily repaid. If the securities are being managed by the Fed, the Fed can always create money for the interest out of thin air. This could increase the money supply. Still it is debt-free money.

    But there will be some securities that were used for deficit spending on government operations, and the Treasury cannot handle them except through use of taxpayer money or rolling them over with security swaps. If there is not enough taxpayer money and the banks want their money back, then the banks have to take these securities to public auction and hope the Fed will buy them. The time may not be right for the Fed to buy them, because it will want to buy securities mainly when there is deflation–a recession or depression. The act of buying with money created out of thin air adds debt-free money to the money supply. So, buying these securities will take place usually to counter deflation.

    Now, the bottom line will be that once the Fed buys these securities with money it creates out of thin air and adds electronically to the spreadsheet accounts of the banks’ reserves kept at the Fed, that redeems the debt for borrowing between the government and the banks. (It’s not just the Treasury’s debt, because it is only an agent of the government). The Fed gets the securities from the banks. And the deficit spending money at this point becomes debt free. Furthermore it equals the new money created by the Fed and given to the banks’ reserves. Because of the fungibility of money (money can be exchanged for equal amounts of other money), and because the Fed’s new money has restored the reserves of the banks to what they were–other things being equal–before lending to the Treasury for deficit spending, the Treasury’s deficit spending money can now be treated as the new money created, while the Fed’s money for purchasing the securities just takes the place of the money in reserves lent to the Treasury and can represent the older money of the original money supply.

    But the effect is the same as if Treasury simply creates and spends new money for the deficit. So, yes, there is more money than before, and money has not disappeared. MMTers do not claim that money disappears when government creates new money. And it does not disappear in our system when the Fed creates new money to buy back securities and redeems a debt of the government to a bank for borrowing. But a loan account at a bank disappears when the loan to the government is repaid by giving up the security in exchange for dollars from the Fed. So, this refutes your key argument I believe.

    What about those securities kept at the Fed after buying them? A confusion, I think, exists between the debt obligation to repay a loan to the government for borrowing for government operations and the obligation of the government to pay the holder
    of the money or monetary instrument the equivalent in dollars in exchange for the instrument. For a mature security, its face value is the same as a corresponding bill in Federal Reserve dollars. You take a dollar bill to the Treasury and you can
    only exchange it for another dollar bill. You take a mature security to the Treasury, in theory, you can only get the equivalent in Federal Reserve dollars. But if it is more in value than what the Treasury has on hand, you will have to go the to Fed with it, and sell it at public auction. But all you will get is the face value in Federal Reserve dollars.

    So, the mature securities at the Fed are like ladies in waiting, waiting for someone wanting them. They are not committed to anyone in particular. No one holds them but the immaculate Fed which does not lay a hand on them for its own pleasure. So, because today we have fiat money and not gold-backed money, the Fed is not owed the face-value of the securities it possesses. All it gets by law is a transaction fee of 6% of the interest on the security it bought. That funds the Fed’s operations, and if there is still a surplus later, that goes back to the Treasury as well.

    A point that may be overlooked here is that the interest the banks get is also connected to the transaction fee of the Fed for its operations. This is designed to keep the Fed in principle independent politically of the Congress. The Fed is not beholden to the Congress for appropriations to fund its operations. The Fed is also independent in part of the Administration because the terms of its officers exceed the terms of the President. The Fed is also prohibited from buying securities directly from the Treasury, although it can buy them indirectly by swapping mature securities for new ones with the Treasury. The Treasury is also prohibitted in having overdrafts at the Fed. So, Treasury and Fed keep at arms length, but do engage in immaculate conceptions in creation of money.

    Above at the first I wrote *circulation*. This was because I disagree with your Austrian assumption that when new money is created, it devalues all money. Money is devalued only if there is inflation, and inflation can only occur when it is chasing
    goods and services in circulation. Only then there will be negotiations between parties over prices. Sometimes these negotiations are implicit as when a price is named by the seller and the buyer can only take it or leave it. But then the seller has to worry whether he will sell if his price is too high. Money is only tokens of debt obligations in units of account in negotiated exchanges between parties in the economy. The value of money is set by negotiation. The idea that money can be fragmented and remain in the same ratios when goods are compared with varying other sets of goods is only an ideal fantasy. When CEO’s can get
    salaries exceeding 100 times the lowest wage in their employ, or baseball players can have $125 million contracts for 8 years, that is not established by meticulous comparisons of these individuals with various goods and services so that they indeed are
    worth 100 times or more the lowest wage person or more than some other ball player. These involve subjective judgments that will vary from good to good, service to service. But inflation will occur when there is full production and full employment and more money is injected into circulation and some buyers have more money than others with which to buy the limited goods and services.
    Gobs of money can be created, but shipped to the Moon and have no effect on prices on earth, even if people know of its existence.
    Gobs of money can be created and sequestered in savings accounts, or used to buy imports and leave the country and end up
    in exchange banks somewhere but not in circulation.

    • myth buster says:

      First, a quibble: Treasury notes are interest-bearing debt instruments issued by the Treasury department with maturities greater than one year but no more than 10 years. What you’re thinking of are United States Notes.

      Second, Treasury can issue United States Notes, but only up to the amount authorized by Congress, which is currently $300 million and which at no point exceeded $450 million. Currently, there are $239 million in United States Notes outstanding, which means that Treasury can issue no more than $61 million additional United States Notes unless Congress passes a law granting them additional authority to issue United States Notes.

      The Treasury does have considerably more leeway in terms of minting US coin, but this is limited by the demand for circulating coin and numismatic coins. The mint issues hundreds of millions of dollars in US circulating coins every year, and spends about half the proceeds on operating expenses. The rest is turned over to the Treasury for debt reduction purposes. The mint also generates a small profit on numismatic and bullion coins and coin accessories. Theoretically, we could fund government entirely off of user fees and profits from government-owned enterprises, but at the present time, those sources of revenue are less than one tenth of our total spending, a bit less than half of which are profits from the Federal Reserve.

  7. stanislaus2 says:

    Erik,
    One other thing I want to be sure you are aware of is that around 1/2 of the national debt is really not for funding government operations but are investments in time deposits by private and foreign investors who have excess dollars they want kept safely somewhere while earning a little interest.

    China and Japan are the countries with the largest holdings of US Treasury securities (marketable). I’m sure you know what a bank CD is. Well, these foreign investors in T-bonds and securities have effectively taken out CD’s at the Fed when they buy these securities. These are time deposits. The money invested just sits there at the Fed. The principal is some amount less than face value of the security, since the securities are sold at discount, with the interest ultimately being the difference between purchase price and face value at maturity. The money on deposit will always be there to return to the investors at maturity.

    What benefit does the United States get from selling these CD’s to foreign and private investors? It takes money out of circulation, which allows the government to engage in deficit spending at appropriate times on
    projects it deems important without incurring serious inflation. (The Fed likes to keep inflation at around 3%, because this will stimulate people not to engage excessively in saving. If they sit on the money entirely, they lose to inflation, so, by spending and consuming they keep the economy going while getting near full value for their dollars spent. But 3% inflation per year is not serious, and most savers will invest their savings, which will keep up with inflation).

    One should worry more about deflation than mild inflation. People lose jobs during deflations. While one may focus on the value lost to inflation for those on fixed incomes and savings, consider that working against that is the gains in value due to technological advances. Over 50 years ago we had computers with vacuum tubes and only 20K memory, and these cost hundreds of thousands of dollars. Those with more memory cost millions. Today my iPhone 5c has unbelievably more memory in the gigabyte range and CPU speeds we couldn’t dream of 50 years ago. Yet my iPhone cost me only about $440. The value of these technological advances to me outstrips the loss in value due to mild inflation in that same period and makes up the devaluation in lower costs for things. And my income has kept pace with inflation.

    You seem to worry about inflation with fiat money. Yes, it is something to worry about. But it is not a problem that cannot be managed. We have had fiat money since 1971 and we have not had hyperinflation. The Fed fights inflation all the time. It sells to banks new securities acquired by swapping mature securities originally bought from banks for new securities with Treasury during inflations. That drains bank reserves and constrains lending. Fed also raises interest rates, which favors saving as opposed to investing. Congress can fight inflation too by raising taxes and cutting spending. We also can fight inflation by encouraging buying imports, which take money out of circulation. We have had excessive deficit spending on the wars in Iraq and Afghanistan, but no serious inflation. In fact we have deflation. All of this was made possible by encouraging imports. But the private sector caused the current recession when following a time of prosperity in which everyone thought things were going swell people then let their guard down to engage in highly risky investing. I don’t presume, for example, that private markets always do better in investing money than the government. The government has done some fantastic investing, as, for example, on building the Grand Coulee Dam. That opened up the West to further settlement and industrialization. And it made it possible to develop the atomic bomb that finally ended the war with Japan. The Interstate Highway system is another government project that private enterprise could not finance alone, but it has been immensely valuable for developing our economy as a major transportation system. So, both private and government investing can be risky and have some failures along with tremendous success (as with personal computers).
    Remember Enron. But I’ll put Scana next to that.

    Replacing Social Security with private investing, even in “premium stocks”, would depend on someone to trust to choose the stocks. There would have to be government regulation–someone neutral. I doubt if the millions of people with below average IQs would do well if left to their own devices in making private investments. But think of the Icelanders and Irish who bought securitized collateralized debt obligations, sold to them by “reputable” sales persons from major world banks, and how they lost everything in the crash of 2007. Those were fraudulent packages sold to them. But they were so complicated, even Alan Greenspan said he didn’t understand them. And Warren Buffet calls them toxic. So, if we leave half of the population to the wolves by privatizing Social Security, that doesn’t seem like a good idea to me. Private doesn’t necessarily mean better.

    • Thanks for your detailed input Dr. Stanis,

      As for your first comment, there is no disagreement there.

      As the Fed monetizes much of the debt issued by the Treasury, it is in essence as if the Treasury was simply printing money. The article recognizes that completely.

      The distinct identities are noted, simply because they are a reality, that at least in Mr. Mosler’s paper, were glossed over. The Fed is at least nominally independent (it actually makes a big deal about that, “independence” is touted as sacrocent among central bankers) and at least in theory, is not required to purchase Treasury securities at any given time.

      So a government, meaning a current administration, is not able to simply create new money out of thin air to fund its deficit spending without limit. Government deficit spending is limited by the Treasury’s ability to find buyers for new securities. I recognize that this is not currently a problem, and that in practice the Fed and Treasury seem to work closely to ensure that this is not a problem, but the Treasury and current policy makers of the US do not act as if they thought they could spend any amount of US dollars at any time regardless of the amount. Close, but not quite, ha.

      Mosler himself often complains about the fact that most of the policy makers do not “understand” or at least agree with his revelation. So currently the US government has no problem financing its deficit spending, but the policy makers are very concerned (at least they say they are) about deficits and not completely dismissive of them. So there are scenarios one can imagine, where there would be a problem for the Treasury.

      You yourself state “The time may not be right for the Fed to buy them, because it will want to buy securities mainly when there is deflation–a recession or depression.”

      So having recognized that in practice, the effect is much as if the government simply created new money to fund its deficit spending, I just was pointing out that there are built in technicalities that are different from this, arguably there in order to make sure that the government does not feel like it can spend any amounts without limit (besides perhaps other interests as you mention such as banks wanting interest for government debt).

      Now even this entire point, I note as theoretically a side-note, because at the end the “system” is as you imply, what the congress legislated it is; so I will grant the point that even if this were a limiting issue for the government in its ability to spend any amount of fiat currency it wanted, ultimately it can simply change the laws so that it would not be an issue.

      For example, you quote the 1917 law which stopped the Treasury from borrowing directly from the Fed (though I very much agree with you, there we were talking about a type of gold standard, and it is a completely different ball game – a fact much ignored), and likewise congress can repeal and make laws at will. So I think the article makes clear, that though it notes certain details that are important to note, ultimately yes an issuer of fiat currency can issue as much as it wants of it.

      In your second comment, you make a very good point that the abandoning of gold backing, which was of huge consequence, does not seem to have been properly discussed (before or after); and there is much confusion leftover due to this fact. Conflicting public knowledge that applies to commodity money is leftover and commingled with more recently developed public knowledge making a pretty big mess.

      As for your main point in the comment, I do not fully follow the “refutation” of my main point.
      You state that when the Treasury sells securities to the public “…at this point there is no change in the money supply, since there is just a shift in money from the banks to the Treasury and then back into circulation when the Treasury spends it.”

      that is precisely what the article claims. In opposition to what Mosler stated in his paper, if you look a bit further down in the paper where it is explained by the Chinese uniform purchase and more precisely by the example of “Joe” buying $100 of Treasury securities.

      In contradiction to what you stated, and what I stated, Mosler believes that this is not money simply “shifting” but rather creation of new money. Not when the Fed may purchase this security from Joe out of new money, but at the very point that Joe took existing money and purchased his security.

      So I believe your statements on the matter agree with the article.

      So you say that “So, yes, there is more money than before, and money has not disappeared” – I agree with this.

      And that “MMTers do not claim that money disappears when government creates new money.”

      Well, my position was that MMTers, and specifically Mosler, often claim that money would disappear not when the government creates new money, but rather when there are surpluses instead of deficits and the national debt is paid back. Since there is $100 new dollars when “Joe” bought a Treasury security, there is $100 less if the government pays him back; goes the logic.

      MMTers consistently claim that government deficits equal increases to net private savings, and surpluses equal reductions in those savings. Some also state that running budget surpluses, until there is no public debt, would reduce private wealth to zero.

      The mechanics you explain on the other hand, I agree with, and show that money dos not disappear by the national debt being paid off. As the article states, it can be paid by taxing people, and so it keeps the money supply the same (a “shift”), or by the Fed’s creation of new money, which would increase the money supply (and thus in essence pay the national debt by inflation).

      You also add important details on the mechanics of the debt held by the government, and I am in agreement as well. The article in fact mentions how the Treasury does not have to pay interest on debt held by the Fed (since it is in large part transferred back to the Treasury), and yes a significant part of the nominal national debt is owed to the government itself, and thus it is not usually counted as part of the public debt. I agree with this, at least when it comes to securities being owed to the Fed, since as you say it is the immaculate issuer of money, but this is perhaps not true for all intergovernmental debt.

      For example, when the Social Security Trust fund is owed to, this is real money that needs to be paid back to the fund as it itself needs it to pay seniors. In a sense, it is not the government here owing money to itself but rather it owing money to senior citizens. So, this arguably must be counted somewhere, either the unfunded liability counted or the intergovernmental debt counted.

      Next you speak about inflation and creation of money. I do believe that creation of money devalues all money ultimately, though of course how that plays out and when in real world prices can vary.
      Inflation is hard to measure, and can be masked easily, for example prices for certain goods can be falling while inflation simply offsets the drop and no inflation there would be noticeable.

      So shipping gobs of money as you suggest, to the moon would most likely not have an effect on prices here on earth, at least not until someone goes there and retrieves them. Likewise, if a single already very wealthy individual is given billions of dollars in his savings account, that might also not have much immediate effects; sequestered as you say. But money eventually tends to circulate, as he increases his spending, his bank increases its lending due to his large deposit, or when he eventually wills his money away to others. Likewise with imports, the money can increase the price of imports to begin with, and eventually also find itself back into circulation within the country; or as it circulates abroad decrease the amount that would otherwise been demanded from the domestic pool. Especially in today’s interconnected financial and commercial systems. So granted, creation of money will not always result in noticeable increase in prices, and when it does it can be in varied sectors and at varied times… but creation of money ultimately always does devalue all money.

      Finally in your third comment you mention about half the debt being time deposits. I am not sure if you are referring to time deposits at the Fed, or are equating Treasury securities as time deposits (to their holders). But if so, why do you say they are never used for government operations? And why half? I would be interested to know what you mean there.

      Of course these take currency out of circulation, that is why as the article makes a strong point of, this is truly like “borrowing”. Money was taken out of private hands to be given to the Treasury.
      And of course, the US greatly benefits for being used as the international reserve currency in this manner.

      You then go on to inflation and mention the productivity and technological advances which made many things cheaper. They are truly amazing, and very regrettably often are overwhelmed by the inflationary loss of value in our currency. We see these price drops when they are extremely large, such as in new electronics, but most goods and services go up in price year after year despite increased productivity. Inflation has robbed many people of the great productivity gains of this century.

      Likewise, the fear of deflation is vastly exaggerated. It is no more than malinvestments being liquidated, deleveraging, which ultimately cannot be avoided, and/or the value of a currency rising making everyone who holds it wealthier. I also question the accepted notion that mild inflation is always necessary. Perhaps it is currently, due the fiat central bank/fractional reserve system currently operational and the need to devalue debt, both public and private, but it certainly should not be a requirement of a more natural financial system.

      You agree that at least high inflation is a problem and indicate that it should be combated by certain measures; no disagreement there.

      On to government and private investment. I agree that in theory both private and government investments can be good (and bad). In practice, government investment tend to be immensely worse and less efficient. This is due to the obvious feedback mechanisms not being in place, and human nature being human nature. But my opposition to government investment is not that it cannot ever theoretically be a good investment, but rather that it is coercive. The wealth itself must come from the private sector in any event, one way or another, despite MMT claims, and so in most cases there is no reason to believe the private sector could not freely conduct any investment it desires, roads and dams included (if government regulations would allow it). And no reason to believe investments it does not desire should be forcefully and coercively made by the power of the gun (with some necessary exceptions aside).

      As far as privatizing Social Security, the paper did not support or oppose it, and it was only used in the context of MMT claims since it is the example Warren Mosler used in his “7 Innocent Deadly Sins” work. He uses it as an example of an issue where people incorrectly fear solvency, and I point out that much of the liabilities owed to senior citizens, medical and for living costs, are inflation-linked; and thus have a similar risk of what he admits exists when a government owes liabilities in a foreign currency. You can always buy foreign currency with your fiat currency, but Mosler admits that the exchange can go haywire with amounts too large.

      • stanislaus2 says:

        Erik, you said:
        >Likewise, the fear of deflation is vastly exaggerated. It is no more than
        >malinvestments being liquidated, deleveraging, which ultimately cannot be
        >avoided, and/or the value of a currency rising making everyone who holds it
        >wealthier.

        I think Bill Mitchell in his blogs on MMT regards inflation as a general increase in prices due to excess money in circulation than is needed to clear the market of goods and services at current prices and not simply rises in prices in this or that sector. I think by the same token ‘deflation’ would be defined as a general drop in prices due to less money in circulation than is needed to clear the market at stable prices, forcing vendors to lower their prices. So, it does not concern this or that malinvestment being liquidated. I also think
        this is how most economists define inflation and deflation.

        >I also question the accepted notion that mild inflation is always
        >necessary. Perhaps it is currently, due the fiat central bank/fractional
        >reserve system currently operational and the need to devalue debt, both
        >public and private, but it certainly should not be a requirement of a more
        >natural financial system.

        The need for mild inflation of 3% is not, I believe an MMT idea, but the
        rationale of the Fed. The idea is that if there is no implicit loss in keeping money hidden or locked away somewhere in savings, people will not spend their savings, which leads to deflation in the economy. Knowing that your money is losing value due to inflation will encourage you to consume something with it at current values or invest it. Still some MMTers may accept this as a good idea because it keeps money flowing into circulation. Whether it does or not is another question.

        You said:
        >So a government, meaning a current administration, is not able to simply
        >create new money out of thin air to fund its deficit spending without
        >limit. Government deficit spending is limited by the Treasury’s ability to
        >find buyers for new securities.

        Frank N. Newman was an Undersecretary of the Treasury during the Clinton Administration, and a former CEO of a Chinese bank bought and taken out of debt by American investors, CEO of Bankers Trust at one time and Excecutive CFO of Wells Fargo Bank. He has written a couple of short books available on Kindle that turn out to be completely in accord with MMT thinking: “Six Myths That Hold Back America” and “Freedom from National Debt”. The two books cover much the same material. Anyway, he has a chapter on myth #2 “Treasuries ‘crowd out’ financing for the private sector.” From that I think we could also derive the idea that there will always be money in the private sector for the Treasury to borrow from, and with enough interest enticement, the securities will be bought. Newman thinks in terms of aggregates. He argues that when the Treasury borrows money from the banks it immediately spends it on the deficit. That puts that money back into the banking system. So there is always money in aggregate in the banking system to borrow. Keep in mind that the banks created new money out of thin air when they lent money to the govt. But it was debt-money. The govt owes the banks for it. When the govt spends it, it ends up in some other banks, but still within the banking system. So that money can be used again to allow some bank to lend the money to the Treasury (govt). In this way money supply increases through lending by the banks.

        Remember also the multiplier effect. While today banks do not first consult their reserves to see if they can make a loan to a sound borrower (and some didn’t even care whether it was or not), they still have by law the need to keep a certain percentage, e.g. 10% of its reserves on hand in case the loan has to be covered. The banks will often borrow the needed money from other banks and if that is not successful from the Fed (as a last resort). The Fed will ultimately lend the money, since to do otherwise would be contrary to capitalism and potential economic growth. So, the multiplier effect, so-called refers to the fact that banks can increase their lending and creation of new money as long as they have minimum reserves to back it.

        ===

        Lincoln’s greenbacks (Treasury notes) were commodity free, not backed by gold. It was pure fiat money issued by the Treasury as it spent to cover
        deficits. It was not printed in unlimited supply. In principle fiat money can always be created and spent. But in practice central banks and governments that know how a fiat money system should be run to avoid hyperinflations, will not continue to create and spend new money. (The President can veto any spending bill; the Fed can howl and complain and begin buying securities from banks if they believe the spending would be hyperinflationary). Congress itself ought to have enough members with brains and understanding to put on the spending brakes and raise taxes once inflation grows excessively. (Current Congress does not suggest that this will always be the case–politicians with brains). The government can encourage savings and buying of imports.

        The idea that federal surpluses lead to reduction of the money supply is an MMT idea. Taxes are not always spent back into circulation. So, if a govt starts taxing more than it spends, it generates a surplus, and it can hold the money in surplus out of the economy, destroy it, whatever, forever. It can pay back the national debt (buy the securities used for deficit spending from banks using the surplus money. That cancels the associated loan accounts to the govt at the banks). That should begin to have the negative multiplier effect, deflating the previous money supply. (I do not think we can know from the multiplier by how much the money supply will be reduced exactly).

        However, MMT’s emphasis on sector balances, leads you to see the bigger picture. Balances can occur across sectors and not just within sectors. Imports can balance deficit spending. Taxes can balance export earnings.

        And yes, deficit spending in the aggregate will utimately equal a resulting aggregate savings. As the deficit money is spent, it is deposited in some vendor’s bank account. The vendor will then buy something from some other vendor and keep a small portion for himself. The next vendor will take the portion spent by the first vendor and spend some of that on something or someone else, and again keep something for himself. As the deficit money not retained in each vendor’s bank accounts circulates in the economy, more and more of it gets saved and only a small, eventually, zero amount remains. So, if you add up all the savings from the deficit money across all the vendors, you get ‘aggregate savings’, which of mathematical necessity has to equal the deficit spending amount. MMTers have shown graphs of deficit spending compared to growths in aggregate savings and they equal one another. Newman also makes the same point in his books. As long as the deficit money is moving rapidly through the economy, increasing amounts of it are being withheld from spending, and aggregate savings is growing to equal the total deficit spending (in the year, or some time interval that allows for this circulation through the economy and banking system). You have to think in aggregates, macroeconomics, to see this.

        I do not think most MMTers emphasize the fact that the banks create debt by loans while the Fed creates debt-free money when it buys. But I get that distinction from Ellen Brown, who has a blog on “The Web of Debt”.

        Just this past week I have finally had the epiphany that the Treasury in managing the money supply, never creates new money. The banks do in its case. The money so created is debt-based money. So deficit spending initially is new money created by banks.

        When the Treasury deals with the debt, it simply rolls over the debt by swapping new ‘immature’ securities for the banks’ mature securities. That does not eliminate the debt. But it postpones its payback forever as long as it continues to roll over these debts. But the banks are functioning with reduced reserves and I think they do not want to go on forever holding all these securities against reduced reserves, but the endless interest income may keep them holding on to the securities. In any case, the Fed may eventually buy back these securities. This will totally redeem the government’s debt to the banks in the securities. It ought to do this more often, but it may wait until there is actual deflation to make these purchases. That creates the illusion that the Fed is not coordinating with the Tsy in creating money.

        When the Fed buys the securities at public auction (where T securities are always sold) it pays face value. That beats any other bid. It pays with money it creates out of thin air. This money is debt-free because it is a purchase and not a loan. This redeems the govt’s debt to the banks because the banks no longer hold them and some bank that gave it up got the face value. It also makes the deficit money debt-free–no one is owed for it. The Fed is not owed because it is acting as an agent of the government for the government. This money adds to the money supply also because it is equal to the money the Fed gave the banks and since that money restored the banks reserves to what they were (other things being equal) before lending the money to the government through the Treasury, everything is as before, except that the Treasury has now spent additional money (money is fungible) into circulation.

        The Social Security Trust Fund holds intergovernmental series securities. These are not ‘marketable’ securities. The Fed by law cannot buy them directly. But that is still no problem. The Fed can only buy marketable securities. The Treasury can issue marketable securities to get money to buy them from the SS Trust Fund. Banks lend in return for securities. The Treasury buys back the Intergovernmental series securities with this money and can extinguish the intergovernmental series securities. The SS Trust Fund gets cash. The Fed can then buy up these marketable securities and redeem the loan for the govt from the banks for the money for SS Trust Fund. Using the banks as intermediaries always makes it possible for the Fed to immaculately fund the Treasury without ever directly giving it or buying anything directly from it. If the government has not learned that already since 1971, then some heads need to roll.

  8. Auburn Parks says:

    Erik-

    The Ultimate proof of the statement that the US Govt has the ultimate authority over its own interest rates is in the 1951 Fed-TSY accord:

    https://www.richmondfed.org/publications/research/special_reports/treasury_fed_accord/

    Notice that this accord is not law, at any time we wanted to, the Fed could announce a price for securities and that would become the interest rate.

    So any analysis must start with the recognition that interest rates are not determined by the market in any important sense wrt to Govt securities.

  9. Auburn Parks says:

    “So no, the previously stock-owning investor does not have to buy the Treasury bills, Treasury bonds, Treasury Notes, Treasury Inflation protected securities (TIPS) nor anything else the Treasury is offering. And the Treasury and US government must maintain a certain attractiveness (by fiscal and monetary responsibility at least in relation to other currencies) to these investments in order to find buyers; a tenant MMT seems to ignore.”

    Au Contraire Erik. just because you don’t understand something doesn’t mean MMT ignores it. You are misunderstanding the reserves dynamic of what Mosler is talking about. Stock traders can exchange money a billion times over (and they do) and it doesn’t matter at all to the total number of reserves in the banking system, only who has the reserves. At the end of the line, ALL reserves not required by law or for bank clearing end up as securities, because thats normally the only way those reserves can earn interest. You are making a classic fallacy of composition mistake. Micro vs macro. MMT in general and Mosler here in particular focuses on the Macro.

  10. Erik,

    You had my attention with some thought provoking arguments for a while. I thought perhaps you may have some genuine contribution to make. But then you lost it completely with your claim:

    ” MMTers should realize it’s government that really can’t do anything, at least nothing (sic) positive. Government can tax people’s money away, spend it unproductively, it can inflate the currency, but it can’t do anything productive……”

    I’d just make two points on that. Firstly I was seriously ill as a small child and would very likely have died but for Britain’s NHS. Secondly my education was totally funded and provided by government.

    You may disagree but that’s more than enough productivity as far as I’m concerned. Your blog, of course, relies on the technology of the internet which has only come about through Pentagon spending in the 70’s and 80’s.

    There’s lot’s more examples of governments doing very useful things of course like building roads and bridges, fighting crime, winning wars etc etc. Of course one could argue that Governments should be more efficient than they are. That WW2, for example, could have been won in half the time if only the job had been put out to private tender, but to say governments can do nothing at all which is productive shows your extreme ideological motivation behind your criticism of MMT. As such it is more than just suspect. It is worthless.

    • Thank you for your input Mr. Martin,

      Glad to hear you were finding my sincere analysis interesting, if not fully agreeable, and likewise sorry to hear you then dismissed it completely due the fact that in my lengthy piece I somewhere expressed an ideological or political opinion. First, let me assure you that I attempt to arrive at any ideological or political position, with the same objective and logical discipline you see I tackle MMT throughout the article… though obviously they come from a lifetime of analysis on a variety of subjects, and not confined to the subject of MMT.

      We all have these (ideologies and politics), and that is only natural; likely for me some of your ideologies may seem to me “extreme” in the opposite direction, but that would not surprise me nor would I hold that against you or any sound arguments you make.

      As for your points, let me address them briefly. You take the selected quote too literal (or perhaps I wrote it too literally); of course government can do something useful.. for example using my own example on pet rocks… let’s say people DO want pet rocks (sort of like education and health care), and the government produces them for people… that I suppose would be an example of government doing something productive since there is a need for it by the people. My point was that government often does not do this nor care about it (often it tries to do what there is no demand for privately but thinks there “ought to be”), and it produces what it produces by edict and coercive power; while the same pet rocks could have been produced by willing market participants, buyers and sellers. I must admit I am big fan of freedom.

      Your case, with respect, I venture to say is hardly unique; in today’s rather socialist systems we all consume many services provided by the government (and paid for by the same citizens in either taxes or inflation), including education and health care that you mention. However, just because the government provides them currently, by again having the people pay for it in one way or another with an added high inefficiency premium, does not that mean that they would be unavailable to you or anyone else in a different freer system.

      Schools were an invention of the private sector, as is education as a whole, and as is medicine. It is likely that the know-how and technology that thankfully benefited you as a child were products of the private sector as well. Simply because government confiscates enough wealth to give the very same population whom the wealth was confiscated from medical insurance, does not mean the government “provided” anything. As I am sure you well know, in the US until the very recent infamous Obamacare, people of all sorts of socioeconomic backgrounds got along with a much more private (I won’t say “fully” since it has been very heavily regulated to its detriment for some time) health care system.

      All one has to imagine is a necessary or non luxury good (like health care) that the government does not currently provide in large scale at least. Let’s say food. Something as important as food is largely paid for privately and by private citizens. If the government provided a minimum standard of nutrition (by even more taxes and inflation) for all its citizens, one could imagine many people not of the upper classes may sustain themselves only by the “free” government provided food. Subsequently, someone could tell me that government does plenty of productive things, since they in fact are alive only by having eaten government provided food for their entire life.

      Sure, but that does not mean they would have starved in a freer society.

      This is the case for goods such as food and health care, I do in the very article mention there are exceptions… I do not claim that there not be a government at all. You mention of one them in your example, wars. Certainly a state that wishes to preserve its existence and freedoms requires a military. Though private tenders as you mention, would certainly cut a lot of the pork in militaries, run logistics better, food, supplies, weapon efficiency and innovation etc… they would not run the actual fighting better… economics does not exist in the trenches… and armies that win are armies who do not break… whose soldiers stand fast, against all logic and self interest (the “weakening instinct of self preservation” as Patton put it), against the enemy until he buckles first; this is not done for a salary, dead men cannot spend their spoils. A private mercenary army can normally be good only against a vastly inferior foe, where the odds of dying are low and thus of profiting high, but pitched battles against a formidable foe are won by men’s belief in ideals far above money, be them camaraderie, patriotism, honor, duty and the like.

      Anyway I digress above only to show an example where there is a good I do believe the state must provide. There is no alternative, if a state with all its other freedoms is to survive, but wherever freedom is an alternative, I prefer it. In other cases, the government can possibly speed things up that the market would have taken longer to do… take for example colonizing the moon. Not that private entities are free to do so now, due to government policies, but assuming they were, it may take longer than if the government decided right now to tax everyone enough to achieve it as soon as possible.

      In any event, what attracted me to MMT as a subject was that I was impressed with it. A field that was not afraid of taking logic to wherever it leads, and was likewise not afraid of facts and details. I approached it with that respect, and discussed it along those lines, without simply arguing past it like most critics have done.

      In the paragraph you quote I was also conveying simply that what government “provides” is not ultimately free and out of thin air (or otherwise I’d be all for it) like the currency it can issue. Something people very often forget. Anything it provides to its population must be taken from the same population. And some believers in MMT can equate the issuance of fiat currency with the ability to provide real goods and services “out of thin air”.

      The reason I express ultimately some of the broader economic ideologies that are in the article (which lead you unfortunately to call the entire piece “worthless”), is to highlight one of the major flaws in MMT, given its many other strengths. Though I tackled many of its specific claims, overall as the article points out, many though not all of MMT’s tenants are generally in large part correct… Yes ultimately the government can just issue fiat currency at its pleasure. Therefore, what ultimately is MMT’s downfall is that believing in its principles will most often lead to the government taking over too large a proportion of the economy. Like I point out in the section about “Greenbacks”, there is nothing wrong with this theoretically, the government could even get rid of taxes all together and just issue the money it needs to funds itself; the problem is that in such a system it will always spend too much and intervene too much.

      An unproductive stagnant and inflation ridden society is what will follow. This is sometimes the fate of small economies that find huge reservoirs of natural resources like oil (resource curse), even when this is real wealth and not fiat currency!… how much more is it when it’s just a country issuing fiat?!

      There is truth that deficits don’t matter in the way people think they do, and there is truth that a country need not worry too much about solvency in its own currency… but what actually matters is the ability to keep the state a small percentage of the economy, deficits or not. This was my point in the areas you point to.

      Despite your violent reaction to my belief in the free market and non government intervention, I am glad to hear you found some of the actual points on the subject matter interesting, and would be happy to hear feedback on those.

      • stanislaus2 says:

        Erik, you need to separate the ideological positions of some MMTers from the idea of MMT itself. It’s not a question of right versus left but right versus wrong. MMT is just a description of a banking system currently used by many countries. In that system there are various possibile things a government can do. Whether those are desirable things to do is a political issue. For example, should we have a liveable minimum wage or should we have lowest-level government jobs to tide people over but not enough to live beyond food and rent. They have to work to get the money with the implication that to live better they will have to seek higher level work. But education, health care, roads, bridges, infrastructure, public safety are things the government does for the promotion of the general welfare (as it says in the Preamble to the Constitution). But MMTers are now emphasizing that the government can spend more without inflation since we are in deflation. They should, say, lower taxes, have government spend more, discourage imports, lower interest to discourage saving–since we are in a deflation. Later if inflation arises beyond say 3% per year, then MMTers will favor raising taxes, encourage saving, discourage investment with higher interest, encourage imports. It all depends.

        Remember the North won the Civil war because of its use of Green Backs (Treasury notes). Banks wanted 25% to 36% interest on loans and Lincoln refused to pay that level of interest. So, fiat money by a sovereign central government can work well.

        • Gentlemen,

          The last few string of comments really are arguing passed the article.

          The article is quite lengthy in order to cover many of the things you are mentioning, and re-mentioning. You are right, in practice the Fed and Treasury do work together to allow more money to be available to the government, in a recent year I recall 77% of new Treasury Securities ended up in the hands of the Federal Reserve. The article does not dispute this, it mentions it, while still mentioning that the Federal Reserve and the Treasury exist.

          Much of the comments are simply restating that the an issuer of fiat currency can issue lots of its currency. The article does not dispute that either, but where it does tackle with MMT on a detailed level, at least MMT as described in Mosler’s work, you overlook it, as you do about the overall implications the paper talks about. Some of the quotes you have argued against are taken out of context, since other parts of the text clarify and often agree with what you are pointing out.

          So for all such instances, I think the article stands for itself.

          Having said that, your last two comments Dr Stanis, (and the last one Peter Martin agreed with) I think hit the mark much better.

          Firstly, you state that MMT is not about left vs right but simply describes the modern system. The article also covers this position, and though it may be broadly correct, I state two caveats. First, I don’t think it completely correctly describes the current system, that is the technical part of the article addresses in some detail, and secondly, I state that the way in which MMTers describe the current system, if widely believed, will lead inevitably to results that are in fact left/right related; it will lead to massive spending (ie left). This is due to human nature. And proof enough is in the type of programs MMTers tend to favor. This is true despite the fact MMTers are better informed or more intelligent than your average voter, and who can appreciate the position you are mentioning (ie just because an issuer of fiat currency CAN issue endless amounts, does not mean it should). However, when your average voter or even politician hears MMTers, he only hears “Spend Spend Spend… we can never go broke”.

          As for inflation not showing up because there was deflation (that the inflation can simply offset), that remains inflation. If prices were going to decrease due to productivity, etc and inflation kept them from doing so, that is inflation. There is nothing wrong with prices decreasing, and when decreasing prices mask inflation; this is nothing more than masking, the inflation is still real.

          The Greenbacks you mention are mentioned in the paper as well, and I go as far as saying that there is nothing wrong theoretically with a Greenback system, it could even eliminate the inefficiencies and waste of the the IRS and taxation altogether. But again, such a system due to human realities, will lead to massive overspending. Much like the US constitution, the systems that a government needs to set in place to be a good government, are in large part constraints… constraints against the realities of human nature and power, despite the best intentions.

          As for your second point, I do believe it is the most important one you have mentioned thus far. In the type of constrained system I would favor, during wartime or some other national emergency, the government may find itself unable to fund itself to the level needed. This is a fair point that must be considered. One possibility is to allow a fiat MMT-like system to be enabled in a time of such emergency (like the Greenbacks were, and subsequently cancelled). Another may be that the people themselves, would buy enough bonds with real cash, when facing an enemy invasion. Cash or no cash or volunteering labor and resources… whatever it may be. What could be better incentives than defeat in war. Some could say that if anything, it would make frivolous wars harder to fund, which is a good thing, but legitimate wars would still be funded by necessity one way or another.

          Interesting questions, but I would say in any event that a system whose advantage is only in a time of great national emergency of war, is likely not to be ideal to operate consistently and continuously, while merely waiting for such an emergency. A different setup is likely better.

  11. Thanks for the reply. I’m just snatching a couple of minutes on my tea break right now so I don’t have much time but a comments like:

    ” but what actually matters is the ability to keep the state a small percentage of the economy, deficits or not. This was my point in the areas you point to”

    is almost entirely political rather than “economical”, so to speak!

    I will come back later to some of your comments but neither MMT, nor any other economic theory, can be considered incorrect because you fear its acceptance will lead to a a larger government that you yourself would like. MMT, per se, says nothing about the relative size of governments. They can be a small or as large as the voters would choose them to be. MMT principles would still apply equally. If they are correct, that is!

    • I will come back later to some of your comments but neither MMT, nor any other economic theory, can be considered incorrect because you fear its acceptance will lead to a a larger government that you yourself would like. MMT, per se, says nothing about the relative size of governments. They can be a small or as large as the voters would choose them to be. MMT principles would still apply equally. If they are correct, that is!

      This is a fair comment. I replied to that effect because you focused on the paragraph you quoted. But if this is the case, feel free to focus instead on the “economic” arguments in the article, which were it’s main goal.

  12. I’ll quickly answer your question:

    “one must ask, why do they (MMT people) care if a debt is denominated in its own currency or not? Whatever the exchange rate is, surely a country can print whatever amount of their own currency is needed to buy the foreign currency required to pay back the debt.

    The answer is that creditors are naturally keen to be repaid in a way which preserves the value of their loan. For instance supposing China held €3 trillion of US debt rather than US$3 trillion. (I’m just using a 1:1 exchange rate for convenience) They could just ask for it to be redeemed at any time regardless of the effect on the US economy. As the US isn’t in control of the Euro they would have to buy bonds from the Europeans. They’d be like Greece and Spain and at the mercy of bond vigilantes. The value of the US$ would plummet and increase domestic inflation. But, from a Chinese POV, so what?

    As things are it only makes sense for the Chinese, when they are ready to redeem their held securities, to increase their imports of US products at an agreed rate, to avoid their held dollars being severely devalued when spent. In any case if they did threaten to spend them too quickly the US could simply apply an export tax!

  13. “you can print money, but not real wealth”

    Correct

    so the more of these dollars you’d print, the less they’d be worth

    Not necessarily. These dollars would only have an effect on prices when spent. Not by their mere existence. Governments should fine tune their economies by spending money to increase activity, or reducing the non government sector spending by increasing taxes to reduce it and keep inflation under control.

    Inflation is the only problem of so-called borrowing. Not repaying any loan.

    but there still would be no national debt, nor interest to pay. Nothing was borrowed.

    It is true that the money base isn’t included in the ND. But it is still a liability of government so probably should be IMO. You yourself seem to recognise that when you say “Without deficits and debt, there would be no money.” That’s only true if printed money (government IOUs) is counted as a debt. That debt is repaid by acceptance of those IOUs as taxes.

    Let’s consider a closed economy of 1000 people. They already have real wealth. Government can’t print that as you say. Land. Tools. Fisheries etc. But previously all trade has been by barter. So they elect a government. The government hand out 10 paper currency units (crowns) to each person. I would argue they are now in debt to the tune of 10k crowns. They impose a tax to make those crowns worth something and take the crowns back as payment in taxes. So all their real wealth can now be valued in terms of Govt IOUs.

    They can start a National debt , as we understand it, by issuing paper Crown bonds which do pay some interest. But if the interest on those paper bonds is tiny, say 0.01% or any imaginable smaller amount, are they really any different to paper crowns in the form of currency? They are both just IOUs of government. A tiny bit of interest can’t make a huge difference to how we consider those IOus.

    • Auburn Parks says:

      And lets not forget a key point here gentlemen, how much real wealth remains not created due to a shortage of dollars?

      Switching to a 99% renewable energy infrastructure would benefit everyone but is not undertaken because of a perceived lack of money.

      How much more real wealth is created by a relatively healthy society than by a less healthy one? And so its important to make sure that citizens have access to the health care services they need to remain as healthy and productive as possible. Everyone should get rewarded for health and exercise targets if its important to a society to be healthy and productive.

      How much real wealth remains not created because we dont issue enough money to send every single citizen to various higher education institutions?

      How much real wealth remains not created because our infrastructure is subpar?

      I can go on and on. The Govt may not be able to create real wealth by itself (its nothing but an institution made up of private citizens after all), but it can sure maximize the amount of real wealth that gets created by ensuring that there is enough money to do things that are not profitable from a private sector POV, but are absolutely critical from a macro POV.

      Inflation is the ratio of money spent to goods and services for sale over time. More money that leads to more production does not lead to more inflation. the US economy was producing over $2 Trilllion a year in new money in the 00’s and yet inflation never rose above 4%.

      • Yes that’s right. In a situation of a National emergency , such there being a large war in progress, what matters are available resources. If workers and raw materials are available, then tanks , aircraft etc of course get built. There’s no money in the kitty , but so what? Everyone becomes a MMTer in those circumstances.

        • myth buster says:

          Or a bond buyer, which is what happened in World War II. Unemployment was almost non-existent and people were making lots of money both in the military and in the factories, but consumer goods were rationed or otherwise heavily limited in availability, so people spent most of their income on paying off debt and buying war bonds.

      • Elias Dottemar says:

        Renewables will certainly not boost productivity. Keyneseans see no difference between casinos and steel plants as long as they both employ and pay taxes. They ignore the factor of physical productivity, of the which energy flux density is the crucial factor of manufacturing and kindred performance.

        The reason the annual $2 Trillion do not inflate is not because they “lead to more production” (not a penny did) but because they subsidized the pace of transaction of securities needed to keep the financial system afloat and thus heretofore never came into “civilian” circulation.

  14. ” also the presence of banks which expand and supply the money supply in our fractional reserve world”

    The fractional reserve theory is somewhat discredited. The BoE has said as much.

    “Money creation in practice differs from some popular misconceptions. Banks do not act simply
    as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.”

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

    Your example of the person who builds a house and sells it for 1% of its supposed value doesn’t make any sense at all! Houses always sell at close to market valuation unless maybe there is some tax fiddle going on!

  15. You raise the issue of the Fed and the Treasury being legally constrained in the financial dealings they have with each other. There’s an easy work around to that!

    If the Treasury want money from the Fed, the Treasury sells T-bills or whatever to Bank X, and Bank X sells them to the Fed.

    So Bank X pockets a nice little commission for doing next to nothing!

    Look, everyone knows the Fed is just a branch of Treasury. Why bother to pretend otherwise?

    • stanislaus2 says:

      Of course! Did I not say something about this before? I’ve said it in other messages at other places.
      Usually the Fed is not involved. The Treasury will simple roll over the debt by swapping the bank’s mature security for a new one from the Treasury. Interest can be obtained by simply issuing securities to borrow money for interest payments. Those securities can also be swapped for new ones. The Treasury has been doing this since the 1790’s.

      Although the Treasury uses this method as standard procedure, it does create new money when the banks create the loan to the Treasury. The Treasury spends the money back into the private sector and the money ends back in the US banking system, from where it can be borrowed again to create new money again by the banks. But this is debt money. That bothers a lot of people who do not realize that this debt will never be paid back, nor need be paid back. The perpetural roll-over technique is sufficient. Yes, the banks get free interest out of this. That’s the price we’ve paid since 1917 when the Treasury was required to borrow rather than create US Treasury notes out of thin air. But the system works. And it is false to argue that the government is near bankruptcy.

      But if this still bothers you, the Fed can always redeem any debt associated with selling a bank a US Treasury security, simply by buying it with money it creates out of thin air. This makes the money received by the government from the sale of the security debt-free money. The Fed is an entity of the government, although it is said to be “independent”. But that is just an illusion. And the Fed does not have to always buy the security immediately after the bank makes the loan to the Treasury. It can, and should, wait until the economy encounters deflation (recession or depression). Then it can buy the securities by the amount needed to get the economy moving again. So, the Fed is in the business of buying and selling securities on its own because it needs a supply of securities to sell during inflations to drain bank reserves. It will usually buy securities during deflations with money created out of thin air to restore the reserves of banks whose reserves were diminished when they bought securities from the Treasury or the Fed.

      The Fed is mandated to fight inflation and deflation (to assist in keeping prices relatively stable). It also is mandated to work to support full employment. It does this by buying US securities from banks during deflations and selling US securities it has collected through various sales to banks back to banks to drain their reserves, constraining their lending ability. But there are other measures by which inflation can be fought also, such as by raising taxes (which drains money out of circulation if not spent back into circulation); by encouraging saving by Fed raising interest; by encouraging imports to drain money out of circulation into foreign accounts in dollars at the foreign exchange banks. Dollars never leave the US banking system, contrary to myths.

      Keep in mind also that about half of all the securities are sold to private and foreign buyers and are not for supporting government spending. They are simply time-deposit accounts at the Fed. The money is there to be paid back to the investors when the securities mature. Interest money can be created by the Fed out of thin air directly, or if the Treasury is involved, it can sell securities to gain money to cover interest, and the Fed can always buy those securities and redeem the debt, making the interest money debt-free.

      The securities held by the Fed are counted in the debt-ceiling law, but they too do not represent true debt of the government for loans for its operations. Securities by definition are IOU’s that carry a debt obligation of the government to any entity (other than the Fed or the Treasury) holding them. It is the same debt obligation associated with Federal Reserve dollar bills. The Treasury must pay anyone presenting a dollar bill to the Treasury a dollar in a Federal Reserve note. The security’s obligation kicks in when it matures to pay the holder the face value of the security in Federal Reserve dollars. This obligation is not extinguished when the Fed holds the securities. It will swap any mature securities it holds for new securities from the Fed (which is legal). The Fed will then sell securities to banks during inflations. It will buy them during deflations.

      The problem is that Americans, including many economists (who do not study monetary theory or banking), most politicians (including the President), and most American voters don’t realize that the debt is always perfectly managed and there is no danger of bankruptcy. We have a fiat money system that is kept under control to avoid hyperinflation. It’s like gun ownership: guns are dangerous things. But dangerous things if treated properly can be managed without harm. Fiat money is dangerous but if managed properly will not be hyperinflationary. Usually hyperinflations occur only in countries that owe other countries money in other currencies than their own. The banks in those indebted countries will try to create new money to flood the foreign exchanges to get the foreign currency to repay their debts before the price of that money in their own currency rises. Germany after WW I had to repay the allies war reparations in silver and gold, which Germany did not have in sufficient quantity. The reparations were worth more than all the property in Germany. Hitler stopped the hyperinflation by stopping reparation payments, replacing the inflated German mark with new currency, and only using barter to get foreign goods Germany did not have. He put Germany back onto a sound currency in a matter of two or three years, and was able to wage a war against much of the rest of the world for 5 years with his economy. He was just lucky to have advisors who favored fiat money. It had nothing to do with his evil actions toward Jews and other “undesirable” groups like the Gypsies, homosexuals, mentally retarded, Slavs, etc..

      Fiat money is just tokens of debt obligations in units of account between parties in exchanges of goods and services in the economy. It doesn’t have to be backed by anything other than the goods it can buy.

  16. Mark Baird says:

    When will you comment on the Japanese economy?

  17. pslebow says:

    It really is impossible and disingenuous to claim that ideology is not tainting the discussions here. I can see that Mr. Zimerman desperately wants MMT to be invalid for it does lead to the inevitable conclusion that government must effectively be in control of not only the money supply but prioritizing how money is allocated in society for the good of society. This is abhorrent to those who believe in the perfection of a so-called, free market. In fact, laissez-faire capitalism always leads to severe inequality by its very nature – it must. This inequality must ultimately lead to the destruction of a society and to a great upheaval that eventually destroys even those who have unfairly benefited from the inequality.

  18. Joe_Wazzzz says:

    I think everybody is missing a greater point. Could MMT function in a democracy? We have clearly seen that it is difficult if not impossible to walk back government spending with a democratic system for several reasons. Public sector unions will not only fight any cutbacks but coerce their members to do the same. Austerity of any kind is fought tooth and nail around the globe. Democracy is a form of government where politicians buy their votes and that is only affordable to the wealthy nation. As resources diminish and the populations grow the outcome will almost certainly be wars over resources rather than cool international democratic heads prevailing. We can see the world gelling into the next world war as I write. It would require a dictatorship to implement MMT.

  19. Joe_Wazzzz says:

    One other point. Mosler seems to almost take delight in the fact that other nations give us stuff for what is basically worthless or becoming more worthless paper. That may be great for us now, but at some point enough of those nations will realize the game and the smart ones will rush to America to spend their trillions of dollars while they still have some value. In a free market, there is little restraint on what they can buy. This should cause massive inflation as these dollars pour into the country in a race to get rid of them. Now the dollar will lose its reserve currency status because nobody will be using them as a reserve. Yes the government can always write a check but when nobody will take its checks, that is a de facto default.

  20. “Firstly, what MMT states, and specifically the way it states it, leads anyone who believes it to realize deficits are not only not bad, but necessary, and that massive government spending is imperative for a healthy economy.”

    Yes, government deficits are necessary to use the currency to achieve certain ends- MMT’s ends are full employment and relative price stability. This doesn’t necessarily mean massive government spending. The way Abba Lerner/Mosler puts it, we set the right size of government politically, and adjust taxes up or down to ensure production reaches its potential. This isn’t a prescription for big government or small government. It’s a prescription for not involuntarily idling the labor force or creating (hyper)inflation. This is the government’s great responsibility. No private entity has that ability or responsibility.

    “So, apparently to many countries, a true float still seems very scary, and thus caring about their exchange rate, the limitless ability to issue fiat currency that MMT believe countries have is not really there.”

    This is one of the more intelligent critiques, but nevertheless it gets addressed once you learn more about MMT. Nobody is very good at finding indicators which predict exchange rate changes, but there are good reasons to be concerned about it, especially if you’re a small country. The Mosler MMT proposals are US focused mainly. I think the MMT insight here, is that your currency is less likely to tank if the underlying economy is vibrant (and growing) than if production is collapsing due to austerity. We know what matters to investors is α. Furthermore a bad economy makes an ideal breeding ground for political extremism. The lesson here is there is no advantage to idling the domestic workforce deliberately. There are advantages to protecting against disruptive financial/trade relations with the rest of the world, I.E. persistent trade imbalances.

    “To make the point even stronger, one must ask, why do they (MMT people) care if a debt is denominated in its own currency or not? Whatever the exchange rate is, surely a country can print whatever amount of their own currency is needed to buy the foreign currency required to pay back the debt. ”

    Domestic inflation is strongly correlated to exchange rates, the more dependent on imports a country is, the more this is true. Again, the goal of any MMT policy should be relative price stability. A government has a lot of power to regulate domestic sources of price instability. It has a lot less power to control international sources of price instability. I.E. They can’t tax the Chinese to prevent them selling dollars and buying euros.. They CAN try to balance trade to prevent the Chinese from saving so many dollars that they pose a substantial risk to the dollar’s exchange value.

    “As far as the fiatness of the modern fiat systems, MMT also glosses over some real important caveats. If one notices, MMT always talks about the “government”, or the “sovereign” issuer of currency. There is hardly ever a mention of the “Fed” or the “Treasury”, or anything more specific like that, and its imperative for their theory to hold any water.”

    Yes, to keep things from adding complexity that don’t add substance. I can list loads of scholarly texts that go into the fine grain detail of the Fed and Treasury. In fact this is MMT’s main contribution to economics. They actually did the work to see what these operations are rather than accept the textbook treatment of these matters. The verifiability of payment system operations is its biggest selling point for me.

    “No. The term “printing money” often refers to a situation in which the central bank is effectively financing the deficit of the federal government on a permanent basis by issuing large amounts of currency. This situation does not exist in the United States. Global demand for Treasury securities has remained strong, and the Treasury has been able to finance large deficits without difficulty.”

    Ok, the Fed is a creature of congress. Yes, one with a lot of independence within the restrictions laid out in the Federal Reserve Act. It doesn’t matter if it is quasi government or quasi private, what matters is what it does and is capable of doing. The whole debate if it is government is a distraction. Treasury securities can only be purchased with the Fed’s liabilities. The Fed is prohibited from buying treasuries directly but they do it indirectly. Again, all of this is laid out in finer detail than you’ll probably find anywhere else in the MMT literature. Even Marriner Eccles the late great Federal Reserve governor sounds like a MMTer if you ever read his speeches or his book about how the Fed always accommodates government spending. At one point he warned his fellow FOMC board members about the risk of opposing a democratically determined budget. He knew that if that ever happens, Congress will not hesitate to take back the constitutional authority to issue the currency.

    Another point is the term “printing money” is a very vague one rife with internal contradictions. MMT clears this up by speaking of the exact financial asset/liability in question. “Printing money” could mean increasing the net worth of another party(s). That is fiscal policy only. It could mean changing the composition of the term structure of private portfolios (like when the Fed buys a Treasury sec). This is monetary policy only. To avoid misunderstandings never use the term “print money.”

    Ok, I’ve spent enough time on this. Your objections are mostly straw men, although there IS work to be done on figuring out ways to stabilize exchange rates, MMT will help with this endeavor by giving a sound foundation for understanding of how money is created and destroyed. Without that, we’re back to monetarism and any good policy that is derived from that shaky foundation would be due to sheer luck.

  21. Joe_Wazzzz says:

    If setting the size of government is political, then the questions is, in a democracy can the government efficiently decide what is the optimum size of government. I would contend that politicians are not motivated or elected by trying to determine the optimum size of government for the economy and democratic governments have no desire to remain small. In a democracy, a politician’s first and foremost job is to get re-elected. They would be tempted to hand out goodies and keep the economy on the edge of unsustainable inflation to stay in office. The voters have never understood (nor probably ever will understand) the causes of inflation. The politicians will blame the greedy private sector businessmen and clamor for more regulation which will of course require more government jobs for which people have always lined up around the block. I think that any kind of centrally run economy is going to breed incredible corruption and public sector growth no matter how perfect it looks on paper. People are genetically wired to game the system and those who understand what you have written will use their knowledge to take advantage of those who don’t.

  22. Cameron Murray says:

    I liked most of this article. You seem to have invested some effort into MMT and found out that in the details there are political constraints – self-imposed and otherwise – to making useful policy given the nature of money.

    But I feel like you just had to wrap up with some strange arguments to reinforce your prior beliefs. Like the conversation about social security – Mosler is right that the accounting operations are the same (interest is another accounting operation). There are no investment effects from people swapping secondary assets.

    Also

    "At the macro level, MMTers should realize it’s government that really can’t do anything, at least nothing positive. Government can tax people’s money away, spend it unproductively, it can inflate the currency, but it can’t do anything productive because the very essence of productivity is based on supply and demand and market pricing mechanisms which the government does not abide by."

    Which really highlights pre-existing beliefs about how society is organised. Can you think of no government organisation that produces something of value?

    • Thanks for the comment Cameron.
      You are right… at the end I delved into some areas in which I perhaps should not have in this article, but I suppose the temptation was there… if someone has read this far down on MMT, here is a bigger issue.

      However, the social security discussion, I believe was well founded, and an area where Mosler makes an important technical mistake in his claims. Since Social security, as a definition by law is in part inflation adjusted, the government cannot really fund any amount of it no matter what. In the same way that he recognizes that a foreign currency liability cannot be paid regardless of its size, the same with social security. Both can theoretically be funded with enough of the local currency; however high the inflation rate, or however high the exchange rate, as long as it is not infinite, enough of the local currency can buy the required amounts.. but Mosler himself admits in practicality that breaks down. He likely simply did not notice this detail… his overall point being that the government can fund any liability that is denominated in its own currency. However it is an important detail that he missed…

      Since the point of the liability was not to promise senior an arbitrary amount of notes (that the government can issue endless amounts of), but to promise them a certain real standard of living, the law factors inflation into consideration. And thus, the liability, becomes like a foreign exchange liability, and it cannot always be funded no matter what. The more money they print, the less it is worth, and the harder it is for it to guarantee that real standard of living.

      As for the last paragraph in your comment, I do believe there is a role for government, and it does produce huge value in that regard, and that is in the role of enforcing the rules for the private market. Enforcing the rule of law, protecting property rights and life and liberty. From external threats or internal threats. The nice rules of capitalism, in which I must battle my competitor only by producing better cheaper products for consumers is true only with a strong government. Of course without it, perhaps some thugs and a few bombs are better. Liberty can be upheld only by a strong government that can hold back forces, internal and external, that themselves would destroy liberty. Be it a foreign invasion or rampant crime and looting. And many on my side of things, may perhaps disagree and believe that there is no role for government at all, and that the market could provide all services more efficiently and better.

      Not to delve too much into that, it is another subject, but what I meant in the quoted paragraph was about production… the text goes on to explain. Government has its role, but it should not be in the marketplace, in production. Increasingly we see the government as the provider of more and more things, and I simply say that this is a very dangerous road and a false one.

      It really cannot provide anything in net terms because it must steal the wealth to with which produce it,(so those with more votes get at the expense of those with less votes) and the production may or may not be desired by the people at least at those prices. Besides that, due to the lack of proper incentives and price mechanisms when government does something, the result is often of terrible quality and efficiency.

      The things we love tend to be of the private market (be it technology, a restaurant, a movie, the Mall, horseback riding or yoga) and the things we all hate, of the government (going to the DMV or being stuck in traffic on state owned roads). And yet we all clamor for more government. As if the mere idea of someone owning something repels people (because then someone might be getting rich “off of people”) and the idea of a government owned institution emits feelings of egalitarianism and fairness… since it has no owner and exists for the public good. Nice in thought, but we all hate to go do anything at that institution.

      Government production, like taxation is dictated. Enforced by power. Government thus skews what would otherwise be more efficient production of goods and services, but more importantly engages in transactions that are not voluntary. The reason why trade and transactions are overall such positive things is because they are voluntary. When that is removed, at least from part of the equation, the results are nearly always damaging. And I think often less than ethical. Now to make sure they are voluntary, I believe government has a role… one cannot enslave another due to the existence of police and courts of law, but one should be able to entice another to work for him by a mutually agreeable deal (ie a sufficient salary). Government denying two that liberty goes against the very reason the government ought to exist in the first place, to guarantee him that same liberty.

      There is a fine line between an organic government of a people, and mere de facto jurisdiction, the power that a state has over an area much like gangsters can have over turf. Mere protection rackets dressed up in nice language… the producers are taxed by those that will “protect” them (and don’t like to produce themselves) and the protection is not optional, it is obligatory. And tougher thugs can come and take over the turf to install their new rules. It is a fine line and I think we often cross it.

      But you are right, this was another subject altogether, and you are right, it clearly points to certain ideology, and so I am glad you liked the analysis of MMT, and feel free to focus on that part of the article which was done as objectively and thoroughly as limited capacities permitted.

  23. Joe_Wazzzz says:

    I came across a video interview with Mosler a few days ago and immediately watched several more, then I read his free book. The thought of regulating the economy by adjusting government spending and taxation as thermostats was interesting, even fascinating, but I just kept thinking, in a real world, this is never going to fly. That led me to google criticisms of MMT which ultimately lead me here. If we had one government, one currency, one religion, one language, one culture and everyone had a degree in economics, I still don’t think centrally planned economies will ever work for the previously stated reasons. It would require government powers that a democracy or representative republic simply don’t have and it would require people to behave in a fashion that simply is not their nature.

    The failure of MMT is not so much in the nuts and bolts of the idea but rather in the almost Utopian world it would need in which to function. Austrian economics still makes sense, yet it is roundly ridiculed. Keynsian economics made sense to the majority but is now imploding. Monetarists thought that velocity was a constant . . . oops! Proponents of all these schools say, “If we would only do it right.” Economics is like religion, some would say it is a religion. We sit around puffing on cigars and sipping brandy and arguing over how many angels can dance on the head of a pin. I firmly believe that MMT will never be practical or implementable no matter how much sense it makes. Economics is something to be pondered not enforced. Just my take.

  24. Thanks for the comment Cameron.

    You are right… at the end I delved into some areas in which I perhaps should not have in this article, but I suppose the temptation was there… if someone has read this far down on MMT, here is a bigger issue for thought.

    However, the social security discussion, I believe was well founded, and an area where Mosler makes an important technical mistake in his claims. Since Social security, as a definition by law is in part inflation adjusted, the government cannot really fund any amount of it no matter what. In the same way that he recognizes that a foreign currency liability cannot be paid regardless of its size, the same with social security. Both can theoretically be funded with enough of the local currency; however high the inflation rate, or however high the exchange rate, as long as it is not infinite, enough of the local currency can buy the required amounts.. but Mosler himself admits in practicality that breaks down. He likely simply did not notice this detail… his overall point being that the government can fund any liability that is denominated in its own currency. However it is an important detail that he missed…

    Since the point of the liability was not to promise senior an arbitrary amount of notes (that the government can issue endless amounts of), but to promise them a certain real standard of living, the law factors inflation into consideration. And thus, the liability, becomes like a foreign exchange liability, and it cannot always be funded no matter what. The more money they print, the less it is worth, and the harder it is for it to guarantee that real standard of living.

    As for the last paragraph in your comment, I do believe there is a role for government, and it does produce huge value in that regard, and that is in the role of enforcing the rules for the private market. Enforcing the rule of law, protecting property rights and life and liberty. From external threats or internal threats. The nice rules of capitalism, in which I must battle my competitor only by producing better cheaper products for consumers is true only with a strong and just government. Of course without it, perhaps some thugs and a few bombs are better. Liberty can be upheld only by a strong government that can hold back forces, internal and external, that themselves would destroy liberty. Be it a foreign invasion or rampant crime and looting. And many on my side of things, may perhaps disagree and believe that there is no role for government at all, and that the market could provide all services more efficiently and better.

    Not to delve too much into that, it is another subject, but what I meant in the quoted paragraph was about production… the text goes on to explain further. Government has its role, but it should not be in the marketplace, in production. Increasingly we see the government as the provider of more and more things, and I simply say that this is a very dangerous road and a false one.

    It really cannot provide anything in net terms because it must steal the wealth to with which produce it, (so those with more votes get at the expense of those with less votes) and the production may or may not be desired by the people at least at those prices. Besides that, due to the lack of proper incentives and price mechanisms when government does something, the result is often of terrible quality and efficiency.

    The things we love tend to be of the private market (be it technology, a restaurant, a movie, the Mall, horseback riding or yoga) and the things we all hate, of the government (going to the DMV or being stuck in traffic on state owned roads). And yet we all clamor for more government. As if the mere idea of someone owning something repels people (because then someone might be getting rich “off of people”) and the idea of a government owned institution emits feelings of egalitarianism and fairness… since it has no owner and exists for the public good. Nice in thought, but we all hate to go do anything at that institution.

    Government production, like taxation is dictated. Enforced by power. Government thus skews what would otherwise be more efficient production of goods and services, but more importantly engages in transactions that are not voluntary. The reason why trade and transactions are overall such positive things is because they are voluntary. When that is removed, at least from part of the equation, the results are nearly always damaging. And I think often less than ethical. Now to make sure they are voluntary, I believe government has a role… one cannot enslave another due to the existence of police and courts of law, but one should be able to entice another to work for him by a mutually agreeable deal (ie a sufficient salary). Government denying two that liberty goes against the very reason the government ought to exist in the first place, to guarantee him that same liberty.

    There is a fine line between an organic government of a people, and mere de facto jurisdiction, the power that a state has over an area much like gangsters can have over turf. Mere protection rackets dressed up in nice language… the producers are taxed by those that will “protect” them (and don’t like to produce themselves) and the protection is not optional, it is obligatory. And tougher thugs can come and take over the turf to install their new rules. It is a fine line and I think we often cross it.

    But you are right, this was another subject altogether, and you are right, it clearly points to certain ideology, and so I am glad you liked the analysis of MMT, and feel free to focus on that part of the article which was done as objectively and thoroughly as limited capacities permitted.

  25. Draip says:

    MMT is 99% an objective description of reality. The ‘theory’ part is in ideas about what can be done with the power of a self-supporting fiat currency. You can’t debunk reality. Here, see it in action for yourself:

    https://www.fms.treas.gov/dts/index.html

    Table III-A is what you want. So far this fiscal year the United States federal government has funded itself to the tune of 46 trillion dollars. Since 1998 the total is 719 trillion dollars. Before that the records aren’t open to the public, but over the lifetime of the Federal Reserve the complete amount must be in the tens of quadrillions.

    That’s it, end of discussion as far as I’m concerned. MMT’s claims are objectively true.

  26. MMT is a comment on the parameters of inflation, and also a statement that inflation is the most important fiscal constraint on government. Finally the theory uniquely recognize problems created by economic abundance and what has value in a post scarcity society.

    Focusing on deficits is misdirected. But deficits are meaningful. Ideally deficits are the growth of value of government plus the amount that government naturally wants to inflate its currency.

    The value of the dollar is a comment on the value of the institution that uses the dollar for financing. This is determined by markets, based on governmental authority, reputation resources and how it uses those things to fulfill its purpose of public service.

    The relationship between savings and deficits only applies if people want to use a particular currency as their form of savings. All the savings in the world have to be saved in one form or another. Public institutions are one of the best ways to save because they are concerned with the common good and (usually) a prerequisite for a properly functioning marketplace. Using commodities or companies as a form of savings is less sustainable, especially as total wealth grows.

    Government can spend as much as it wants as long as the value it creates through that spending is greater than or equal to the amount it spends. This constraint is not unique to government. Companies finance themselves by selling stock. That stock increases in value, and the share holders can then spend more. Sovereign governments usually try to stabilize their currency so it makes sense for them to issue more money and spend it for public good instead of giving all increase in value to investors. In the absence of an inflationary threat, governments should spend liberally, provided that they understand the channels whereby the money is being absorbed into savings and that it won't create future unstable inflationary liabilities.

    Talk about paying down the national debt is ridiculous, if our currency is worthless, it should be fairly easy to pay stuff back, it it's valuable, there's no need. A debt is an obligation where someone else controls the terms. Sovereign governments dictate their own terms for currency whether it be bills or bonds. Government is the enforcer and the law keeper, there is no entity that can collect from or enforce terms on sovereign governments. The value of their currency is their primary financial constraint. This is why understanding the parameters of inflation is so important.

    Governments are valuable because they are legitimately recognized and supported by the people they govern and they support the public good. Few private institutions or companies have the same relationship

    Certainly we must consider investor volatility and long term trends that could create inflationary threats, but the great realization of MMT is that government is actually a key component to the value of marketplaces. Government resolves disagreements(hopefully) without war, killing or unnecessary inefficiencies(tollbooths for example).

    I think you are focusing on the pedagogical rhetoric that is used to explain MMT more than the core principles of the theory. The one core principle you do discuss is the relationship between deficits and savings, but again this is only a statement about savings in that country's currency.

    The economic problems we face today are not so much a problem of scarcity of resources. If I have money to spend I can get what I want, where I want it, whenever I want it. We have the infrastructure and tools to care for all our needs. The economic problems we face are created by unprecedented abundance. To resolve financial issues we must understand the implications of this abundance. How does it affect our relationships both economic and personal? How do we conserve key resource that are actually scarce(oil) even though we have virtually limitless productive capacity? Finally, what has long term value in such an ecosystem?(Hint: government, rule of law, public good).

    My two cents (nevermind, only gov can issue cents, I can't even issue a penny).

  27. jag37777 says:

    Spoken like a true neoclassical.

  28. David White says:

    This is not a critique of MMT.

    The reason being is you can’t grasp how the accounting actually works in reality. Study it in great detail then come back and look at the topic again.

    These sites will help

    http://www.3spoken.co.uk/

    http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html

    Especially Eric Tymoigne’s work

    You only understand the basics but to do a proper critique you need to know it inside out.

  29. Alan says:

    This article is so bad it does the opposite of its intention, it supports MMT!. I am new to MMT and wanted to hear someone attack it and show how it was fundamentally flawed and does not work. It quickly became clear that the author did not really understand how money works at all and just displays his own ignorance and unknowingly and most likely unwillingly lends support to MMT by the weakness of his arguments. It was a relief to read this crap and know that MMT is right after all. This is not the first such overtly critical article that I have read that ends up supporting MMT by failing to find anything wrong with it. No need to worry though the dark forces of neo-liberalism, rentiers, free lunchers, banks and the like will ensure that the present status quo will remain as it is.

    • Thank you Alan for that very SPECIFIC critique. That whole article and all I did was lend support unwillingly (I suppose you meant unwittingly) to MMT. Can’t really reply to anything you said, but I hope you are right that we have nothing to worry about and the “dark forces” will protect us (though if it’s by maintaining the status quo then we are really in trouble!).

  30. Dismayed says:

    You need to reread the MMT literature. I stopped when you butchered the requirement that debt be denominated in a sovereign’s own currency. Your assertion that it doesn’t matter since you can always exchange currencies is wrong. Do some research on debt crises and you may learn how absurd your position is. No need to read further if you missed that one. FAIL.

    • If you meant what you wrote at least, then it is your comment that is ironically the FAIL. If you had read on, you would have understood that the position was NOT “that it doesn’t matter” but exactly the opposite. But it’s difficult to understand what you meant exactly… did you think the paper actually advocates the position “that it doesn’t matter” (in which case you misunderstood it and we may agree on that point), or that I attributed the “it doesn’t matter” position to MMTers wrongly? If it’s the latter, it is also not the case, I merely used that as an illustration of one of the flaws in the MMT logic and even quoted Mosler in that section speaking about the foreign currency dangers (although he also meanders vaguely around the danger saying only it would “multiply” the debt greatly making it impossible to pay and not clarifying why any amount would not be possible to pay of ones’ own currency, which usually is he whole point… hence the crux of the issue… you can issue and issue currency, but not value. it’s value goes to zero as you continue to issue).

      Furthermore if you stopped there, you never got to the nuts and bolts of the argument which clearly point out the error in MMT, at least as it is famously explained by Mosler.

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