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!!!
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.
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.
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.
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.
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.
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.”
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.