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Sad day for America

I followed the US mid-term election campaign as best I could – being an outsider. Sometimes the level of debate appeared to be below that which I imagine the primates engaged in back then. I don’t intend to become a psephologist (not qualified) but I am interested in exploring why these witless conservatives have made ground. In Australia’s recent national election where the so-called progressive Labor Party (not!) lost office in their own right the swing was to the Greens rather than the conservatives. This does not appear to be the case in the US. So there are two questions I am interested in. First, what role did the neglect of the unemployed play in the election results? Second, do the result really amount to an endorsement of the neo-liberal economic approach? But the reality is that the US political debate has become so divorced from reality – which in my parlance means that it has totally failed to provide a vibrant debate about the options that the monetary system offers government to improve the lives of the citizens. Instead, candidates who have no understanding at all have been elected on the basis of a pack of lies and only demonstrate total ignorance when it comes to informed debate. In that sense, the mid-term elections have foisted a number of very dangerous individuals into office. Sad day for America!

With 96 per cent of the Senate vote counted in Connecticut, I can confirm that 10,888 (1 per cent) of the voters demonstrated good judgement (voting for my mate Warren Mosler). That is not many. They prefer to elect a person who cannot tell the truth about his background but more importantly doesn’t understand how the economy works over someone (Warren) who actually knows how the monetary system operates and has a solution to the current crisis. Okay, their choice.

But this result was magnified throughout the states – with big swings to candidates who by their public statements similarly demonstrate a gross ignorance of the way in which the monetary system operates and the potential that government has to reduce the impacts of the current crisis.

We would never put a person who couldn’t fly in charge of a plane – why do we entrust positions of government to those who cannot possibly make the correct decisions especially at a time when government has to make the right moves or else millions more will lose their jobs.

Over the course of the campaign there have been so many classic statements by these nonsensical conservatives. The Democrat candidates have mostly been no better by the way. I have no truck for either side of politics in the US. A complete clean sweep of the Democratic party machine is required to purge it of its conservative ignorance.

For Australians, I would advocate the same purging of the Labor Party and the neo-liberal inspired Greens. Please read my blog – Neo-liberals invade The Greens! – for more discussion on this point.

Some of the statements made by the t-party candidates sum up the malaise that the US polity is now in.

For example, on October 10, 2010, the New York Times carried the story – In Pennsylvania, Anger Fuels a Race for Senate
– Republican tea party candidate Pat Toomey said:

These guys in Washington are creating an environment that is having a chilling effect on small businesses and medium and big businesses, as well, and that’s a big part of why we don’t have the job growth that we badly need … They are creating a staggering amount of debt, debt that is eventually going to have much higher interest rates, probably lead to very high inflation … It’s a very worrisome combination, and we have got to get on a new track.

He was then asked what that new track might look like and he struggled. He supports making the “Bush-era tax cuts permanent for all Americans” (including the rich) but simultaneously wants to cut the deficit and balance the budget.

But the best part of the article was this interchange:

Mr. Toomey says he favors making the Bush-era tax cuts permanent for all Americans – which would add $700 billion more to the deficit over 10 years than the plan advocated by President Obama to let the lower rates expire for the rich. But he also expresses a desire to reduce the deficit.

At the ironworks shop, Mr. Toomey brushed aside a question from a local reporter who pointed out that real income for American workers dropped after the Bush tax cuts, saying he did not believe the data.

So this brand of conservatism has learned the lesson I was taught by a right-wing professor when I was a student once. When it was clear that the theoretical models he was propounding had no correspondence with the data of the real world he told us that “the data was simply wrong”.

Okay, measurement area and other statistical bewilderments can clearly occur but the data put out by the national statistical offices is typically of a very high standard. But still if the message of the data gets in the way of your pet theory then the answer is simple: the data is wrong. I think that is called blind ideology – or religion.

Another gem from the mid-term elections was the lesson in macroeconomics offered by another extremist Rand Paul who spoke to CNN after he was successful yesterday. Here is the video snippet of what is a most extraordinary interview where he declares there is no poverty in America – just interlocked consumers and producers.

As you can see he wants a balanced budget and wants to get there by spending cuts. This section of the interview was particularly revealing. He was asked what he would say to those who wanted to reduce the deficit by stopping the Bush-tax cuts for the highest income earners and he replied:

RAND PAUL: I would say that they must be in favor of a second American depression, because if you raise taxes to that consequence, that’s what will happen in this country. Raising taxes in the midst of a recession would be a disaster for our economy. And anybody who proposes such a policy really is, I think, unfit to be making decisions.

CNN: What if they just raised taxes on the richest, those making more than 250,000 dollars a year?

RAND PAUL: Well, the thing is, we’re all interconnected. There are no rich. There are no middle class. There are no poor. We all are interconnected in the economy. You remember a few years ago, when they tried to tax the yachts, that didn’t work. You know who lost their jobs? The people making the boats, the guys making 50,000 and 60,000 dollars a year lost their jobs. We all either work for rich people or we sell stuff to rich people. So just punishing rich people is as bad for the economy as punishing anyone. Let’s not punish anyone. Let’s keep taxes low and let’s cut spending.

Anyway enjoy the video. If it wasn’t serious you would think this was a comedy skit. But presumably, a huge government order of all the products that the rich make would help the economy, no?

The progressive side of politics is to blame for this debacle. It was clear in the weeks after Obama was elected that their economic policy was lost. The Democrats and the President’s administration have perpetuated all the deficit terrorist myths that the t-partiers have now crucified them with.

They allowed unemployment to persist and white-ant peoples’ lives and undermine the continuity of local communities. Obama’s economics team has been culpable in that regard but given their New Keynesian slant it was no surprise that they would ignore a quick fix for the unemployment. The economics paradigm that rules in the White House doesn’t understand the basis of mass unemployment.

I thought this retrospective (October 20, 2010) written in the New Yorker was interesting. The related articles from 2008 are – The Fall of Conservatism and The New Liberalism.

The writer Tom Perriello had previously postulated that:

… after decades of ascendancy, the modern conservative movement had run out of ideas and talent, with no serious answers to the central problems of our time. For all the right wing’s noise and energy and apparent momentum going into this year’s midterms, these points are no less true today, and the Tea Party provides nonstop proof. There are no new conservative ideas, only the old ones presented in their most extreme form. Government is still the problem, tax cuts and deregulation are still the solution, liberal Γ©lites are still the enemy. All that’s changed is the level of vituperation, ideological rigidity, and anti-intellectualism.

I think that is a very insightful summary of what has happened. I am looking into the results a bit further and I am conjecturing that the agony of unemployment has led people to fall prey of these popularists who really just wheel out slogans that bear no relation to the reality they seek to address.

I believed that the crisis would see the end of neo-liberalism and a major re-appraisal of the dominant economic theory. I naively held onto that belief in the early months of the crisis. I soon realised that there was not going to be any major paradigm change this time around.

The election results in the US yesterday clearly demonstrate how the moribund conservatives can still command electoral appeal – aided and abetted by the corporates (media, health care companies, Wall Street bankers etc) – without having any understanding of the problems at hand.

Perriello noted Toomey’s data denial. He said (remember this was written on October 20, 2010):

But if a candidate deals with core economic realities by asserting his right to his own facts, that’s not a sign of a vibrant political creed, however good his poll numbers …

That is the problem. Politics has become divorced from reality. The media onslaught funded by the top-end-of-town (who have done very well out of the fiscal interventions) has played on the insecurity of the unemployed. Never mind the facts – it is all emotion and positioning.

Perriello’s insight is interesting. He said that despite the 2008 US election being a vote “against conservatism”, there has been no “self-reform or self-purification”:

Instead … conservatives have resorted to saying the same thing louder (much louder). It will happen again in 2012. The grassroots zeal on the right has been astounding. The party’s refusal to make any effort to help the Administration solve problems created under Republican rule has been shrewd (and deeply irresponsible-I’d say unpatriotic). These things will benefit Republicans next month. Over the longer run, they will help marginalize the party.

We have endured nearly three years of the conservative screaming. As a macroeconomist I have seen total falsehoods paraded out each day by so-called experts on the financial channels and radio shows. The politicians have just picked those lies up and broadcast them far and wide. The harvest has been an unbelievable distortion of reality … and persistently high levels of unemployment.

That real damage will worsen if these characters – who have now taken over the US government – actually implement their promises. The problem is that the “progressives” will chase them to the right – as you can see in Australia with the Labor party. They are not more right wing than the long-standing post WW2 conservative government.

Perriello also reminisces about the the progressive failings in the US. He says:

We’ve seen several pieces of landmark legislation, including the most important social reform since the Great Society, health care, which is also the first significant blow to economic inequality since the trend started in the late seventies. But there’s no new or revived ism to sustain the values and ideas behind these achievements … F.D.R. had the labor movement; L.B.J. had the civil-rights movement. Obama had Obama for America. His campaign was based on the man more than any set of ideas or clear vision of the future. Everyone knew what Reaganism stood for. No one knows what Obamaism means, which has allowed his enemies to fill in the blank.

I actually see it as being worse than that. From the perspective of my expertise (economics) the Obama Administration and the Democrat politicians chose to perpetuate all the major mainstream macroeconomic myths about budget deficits, interest rates, and debt.

When the US president announced to his nation on December 3, 2009 that the – The US government has run short of money – it was game-over syndrome for the progressives.

He got to that point by appointing a host of neo-liberal economists who made some “progressive noises” about deficits but ultimately continued to fuel the deficit terrorists.

Where were the papers from the Council of Economic Advisers pointing out the way the monetary system operates and the opportunities that the national government had to resist the private spending collapse? Why didn’t the US government take advantage of its early political popularity and implement a huge FDR-style public job creation program?

Such a program would have reduced the immediate severity of the private spending collapse, bolstered the housing market, reduced the bad debts that the banks were forced to carry and led to an earlier return to economic growth. It was an obvious policy option – for anyone not imbued with the years of mainstream macroeconomics logic that eschewed the use of fiscal policy.

Perriello notes in this context that:

Skepticism of government’s ability to improve people’s lives runs deep. The White House designed the positive effects of the stimulus bill (there have been plenty) to be undetectable to the naked eye. Americans’ economic circumstances have gotten harder, not easier, since Obama took office. Arguably, the same could have been said of F.D.R. in 1934 (the midterms that year went his way), but back then people were more desperate and less informed, meaning less likely to convince themselves that they shouldn’t “believe the data.” And conservative, pro-rich populism didn’t exist. The Liberty League, unlike the Koch brothers, had no Glenn Beck.

One of the failings of the progressive movement over the last three decades is never more obvious now. I refer to my long standing beef that the rise of the “think tanks” has been a largely conservative innovation. These institutes and lobby institutions have proven to be a spectacular success for the conservatives and have assailed the public with a massive quantity of propaganda dressed up as science.

They have been able to muster massive funding sources and have developed excellent media presences. Daily they can wheel out “experts” to advance the deficit terrorist cause.

The progressives have been very unsuccessful and even loathe to follow suit. I agree that the tie in to the corporate dollars has been easier for the conservatives and so the progressives have less capacity to raise funds to underpin the creation of these institutes etc.

But the progressive institutions that do have funds – for example, trade unions – have propped up political parties and their machines which have been steadily moving to the right. They have declined to support truly progressive organisations that could have been capable of presenting a truly alternative viewpoint.

We get what we sow!

Anyway, the media is now full of talk of liberty and balanced budgets and reducing debt slavery and all the rest of it.

But very little of the commentary or statements by those coming into office bear any semblance of an understanding of the problem facing the US or its solution. Ultimately, whether you like it or not, the solution has to be found in manipulating the monetary system. The policy directions now being espoused are exactly the opposite to what is required.

US Sectoral Balances

One of the things that always amuses me about public commentary from conservatives (and progressives too) is that they make statements that cannot possibly be true. It is clear they make them not realising that all the propositions they advocate are impossible to achieve. Whenever I hear these sorts of statements I conclude that the person does not know how the macroeconomy works and is thus a danger in public office.

I have always urged my macroeconomics students to understand the national accounts and the summary sectoral balances as one of their first tasks in dealing with macro-level reasoning. For many students this is an unattractive option – not very exciting – “we didn’t enrol in accounting!”. But a failure to really grind this framework into one’s understanding leads to persistent errors of reasoning when things get a bit more interesting …. and complicated.

Recall that aggregate spending and income (Y) is comprised of consumption spending (C), investment spending (I), government spending (G), exports (X) and imports represent a leakage from the expenditure stream. The external sector contribution to demand is measured in net terms as Net exports (X – M). So:

(1) Y = C + I + G + (X – M)

This income is distributed ultimately to households who either consume it (C), save it (S) or pay taxes with it (T). So from the perspective of uses of national income (which is just another way of looking at the aggregates) we write:

(2) Y = C + S + T

Bringing these two perspectives together we get:

(3) C + S + T = Y = C + I + G + (X – M)

And we re-organise that to get the familiar sectoral balances accounting relations which are depicted in the following graph:

(S – I) = (G – T) + (X – M)

The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

Typically we express these balances as percentages of GDP to scale them accordingly.

Another way of saying this is that total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

All these relationships (equations) hold as a matter of accounting and are not matters of opinion or debate. The interpretation of the causality can form an interesting debate but not the result that has to hold at all times.

So think about the statement – debt is enslaving us – and so we want government to reduce it debt and balance the budget. Under certain conditions that can be achieved.

What about the US at present? It has a large external deficit (X – M < 0) and that is not about to change anytime soon. Even if they persuade the Chinese to revalue their currency, this will just shift the external deficits between countries not increase American exports in any significant way. Further, there are no signs that there will be a significant revival of US exports or a significant decline in imports. From a Modern Monetary Theory (MMT) perspective that just means that the US is enjoying the real resources of the rest of the world at very favourable real terms of trade (that is, they are sacrificing less of their own resources to get more of the foreign real resources). They should enjoy that while they can for it may not last indefinitely. Anyway, for the purposes of discussion, we should assume that the external deficit will persist over the next decade or so at least. Logically, under these conditions, if you want the government to balance its budget (G - T = 0) then you must simultaneously be endorsing a private domestic deficit equal to the external deficit. That is tantamount to endorsing increasing private sector indebtedness. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process and eventually the house of cards collapses under the strain of servicing this debt. It is clear that one of the major problems at present is the level of private debt. The credit boom foisted massive levels of debt onto households and business firms (in some countries). The banks (many partly or fully nationalised) are carrying some of the burden of the debts that went sour. But it still remains that the private domestic sector in the US and elsewhere is carrying very heavy debt burdens. One of the reasons there is a reluctance to borrow and expand credit again relates to the debt burdens. A sustainable growth path will require the private domestic sector overall to reduce its debt levels. That means the sector as a whole has to start saving and keep saving for years to come (in net terms). So if you want to reduce the "private debt slavery" what does that imply about the conduct of fiscal policy? Answer: it is glaringly obvious. Given our assumption of an on-going external deficit, then if the nation is to provide the capacity to the private domestic sector to net save, the government sector has to sustain deficits.

That is not my opinion! It is a fact that emerges from a thorough understanding of the way macroeconomics works in the real world.

It might soothe the voters for a candidate to scream that he/she will bring down all debt (public and private) but given the reality it is impossible to reduce both private and public debt levels as a percentage of GDP.

Further, the relationship between net public spending (deficits) and debt-issuance is entirely voluntary under a fiat monetary system. There is no necessity at all for public debt to rise $-for-$ with net spending. The institutional arrangement that renders that outcome inevitable has no grounding in the operational reality of the monetary system.

It is a political construct designed by neo-liberals post the collapse of the Bretton Woods convertible currency system (1971) to limit government activity. It is a mindless constraint on government because it serves no productive purpose.

The opposite cannot be said for the private domestic sector. Its deficits (S < I) has to be financed by increased indebtedness (ultimately). The difference between the two sectors is obvious to anyone who understands the nature of a fiat monetary system.

A sovereign government is never revenue constrained because it is the monopoly issuer of the currency. The household, as the user of the same currency, is always revenue constrained and has to “finance” every penny they spend (either by earning income, running down savings, selling assets or borrowing).

The following graph shows the US sectoral balances from the first quarter 1952 to the third quarter 2010. The balances are expressed as a per cent of GDP. Thanks to my mate Scott Fullwiler for the data.

You can see that there is a close relationship between the private domestic balance and the government deficit. The current situation is characterised by a strong desire by the private domestic sector to net save and that is being “financed” by the public deficits given the external situation. I use the term “finance” here to denote the fact that the public deficits are maintaining most of the economic growth in the US at present which is generating the national income growth that private saving requires.

If the deficit was not moving in this direction, the US economy would have collapsed (worse than it has!) and the private sector would have been highly constrained its obvious desire to save. Yes, the collapse would have reduced the leakage from imports but not by enough to “fund” the private saving ambitions.

It is also clear that with US economic growth languishing and unemployment still persisting at ridiculously high levels, there has to be greater deficits right now to support the direction of private domestic saving and stimulate further growth.

The t-party conservatives have demonstrated no capacity at all to understand any of this. That is why they will be highly dangerous once they get their (ignorant) hands on the steering wheel.

The latest announcement of the US Federal Reserve Bank that they will expand their assets purchase program by $US800 billion should inform all of us that there are no “financial” constraints on government spending. The bank is, after all, a component of the consolidated US government when viewed from a monetary perspective.

All the politics in the world and rhetoric about central bank independence cannot cover the fact that from a monetary perspective the central bank in a fiat currency system is as much a part of government as the treasury is. Please read my blog – The consolidated government – treasury and central bank – for more discussion on this point.

Anyway, the US Federal Reserve Bank said (November 3, 2010) that:

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

So where are they going to get the “money” from? Answer: nowhere. They can create non-interest bearing claims on government without limit anytime they like. The central bank and the treasury (finance department) can issue unlimited claims denominated in the currency that the government issues under monopoly conditions.

They can always pay their bills and honour their liabilities.

They never have to tax to pay back debt or service the interest payable on that debt.

They can bail out any private company/bank should they see that to be in the interests of the public.

Readers might enjoy a flashback to September 1997. The then US Federal Reserve Chairman (Greenspan) made the following comments to the Jackson Hole Economic Symposium:

Let me begin with a nation’s sovereign credit rating. When there is confidence in the integrity of government, monetary authorities-the central bank and the finance ministry-can issue unlimited claims denominated in their own currencies and can guarantee or stand ready to guarantee the obligations of private issuers as they see fit. This power has profound implications for both good and ill for our economies.

Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.

That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.

Very prescient! Where will you find that understanding expressed in the modern macroeconomics textbooks? Which of the t-party candidates understand that? Which of the conservative commentators understand that? Ask your macroeconomics lecturer whether they understand that?

Clearly, if the government expands aggregate demand beyond the capacity of the economy to absorb that then there will be inflation. Deficits always involve inflation risk and that risk has to be judged according to the prevailing spare capacity (correctly measured) in the economy. There is no issue that there is an inflation risk.

But there is no such thing as the government running out of money or a government having to impose debt slavery us or higher taxes (to reduce the debt slavery) if it runs deficits.

If there is an external deficit, then the government has to run a deficit to allow the private domestic sector to reduce its debt level and to net save. Get used to it!

By trying to run budget surpluses to get the public debt levels down the government will undermine the capacity of the private domestic sector to restructure its balance sheet (that is, to reduce its debt).

The resulting short-fall in aggregate demand will reduce national output and income and reduce national saving (which is a function of income). It will also most likely drive the public balance into larger deficits as economic activity falters and tax revenue shrinks. We are seeing that result occuring in Europe at present as the austerity drives undermine economic activity.

Keeping vigilant – on the lookout for that inflation outbreak!

As regular readers will know I have upped my sense of responsibility as a citizen lately and now provide a frequent “inflation watch” service. The RBA tells us that inflation is going to rise soon despite it actually falling at present. So we all better be on our toes.

Today, the Australian Bureau of Statistics (ABS) released two pertinent data series: (a) Retail Trade which tells us whether consumers are running riot or not in the goods market; and (b) International Trade in Goods and Services which tells us whether our so-called once-in-a-hundred years export bonanza is flooding the economy with so much demand that all labour, capital, housing and other real resources are soon to be fully utilised.

What did the data tell us today?

1. Retail sales are stagnant – rising modestly only. The ABS report that “the seasonally adjusted estimate for Australian turnover rose 0.3% in September 2010 following a rise of 0.3% in August 2010 and a rise of 0.7% in July 2010”. This is also consistent with the flat credit demand. So no consumer led boom. The last surge in retail trade figures coincided with the fiscal stimulus effects. Since then the growth has been very muted.

2. Net exports – Exports of rural goods fell by 8 per cent and exports of non-rural goods (including minerals) fell by 3 per cent. So notwithstanding the booming terms of trade, overall exports are down and the trade surplus narrowed.

Conclusion: Still waiting for the signs that our economy is dangerously overheating.

Conclusion

Mid-term elections? Sad day for the truth. Sad day for America. Sad day for the unemployed who desire liberty but require a job to enjoy it.

Data request

If there are any keen psephologists out there that have compiled the US mid-term election data by state for the House and Senate in terms of the party votes, proportions, seat changes, and swings since 2008 I would love to get the data.

I can do it myself but because it is not core research for me I am reluctant to spend the time. I want to write a blog investigating whether the swings to the conservatives are related in any way to the movements in unemployment by region since the crisis began. My conjecture: we should find a very significant relationship.

If so, the solution for the Democrats is easy: create some jobs immediately and target the creation by region. The best place to start is with a Job Guarantee. Then start building up from that.

But I will gratefully receive any aggregated data and acknowledge the effort. If anyone is keen to help you can get semi-aggregated data with incomplete information from the UK Guardian (excellent coverage by the way) – HouseSenate. That would be a good place to start if you have some time to organise it more simply.

That is enough for today!

This Post Has 221 Comments

  1. This article by George Monbiot might shed a bit of light about at least the rise of the Tea Party in this election cycle… portions from the early part of your post dovetails into this article:

    The Tea Party movement: deluded and inspired by billionaires

    http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/25/tea-party-koch-brothers

    Here’s a link to the film he refers to, to its trailer:

    (Astro) Turf Wars

    http://astroturfwars.org/ (awfully disheartening… not sure how to counter this)

    I live in Houston, Tx. It felt futile in a sense to do so, but I can at least say that I voted; not many of us not filled with the zeal of the mid-term “right”… voted this election (which is usually the case during mid-terms)… And I can’t be particularly proud for voting… I’m not sure my sister would have let me into our shared home if I did not show up with my “I voted today!” sticker on my blouse…

  2. I cannot answer any questions, but, living in the States, I observed a very strong propaganda onslaught this year, apparently aimed at killing any additional stimulus and guaranteeing a Republican victory in the polls. In February and March there were questions about future inflation, which were taken up by mainstream economists. What about an “exit strategy” for the Fed, for example? This, I thought, was misdirection, to take focus away from unemployment and the need for more stimulus. Then, in the spring, came a full fledged attack by debt/deficit hawks, spreading out and out falsehoods, such as that the U. S. was in danger of bankruptcy. This was largely ignored by mainstream economists, and not questioned by the media. That passed by late spring or early summer, when the drive for austerity in Europe had some spillover, and questions about the future again came to the fore. The question of whether U. S. unemployment was structural was also discussed.

    I do not know if this was coordinated propaganda, but if it was, it was, IMO, masterful. The outright lies only lasted for six weeks or so. The rest of the time otherwise reasonable people were induced to act as though our real problems were nebulous future possibilities or problems that only time could heal.

    It was disturbing that economists did not rise en masse with James Galbraith to debunk the lies, and that the Dems also failed to respond. When the Reps blocked extending unemployment benefits in late summer, I thought that they had shot themselves in the foot, given that polls indicated that the electorate thought that unemployment was the main economic problem. But the Dems did not take advantage, or even try to do so.

    Most peculiar, Mama!

  3. It’s interesting how when the CB wants to purchase a trillion or so of securities, then there is almost no political opposition either from the media, or from mainstream economists, or from the punditry at large. There is no government budget constraint when there is a chance of raising asset prices. The wildest schemes with 9 zeroes are quickly adopted without much fanfare other than “will it work?” Everyone intuitively understands that the CB can make as much money as needed.

    But when it comes to investing in real resources, or paying for social security, or healthcare, then suddenly we have a budget constraint. Then, we are broke and need to borrow from China. The same economists who enthusiastically speculate about spending trillions on purchasing equities in the hopes that maybe someone will get hired from this become hard money men when congress, rather than the central bank, does the spending. Fiat money for troubled assets, gold-standard for troubled lives.

  4. Stiglitz was interviewed today with regards the failings of the Democrats and resurrection of the Republicans and said Obama could easily have redirected a significant part of the military budget which is spent on ‘weapons that don’t work for use against enemies that don’t exist’. That way he could have been perceived as using wasted money as stimulus elsewhere while keeping an eye on deficit reduction.

    I really can’t see how the Republicans’ policies can be any worse than what is currently out there and maybe a bit of gridlock and reversal Obama’s bills already in play may not be a bad thing.

    Clearly Americans this week have shown they do not agree with your views of spending like crazy but I guess that means they are stupid and you are right.

  5. It looks to me as if the Democrats have completely lost the plot. I watched two Democrat Senators on a CNBC panel smiling smugly at the riduculous claims of right wing GOP’ers and Tea pots. They had no counter arguments, nothing to say whatsoever. One completely crazed flat taxer came on (with a strange hairdo like a toupe). An economist (a smart black guy) who appeared to understood the monetary system, easily trounced his childish arguments.

    The lack of a decent unfied message from the Democrat side was appalling incompetence. They deserved everything they got. The GOP arguments, whilst rabid, are not particularly strong and easily debunked. As Bill said, the Dem’s sealed their own fate when they admitted there was a terrible national debt and promised to reduce the deficit. The Republicans have them by the balls now, it’s painful to watch. Can they possibly think the GOP will be stupid enough to cut spending and accept blame for a double dip?

    Unless senior Dem’s have an epiphany, I guess all they have is two years of bickering over programs, whilst the unemployed atrophy. Maybe Obama is fed up already and want’s out quickly, he has the same detached look Bush had in his second term.

  6. Nice take on the elections. I can understand the political realities facing the Obama administration, and I do appreciate the progressive legislation which was passed under his watch, but I think he made some key mistakes early on which cost him and his party dearly. If I recall correctly, Christine Romer, his chief economic adviser, wanted a stimulus package of around 1.2 trillion, most of it composed of direct spending. This estimate was based on overly-optimistic forecasts, even relative to the very-mainstream CBO forecast of unemployment at the time. The Administration axed Romer’s proposal immediately, arguing that it was a political non-starter. The result was a stimulus plan 400B less than Romer’s optimistic estimate, and, in addition, a package composed mostly of tax cuts. The optimistic forecasts were shredded within a matter of months, the employment situation continued to deteriorate, and Obama’s popularity plummeted as the stimulus began to be perceived as ineffective and wasteful.

    Lyndon Johnson once told his economic advisers that it is their duty to tell him what is needed and his duty to sell it to the people. In late-2008/early-2009 Obama did the opposite. His political team told his chief economist what could be done and then sent her out on the road to defend the decision. It was a huge mistake.

    The only point I would make with your analysis is the idea that conservative ideas are old and always the same. I hear this argument used a lot amongst liberals and I find it pretty weak. Was not the very progressive idea that government should act to sustain demand and maintain full output most forcefully articulated by Keynes back in the 1930’s? The progressive ideas are very old too — the only difference is that they are right!

    Also as an aside — we say tea-party over here as opposed to t-party. Thanks!

  7. RSJ,

    You make a great point. It is a sign of the times we live in. When Thatcher extended share ownership and more pension schemes were privatised in the UK, millions of Britons became new stakeholders in the capitalist ideal. All it took was a bribe of 300 BT shares worth a hundred quid. I’m sure other countries had had similar “equity sharing” schemes. The minions became proselytes for their masters ideals without understanding the eventual consequence. The Labour party became unelectable under the old rules and had to adopt free market ideals under Blair to get elected.

    The rate at which labour has been devalued and capital has ascended has been slow but steady. Small growth in living standards of the common man blinded him to the exponential growth of living standards at the top end.

    Labour has not had a fair share of the rewards for productivity increases but many people feel they have benefited as small stakeholders in free market capitalism. It’s taken me 35 years before I saw a burning bush and the scales lifted from my eyes. Slowly others will come to their senses one by one. The flat tax madness will help.

  8. There is another reason, apart from pure ignorance, that conservatives sound so stupid when they talk economics. They must obfuscate their real agenda, which is to transform the US into a neo-feudal state with the bottom 80% working at subsistence wages for the benefit of the top 20% (which will obviously include themselves and all their friends). Obviously they can’t use this as a selling point during election time.

  9. There are a wide range of problems, but what gets shown on TV is just for distraction. You can see how big the gap is on specific issues by looking at public opinion polls (like http://www.gallup.com/Home.aspx and http://pewresearch.org/). The problems are generally: extremely limited media access for alternative views, a really terrible electoral system, and issues with campaign financing. See this article by Noam Chomsky: http://www.chomsky.info/articles/20100124.htm

  10. Bill

    Just to clarify are you and MMT’ers saying that printing money can solve economic problems:

    1. Temporarily – rather like a blood transfusion after an acccident.

    or

    2. Permanently, because printing money has no negative consequences?

    or

    3. Something else

    Thanks

  11. Guys – does no one reading this blog have any influence with politicians or journalists such as to try and spread the word a bit faster?

    MMT understanding is getting disseminated via this blog, UKCM, and Mosler’s efforts, but frustratingly slowly. Not only is this disastrous for the economy in terms of human misery and lost GDP output, it risks Obama being a one-term pres.

    A new approach is surely required.

    MMTP

  12. Dear Ray (at 2010/11/04 at 19:02)

    You said:

    Clearly Americans this week have shown they do not agree with your views of spending like crazy

    I know we disagree on things if your comments are anything to go by but where can you find even a scrap of evidence in my written work (academic or blog or Op Ed) – and you have millions of words to use as the body of work over more than 30 years now – that I have ever advocated “spending like crazy”.

    Please provide some quotes to back your statement. If you cannot please do not comment on my blog again! I am happy for diversity of opinion on my blog but I will not support unsubstantiated lies.

    best wishes
    bill

  13. Dear ds (at 2010/11/04 at 19:52)

    Thanks for your comment.

    You pointed out:

    Also as an aside – we say tea-party over here as opposed to t-party. Thanks!

    I know that. But I just happen to love drinking tea each day and I don’t want that experience associated with the moronic ideas of these conservatives. So I invented my own depiction of them, which I am sticking to – t-party.

    best wishes
    bill

  14. If it’s any consolation to you, the Swiss Social Democratic Party that attracts ca. 20% of votes has just adopted a revised manifesto that includes: the aim to overcome capitalism (!), to abolish the Swiss armed forces, fair taxes (which means no more loopholes for the rich > fat chance), not raise the retirement age, expand universal health care and other social institutions. Sadly it also commits itself to achieve full European Union membership, which will probably include the beloved Euro – but that’s not going to happen any time soon. At least they’re not afraid to voice strong and somewhat coherent opinions. Pity the Swiss executive is run by representatives of 4 parties (not that they’d ever win a majority with that programme…).

  15. Bill

    You said above:

    “So where are they going to get the “money” from? Answer: nowhere. They can create non-interest bearing claims on government without limit anytime they like. The central bank and the treasury (finance department) can issue unlimited claims denominated in the currency that the government issues under monopoly conditions.

    They can always pay their bills and honour their liabilities.”

    If the government prints the liabilities they progressively lose their value. You cannot honour liabilities by printing them. To be honourable those liabilities have to be able to buy assets of the country at a known future value when the liabilities are created.

  16. Ray – surely you’ve spent enough time on the MMT blogs by now to realise that MMT encompasses – and is consistent with – a range of views of the optimal size of the state? Mosler is more inclined towards tax cuts, whilst others incl Bill are more inclined to increase spending (incl on JG). All positions on this spectrum would agree, though, that the deficit should be sized based on real resource constraints, not any spurious ‘financial’ constraints.

    And surely you would agree that extending the tax cuts for the upper echelons – where the Republican focus – must have a lower multiplier effect on the economy than pretty much any other fiscal measure?

    MMTP

  17. Dear Andrew (at 2010/11/04 at 20:47)

    You have repeated a statement you have made several times here:

    If the government prints the liabilities they progressively lose their value.

    That is a false statement as it stands. The currency unit only loses it value if nominal demand is unable to be absorbed by real production.

    Please update your understanding of this. You sound like a (mindless) quantity theorist who believes in permanent full employment.

    best wishes
    bill

  18. RSJ, good point. I suggest that as many people as possible repeat this point on Republican / conservative blogs.

    MMT Proselyte, re your frustration at the slow progress, it’s probably just going to be a long hard slog. I’ve spent half an hour a day over the last year seeking out anti-deficit conservative sites and contradicting what they have to say. I’m happy to go on, and on, and on. I enjoy it!

  19. Bill

    I dont understand your answer but if you want MMT to be mainstream it might be better to be polite to curious people like me rather than suggesting they are mindless.

    For example please direct me to something i can read to ‘correct my understanding’

    Thanks

  20. First, what role did the neglect of the unemployed play in the election results?
    None. Unemployment played the significant role here. Not “neglect.”

    Second, do the result really amount to an endorsement of the neo-liberal economic approach?
    I’ve been reading Keynes and Smith for 33 years now, and I don’t know what “neo-liberal” means. You can bet most U.S. voters don’t know, either.

    But the reality is that the US political debate has become so divorced from reality – which in my parlance means that it has totally failed to provide a vibrant debate about the options that the monetary system offers government to improve the lives of the citizens.
    Reality is divorced from reality? Anyway, No, no discussion of economics at all. Only politics. Meanwhile I’m still trying to figure out where the idea came from that government debt-and-deficits are the cause of our economic troubles. There has never been an explanation of that. Only that taxes are too high.

    On another note, you cannot use words like “these witless conservatives” who “demonstrate total ignorance,” and expect those people to listen to you.

    In that sense, the mid-term elections have foisted a number of very dangerous individuals into office. Sad day for America!

    Amen.

  21. Dear RSJ (at 2010/11/04 at 19:01)

    That was the point I was making in introducing the Federal Reserve’s decision in the discussion about balanced budgets. And the Federal Reserve officials are not even elected!

    best wishes
    bill

  22. Andrew – the only thing that makes the currency unit lose value is inflation – pure and simple.

    If increasing the money supply leads to inflation, then your statement is correct; but in fact this assumption (that the money multiplier is a constant) has been overturned by the experience of ballooning reserves in the face of shrinking broad money in both Japan and now US and other countries. Here is a handy graph to illustrate: http://ftalphaville.ft.com/blog/2010/11/03/392846/charts-du-jour-qe2-edition/

    At the very least, if you want to claim that printing money = devaluing the ccy unit, you need to defend the money multiplier – you can’t just assume it or else (I’m afraid to say) you risk coming across as mindless! No offence intended though I’m sure.

    Best wishes
    MMTP

  23. “For example please direct me to something i can read to ‘correct my understanding'”

    OK. If you have a baker with a loaf of bread available for one groat and two people with one groat each who want bread. What will the baker do tomorrow morning, double their price or bake another loaf of bread?

  24. also to RSJ’s point at 19:01:

    It seems there are 2 measures for inflation, the type that profits capitalists and goes by the friendly name of ‘asset price appreciation’ and the type that profits the rest of us, mainly through wage increases, that goes by the ugly name of inflation. The fact that the two are functionally detached to a certain degree (is that correct?) means that one can be played off against the other to achieve a relative benefit. If I remember correctly, until the ’70s households were net creditors and corporates net debtors within the private sector – a position that has since been reversed – which means the implications of the two kinds of inflation for the respective sectors has also reversed, no?

  25. how will the baker get twice as much yeast flour and so forth, when every buyer wants twice as much and production is the same? What will the flour grower spend his rising income on? Will he pay more for property?

    If gold is the currency because it is rare and the government finds the centre of the earth is made of gold will gold be as valueable as before? Air is also valueable to humans but there is plenty of it.

  26. Oliver – interesting point. There certainly has been a switchover in the past 10-20 years from the traditional financial balances structure with households running a surplus and corporates runninga deficit (ie sucking up capital, as would be proper for the economy). Most recently, HH have been running deficits whilst corporates (particularly in the UK, less sure about the US) have been runnign a surplus or ‘decapitalising’. But I think HH are still net creditors in terms of financial assets (and even more so if you add in real assets incl housing).

    Best
    MMTP

  27. Andrew,

    I think you just picked a bad day to post questions here. That said find a day or two (whole days too) and read through Bill’s articles. You’ll find your answers – just be prepared to be absolutely confused at first you need to be de-programmed (like most of us).

  28. Bill and Andrew: “If the government prints the liabilities they progressively lose their value. That is a false statement as it stands. The currency unit only loses it value if nominal demand is unable to be absorbed by real production. Please update your understanding of this. You sound like a (mindless) quantity theorist who believes in permanent full employment.”

    -I get the impression that Andrew is struggling with the same aspect of MMT that I have also failed to grasp despite my following this bog for a few months now. I can totally see how “printing money” does not create consumer price inflation in the current circumstances but equally I fail to see how anyone can fail to see that it does lead to asset price inflation (taking a diversified global mix of assets and looking at a >decade long time scale). Andrew did expressly say value of money for buying assets didn’t he. Dismissing asset price inflation by using arguments about consumer price inflation seems a key way that MMTers ensure that they remain a fringe sect :).

  29. stone – whether consumer or asset price inflation, the point is you can’t simply equate narrow money growth with either, unless you demonstrate a transmission mechanism.

    You seem to be saying that there is an empirical correlation observable (if you define it properly) – but that isn’t the same as causality. Back in the 1970s monetarists relied on correlation too; they supplied an ostensibly ‘causal’ framework in terms of fractional reserve banking, although that has now been debunked as inapplicable to contemporary economies (not least on this site). With FRB and the money multiplier debunked, I think you are left with statistics alone, which is not going to convince anyone.

    There’s a great piece at the Levy Institute from September on Goodhart’s Law (“Innocent Frauds Meet Goodhart’s Law in Monetary Policy”) – statistically observed relationships tend to break down if pressure is put upon them. That about sums up the money multiplier.

    Best
    MMTP

  30. ” Dismissing asset price inflation by using arguments about consumer price inflation seems a key way that MMTers ensure that they remain a fringe sect ” .

    Are they dismissing asset price inflation? I always thought the implication was that asset price inflation should be dealt with in other ways i.e. taxation.

  31. @MMTP

    I can see the difference between base money inside a computer belonging to a bank, and credit money inside a computer belonging to consumers. So no surprises there.

    @Adam

    From your comments yesterday I wonder if you are seeing the relationship between cash and reserve balances correctly. They are effectively the same thing. A bank is always going to invest most cash and reserve balances but outside of a systemic crisis they can always be made liquid again.

  32. MMTP

    FRB is not debunked. Banks have always levered their balance sheets to create liabilities subject to the demands this creates upon them to issue the assets backing those liabilities. The art of banking has always been to act as intermediatory between a willing buyer and a willing saver where neither have any money.

  33. stone and Andrew: Why would asset price inflation be inevitable, so long as people are happy to hold their savings in fiat money or government bonds?

    I would also appreciate learning more about what Bill’s take is on this issue, but it certainly doesn’t seem like asset price inflation would be inevitable from where I stand. It would only follow if the private sector wanted to get rid of money – in favour of other assets like land, houses, whatever. But then again, this kind of asset price inflation can happen totally independent from the size of the budget deficit.

    Brainstorming a bit more about this: MMT tells us that reducing the budget deficit is an appropriate response to inflation. The question is, how do you react to an asset price inflation with simultaneously stable consumer prices. Just let the market do its thing, i.e. let asset prices increase until people realize the silliness of what they’re doing and they start affecting consumer prices instead? Try targeted taxation to cool off those asset markets? If so, what kind of taxes?

    These all seem interesting questions to me. However, it’s not really fair to blame MMTers for not talking about them much – after all, nobody else is coming forward with any reasonable proposals, either!

  34. Andrew – you’re not engaging; you just seem to be ignoring what MMT says.

    If you’re going to claim that FRB hasn’t been debunked, then I think you need to engage with the extremely expansive MMT account which says that the banking system doesn’t check it has sufficient reserves before it makes loans. If you’re going to ignore that, then I think MMTers are likely to ignore you.

    You seem to be claiming that increasing bank reserves will inevitably lead to an increase in the money supply and then in prices. How do you square this with the facts of Japan, US etc?

    Best wishes
    MMTP

  35. Nicolai

    When people expect inflation they spend money quickly rather than expect to get a return from a bond or a bank deposit which is being intentionally devalued at the inflation rate by the government.

    Anyway if you have a bank deposit or government bond your money is not *inside* those things. You are the creditor and the debtor has your money to spend. It would be different if it went in your mattress.

  36. MMTP

    Since thousands of years a bank with 100 gold could issues loans of 200 banknotes for 50% reserve with no requirement to get more deposits once it began issuing those banknotes. Nothing new there.

  37. “when every buyer wants twice as much and production is the same?”

    And that is the nub of your problem. You don’t believe that humans can create more stuff to absorb the money – that real ‘aggregate demand’ can increase.

    Bill implies here that the econometric data points towards an expansion in the production of real goods and services in response to a monetary demand stimulus when there are idle hands in the economy (unemployment and underemployment). No doubt there are others that suggest that real production remains flat and prices go up. Have they the data to back that up?

    @stone,

    Similarly with assets. We will create more ‘real’ stuff underlying the assets – more houses, larger companies, and frankly more gold and diamonds (if you want to call them assets).

  38. Nicolai HΓ€hnle “it certainly doesn’t seem like asset price inflation would be inevitable from where I stand. It would only follow if the private sector wanted to get rid of money – in favour of other assets like land, houses, whatever. But then again, this kind of asset price inflation can happen totally independent from the size of the budget deficit.”

    -As far as I can see, if someone has savings, then if they keep them as cash, then they will be getting 2.5% interest and consumer price inflation is say 3.5%, so they will be loosing value. If they buy assets then depending on what budget they have to pay for managing the portfolio of assets, they will either loose money or (if they can afford the best management) get >15% annually compounded decade after decade. I find it very hard to get my head around the idea that with so much of the wealth in the hands of people able to afford such expert management, asset prices are not being pushed up.

    “reducing the budget deficit is an appropriate response to inflation. The question is, how do you react to an asset price inflation with simultaneously stable consumer prices. Just let the market do its thing, i.e. let asset prices increase until people realize the silliness of what they’re doing and they start affecting consumer prices instead? Try targeted taxation to cool off those asset markets? If so, what kind of taxes? These all seem interesting questions to me. However, it’s not really fair to blame MMTers for not talking about them much – after all, nobody else is coming forward with any reasonable proposals, either!”-

    As far as I can see it both MMT and neolibralism are constrained by an apparently unquestionable imperative that “leakage to savings” must be accommodated by monetary expansion. It is important to keep in mind that if someone starts saving at 20 years old in order to pay for pony and piano lessons for future grandchildren 60 years later, then that is not “leakage to savings”. The “leakage to savings” is money that is never ever to be spent and is just to add to the ever increasing global accumulation. If the tax burden was moved to an asset tax (on cash, real estate, stocks etc), and the budgets were balanced such that there was no accommodation for “leakage to savings” then I do not see how there could be any form of long term global asset price inflation. I think the much reviled Austrian School say the same thing but they also tend to advocate no government and no redistribution of wealth and such objectionable opinions that I don’t think need be connected to the principle of no monetary expansion.

  39. We can all see if demand for cars doubles there is going to be a delay tooling up the production to handle the demand. Importantly the manufacture might attempt to increase production with overtime before he hires new people and buys new factories – he does not know the final demand when it begins rising – it is not a maths problem where he sees the answer. You are looking at it as if the corn for the flour can be produced overnight to satisfy higher demand by the bakers.

  40. MMTP

    You also need to realise that for each new deposit backed by the banks equity the bank has a lower fractional reserve.

    For the basel bank total owned assets are the reserves that back the deposits.

    What we know today is that the banks are excessively levered. They have insufficient equity for created deposit money.

    Lehmans failed at 2.5% or 40:1

  41. Andrew – I’m afraid I don’t follow your “nothing new there” point – seem to be at cross-purposes. If this is arguing against some claim of mine (or someone else’s), please can you be more explicit?

    Are you declining to even try and defend your belief in the money multiplier?

    Best
    MMTP

  42. Neil Wilson “We will create more ‘real’ stuff underlying the assets – more houses, larger companies, and frankly more gold and diamonds”

    That is what I see as the real tragedy of both MMT and neolibralism and of monetary expansion generally. That amounts to pure waste and pollution. -Apparently about half the World’s gold has already been mined. Gold now sells for about twice what it costs to mine. So the remaining half will be mined in order to sit in a vault. People die gold mining. Rivers are polluted by gold mining.
    -In Manchester near where I live, there are streets full of boarded up perfectly good houses and blocks of newly built unsold apartments.
    -The “larger companies” you talk about are what exactly? The FTSE100 for instance has become dominated by finance companies that are just part of a positive feedback loop where monetary expansion leaks to savings that get invested in financial companies to invest the savings etc etc.

  43. MMTP

    Money multiplier is wrong. Obviously i can create a loan of 100 for you and worry about paying you later. I have zero reserve for 100 deposits.

    All that MMT does is point out that banks can lend today and worry later. This is not new or news.

    However it is still true that banks usually have millions in cash in the branchs and ATM. But obviously 100 is not placed on the loan officers desk when he creates the loan money.

    The banks are even so Fractional reserve banks. Their created deposit money is only backed by a much smaller amount of money.

    If the bank goes to the CB for a loan then that is another deposit for the bank. Meanwhile the bank does not expect all depositors to want their money back simultaneously. It is the way banks have always operated.

    There is no difference other than the inflation targeting method via supplying or removing reserves to maintain the target rate.

  44. MMTP

    You appear to be confusing:

    1. a reserve of something which is kept in case the depositors want money which can be a bond that can be sold for money or some amount of cash to meet a few days withdrawals, which amounts to a fraction of the total deposit liabilities

    with

    2. Reserve balances held at the central bank which are just there to make it easier to manage the banks cash needs rather than trucking around tonnes of paper and where out of convenience the fractional reserve has been administered by the central bank using these reserve balance accounts.

  45. Andrew –

    This is the second blog this week I can tell that you have commented on with a deluge of questions and observations about an esoteric topic completely irrespective of the purpose of the subject blog: the EU monetary and political system and the US midterm election and sectoral balances. Come on man!

    Please re-read Bill’s response: “That is a false statement as it stands. The currency unit only loses it value if nominal demand is unable to be absorbed by real production.” De-program your first impressions and read the number of blogs that Bill has written that address banking, reform of this part of the economy, and asset price inflation (specifically he addressed housing).

    Talk about the US elections and your impressions to stay on topic.

  46. Rob

    How can my responses to Bills comment and my interactions with people about MMT and FRB be esoteric on this board??

    But you have a point. It is a pity there is not a room here where people can talk about banking

  47. As a US citizen living and working abroad but closely following US politics, here is my take…

    1) The electin of a “black man” to the White House triggered a lot of racial sensitivities, including immgration issues from south of the border, that have been stewing just under the surface. As jobs became scarce, the racial fears of losing jobs to “those people” grew dramatically. Rather than work to change the Obama/Democratic policy, the Republicans (like Mitch McConnell) have as their goal to keep Obama to a single term president. Thus, hatred and anxiety an intolerance rose amongst a disaffected and fearful public. The party of “No” and the enormous disrespect shown to a sitting president (remember the famous Joe Wilson “You Lie!” shout at the president? For more on this racial aspect, read Paul Krugman’s book “Conscience of a Liberal”.

    2) The Republicans and Tea Party-ers managed to get their message out in pithy sound bites that progressives and Democrates couldn’t or wouldn’t match. The whole heath care debate was a shambles…something that should have been passed (with a full public option) in 3 months. This would have left plenty of time for more focus on the economy and possible stimulus (stimulus is itself now a dirty word, unless of course it is “Fed stimulus”, which is somehow acceptable to some parts of society) led to outrageous claims of “death squads” and “kill granny”. (Thank you, Sarah Palin). This right-wing group has remarkably talented (but outrageously wrong) and inflammatory spokespeople in the guise of Rush Limbaugh and Glen Beck. Fox news and Murdoch are helping here. But Obama must take some of the blame for not marshaling his forces and voices.

    3) Like any big country, the US has a mass of politically and economically ill- or at least mis-informed…and maybe a bit lazy about learning something new about the way things really work. Most just want to have a job and aspire to the old American goal of creeping of the ladder of the middle class..don’t confuse them with facts. For someone to have a discussion with most of these people about topics like MMT and the non-issue of sovereign government debt and the over-emphasis on deficits seems to be too much for this group to listen to…or at least it is hard to make the arguments when shouted down by the simple minded but high volume slogan-banging discontents.

    4) Electioneering in the US has become largely a game of who can spend the “mostest the fastest” with the “bestest” slogan sound bites (one exception: Meg Whitman, although spending a record USD150 million of her money on the campaign for CA governor, lost to Jerry Brown). With the US Supreme Court now run as a W Bush club under Justice Roberts, corporations were given unlimited ability to advertise and support political campaigns. And most of the corporations have no interest in a progressive agenda. In fact, the corporate supporters of Obama in 2008 have abandoned him, apparently because of hurt feelings that he is not “pro-business” enough…whatever that means. Imagine, the very banks that were being rescued were spending billions of the taxpayers’ money on lobbying against the Obama Dodd-Frank reforms designed to try to prevent the need for future bailouts…incredible, is it not?

    This is my take…I am very saddened and would have to agree now with Mitchell’s comment several days ago about the USA becomng a “falied state”. Very saddened, indeed…

  48. I seriously wanted to write a rebuttal to the Toomey/ anti government rhetoric that was being written in the local papers in PA. Problem is outside of the standard “letter to the editor” an Op Ed piece needs to be very well written and edited. Being fairly new to the MMT topics I did not feel confident in creating a rebuttal that would not have been reviewed prior to submission. Additionally many papers require some “expertise” to be associated with the Op Ed. The TP and other conservative organizations have recognized this and have either created pieces for submission or support Op Ed commentary.

    In other words if you want a grass root effort you need create the environment to grow it outside this blog. The video conference was a great resource of information for learning but I could not take information and actually apply it.

    Just my thoughts.

  49. Andrew, you are definitely confusing reserves with … reserves.

    Your two points are effectively one point which describes reserves as liquidity of a bank regardless of whether it is retail (cash) liquidity or interbank liquidity. As you are clearly aware your two types of reserves are convertable at par at short notice and at will of commercial bank. The fact that they operationally serve different purposes does not mean that they are uniquely different. They are one thing with the goal to settle liabilities should a customer request come in. And obviously, a customer request to settle liability of your bank will one way or the other become a liability of another bank. That is the reason why reserves do not matter on the macro-level of the banking system. The rest of your arguments simply describes the cost effects of liability management of different banks and banking system. Important? Yes. But not to such extent as to define or influence operational procedures of the banking system.

  50. Bill,

    I have been reading your blog for some time now and I really feel enlighten by it. Thank you for that.
    I am italian and feel frustrated that it appears no one has grasped the foolishness of the stability pact and austerity measures being passed on to the public. There is no dispute whatsoever whether such measures are grounded on sound economic principals. Both economics on each side of the parliamentary spectrum embrace a rigid stance against deficit and public debt.
    I wonder whether you know of anyone in Italy embracing an MMT perspective trying to debunk all this neoliberal economical nonsense.

    Thanks
    Alessandro

  51. “how will the baker get twice as much yeast flour and so forth, when every buyer wants twice as much and production is the same? What will the flour grower spend his rising income on? Will he pay more for property?”

    This is an excellent question, Andrew, because it ties the monetary system to the real economy.

    The baker can buy more ingredients if the real economy is not resource constrained. So, yes, in that circumstance, the baker will be able to buy more supplies. If the economy is already operating at full capacity, then the government would need to reduce private sector purchasing power by taxing.

    I’m working to get my arms around MMT, too. and that means unlearning most of the nonsense preached by my U Chicago professors.

  52. Andrew – appreciate the contributions, but I have struggled to see their relevance. I am simply trying to discuss your claim that printing money / increasing narrow money leads to inflation. I can see that is looks plausible in you believe if the multiplier, but as you don’t, why do you believe it? I’m happy to be convinced, but you don’t seem to be offering an explanation.

    Sergei explains it well; the wider reserves definition; I don’t think it’s that helpful in this discussion to split out cash holdings from CB reserves, and that certainly wasn’t my intention.

    “All that MMT does is point out that banks can lend today and worry later” – this just isn’t true. MMT points out (int. al.) that reserves are ‘pulled’ by individual banks’ lending activity (specifically, the funding of such loans). This is the opposite to the orthodox model which suggests that the reserves themselves ‘push’ increased loan activity. You say “nothing new” but this seems quite important.

    Best
    MMTP

  53. “It is a pity there is not a room here where people can talk about banking”

    Andrew,

    It is becoming clear the more I read your comments that you are a master at misinterpretation and changing the subject rather than carefully listening and engaging the actual responses to your own comments. Rob specifically said, “read the number of blogs that Bill has written that address banking, reform of this part of the economy, and asset price inflation (specifically he addressed housing). ” That is, there ARE many, many places on this blog to discuss these issues, and Rob was inviting you to comment there.

  54. So where will our new “U.S. Political Leaders” take us? A repeal of the health care bill? The dismantling Social Security? The implementation of Medicare Death Panels? More endless wars? The elimination of clean air and water regulations? Repeal of Civil Rights Legislation? No worries – the market will make everything right!

    We’re on the path to a 3rd world income distribution. The serfs only exist to serve the needs of out Lords.

  55. MMTP

    We are going in circles here.

    I already agreed that if the central bank has a cash rate target and a posative inflation target then the CB will keep increasing the amount of reserves in response to the banks creating a demand for more system reserves so that the cash rate does not go higher than the target.

    But we still have an FRB system. I then wondered if you were confused between:

    bankers balances which are used to enable banks to avoid moving tonnes of cash around which are *also* used to manage fractional reserves when that applies and are therefore called reserve balances and

    The banks capital, where the capital backs the deposits the bank creates.

    Additionally the banks have millions of cash as a small fraction of cash to back the total created money deposits.

    The banks obviously operate exactly like they always did. The only difference is that interest rates can be kept lower if inflation is low by ensuring the cash rate cannot spike higher and sound banks can easily borrow amongst each other using the available total supply of reserves.

    I am not saying inflation can be created by additional reserves. I am not saying Money multiplier theory is valid.

    @sergei I think you have got confused by what i was attempting to explain to MMTP? ie that the banks are FR banks. And that FRB Γ­s not debunked.

    @Scott Your comments against my character are not very helpful. On a point of information your comment yesterday that banks do not use their bonds or assets to get central bank loans *only* applies for the USA. Where up to a certain limit a bank can get *daylight* loans only without collateral – but even then conditions apply. The fact is the only way the banks can simply go to the feds to get unlimited money is if money itself is devalued by the feds taking junk assets and not wanting the money back. You cannot take todays mess and then say it can always be like – because for sure it will be another mess if banks can just get cb money whenever they want without good quality collateral

  56. Andrew

    collateral just raises the effective price of borrowing and is well understood by mmt’ers. it does not have anything to do with validating the multiplier or FRB.

  57. Also, I should have referred to your comments, rather than to you–my apologies. At any rate, at issue is the fact thus far you have danced around many of the issues that have been raised in reply to your comments. Note how often you and others appear to be talking past each other, or how long these threads have become the past few days with virtually no progress in understanding respective positions. Again, as Rob noted, there are MANY previous posts and comment threads on the issues you are raising the past few days.

  58. If people here think there are better locations to discuss this then why not invite a newcomer like me to that place rather than being hostile about my presence? That would be the friendly response that encourages learning. Surely it is a two way street?

  59. Regarding why politics in the US are so confused and disheartening: things only change for the better if people take collective action to make them change. Sadly, as it stands in the US there is no-one left organising for progressive change. Perhaps one day…

    Take a look at Chris Hedges’ Death of the Liberal Class at http://www.truthdig.com/chris_hedges.

  60. Andrew – we are certainly going in circles. I’ve spent long enough on this blog not to confuse reserves with capital (asset vs equity). Some of the things where you say “we agree that [ ]” I don’t agree with; but let’s forget FRB and get back to the nub of this.

    I repeat: the starting point was your claim that printing money (ie increasing narrow money) equals inflation. I am interested to hear you defend or substantiate this claim by reference to a link or transmission mechanism. If you decline to do so, that’s absolutely your right, but I’ll struggle not to agree with Scott’s conclusion about your tendency to change the subject.

    Best wishes
    MMTP

  61. Andrew–I personally don’t have a problem with you having this discussion here. I was just pointing out that you had misinterpreted Rob’s comments. My rationale for repeating Rob’s suggestion a second time was to point out that the issues you’ve raised have been discussed many times–this is all well-tread territory–not to force you to take you comments to those pages.

    But, I agree with you that it would be nice to direct you to some of those places. I can’t do that off hand, but perhaps others can help out.

  62. MMTP

    I already gave simple illustrations of how more money leads to higher prices. Car production and the price of flour where car production and flour cannot be provided immediately unless there is surplus capacity already available.

    I engaged with you about your claim that FRB is debunked. That was the issue i had.

    Obviously in condition of lack of demand and oversupply more money is not going to do much to raise prices when the overwhelming reality on the economy is one of deflation. Additionally reserve balances alone does not get the money into the economy for most people to spend it. I already went thru this.

    As i said, FRB is not debunked.

    How are you all defining FRB??

  63. “Obviously in condition of lack of demand and oversupply more money is not going to do much to raise prices when the overwhelming reality on the economy is one of deflation.”

    That’s exactly what Bill said. So we agree πŸ™‚

  64. Bill,

    It seems that you have a pretty thorough understanding of the economic situation in the US, especially with the finite details. Firstly, I’m impressed that an outsider knows more about this than I do. However, understand that my understanding of economics started from my own personal education of the subject, and not from a university. My understanding is a direct result of reading and staying informed. I also tend to apply common sense.

    I cannot tell you why these stupid politicians say and do the things they do. But, what I can tell you is how I think we got in this mess to begin with. Firstly, unlike many other countries, you must understand that Christianity, however unreasonable this sounds, actually runs our country. Personally, I find this to be a travesty on all accounts.

    Additionally, many voters choose to falsly think that the politicians who are running our governement should be moral role models for themselves and their children, mostly because most American parents these days are too lazy to actually parent. Furthermore, there is also understanding required for the typical American mindset. The Republican politicians use the guise of religion and moral values as their platform. This is how they get voters, as they appeal to the conservative mindset with the anti-abortion, anti-immigration, anti-international participation ideals. Unfortunately for many progressives in this country like myself, who are not religious, suffer from this hypochrisy. The main fact here is that religion and moral values appeal to the majority of the American mindset.

    The Tea Party, on the other hand, is a bigger bunch of idiots. They clearly do not have even the basic understanding of how our government should work, how international economics work, and additionally they really do not care about the international opinion of United States. They are basically a newer form of Puritan, with a real lack of sensible education. They are also mostly isolationists and, unfortunately, bigots. The Tea Party section of this country just cannot stand the fact that we have an African American as president. These are the same people that think that China will want to take over the US because of our debt to them, clearly displaying a lack of comprehension in this subject. Even further, they also tend to hate anyone who is not of a white anglo saxon decent. Honestly, these people scare the hell out of me. If these morons get in a majority control of our government, even at the state level, then you may see many people like myself making a move across the pond. These are not the ideals that I support. Furthermore, I find these people to be a very backwards and hillbilly-ish group, that are extremely incapable of running this country. Furthermore, unfortunately they will continue their hate mongering and scare tactics that will convince voters to vote for them.

    The Democrats also really still have the wrong message as well. Not to sound like a conspiracy theorist, but the Democrats basically believe in a quasi-democratic, socialist country. Which I am not all about either. The democrats have also truly made some mistakes too that have probably been the reason why our economy has not truly turned around and basically sits in limbo at this time. I support the moral position of the Democrats, however in my beliefs these are not qualifications to get the job done. Honestly, if this country were my own business I would probably fire them all, file for bankruptcy, and start all over again.

    To understand this even further, the majority of the US population is, sadly, a very uneducated bunch as well. This is why our society believes these politicians. Combine their lack of education with the attitude that nothing matters but themselves, and you probably have arrived at a much greater understanding of the problems that we, as a country, are faced with. Again because of their lack of quality education, the American society is pretty much too stupid to see this (a ‘they can’t see the forest because of the trees’ mentality).

    You are truly 100% right, November 2nd was a VERY sad day for America. The American people voted in some of the worst qualified and crooked people that we could. (Don’t blame me, none of my people won!) For an example, in the state that I live in our citizens voted in a white billionaire as our governor. I have no issue with the white billionaire part, but what I do have a problem with is the fact that he de-frauded the national medicare system out of milllions, if not billions, of taxpayer dollars that went straight into his own pocket. How did he manage this? Well, as I understand, he was the CEO of a large healthcare management corporation here in Florida. The Democratic choice in this governor’s race, was the previous CFO of our state. She had much more experience in government than this fool did, and additionally she had the better message.

    To explore even further, you also have to understand a few additional things. It is said that right now our unemployment rate hovers around 9.9%-10.5%, depending on where you get your information. The problem with this figure, is these counts are only considering the people who are on state and/or federal unemployment insurance. There is another 10%, +/- 2%, of unemployed citizens who are not even counted in this figure because they no longer receive unemployment insurance (Our citizens can only receive this for so long). Many people also do not understand that the housing market crisis that we are faced with, was not caused by a particular president or administration. Additionally, these problems arose out of the true greed and economic misunderstanding of the very wealthy in this country. The start of this housing issue actually extends back the deregulation of the banking and mortgage systems back in the 1980’s and 1990’s. Further blame can be placed on a few additional items as well. Firstly, there were people getting mortgages who had no business getting a mortgage, but the government deregulated this so these greedy banks could give these people mortgages and fully know that there was no way these people could keep these mortgages. Secondly, there is also blame to be placed on the common citizen. The common American citizen beleives that they need the biggest or the best of everything. So, these people were selling their modest homes for the giant homes, that in reality, they had no business being able to afford. Basically, the banking industry, because of it’s own greed, setup these subgroups of people to essentially fail because there was profit involved. Isn’t it really sad what our fellow citizens will do to each other all for greed?

    You also need to understand that the American population as a general rule, is very angry about the unemployment situation. Now, could our government have done something to make a quicker and lasting impression on our economy? There is no doubt in my mind about this. However, I truly believe that most of the systems that were put in place by the current administration were good ideas for the long haul. But, again considering the American state of mind of “I want it now!”, Americans are unhappy with these systems.

    Understanding of one more major point may help you understand why the population did what they did on November 2nd. In the last fifty years or more, the great divide between American citizens was the fact of being a Republican or a Democrat. Well, times have changed, and the division that we have now is much more dire and truly has more consequences as well. This division now is really based on religion and social morals. The battle now seems to be a holier than thou attitude, because of issues like abortion and gay rights. To me this is all stupid, and I truly cannot understand this as well. Why do I really care if gay people want to get married? This really says nothing negative about our society, in fact it would say that our society is a very modern one, similar to many western European countries. Gay people to me are just people, who should have the same rights that I do regardless of their sexual preference. Abortion rights is another big topic. The religious subgroup thinks that this is against the Bible, and against God. Well, there is nowhere in the Christian Bible that speaks about abortion. And, to be honest, it doesn’t matter to me what people do with their own bodies. I do not truly think that there are negatives associated with abortion, and being that there are thousands of children who already need good homes, I think this actually eliminates a negative societal issue.

    In my opinion, I think I know what the true solutions are. Firstly, I think we need to purge ourselves of the millionaires and billionaires running this country, simply for the fact that they are a proven, greedy bunch that will capitalize on any loophole that they can find and/or engineer. Additionally, I also call for a greater seperation of church and state. Social and moral values have no business in government. If you need someone to direct your decisions and tell you what is right and wrong, then you do not look towards the government for these answers. This is why these people need to go to church. Church will teach all about the morals and social values that you should have, instead of relying upon the government to do so. I also do not believe that anyone in government should be considered role models for anyone’s children. To put it bluntly, government is an ugly thing. I also want to make it clear that I do not have a problem with wealthy people, nor do I believe in spreading the wealth around. If you honestly made that money, then it should be yours. There are truly advantages and disadvantages in a capitalist society, some are winners and some are losers. That’s just the way it is. I know that I will probably never be that wealthy, but it doesn’t bother me. Honestly, I would just be very happy if I could have a job and make the amount that I used to. This would allow me to resume my upper middle class lifestyle, and put my quality education, that I personally worked very had for, back to benefitting society.

  65. I dont think that these tea party fellows, at least not all of them, are ignorant on your points. Quite on the contrary: they seem to comprehend them very well… they simply consider fiat money system evil. What i am not so certain is whether they also consider the fiat money derivative, namelly, the modern public social security network as equally evil. Because one thing is certain: there cant be public health, public pension, public education, public fiscal policy if a country cant print its money… inter-generation borrowing isnt that simple if there is credit risk involved…

  66. Scott

    Once again you want me to go off and get ‘corrected’ by some kind of private education. Yesterday you were saying that the conversation was not yet sufficiently advanced for Andrew to understand ‘that comment’ but we are getting there. It appears you think like Bill that i need to get the correct understanding while yours is “operationally perfect”. I find this style a bit odd.

    I was saying it would be nice to have one location to discuss this, to find, for example why people here think that FRB has been debunked, without that interfering with the work of bill and his daily posts.

  67. Andrew seems to be bound on displaying his ignorance here. He makes claims that have already been roundly refuted in advance by Bill, yet refuses to take the time to read the freely available archived blog entries where Bill explains why Andrew is wrong.

    Misunderstanding is normal but curable, but pig-ignorance is not. Andrew misunderstands economics and refuses to learn about his misunderstanding. That\’s willful ignorance, blind ignorance, pig-ignorance. Go understand what Bill is actually saying, Andrew, instead of beating strawmen here. Maybe Bill is wrong about some points, but you\’ll never be able to refute his mistakes, if any, unless and until you take the time to understand what he is really saying first. Your attempts at bullying Bill will not impress anyone here.

    Ed

  68. Andrew – the reference to FRB was more to the standard account of the money multiplier in terms of how lending works; clearly FRB is still with us in the sense that banks aren’t required to be ready to accommodate the withdrawal of all the on-demand deposits on any one day.

    It sounds as if your model of inflation is based on demand increasing above the level of supply – somehow the customers get more cash and their desire to spend it on bread or cars increases accordingly. But MMT says specifically that deficit spending should always be careful not to stimulate AD in excess of AS – because that would lead to inflation. Clearly in the current climate of significant spare capacity inflation is less of a concern. I think you agree with the MMT analysis here! But I don’t see how that squares with your comment that printing money leads to inflation. As you point out, increasing reserve balances alone does not lead to price increases.

    I can only conclude that your equivalency between printing and inflation is premised on an assumption that govts/CBs will not be able to drain purchasing power from the economy quickly enough once the private sector’s propensity to spend goes up. I don’t see this discussed much, but there seem to be many ways this can be accomplished.

    Best
    MMTP

    P.S. There was some technical discussion on banking recently here:
    https://billmitchell.org/blog/?p=12176#more-12176

  69. Bill “That means the sector as a whole has to start saving and keep saving for years to come (in net terms).”-

    All the debts must have corresponding savings held by other people. I don’t understand why policies that resulted in money being transfered from those with savings to those with debts couldn’t fit in with the accounting just as well as a policy of deficit spending.

  70. Andrew, FRB is debunked as a macro-economic concept since money multiplier concept is invalid. As it has already been many times pointed, there is no clear transmission mechanism from monetary base (reserves + cash) to inflation. Full point.

    If by FRB you mean the fact that every bank voluntarily keeps a certain share of deposits as reserves=liquidity (cash or otherwise) then you miss the point that this is about cost management and regulations. And I skip the fact that it is very dependent on business model and specifics of each particular bank. It is not possible to draw any general conclusions from such observations. That is why you are going in circles.

    Surely, you can find many anecdotes supporting your point but this rather will be the case when exceptions prove the main idea. Anecdotes can be used to support macroeconomic points rather and not to say that you know a bank which has all its reserves in cash and therefore [… whatever you claim is …]. And btw I do know such a bank. At least it officially has word “bank” in its name. But this is a macroeconomic blog and nobody is really interested in such curious observations. Lots of people do lots of crazy things but you will not force this fact as a macro-theory, will you?

  71. Bill “That means the sector as a whole has to start saving and keep saving for years to come (in net terms).”-

    Further to my above comment, much of the private indebtedness could and perhaps should be eliminated in the form of defaults and write offs of the debts.

  72. Andrew @4:41 . . .and once again, you’ve misinterpreted. I don’t personally care whether you ever agree or not with MMT. The point is, these ideas have been discussed many times over and since we constantly talk past each other, it might be nice to try and understand where MMT is coming from. This is, after all, an MMT blog. I wouldnt’ think of going to another blog from with an established perspective and attempt to have useful conversation there without understanding the views there, unless I were just trying to be an a$$ and make people angry (not saying that’s what you’re doing here necessarily–just that this would likely be my own motivation if I were to do that sort of thing).

  73. Scott

    Money multiplier theory is 100 deposits leads to 100 loans and deposits. or 100 deposits leads to 90 loans and deposits with 10 required resesrve and 90 excess reserves ‘loaned out’. Which implies the fractional reserve is something different to what it actually is. This ‘MMT’ still needs willing lenders and borrowers and still cannot create inflation if the forces of the economy are overwhelmingly in favour of deleveraging. Only government spending can overcome that.

    In reality the 10% fractional reserve bank can do 100 deposits leads to 100 required reserves and 900 loans and deposits in a single loan if it is so inclined and can manage the demands for liquidity this creates. But it cannot really do this very often unless all banks are doing the same and the government is ready to support that deposit creation if borrowers stopped borrowing or repaid loans

    With no required fractional reserve the bank requires no money to lend money. But it now has Zero required reserves and any reserves it has are excess reserves.

    By definition if a bank has one dollar and keeps that in case it is needed then that is the retained reserve which it uses to back the billions of liabilities it creates. But it is even so it is still a fractional reserve bank and all the accounting is exactly the same other than the need to have a higher retained reserve. In any case with maintenance periods the banks can have no reserves providing they maintain on average the required reserves regulations expect.

    My point here is if people say banks are not fractional reserve banks operating with zero or almost zero reserve then they are clearly misunderstanding something.

    All banks other than islamic banks are FR banks

  74. Scott

    It is you who misunderstands me again. I meant a specific blog entry on this blog. Called for example ‘place to discuss MMT in exhausting detail for Scott and MMTP Sergei and Andrew’ – for example. Obviously a blog like this is the place to talk about MMT

  75. Andrew- I guess they mean for you to make a comment to one of the older blog posts about say fractional reserve banking. If you were to do that then it might revive that thread. I think a lot of people do take a keen interest in the banking side of things.

  76. Andrew . .. so, in your view, are banks in an FRB system constrained in how much they can lend or otherwise expand their balance sheets by the quantity of reserve balances they are holding?

  77. Scott – really off-topic, but just wondering have you tried engaging with the ratings agency sovereign analysts?

    It strikes me that having S&P and Moody’s constantly referring to the UK etc as if solvency were in question really supports the nonsense spouted by deficit hawks – and provides a barrier to us all being able to convince more people how unworrying the fiscal situation is.

    I work in finance and am inclined to call these guys up and try and get them engaged on some MMT basics, but wondered if you (or any of the other pros) had already tried.

    Best
    MMTP

  78. “The baker can buy more ingredients if the real economy is not resource constrained”

    What if we’re becoming constrained? Fossil fuels are a finite resource but only a select few people (if anyone at all) may have any idea how long they will last.

    Perhaps governments want to reduce their debt because they know that growth will soon become much harder to come by.

    I think that governments are putting the brakes on growth now through these seemingly bizarre (corrupt) fiscal policies, green policies and global warming predictions.

    Or maybe I’m going mad because nothing makes sense any more!

  79. skeptic, we are clearly massively constrained by our finite planet. Any economic growth that involves using up natural resources is going to have to go into reverse. In the UK the fish catch 100 years ago was both sustainable and double the size of the current fish catch that is now unsustainable due to environmental degradation. Much food is currently grown using underground “fossil water” aquifers that are running dry. The idea that we can all fly around in helicopters eating bluefin tuna or whatever is patent nonsense. In China there are only 60 motor bikes and 70 cars per thousand people but that is changing very fast. How can people in europe, USA , Japan etc possibly expect to consume much oil in the future?

  80. Effects of “printing money” are no theory. Government deficits bring new money to the economy and what we call “government debt” is just accumulated total of it. There is no practical difference to holding a government bond and government-issued currency, other than bonds get interest payments. Both are form of financial wealth, quite liquid and easily used for purchasing purposes.

    Now we may ask, has the large fluctuation of government debt levels over the last 100 years or so ever caused negative consequences? Asset bubbles? Economies around the world grew at healthy pace after WW2, when debt levels were high, with no asset bubbles. Growth started to falter when stock of government issued money grew too thin relative to the needs of the economy. First generation of Keynesian understood this very well, for example Alvin Hansen in his book fiscal policy and business cycle discuss issue in much more detail than Keynes himself.

    Still a good read:
    http://books.google.com/books?hl=en&lr=&id=UYST0jOht7YC&oi=fnd&pg=PA13&dq=fiscal+policy+and+business+cycle&ots=raeqS3-yij&sig=9cYAk0kbxGuBhwRMnbrKBumqPtQ#v=onepage&q&f=false

  81. MMTP

    I know Warren Mosler’s done that, and he’s written a few pieces on that. Go to epicoalition.org and click on papers; scroll down and I think there are pieces there by Warren and Randy on this topic.

  82. Puzzle,

    I’m in general agreement there. FYI, I did a piece last November saying much the same at the KC blog titled “What If The Government Just Prints Money?”

  83. (S – I) = (G – T) + (X – M)

    in this formula – what represents capital flight?

    My guess it is “I” – for that would be like investment abroad. But putting it like this:

    S = (G – T) + (X – M) + I

    would make it seem like capital flight is a thing that adds to population savings – which means a good thing (?). But in fact it would be contributing to economic development of some other country.

    A bit confused on this. Any ideas?

  84. Andrew: “If the government prints the liabilities they progressively lose their value.”

    We are taught that scarcity affects the value (price) of something. To be sure, if all of a sudden the gov’t created 1,000 times more money than we have now, things would cost more, i. e., money would be worth less. However, there is no simple relationship between the quantity of money and its value. For instance, in the aftermath of the financial crisis the U. S. money supply (pick M2, for example) dropped by a huge percentage. More than 1/3, IIRC. Did prices drop by a like amount? No, they did not.

    Statistics do not show that the value of the U. S. dollar bears a simple relationship to its quantity. Rodger Mitchell talks about this on his blog. ( http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/?preview=true&preview_id=1015&preview_nonce=72b4e94651 )

    Andrew: “You cannot honour liabilities by printing them. To be honourable those liabilities have to be able to buy assets of the country at a known future value when the liabilities are created.”

    That depends on the contract. Suppose that, after the crisis and the contraction of M2, I went to a restaurant and asked for a 35% discount. The restauranteur could not agree, or he would go out of business. Charging less might have been honourable, but the restaurant has to stay in business. Besides, as I would have been told, Sorry, but those are the prices. Suppose that I contacted my credit card company and asked them to reduce my balance by 35%. After all, it reflected previous purchases that are now worth less, in dollar terms. Sorry, they would say, we have a contract. Now, maybe contracts should have clauses that reflect changing economic conditions. With the collapse of the housing market, maybe mortgages should have automatically adjusted, so that they were not under water. Maybe so, but that’s ot how we have things set up.

    Prices of gov’t bonds and bills fluctuate. Buyers do not complain. They know in advance that prices will fluctuate. They do not expect for the face value to change. The obligation is clear. Nobody knows future values. Some bonds are indexed to inflation. The obligation is clear, there, as well. That’s how we have set things up. πŸ™‚

  85. RSJ says:
    Thursday, November 4, 2010 at 19:01

    What you say is absolutely correct. It’s a reflection of the outsourcing of all demand management policy to the Fed for the last few decades. When times are relatively good, why upset the punters with unpopular fiscal initiatives! Let the Fed do it. The problem then comes, as we’ve seen, when the economy has become so unbalanced that it is no longer responsive to interest rates. It has hit that tipping point.

    What is happening now is the Fed/officialdom trying to lift the economy by having asset prices pull it up from the bootstraps, rather than do what is best, and that is, build it from stable foundations. It looks to me to be simply supply side/trickle down economics in disguise.

    The disgrace of it all is to hear Bernanke rabbiting on about getting inflation higher, influencing expectations and all that claptrap, then posting an op-ed which says QE isn’t inflationary! Well we know that part is true, so it begs the question of why do it in the first place, especially if he can’t help but spill the beans only hours after implementing another round of QE.

    Anyhow, back to my coffee.

  86. Ralph Musgrave: “I’ve spent half an hour a day over the last year seeking out anti-deficit conservative sites and contradicting what they have to say. I’m happy to go on, and on, and on. I enjoy it!”

    De l’audace, encore de l’audace, toujours de l’audace!

    — Danton

    πŸ™‚

  87. Scott

    “Andrew . .. so, in your view, are banks in an FRB system constrained in how much they can lend or otherwise expand their balance sheets by the quantity of reserve balances they are holding?”

    Reserve balances is a red herring – if that is the correct expression.

    What the banks need is the ability to borrow or liquidate assets to get another asset to enable settlement.

    If a bank is levered 1000:1 and it can borrow to get the settlement asset it does not have a problem. if it levered 2:1 and cannot borrow it can be busted.

    Also i think it easier if we forget about reserve balances and just talk about cash. There is no difference that matters for a complete basic understanding. Only if you want to get into settlement systems or maintaining required reserves does it seem to matter much other than velocity.

    In the BOE system reserve balances only came in around 1878. And there are no fundamental differences today to the way banks have been operating since about 400 years.

  88. Bill,

    Economics and politics are not the same thing as you well know. I think your post relies too heavily on the importance of jobs and economics in the current cycle. Both parties are equally wrong if you believe in MMT. But few do believe in it or know it to be true. So we are dealing with an innocent fraud as Warren says. The DEMs get slaughtered on this because they have greatly increased spending while still arguing that debt is a problem. So they are the losers on the issue. They are also losers because Romer set wrong expectations. They are also losers because of Obamacare. Substance aside, procedurally they crammed that bill down the throat of America in the face of the enormous Scott Brown victory which was the canary in the coal mine. Moreover, they did the cramming while the economy was floundering projecting that they cared more about trophy legislation than actually helping the economy. Then there are the smaller issues that most don’t like. They are on the wrong side of the Arizona immigration issue, they are on the wrong side of the terrorists in civil court issue, the GM bailout was also an issue because it appeared the administration was favoring unions. Lastly, the DEMs ridiculed the tea party and healthcare protesters and rather than combat them on the issues derided them as racists or bitter and old, etc. This just fanned the flames.

    All these things combined for a historic blowout which would have been a bit better on the Senate side if a couple fo tea party candidates were stronger.

  89. Andrew: “If gold is the currency because it is rare and the government finds the centre of the earth is made of gold will gold be as valueable as before?”

    When the U. S. was on a gold standard in the late 19th century, there was a long period of deflation and economic stagnation. Farmers lost their farms to bankers. Progressives clamored for the U. S. to go back to coining silver, as there was not enough money. Then a lot of gold was discovered in the world, which ushered in the Roaring Nineties. Without those discoveries, William Jennings Bryan might well have become President. πŸ™‚

  90. Scott

    Do you agree a bank is fundamentally no different to you or i, if we have people we know who will save with us who have things to sell? This was one of the biggest stumbling blocks i was having with the two mmters over at talk finance.

    For example a solicitor can create a 400,000 loan to enable a son to buy his fathers house if the father agrees to save with the solicitor and if the son defaults the house is repossessed to pay the father, or the mortgage can be sold to the father so he has control of the property in the event of default. The bank just being about debtors and creditors. People seemed to find this incomprehensible. They said for example you cannot give me a deposit i can take to another bank. To which i replied you cannot take your statement to another bank for settlement either. The banks needs a settlement method.

    And are agreeing the banks are fractional reserve banks? and if not what is the stumbling block?

  91. Andrew: “If people here think there are better locations to discuss this then why not invite a newcomer like me to that place rather than being hostile about my presence? That would be the friendly response that encourages learning. Surely it is a two way street?”

    I sympathize. πŸ™‚ There is a kind of “If only people were not so stupid” meme that hovers around MMT discussions. At the same time, Bill Mitchell is a prolific and clear writer, and the archives of the blog are full of valuable explanatory material. It may not be so easy to navigate, but there is a lot of good stuff here.

    BTW, when central bankers in the West all seem to be infected by the austerity meme at the same time, yet offer no explanation for it, I can understand the frustration. It is hard not to think that they have all been struck stupid. I suspect that they are just evil, but I am a cynic. πŸ˜‰

  92. Andrew,

    I’ve actually often explained how banks operate to students by suggesting to them that banks are no different, mostly as you’ve said. The difference, at its core, is that you or I can’t get our liabilities to circulate as a medium of exchange like banks do, and we don’t have a guaranteed source of refinance (collateralized or not) at an essentially fixed rate of the state’s money if someone wants to exchange my liabilities for the state’s money.

  93. Andrew,

    To clarify, I never said the US did not have a fractional reserve banking system. I said that the fractional part of it was of almost zero importance compared to other attributes – I believe I called it a canard. I said this over at TalkFinance because it seems so many are hung up on the fractional aspect as if it were the root of all evil.

    I completely agree with Scott’s comment at Friday, November 5, 2010 at 8:28. This was where I was headed with the question to you regarding the Fed’s open market operations, but I got frustrated in my own ability to clearly convey what I meant without getting sidetracked. The Fed is always there to loan or buy – you and I don’t have that guarantee.

  94. Scott

    what do you mean we cannot get our liabilities to circulate like banks do?

    And as i said before other than in the USA, banks do not have a guaranteed source of refinance during the day. Banks can fail there and elsewhere.

    I dont see any differences other than costs. And in that regard it is like big banks versus small banks. There are only very few settlement banks in the uk for example.

    And if i want a car i cant go to ford motors. I have to go to a dealer. Similarly i cannot buy wholesale potatos i have to go to a local retailer.

    Similarly with ‘my credit operation’ i have, if i need it, an overdraft account with the local bank as my lender of last resort. He is always open at a cost.

  95. Tom Perriello: Americans’ economic circumstances have gotten harder, not easier, since Obama took office. Arguably, the same could have been said of F.D.R. in 1934 (the midterms that year went his way), but back then people were more desperate and less informed, meaning less likely to convince themselves that they shouldn’t “believe the data.”

    It is Perriello who is misinformed. No reasonable person believes that things didn’t get better quickly under FDR – look at unemployment, GDP, stocks. Only revisionists paid to lie say otherwise. The problem is that the US has gotten a lot richer, stupider and less desperate. “When a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.” Compared to the Americans of 1934, those of 2010 are less informed & more able to convince themselves to disbelieve what is in front of their noses.

    The bright spot of this election is that losses were concentrated on the Blue Dog Democrats, while progressives suffered little. Since 1964, the Republicans have progressively purged their party of anyone with an ounce of sanity. Hopefully, this is the start of the reverse phenomenon.

  96. Andrew –

    Have you read Bill’s following blogs?

    Building Bank Reserves will not expand credit
    Building Bank Reserves is not inflationary
    Asset bubbles and the conduct of banks
    Money multiplier and other myths
    Quantitative Easing 101
    Operational design arising from modern monetary theory
    The consolidated government – treasury and central bank

    I think if you read those blogs you will find answers you are seeking.

  97. According to BIS and several other reports, it’s standard for all central banks to provide intraday or overnight credit at some price. Also, again, in the aggregate, the price of refinance is guaranteed as any reserve balances needed by the system are provided in order to achieve the target rate.

    At any rate, my point about my liabilities circulating is that, absent others voluntarily agreeing to hold and even use my liabilities in settlement, they won’t do so. Banks have already overcome this issue, most fundamentally because checks drawn on their liabilities are always accepted by the state. As Minsky said, anyone can create money, the trick is getting it accepted.

  98. Scott, Friday, November 5, 2010 at 8:28 : Beautifully succinct. Brevity is … wit.

  99. Scott

    Central bankers are lenders of last restort rather than first resort. I think collateral is important you seem to think it is no big deal. The banking system with the most problems appears to be the USA and they are the bank that does not require day time collateral. I have been thru this many times now. All the other banks require collateral or at least did do until more or less last week. as far as i know they all still do require collateral other than the USA. Switzerland and Japan do not do intraday loans. Settlements in Switzerland will wait until they can clear. In japan they get sent back to the sender.

    As for circulating liabilities if i go to a huge effort to build expensive computers and build a massive building and have massive buildings across town and in every town i might find it easier to get retail depositors. But essentially it is just as hard or as easy as for the banks for me to get my liabilities to circulate.

    What do you mean by a cheque drawn on their liabilities is accepted by the state? Anybody will accept one of my cheques drawn on my liabilities too. Cheques have to clear.

  100. Apj,

    Absolutely agree. In my opinion, using monetary policy to manage Aggregate Demand works because household deficit spending is just as stimulative as government deficit spending. Any deficit spending is stimulative.

    Up until households are not willing to engage in deficit spending, and then monetary policy becomes ineffective.

    It was a total abdication of responsibility for demand management by the fiscal side of government, and a total neglect of the demand-draining effects of income inequality. No one cared as long the economy kept growing, and it worked for 20 years, but at a terrible cost to the fundamentals.

    At core, all the sophisticated reaction function stability results are completely reliant on more household real estate borrowing funding more household deficit spending, which funds the increasingly insane earnings growth demands of the corporate sector. After households deficit spend enough, eventually someone gets hired.

    Over time, more and more needs to be borrowed and spent in order to get an additional private sector job. More and more income inequality, with more and more assets per median wage.

    When the bubble bursts, we are stuck with unrealistic return demands by firms, and households no longer willing to carry the economy on their back. Meanwhile, the monetarists scramble about discussing goat sacrifices and talk therapy to try to get things going. They just can’t understand what could possibly be wrong with the underlying fundamentals, since everything was working so well before.

  101. I understand that lowering the interest rate also reduces incomes for those that depend on interest payments:-

    I’ve read somewhere that the net increase in aggregate demand on the UK economy of droping the interest rate to 0.5% has been a mere Β£8Bn to-date – chicken feed. If fewer-and-fewer people get mortgages/loans, and more-and-more people have their homes repossessed or go bankrupt, then surely there will come a point where you can only stimulate demand through monetary policy by increasing the interest rate.

    I’ve also seen a quote from an official of the Indian CB that they only seem to be able to control inflation when there is strong monsoon season! Doesn’t say much for monetary policy.

  102. Scott – thanks for ratings agency piece tip. Will try them again, as they clearly haven’t got the message.

    Andrew – are you happy to withdraw your comment that printing = inflation?

    MMTP

  103. @RSJ

    “It’s interesting how when the CB wants to purchase a trillion or so of securities, then there is almost no political opposition either from the media, or from mainstream economists, or from the punditry at large. ”

    ——————————————————————————–
    Does Glenn Beck count as a pundit? He’s been going nuts about the QE. I think, although I didn’t watch the whole thing, that it’s all part of the plan to destroy the country by devaluing the dollar. Then Obama and his Socialist Army can move in and mop up.

    Friday’s show is a must-see. He’s going to explain exactly how doomsday comes upon us once China stops buying our bonds.

    If I recall the latest numbers..about 3 million people watch Beck every day….

  104. Andrew:

    Don’t you see you are using the loanable funds model? You and I are fundamental DIFFERENT from a bank; we do not have accounts at the Fed. Don’t confuse personal debts with commercial debts – this is a significant difference can appear subtle. It’s a matter of how much latitude I have as a individual to modify the terms of my “loan”. If done at an institutional level, individual control is lost and you are bound to the rules of the aggregate.

    And we should agree that banks are NOT fractional reserve banks. They are ZERO reserve banks – they can get reserves at command (with a price). The fraction is ZERO – which means the multiplier is INFINITE which means the equation is meaningless.

    You need a new model.

  105. Gary @ 7:03

    Remember your stock/flow consistency there… those terms in the SBE are ‘flows’ I believe and capital would best be described as a ‘stock’. So you have to be careful to maintain stock/flow consistency, its probably not correct to associate something called ‘capital flight’ with the SBE at all.

    Larger Issue: Here we have another term: “Capital Flight” that is a physical analogy to what is best described via accounting transactions. “Capital Flight”…I have this vision of a Reserve Note with tiny white wings on it, ‘flying’ up, up and away out of one country and over the border into another…. this is inappropriate thinking.

    Consider whenever you hear one of these types of terms thrown out in the mainstream (and Gary, I have heard it here in the US this week with the QE2 and now there is going to be “capital flight” from the US, etc.) where your first inclination is to visualize some sort of physical phenomenon appplied to accounting transactions…. you must catch yourself and try to stop thinking that way as soon as you can. Instead just try to think in terms of mundane debits/credits to international bank asset/liability accounts, etc..

    Ramanan who often posts here has this type of transaction down cold. All I can remember is that nothing ever leaves the ground. πŸ˜‰

    Resp,

  106. Matt Franko,
    Would it be fair to say that : whoever is in possession of your nations money/bonds, wherever they are in the world, is still a part of your nations economy to the extent of that possession? And a foreigner in possession of your nation’s money is the same thing as a native of your domestic sector ‘saving’ your nation’s money?

  107. Hi Charles,
    As these answers cannot be derived thru debits and credits, these would be my subjective answers πŸ™‚
    Q1: No, if you define ‘part of the economy’ as a domestic participant contributing to GDP.
    Q2: Yes. The ‘foreigner’ would have to have a US bank account to ‘possess’ meaningful amounts of USD.
    Resp,

  108. “Switzerland and Japan do not do intraday loans. ”

    According to the BIS’s committee on payments systems, in 2005 average daylight overdrafts in Switzerland were $6.78B francs, and in Japan they were 16.168T yen. Again, doesn’t matter–some CBs provide overnight loans instead. And, as JKH said a few days ago, there’s still credit lines, money markets, and (last, but absolutely not least) the fallacy of composition.

    Central bank lender of last resort is VERY different from management of they payments system. The former is invoked only in a crisis. The latter is constant, and is the fundamental purpose of a central bank.

    As for your liabilities being readily accepted, if you believe that, I’ll offer you 100 million “Scott Bucks” in exchange for your house. What say you?

  109. I’ll trade you my house for a million “Scott Bucks” but you have to take the bank note too!

    I think the mid-term elections were less a showing of support for the t-party and more generally a disillusionment among progressives for Obama’s policies. Everybody showed up in ’08 in the hopes that we would have a progressive pres. for the 1st time in over 40 yrs. Didn’t happen, so they didn’t show up this year. Aftermath doesn’t bode well either. Obama hasn’t figured this out and seems inclined to play their game.

    Q. I understand the sector balances thing is crucial to MMT and is an “accounting fact.” However, those explanations seem to be at odds with the concept that the private sector can create $ on its own through expiration of debt. Can someone explain to me where this is considered in the equation? It’s pretty hazy here, cough, cough. Thanks!

  110. Scott

    I will check your intraday loans for CH and Japan.

    >>”As for your liabilities being readily accepted, if you believe that, I’ll offer you 100 million “Scott Bucks” in exchange for your house. What say you?”

    I do not save with you. I save with the entity that i trust.

    To get your scott buck to me in my bank you will need to borrow from my bank or send my bank 100 million. Credit is usually immediately extinguished upon settlement of a mortgage unless the seller saves with the money creator.

    You and i are absolutely no different to a bank. The banks need savers or creditors. And that is harder than you seem to imagine.

  111. Pebird

    Fractional reserve is not defined by the use of central bank reserve accounts.

    Central bank reserves is a total red herring. Central bank reserves are just another bank owned asset.

    The banks always have an asset amount that is a fraction of their total deposit money because they keep some cash in the branches.

    If i agree to lend you 100 with 5 in my pocket and we go to the ATM together and i get you 100 on my overdraft, i am functioning exactly like a 5% reserve, fractional reserve bank. I now have 5 to back my total deposits of 100 owed to customers.

  112. Scott

    My information was in fact from 1996 for Switzerland and Japan.

    As of 2004 via the Swiss national bank you can get intraday credit by repo at zero interest with a 400bpt penalty if you dont repay.

    Again i see collateral as being important. Evidently you do not.

  113. MMTP

    >>Andrew – are you happy to withdraw your comment that printing = inflation?

    Definitions are helpful here. Printing means you produce banknotes. If banknotes are distributed via wages they will be collected probably by the private banks who are worried about loan losses and non-payment of interbank loans with longer term horizons maturing say in 2012 for a 5 year term begun in 2007 – unless simultaneously more reserves are made available where having cash is just inconvenient

    Printing obviously creates inflation where there is already an inflationary environment because production cannot immediately supply the goods and in any case for most people one tin opener is sufficient or one car and so forth.

    The current situation is a bank solvency crisis due to asset deflation. It is a very exceptional event that occurs maybe every 80 years or so when people forget the nature of money.

    You are demanding i supply you with an answer for today, when you already know we are in very very exceptional times.

    Other things being equal if you produce more of the same money then the money is devalued because it cannot be spent in a manner that perfectly allows the money to go to ‘good things’

    QE is in theory withdrawable money. other government printing can be withdrawn by burning taxes – which is why we heading to austerity. Inflation will rise with the money printing eventually and either interest rates rise or the government has to stop spending money.

  114. “”As for your liabilities being readily accepted, if you believe that, I’ll offer you 100 million “Scott Bucks” in exchange for your house. What say you?”

    I do not save with you. I save with the entity that i trust.”

    So you agree that Scott’s IOUs are different in nature to bank’s IOUs?

    A bank deposit would generally be considered final payment in a transaction, whereas Scott’s IOU would not be. Bank IOUs are fundamentally different from Scott’s IOUs. As Scott says, anyone can generate IOUs, but getting them accepted as a means of final payment is another matter.

  115. Puzzle says “Economies around the world grew at healthy pace after WW2, when debt levels were high, with no asset bubbles. Growth started to falter when stock of government issued money grew too thin relative to the needs of the economy.”-

    I think it is imperative to bear in mind that after WW2 their was massive scope for the real economy to expand as Europe and Asia were in ruins and needed rebuilding from scratch and the whole world’s economy needed reconfiguring from making bullets to making TVs or whatever. Also after WWII there were very high taxes on the richest people and that greatly reduced “leakage to savings”. I totally agree that currently in most of Africa there is currently plenty of scope for the real economy to expand. In the developed world that is much harder to see. What are we supposed to do so much more of? If we had zero or even negative economic growth but redistributed better than that would address real reasonable needs such as poor health care or education for the least well off in developed nations. Currently in the developed world, government deficits are pretty efficiently converted into expansion of the FIRE sector as far as I can see. In the globalized economy we have now it doesn’t wash to say that in the 1990’s the FIRE expansion was in the USA and UK whilst the deficits were in Japan so deficits don’t lead to FIRE expansion. Money now is global money.

  116. Andrew – I’d submit that you are using a fairly trivial, ‘thin’ sense of FRB dealing with keeping resources ‘on hand’. What pebird etc has been refuting, is a ‘thick’ sense of FRB where banks will tend to automatically loan out a multiple of their reserves (cash at hand + CB).

    Definitions are essential. First, suggest ‘printing’ is defined in terms of bank reserves rather than banknotes to be a bit more accurate. I know we’re in unusual times, but that’s irrelevant – the point is that these times have demonstrated clearly the non-existence of the multiplier, which is what anti-multiplier theorists have maintained conceptually all along.

    Your argument seems to elide narrow money, which is the stuff created by ‘printing’, with broad money, which is the stuff relevant to prices in any MV=PT equation. This elision is fine if we believe in a constant or controllable multiplier – but these days everyone has to accept that the multiplier as a transmission mechanism is dead.

    So on what basis do you think it’s right to equate narrow with broad?

    Best
    MMTP

  117. Dave

    The SFB approach is indeed essential to MMT. When you’re thinking about private sector debt, do you mean debt within the sector? If so, this will merely shift financial asset and liability balances of various private sector parties, but will have no impact on the private sector surplus.

    MMT usually focusses on the private sector in aggregate. I’d actually argue that there ought to be more focus on households vs firms, as this analysis can reveal some fairly disturbing results.

    Best
    MMTP

  118. Wow, what a great discussion on this thread.

    As a (very slightly) biased observer I would have to tally the score as ;

    Scott- 2

    Andrew- 0

    Now keep playing the game boys, Ive got an infinite number of points to give out. We wont declare a winner during some arbitrary time frame like a year. Just keep on going knowing there are always points to be won. (Now I have to figure out how to give these points some real value hmmmmmm!)

  119. Andrew:

    When you (as an individual) loan me money – you need funds prior to lending – which can be either those already in your account and/or a loan facility (overdraft).

    That is not a fractional reserve process.

    In an overdraft, your overdraft liability and loan funding are simultaneous. The bank does not give you time to go get the funds from some other source, nor does it consider whether the loaned funds return to the bank as a deposit from another individual. In fractional reserve, there is a reserve requirement, which must be met either by process settlement – the loan made may return as a deposit, reducing reserve requirements. After netting and settlement, the bank may buy or sell reserves as needed.

    If you lend me 100 and I deposit it in the same bank as your account, you still get hit with the overdraft for the full 100 – if you were a bank and lent 100 to me and I deposited 100 in the bank, you as a bank would only be short the reserve requirement (10%, etc.).

    Of course, the fractional reserve process is a fiction – it is more properly thought of as a simplistic model to describe bank reserve operations. MMT provides a more accurate model (IMHO).

  120. “You and i are absolutely no different to a bank. The banks need savers or creditors. And that is harder than you seem to imagine.”

    Yes, but the bank has already accomplished this, while you and I have not. And the bank has the added benefit of (1) govt deposit insurance and (2) checks drawn on bank deposits are accepted as payments to the federal govt. THAT is the difference between anyone else and a bank, as I’ve already said, or do you think these make no difference?

    “Again i see collateral as being important. Evidently you do not.”

    It’s not that it’s not important. The point is that the effect is on the price of obtaining refinance. The price of liabilities is what matters in deciding to make a loan, as I’ve repeatedly said. As we saw in the fall of 2008, the Fed had to reduce this price effect on refinance by accepting increasingly less creditworthy forms of collateral–so it definitely matters.

  121. Paradigm shift

    >>So you agree that Scott’s IOUs are different in nature to bank’s IOUs?

    No. Scotts ious are only good for his savers or creditors. They are useless to me unless i save with scott because i trust that scott is good for the money owed. If scott wants to credit me then i want central bank money rather than his iou.

    That is the nature of banking. it applies to the banks and it applies to me and scott.

  122. MMTP

    >>Andrew – I’d submit that you are using a fairly trivial, ‘thin’ sense of FRB dealing with keeping resources ‘on hand’. What pebird etc has been refuting, is a ‘thick’ sense of FRB where banks will tend to automatically loan out a multiple of their reserves (cash at hand + CB).

    FRB banks dont ‘lend their reserves’. They create commercial bank money or deposit money and then manage the liabilities this creates for them for central bank money. They create inside money or deposit money. To do that they need to obtain outside money or central bank money.

    >>So on what basis do you think it’s right to equate narrow with broad?

    You have a habit of imagining you understand me and then you decide you know what i am thinking. Obviously central bank money or base narrow? money is different to broad or deposit money or all money combined.

    Fundamentally it appears you do not understand the nature of FRB because you think the money multiplier is relevant to it and then you decide i am wrong.

    FRB banks dont require any reserves or central bank money to create deposit money. All they need to be able to do is manage the liabilities that this practice creates.

  123. Pebird

    >>When you (as an individual) loan me money – you need funds prior to lending – which can be either those already in your account and/or a loan facility (overdraft).

    Wrong. I can agree a loan with you and you can have spendable money to buy things from my customers who save with me.

    There is no requirement for ‘funds’

    Banks dont lend funds. They create credit or ious.

    If the bank creates a deposit for you then you have nothing other than a promise.

    The point here is the bank has no special powers other than its ability to get customers who save with the bank which it does by having sound systems and marketing its products. Things i can do also in my community amongst people who know me and trust me.

    People bank with the bank they know and trust.

    Depositors are investors in the banks profit making operations.

    IF you get a 1000 bank loan and have not spent the money then you have the same as a 0 balance credit card with a credit limit of 1000 where you get charged interest on the 1000 credit limit and zero balance. Not many people chose that option for obvious reasons.

  124. Andrew

    I didn’t use the phrase “lend their reserves”; a fairly disappointing miscontrual. But I’m happy to leave the FRB discussion to pebird, as we are perpetually talking at cross-purposes on this point, and this is secondary to my interest in inflation.

    Far be it from me to claim to understand what you are thinking. I\’m simply trying to find arguments for your claim that printing will lead to inflation, so that I can engage with your premises and reasoning. I keep asking you for such an argument and you keep not providing one, so I’m trying to read between the lines.

    The only thing you have provided so far is this: ” Other things being equal if you produce more of the same money then the money is devalued because it cannot be spent in a manner that perfectly allows the money to go to ‘good things’ “. Your first use of the word “money” seems tantamount to narrow money, and subsequent uses of the word seem to refer to broad money.

    I’m not trying to score points here: it may be that you are correct that printing = inflation, but I’d like to hear an argument I can evaluate. Japan seems so clearly to be an example of printing not having led to inflation, that I am frankly startled to hear someone who knows even a little about MMT claim that the two are linked.

    Best
    MMTP

  125. MMTP

    >I didn’t use the phrase “lend their reserves”; a fairly disappointing miscontrual.

    If you have the same understanding as me you were unclear to me. I sought to get clarity since so far we cannot understand each other on FRB where you appear to say my view is a trivial one – suggesting it is of no importance. And your response now is that i am dissapointly distorting you. I cannot see how this way of communicating is very constructive.

    The situation in Japan will be unclear to all of us i think. But we know that japan is a nation of savers with an aging population and demographic issues. Money creation devalues money in my ‘thesis’ which disadvantages savers. Savers can be powerful lobby groups. In the USA today we see people resisting ‘fiscal irresponsibility’. The makings of the deflationary trap are there in the west already. Bill and others around the world wonder how it can be that people do not spend sufficient money to prevent ‘austerity’. Economists around the world are wondering if we are going to turn japanese. The western economists claimed that Japan had not restructured their banks and had zombie banks and now the west is doing the same thing. Zombie banks cling to life, cannot create new lending vigourously, and are better off dead.

    So from point of view it Is not so mysterious that i can put all of this together into one ‘conceptualisation’.

  126. Scott

    >the bank has the added benefit of …. checks drawn on bank deposits are accepted as payments to the federal govt.

    You said this before and i asked you to explain your meaning. Cheques have to clear. Your meaning is lost on me so far.

    >>The price of liabilities is what matters in deciding to make a loan, as I’ve repeatedly said. As we saw in the fall of 2008, the Fed had to reduce this price effect on refinance by accepting increasingly less creditworthy forms of collateral-so it definitely matters.

    Yes. But in ‘my thesis’ the feds are devaluing money when it is issued by doing this. Their desire is to create inflation where in my ‘thesis’ says the more money they can introduce into the economy the more likely they can keep interest rates low, encourage bank spending and lending and raise prices or maintain them. Which so far has been fairly successful for many prices.

    You appear to be saying that this devaluation of money is not particularly important when it comes to inflation. But in my thesis as inflation rises then this cheap money will have to be drained from the system and new money will only be going in at a rate to create the desired inflationary outcome

    I find it telling for example that the financial basket case of the world can be considered to be the USA and they do not require collateral for intraday loans. In the rest of the world intraday loans are in theory only providing liquidity via temporary asset swaps. New money enters in theory by open market operations.

    The way you guys describe the bank can just lever up to the sky with no regard for the number of reserves that come in thru the front doors. And therefore you seem to me to create a misconceputalisation of the realities involved where any old bank can be competitive by lending nothing in all cases and getting reserves later if required. That is a simplification that distorts the realities

  127. MMTP

    I am not saying printing equals inflation. That is too simplistic. surely it must be obvious that in a deflationary situation as powerful as the one today it requires massive helicopter drops upon consumers to create inflation.

    However in a situation where you have a self sustaining economy that is not on life support i think if you produce more money you are only going to devalue money and this cannot create wealth for the whole economy. So it would have to be finely targetted.

    Otherwise you are arguing that on a gold standard people get richer when the government finds the centre of the earth is made of gold and they can access it. Only if gold is productive for peoples lives would it mean that peoples lives get better and of course gold is a fantastic metal to work with. But i think you can see my point here?

  128. “You said this before and i asked you to explain your meaning. Cheques have to clear. Your meaning is lost on me so far. ”

    The point is, I have to get someone to accept Scott Bucks if I’m going to issue them when I make loans or purchase assets. That the Tsy accepts checks drawn on bank liabilities (yes, assuming there’s a balance there) gets the bank over that hurdle. The Tsy doesn’t accept Scott Bucks, but if it did, I’d be over the hurdle. That’s a big difference.

    “Yes. But in ‘my thesis’ the feds are devaluing money when it is issued by doing this. Their desire is to create inflation where in my ‘thesis’ says the more money they can introduce into the economy the more likely they can keep interest rates low, encourage bank spending and lending and raise prices or maintain them. Which so far has been fairly successful for many prices.”

    This has nothing to do with my point. The issue about FRB is whether banks are constrained by quantity of settlement balances or the price of them. The effect of changes in this price are irrelevant to our discussion, though relevant perhaps to your discussion with others here. What I’ve been saying is that the price of obtaining settlement balances is what is factored into a loan decision, not the quantity of settlement balances. Yes, changing this price could very well effect this decision. That’s exactly my point–this IS what matters regarding settlement balances.

  129. “The way you guys describe the bank can just lever up to the sky with no regard for the number of reserves that come in thru the front doors. ”

    Reserves don’t come in through the front doors, deposits do. But yes, the QUANTITY of reserves has nothing to do with how much banks can leverage. The PRICE of reserves will affect lending decisions. But, leverage overall is set by capital requirements, assuming they are enforced.

  130. Scott

    What do you mean the treasury accepts checks drawn on bank liabilities??? What actual meaning do you wish to convey please

    >>I have to get someone to accept Scott Bucks if I’m going to issue them when I make loans or purchase assets.

    The private money issuer or bank cannot make purchases with its own created money unless it creates savings for the seller which are equivalent to the bank receiving savings from the seller and burning the cash

    The bank would however have the use of the asset while paying interest for that luxury – somewhat like rent – while still owing the full purchase price.

  131. Scott

    >>Reserves don’t come in through the front doors, deposits do

    The plot thickens. Do you accept that an outside deposit arriving at the bank enters the bank as one of two types of central bank money which are functionally identical for accounting purposes and wealth purposes? Ie the deposits arrive as reserves or as cash?

    >>But yes, the QUANTITY of reserves has nothing to do with how much banks can leverage.

    ?? bank wealth has nothing to do with leverage??? ah you mean by regulation in Basel CA where deposits are not part of bank capital in basel. Obviously it impacts the banks leverage in practice.

    >>leverage overall is set by capital requirements, assuming they are enforced.

    You mixing capital adequacy regulations which are regulations that have failed the community with the kinds of sound banking practices for hundreds of years where the amount of liquid asset held by the bank does impacts its ability to pay out depositors at a time when all banks are paying out depositors and where only by taking the banks loan assets can the central bank prevent massive deflation – where it is the case the central bank does not simply lend to the banks but requires collateral – in this case assets which are not part of regulation capital

    You appear to be arguing it is fine for the banks to be totally wreckless and this is normal

  132. Scott

    i said:

    >ah you mean by regulation in Basel CA where deposits are not part of bank capital in basel. Obviously it impacts the banks leverage in practice

    I meant the deposits of reserves or cash are not part of the banks capital in basel.

  133. Scott

    >>The issue about FRB is whether banks are constrained by quantity of settlement balances or the price of them. The effect of changes in this price are irrelevant to our discussion, though relevant perhaps to your discussion with others here. What I’ve been saying is that the price of obtaining settlement balances is what is factored into a loan decision, not the quantity of settlement balances. Yes, changing this price could very well effect this decision. That’s exactly my point-this IS what matters regarding settlement balances

    What you are saying here is that the FRB never has to consider deflation because asset prices will always rise. Therefore it can safely borrow and tomorrow or next week it can borrow again and it can always borrow and it never has to face a day when the banks say no!! where only the interactions of the central bank in taking junk assets enables reserves to be fed into the system in sufficient quantity they can be loaned out to those banks that need to roll over loans where nobody will lend

    Surely this sounds familiar??? you are wanting to make this situation normality when it was a distortion that brought the whole financial world to to the brink of disaster and there is no immediate end in sight due to the excessive leverage

  134. Andrew:

    I am generally sympathetic towards your worries wrt. to some MMT construct features, as I have mentioned before.

    You seem to understand bank operations rather well, but one has to be careful when saying the following:


    The plot thickens. Do you accept that an outside deposit arriving at the bank enters the bank as one of two types of central bank money which are functionally identical for accounting purposes and wealth purposes? Ie the deposits arrive as reserves or as cash?

    There are at least two situations when no base money is needed to make a deposit with a check or online transfer:

    1. The source and destination accounts are in the same bank.

    2. A netting clearing system cancels out mutual bank obligations.

    So, generally, it is not true that you always need base money to make a deposit. Sometimes, you need just bank private money.

    That’s, probably, what Scott means by exchange of liabilities.

  135. Hmmm … I consider most of the discussion here not OFF TOPIC only in the sense that it perfectly displays the response of reasonable people to T-Party folks. One Andrew comes along and declares proudly the earth is flat. All the good meaning fellows hanging out here then respond with “I have another good argument why the earth isn’t flat. What do you think?”

  136. VJK

    I agree. By outside deposit i meant a deposit originating from outside the bank so that excludes the same banks internal settlements. Netting also does not result in outside deposits coming into the bank as we agree but might not have been obvious. An outside deposit is by definition central bank money versus internal deposit money or inside money.

    The problem with these discussions is if you leave out stuff it might show you are confused or it might mean you realise it is more complicated but an explanation becomes almost impossible to achieve without confusion.

    And i am still learning about this subject and of course can get confused and make mistakes and so forth.

    Thanks for your support. Hopefully it does not make you unpopular!

  137. Andrew –

    Have you read the list of blogs that I suggested on Friday, November 5, 2010 at 9:29. I think if you read/study them it will enrich your understanding of the topics you have brought up for discussion.

  138. Rob

    Rather than giving me a long list of my most important weaknesses which need enriching, perhaps you could tell me what is the number one issue that needs transformation? I could then be motivated to understand your point of view.

  139. I don’t understand how you can argue about nuances of banking within the MMT framework without first reading Bill’s blog posts about the subject which SPECIFICALLY ADDRESS THE TOPIC.

    It’s insulting ands show disrespect to others time in this debate because it shows your complete lack of interest in at least understanding the foundational material which others are referencing when trying to refute your claims. Why come here and ask if you will not spend time reading the material? It appears that you haven’t even attempted to read it. That’s rude.

  140. Rob

    The essential nature of MMT is that it is based on ‘the operational truth of banking that cannot be disputed’

    There is therefore no need to be an expert in the theory of MM to talk intelligently about the operational truth of banking.

    The foundation material is not in the theory because by definition it only exists in the realities of everyday banking practices.

  141. Please point me to where I can find more information about a basic question.

    Before asking my question, however, let me say that since reading many articles in your archive and watching the whole video of the recent MMT conference, I believe I understand some basic points (which have been an eye opener, so thank you). Also, I’m not an economist, never took an Econ101 course and so don’t understand the lingo, but I do read a lot about our current economic situation in the U.S.

    My question is this: How do the operating principles of the monetary system as described in MMT relate to the practical realities of the federal budget?

    I understand that the U.S. government can never go bankrupt; that the constraint of the budget cap is voluntary and therefore can be raised without (immediate?) consequence; that the deficit represents the savings of the private sector, both domestic and foreign.

    What I don’t understand is what the downside of a high budget deficit is going forward, from an MMT perspective. Surely it will need to be cleared at some point, or doesn’t it matter if it’s ten years from now, twenty years, or a hundred? Are there no economic consequences of ongoing, ever bigger budget deficits, or is it all just sterile bookkeeping, with no real-world effects? Theoretically, could the government pay off its whole deficit at once with just the stroke of its pen (key)? I’m sure it can’t or it would have done so before now, but I can’t say I understand why.

    Thank you for taking the time to read this and for the incredible effort you put into helping so many people understand the monetary system. I’ve been wanting to refute in blog comments some of the misinformation that’s constantly spread, but I don’t yet know enough to do so.

    Barbara Astone
    New Hampshire, USA

  142. Hi Barbara,

    “could the government pay off its whole deficit at once with just the stroke of its pen (key)? I’m sure it can’t or it would have done so before now, but I can’t say I understand why.”

    The US government has a self imposed constraint in that the US Treasury, which has a bank account at the Federal Reserve very similar to the one you have, will not allow itself to be in “overdraft” in that account. It is a self imposed constraint, this just seems to be the way they have always done things and they want to keep it that way for now I guess.

    So to maintain that positive balance in that account, the Treasury will issue Treasury Securities to the non-govt to get the balances applied to it’s account just prior to paying for govt contracted goods/services so the account stays in positive balance, once the goods/services are quickly then paid for, non-govt sector bank accounts are thus replenished with net new financial assets (USD balances) that were previously reduced to buy the govt bonds. So this would preclude them from paying off the whole deficit (operationally) in one stroke, unless they remove this self imposed constraint, it would seem to me.

    If they removed this self imposed constraint, they could yes just redeem all the treasury securities outstanding as they matured by transfering balances to the maturing bond holders bank accounts without regard to the debit balance in the US Treasury’s account at the Fed Reserve; everyone who then previously owned Treasury Securities would then just have the equivalent face amounts in their bank accounts instead as the govt redeemed them (really just the same thing before and after if you think about it), before you would have had money in short term US bonds or short term US govt money market mututal fund, then after you would have more in your bank savings account….same thing really.

    This post
    includes sort of a picture of what it would look like.

    Glad to see you learning about this…looks like Prof Mitchell has to ‘chalk another one up’ !

    Resp,

  143. Barbara

    I’ve just started learning MMT and am also a bit unsure on the downside of permanent deficits from an MMT perspective.

    As you say the accumlated deficits represent, as an accounting identity, the desire of the non-government sector to net save. To me therefore it seems the only danger is a sudden and massive shift from saving to spending in such a way that the capacity of the economy is unable to cope.
    However that problem exists whether you adopt an MMT approach or not.

    The real breakthrough for me was in understanding that the idea that the Govt of the UK needs to borrow to finance deficit spending is false and that using debt as an excuse to convince people of the need for austerity and job cuts is criminal and has to be opposed.

    The big challenge now is trying to convince commentators and anybody who will listen of the truth. It amazes me that intelligent people seem, at first, willing to engage with idea and discuss it but somehow can’t quite bring themselves to go the whole hog. I think the reason is “It just can’t be true. Not everybody can be so dumb for so long and not see it”
    Many of them also visit this site and happily accept the free education on offer but just use the knowledge gained to spout half truths to try and look as if they know what they are talking about whilst putting forward their own personal, and usually misguided, agendas.

    With regard to the first question in your post, have a look in the categories and archives at the right hand side of this page. Bill has talked written the federal budget many times and I’m sure you will find the answers to some of your questions there.

    ‘Full Employment Abandoned’ arrived yesterday so now I’m really going to get stuck in.

    All the best

  144. Dear Barbara (at 2010/11/06 at 8:30) and Matt Franko (at 2010/11/06 at 13:04)

    Barbara asked:

    could the government pay off its whole deficit at once with just the stroke of its pen (key)? I’m sure it can’t or it would have done so before now, but I can’t say I understand why.

    As a matter of terminology and matching it to the concept – a government never has to “pay off its whole deficit”. A deficit is the difference between two flows – revenue (tax etc) and spending. Flows are defined as dollars over a period as opposed to a stock which is measured at a point in time.

    So the government by definitions “pays” for its deficit by spending. Once the deficit is created it is gone! That is the nature of the flow. But I guess Barbara was meaning the stock that is associated with the deficit – the accompanying public debt.

    This stock is a totally voluntary contrivance as Matt pointed out and is organised in different countries in different ways. But there is no operational necessity for the government to issue the debt to run the deficit.

    But, given that it does, it can always service that debt. Paying it all back at a point in time would be tricky because of the different maturities outstanding. But it could always retire the debt when it matures and not issue any more.

    best wishes
    bill

  145. I’ve been using a credit card analogy on blogs. Hopefully it is relatively accurate and assists matters. (If not let me know). It goes like this.

    The government owns the currency and this is like having a Super Platinum Credit Card with no credit limit and where you never have to pay anything off. Even better it has the best cashback deal in existence. Every time the government spends Β£100 on its credit cars then it gets a percentage of that spend back (taxation). However one person’s spend is another’s income and when that person spends what is left of the money, the government gets cash back again. And this continues on until the money finally disappears.

    If you do the mathematics then the government *always* gets Β£100 back for every Β£100 it spends. It’s a simply mathematical progression to zero for any positive tax rate.

    So that begs the obvious question: if that is true, why does the government appear to be running a balance on their credit card? (The deficit) Well if you think about it the only thing that could stop the government getting its cashback is if some currency user somewhere along the chain didn’t spend everything they received as income. In other words they saved something.

    And that’s it in a nutshell. The deficit is currency user’s savings and if they’re saving they’re not spending. And if they’re not spending how can the ‘deficit’ be inflationary?

  146. Andrew

    Ok so you’re saying that printing doesn’t equal inflation right now but it could do under better economic conditions. Your top down scarcity-driven approach is still flawed to my mind because you fail to distinguish helicopter drop – style printing (banknotes to everyone – ie broad money) from how ‘printing’ typically takes place. You are highlighting one potential effect, and disregarding many other complex levers incl money velocity.

    But I doubt I’ll convince you – so I suggest you google Scott’s article on NEP “what if the govt just prints money”. There’s good reason to believe unsterilised deficits could be less inflationary than sterilised ones.

    Also suggest you google data on money supply growth vs GDP growth going back decades: they just ain’t correlated.

    Best
    MMTP

  147. Neil

    1. If the government spends 100 ‘claims’ and gets 100 ‘claims’ back there may be or may not be a deficit

    2. The creditor nations that are saving ‘claims’, are not mainly accumulating banknotes or reserve ‘claims’, they are instead reinvesting the money ‘claims’ back into things like fannie and freddie and USA bonds where there is no money ‘inside’ those things. The government has the claims back but they are already claimed by somebody else.

    So if you issue 100 which i then earn and i then buy your bonds you have the 100 again. But i have a claim on the 100. You have a deficity of 100 and i have a surplus of 100 (if i can get it from you). I buy your bonds because they pay interest claims on your wealth and when they mature they pay me the full amount of the claim i have on your wealth that i gave to you when buying the bonds.

    So if a country issues claims these can be used to purchase the country.

    If you get your super duper platinum card out and spend, then when i get your money i can buy Boeing or Arizona or whatever. That is only worthwhile if you get something useful from me.

  148. MMTP

    First we have to deal with the system as it exists today as best we can understand it. The government basicly is spending money into existance where treasury is required to issue sufficient bonds to cover this as it happens. But this is zero sum unless there is QE. With QE the government spends the money into existance and the central bank ‘buys’ the bonds.

    So i am not sure i am ignoring things. What have i still ignored given what i just said.

    In our system the government is normally constrained in the amount it can spend by the interest rate investors require to buy the bonds. With QE there are no constraints providing the feds can somehow convince markets that the longer term bonds it is not buying are not going to be driven higher because investors who would normally be buying the short term monds that are being bought with QE have decided the whole deficit is going to be ‘monetized’ by more and more QE and the longer bonds are in fact going to be worthless in 30 years time or whatever.

    As i have said elsewhere you are arguing that under a gold standard where gold is more valueable than iron hat when gold becomes as common as iron that gold and iron cannot have the same price.

  149. Barbara:

    There is no need for the budget deficit to ever be cleared. Just to be clear, the deficit is the annual position of budget income vs. expenditures, the government debt is the accumulation of deficits over the history of the country. I assume you mean the government debt being cleared (total sum of deficits).

    Hopefully, we will never try to pay off the “debt”. That would be equivalent to asking everyone in the country to liquidate their assets and accept a lower standard of living. After Andrew Jackson paid off the federal debt in 1835, poor Van Buren had to live with the consequences of a 5-year depression starting in 1837.

    However, your question as to whether there are economic consequences is important. Depending on what the deficit is used for, there can be significant impacts on the real economy. Also, if the private sector starts to drive economic growth, then there could be a competition with the government for real resources, which would affect prices.

    But from an abstract perspective – the deficit is a neutral concept – neither good nor bad, it must be placed into some context in order to make a value judgment.

  150. “Just to be clear, the deficit is the annual position of budget income vs. expenditures”.

    Actually, that is not clear. The deficit is the annual position of ACTUAL income vs. expenditures for the government.

  151. “It is a political construct designed by neo-liberals post the collapse of the Bretton Woods convertible currency system (1971) to limit government activity. It is a mindless constraint on government because it serves no productive purpose.”

    This is what I still don’t really understand about the U.S. economy after starting to study MMT.

    In the press it is assumed that the U.S. the treasury must create bonds for every cent of the deficit. Is this true and if so what is the precise law?

    I guess this is related to the debt ceiling as discussed in this article,
    http://www.huffingtonpost.com/2010/10/28/democrats-post-election-strategy_n_775379.html

    but the Fed is completly exempt from all of this?

    thanks for any help.

  152. Andrew, lol, you should really do some reading before you keep on pushing standard non-sense. Your last comment clearly shows that you do not appreciate the most basic messages of MMT. If that is so and reading does not help you then it is better simply to cut this thread off. It does not make sense. One of the most basic messages of MMT is that central bank buying treasury bonds does not change the amount of government liabilities in the private sector. It only changes duration of these liabilities. Drawing any conclusion with regards to inflation (i.e. purchasing power of unit of cash) from changes in duration of government liabilities (part of which is cash and CB reserves) is by all means a complete waste of time and effort.

  153. Andrew:

    “I can agree a loan with you and you can have spendable money to buy things from my customers who save with me. ”

    I am not sure what you are suggesting, are you now a bank or are you a firm? Are you suggesting I would get currency or some credit from your customers?

    If you agree to loan me 100, and I receive 100 from you, then you had to have the 100 in order to lend it to me. That requires that you “fund” the 100. Whether you financed it through your customers or mattress savings is no concern to the borrower (me).

    I agree that if a bank creates a deposit, then I have nothing other than a promise, but that is all money (in its various forms) is, a promise-to-pay, a liability (for the issuer). Even when using GOLD, money is still a promise-to-pay (e.g., settle).

    Now, the bank DOES have special “powers”. We can call them operational or political, but they have the ability to create money via a charter with the government, with associated requirements, regulations, etc.

    Depositors are NOT investors in the banks profit-making operations. Investors provide capital in return for a share of profits. Depositors obtain interest, but that is most definitely NOT a share of bank profits (please don’t come back and tell me that costs are taken out of profits – otherwise we need to do micro as well as macro here).

    The 1000 loan example is different than the 1000 credit card. With the 1000 loan, I would be earning interest on my loan balance deposited at the bank. The credit card with a 0 balance and a credit limit does not constitute a loan, since I have not used it, even if I have to pay fees to have the facility. I have no liability with the unused credit card, unlike the executed loan. Also, in the loan case, money has been created (sitting in my bank account), whereas with the credit card, no money has been created. For someone so concerned about money creation, I think the difference would be obvious.

    On some other of your comments:

    I don’t know what you mean by bank “wealth”. Deposits are not bank equity – they are a liability to an entity outside of bank ownership.

    I also don’t know what you intend to mean when you use the terms “internal” and “central bank” money. Banks cannot create money for their own use (although some have tried).

    The central bank increases the monetary base by buying securities for its portfolio. It decreases the monetary base when it sells securities.

    Deposits are not base money – they are claims on base money. Bank hold reserves of base money to meet settlement needs. Depending on the type of deposit – there may be an impact on reserve requirements.

    I don’t think anyone who is a regular at this site believes the Fed is operating in the best interests of most US citizens. Many, if not all of us believe there should be more fraud prosecutions and stricter regulations surrounding the banks. No one thinks banks should “lever to the sky” or that inflation or deflation should not be serious concerns.

    MMT describes how the monetary system works from an operational perspective, without value judgments. It is what it is. If we do not agree on how it operates, then any political or policy discussions we have will be MEANINGLESS, because chances are we will have different views on the effects of these policies when implemented through the operational apparatus.

  154. Sergei

    The point i am making is that the central bank can buy the treasuries directly off the government and retain the treasuries indefinately or for ever. Obviously the government can then just spend directly into the economy but that is not the normal way we are told it happens. The fed is not audited for example.

  155. Pebird

    Deposits is a very confusing word. Therefore it is clearer if we say outside deposits which is central bank money arriving as deposits and inside deposits which are always created by the bank as deposit money.

    So deposits arrive from outside and become bank owned. They are part of the banks wealth which they can do whatever they want with. Bonuses for example. Depositors get a created money deposit or iou. Depositors get hope. The bankers get wages.

    But the bank does nothing that a man sitting in a temple with a set of books cannot do. ‘Operationally’ he creates his customers money and loans this to borrowers who buy things from sellers who save with him. Anybody can do this. It is just debits and credits and rates of interest. Banks are regulated but they dont get special abilities to create money as such.

    OK lets go thru the stuff you have raised.

    >The 1000 loan example is different than the 1000 credit card. With the 1000 loan, I would be earning interest on my loan balance deposited at the bank.

    You would be paying a higher rate of interest on the loan than in your savings account. Net you pay interest. Why would you do that unless you had no other way of having a useable cleared line of credit? I have for example a HELOC which acts like a credit card. I have zero balance and a few hundred thousand credit limit and pay no interest.

    The unsecured 1000 means you pay interest on the 1000 but if you are saving also you dont pay so much while not using it, and when you use it the loan rate is much lower than a credit card for a loan for a one year duration. A credit card is no interest for one month if you can pay it off and then very harsh interest and something to avoid unless you are careless or desparate and unable to get a personal loan or Heloc.

    These are just different loan products for different customers and not much more than that.

    >>I don’t know what you mean by bank “wealth”. Deposits are not bank equity – they are a liability to an entity outside of bank ownership.

    As above. deposits is a confusing word. the outside deposit is not equity. Depositors have priority. But for sure the bank can use this money to go down the pub or whatever.

    >>I also don’t know what you intend to mean when you use the terms “internal” and “central bank” money. Banks cannot create money for their own use (although some have tried).

    Deposit money is a created money for customers use only. In theory a bank can buy things off other customers by paying the customers interest (or no interest and charging fees) while owing them the full purchase price.

    Deposit money is only an iou. It is however the means of exchange between the banks customers and therefore it is money.

    >>The central bank increases the monetary base by buying securities for its portfolio. It decreases the monetary base when it sells securities.

    Agreed.

    >>Deposits are not base money – they are claims on base money. Bank hold reserves of base money to meet settlement needs. Depending on the type of deposit – there may be an impact on reserve requirements.

    Agreed.

    >>I don’t think anyone who is a regular at this site believes the Fed is operating in the best interests of most US citizens. Many, if not all of us believe there should be more fraud prosecutions and stricter regulations surrounding the banks. No one thinks banks should “lever to the sky” or that inflation or deflation should not be serious concerns.

    We would be on a similar page about these things. No doubt you have heard of william black who is always great to listen to.

    >>MMT describes how the monetary system works from an operational perspective, without value judgments. It is what it is. If we do not agree on how it operates, then any political or policy discussions we have will be MEANINGLESS, because chances are we will have different views on the effects of these policies when implemented through the operational apparatus.

    MMT operationally appears to ‘think’ like Alan Greenspan. Since asset prices always go up then banks can always lend more and not be constrained by future deflation or need to have sufficient assets set aside for a rainy day, where central bank reserves are simply another asset. Banks who are overlevered because they have borrowed from another bank which is lending rather than borrowing from banks, go bust once they are required to repay these interbank loans, and their pledgeable assets are of insufficient quality to enable them to get CB funds. But according to MMT the banks dont have to worry because they always can get funds from the central bank or somebody and price is the only considation.

    Also the banks ttreasury sets the lending rate for loans and the advertised rates to attract central bank money or keep deposits reinvested. The loan officer is not required to do anything other than sell loans but somebody else is managing operations to ensure it either ends well or poorly. MMT says the loan officer is the only person to consider. A bank for example that creates high ltv loans that has a poor ability to retain deposits is not going to last a crisis.

    The challenge for MMT’ers is to be able to create a sustainable money system rather than emulate Alan G.

    MMT’ers have to take the emphasis off reserves and consider the banks other assets like cash or bonds and so forth. Obviously a bank with no cash is contrained in some kinds of lending and risks customer flight unless it has plenty of ‘reserves’. MMT as described is ‘operationally correct’ and yet that popular expression here about lack of all the information applies here also. Fallacy of composition. A phrase i had not heard of and a useful one to know if others know it.

  156. @Andy
    Saturday, November 6, 2010 at 16:38:

    “The big challenge now is trying to convince commentators and anybody who will listen of the truth. It amazes me that intelligent people seem, at first, willing to engage with idea and discuss it but somehow can’t quite bring themselves to go the whole hog. I think the reason is ‘It just can’t be true. Not everybody can be so dumb for so long and not see it'”

    Interestingly, your characterisation of people’s typical reaction to the MMT thesis applies perfectly as well to their reaction to being told that “loans create deposits”, or that when their employer makes a credit transfer of their salary to their bank account the bank instantly (and perfectly legally) appropriates it for its own use, or indeed to the whole notion that banks create nearly all of our money and draw interest on it.

    There could be a number of explanations, I suggest. I’ll offer one or two.

    “The truth” (to use your phrase) is counter-intuitive. Most people refuse to believe either that for a government to create currency without any self-imposed constraint will not devalue the purchasing-power of that currency, or that it really can be the case that private corporations and their shareholders, rather than government, are being allowed to create money (and to profit handsomely from it). They further believe that if the determinant of the size of budget deficits is (albeit within a broad framework) the amount that politicians decide they want to spend, no restraint on the amount of that spending will be observed in the short to medium term at least and, furthermore, that it will be shaped and timed to suit a party-political agenda – to buy popularity and hence re-election, if you like. Is that so surprising?

    In point of fact if, as is actually the case, government has mistakenly or otherwise adopted self-imposed constraints then it is also true that cutting-back public expenditure and/or increasing taxes will be necessary if the constraints adopted are tight. Whether it ought or “needed” to have adopted those – or any other – constraints is a separate argument; even if MMTers are right that there is no physical necessity (on the part of a sovereign government with a fiat currency) to do so it does not necessarily follow that there cannot be any reasons at all. It is of course wrong to pretend in that case that the constraints are not self-imposed – ie that they are in some way “natural”. Rather it ought to be acknowledged that they are self-imposed and reasons put forward why as such they are argued to be justified.

    People, I suggest, instinctively rebel against the implications of a fiat currency. It’s clear (it seems to me) that people are deeply uneasy with the thought that money can lack intrinsic value; they want it to have value and for that value to be kept stable by being tied to something tangible, and some even respond by proposing reinstatement of the gold standard to meet that need. MMT on the other hand is far too rarefied to appeal to any but a tiny minority and is never going to gain widespread acceptance or understanding among the general public. To say: “But MMT only tells things exactly as they are; that actually IS the way the banking and monetary system works” cuts no ice for anyone who believes that it is the banking system itself that needs to be reformed – root and branch – as a precondition for bringing about any improvement in our circumstances. Somewhere along the way it has become totally perverted and deeply corrupt, and long ago ceased to serve the ends that ordinary people would wish and which it has more or less honestly sought to serve in the past (either willingly or because it was forced to). It has above all become an instrument in the hands of the wealthiest for continuously redistributing society’s wealth in their favour with the result that the gap between them and the rest of us becomes ever-wider year by year. MMT proposes only fiscal remedies to this, ignoring the fact that without systemic change fiscal measures will be deflected or subverted by deeply-entrenched vested interests.

    Just look at what is unfolding before our eyes in the US, and then tell me about fiscal remedies! Pie in the sky imo!

  157. Robert

    ‘Loans creates deposits’ is a bit misleading because without deposits you cannot create loans.

    Loans require creditors. The loan ‘ledger entry’ describes no net debt, the bank is in debt to the depositor and the borrower depositor is in debt to the bank.

    So when you say the banks create money it creates a meaning other than the bank is a middle man between buyers and sellers, where sellers could in theory offer credit and hope to be repaid by the purchasors. Instead the bank being in the liquidty insurance buisiness provides that service for them.

    So little wonder it is hard to sell the message. The message creates realities that are not entirely true because the banks need creditors.

    Banking is done the way it has been done for centuries if not thousands of years.

    What is needed is better regulation which is going to mean that many people are going to be poorer.

  158. Andrew:

    “But the bank does nothing that a man sitting in a temple with a set of books cannot do.”

    I think a man sitting in a temple with a set of books is a good starting definition of a bank – just need to add water (that is a joke for us stock and flow folks).

    But whatever this high priest of finance creates has to be accepted by others to function as money. Not anyone can do this – one must be willing to jump through hoops, raise a certain amount of capital and then agree to operate in a certain fashion with respect to the state. If you don’t think that is important – then see if you can start the First Bank of Andrew without doing so.

    Take the loan shark – how is he operationally constrained? He has to be willing to work outside of the law and possibly use violence to collect his debts.

    I don’t know that just “anyone” can become a bank any more than become a loan shark – you have to be willing and able to execute the requirements of the particular role.

    I think the fact you don’t see the difference between the 1000 loan and a credit card is telling.

    Clearly with the 1000 loan, money has been created. Do you think having an open line of credit creates money prior to it being used? BTW, this is not a simple question with a straight-forward answer.

    Deposits should not be a confusing word, any more than equity. Depositors in the US (up to $250K) are insured via the FDIC, not via the bank assets in the event of failure.

    “Deposit money is created money for customer use only”. As soon as I receive my loan, I can use it outside of the originating bank – in fact I may have it deposited in my account located in a competitive bank. I think you would do well to think through this a bit and use more generally accepted terminology.

    I don’t know what you mean when you say MMT operationally appears to think like Greenspan. MMT can describe a monetary system where asset prices fluctuate, go up or go down – there is no requirement for asset prices to continually rise.

    MMT does not say that banks can always get funds from the central bank. MMT understands that excessive private expansion will result in insolvent banks. MMT does not advocate too-big-to-fail bailouts.

    The fact that insolvent banks have not been shut down in an orderly fashion is not due to MMT, but by actions from those in power who would rather the rest of the world never understand MMT.

    BTW, you can create loans without deposits, it happens all the time.

    I understand you are new to this – it takes time to sort out how the monetary system operates, even if you have a gold standard view or neo-liberal fractional reserve perspective. But as long as you are sincere in your willingness to learn, I don’t have a problem responding to questions.

  159. Pebird

    The trick to being a private financier would be to ensure you take their rolex before you grant them a loan. Violence upon them would not be unnecessary, you might be more worried about what they would do.

    >Clearly with the 1000 loan, money has been created. Do you think having an open line of credit creates money prior to it being used? BTW, this is not a simple question with a straight-forward answer

    You are making too much of the word ‘money’. All the bank creates is the means of exchange. In both cases with a credit card with 1000 limit and a loan of 1000 you have the means of exchanging 1000 for something you want.

    Interestingly, in terms of making too much of the word money, you repeat a comment I made and say:

    >>”Deposit money is created money for customer use only”. As soon as I receive my loan, I can use it outside of the originating bank – in fact I may have it deposited in my account located in a competitive bank. I think you would do well to think through this a bit and use more generally accepted terminology.

    This suggests you dont understand something that you can say such a thing.

    if the bank AAA creates inside deposit money of 1000 for you and you want to use it to buy something from a customer at another bank BBB then your inside deposit money is debited to zero. There is no inside deposit money remaining created from the loan. The bank AAA then sends the other bank BBB 1000 central bank money, or if this other bank BBB is a customer of the sending bank AAA then with agreement AAA would create 1000 inside deposit money for BBB and pay BBB interest. Once satisfied BBB would create 1000 inside deposit money for the selling customer and you would get your goods. This is at least the essence of the practice of settling customer transactions between banks.

    I think it was also you objecting to the use of FRB to describe modern banking?

    >>Deposits should not be a confusing word, any more than equity.

    ‘Deposits’ can mean you deposit 100 banknotes in the bank. or
    The bank with no banknotes or assets at all had 100 ‘deposits’.

    ‘Deposit’ can mean i am transferring the ownership of my 100 banknotes to the bank for their wealth creation purposes, or
    it can mean i have a deposit promising me 100 banknotes.

    So i disagree. That is one heck of a confusing word!

    >>BTW, you can create loans without deposits, it happens all the time.

    >>I understand you are new to this.

    That is not an attitude that is going to help you learn anything.

    The loan account entry creates the deposit. Without the created balancing deposit liability you cannot create the loan asset.

  160. Robert: “It’s clear (it seems to me) that people are deeply uneasy with the thought that money can lack intrinsic value; they want it to have value and for that value to be kept stable by being tied to something tangible, and some even respond by proposing reinstatement of the gold standard to meet that need.”

    “I wish a buck was still silver.”

    — Merle Haggard

    Robert: “MMT on the other hand is far too rarefied to appeal to any but a tiny minority and is never going to gain widespread acceptance or understanding among the general public.”

    I don’t know about that. The American colonies, particularly Massachusetts and Pennsylvania, embraced fiat currencies. One reason for the Revolution was the Britain passed laws against them. The Colonial failed, but it never had the backing of taxation. The world now runs on fiat currencies. Sure, there are some people who hate them, but they have advantages, particularly in hard time like these. Even gov’ts on the gold standard would go off of it in difficult times. The gold standard, whatever its advantages, is a strait jacket.

  161. Andrew:

    I speak as a layman, which puts me in the same boat as something well in excess of 90% of the population. That needn’t mean I’m right but neither does it make me automatically wrong – it’s a different perspective (than that of the expert or specialist). I do however in general hold with Shaw’s dictum that “all professions are conspiracies against the laity” – and most especially so in regard to the banking profeesion.

    From the content of your post I gauge that we’re destined to disagree on almost every score on this occasion although (so far as I understood them) I agreed with most of your previous ones.

    “So when you say the banks create money it creates a meaning other than the bank is a middle man between buyers and sellers, where sellers could in theory offer credit and hope to be repaid by the purchasors.”

    This is typically the function performed by a hire-purchase agreement, provided by finance companies rather than banks as a rule. But hire purchase is simply a loan agreement; the seller of the car or whatever is paid by the finance company to which the purchaser is then indebted for the loan of that sum plus interest. It’s no different in principle to any other loan agreement and was not what I meant when saying that banks create money.

    So yes, I agree that of course to say that banks create money creates a meaning other than that. That was precisely my intention. Banks create money by creating deposits.

    “‘Loans creates deposits’ is a bit misleading because without deposits you cannot create loans.”

    As you can scarcely be unaware, the phrase in question is not mine (that’s why it’s in quotes). I gave it simply as one example among others of what the general public, intuitively, finds incomprehensible about modern banking practice (measured against the average layman’s perception of what banks ought to be for). It may, or may not, have been a well-chosen example.

    That aside, from my perspective you’re just nitpicking here. But by all means be my guest!

    “The loan ‘ledger entry’ describes no net debt, the bank is in debt to the depositor and the borrower depositor is in debt to the bank.”

    To me this is double Dutch. (Try it out on the next five people you meet walking down the High Street). As a borrower all I know is that if the bank makes me a loan I am in debt to the bank for that sum plus interest, and I am at liberty to go out immediately and spend it (which is what I planned to do when I saddled myself with the debt in the first place). It’s not of the slightest relevance to me how the bank represents that in its accounts, nor can I – and nor do I wish to – read the bank’s accounts anyway.

    “Banking is done the way it has been done for centuries if not thousands of years.”

    It’s evident that our respective readings of history are diametrically opposed. But of course no one’s own reading of history is incontestable because one can’t “fast-reverse” and “re-play” history. So who can say which of us is the more correct?

    “What is needed is better regulation…”

    You’re entitled to your opinion and I to mine. As will have been clear from what I previously posted our opinions as to what is needed are, again, polar opposites so perhaps we should leave it at that.

  162. Min:

    Just to be clear: I wasn’t personally taking the position you seem to be attributing to me. I was just pointing out that that is the position which many ordinary people intuitively take in regard to the concept of a fiat currency:- that it goes against the grain.

    My own position (for what it’s worth) is that I agree with you.

  163. “The trick to being a private financier would be to ensure you take their rolex before you grant them a loan.”

    Definitionally, what this desribes is pawnbroking not being “a private financier” (aka loan-shark). Whether that distinction is one with or one without a difference is not for me to say. Both may be said to be fulfilling a social purpose, but whether at an acceptable cost is arguable.

    “You are making too much of the word ‘money’. All the bank creates is the means of exchange. In both cases with a credit card with 1000 limit and a loan of 1000 you have the means of exchanging 1000 for something you want.”

    This to me epitomises the remoteness of your argument from the ordinary experience of ordinary people. (And as an aside I would add that in the final analysis it is the people – not the “experts” and least of all the bankers – who are the only proper arbiters as to whether the way banking is practised meets society’s needs or fails to).

    In saying “all the bank creates is the medium of exchange” you are to my mind simply playing with words, in a most casuistical way. As if that were any different in its meaning from saying “all the bank does is create money”! In common parlance that is what the bank does: why seek to obfuscate it by using a circumlocution? Or is this dialogue required to be conducted in such rarified terms so that the hoi poloi may be excluded from it? Where lies the virtue in choosing deliberate obscurity of expression to describe processes which ought to be perfectly capable of being described in ordinary language?

    “‘Deposits’ can mean you deposit 100 banknotes in the bank. or
    The bank with no banknotes or assets at all had 100 ‘deposits’.

    ‘Deposit’ can mean i am transferring the ownership of my 100 banknotes to the bank for their wealth creation purposes, or
    it can mean i have a deposit promising me 100 banknotes.

    So i disagree. That is one heck of a confusing word!”

    But it needn’t be! It is so only because you are choosing to employ it in a completely confusing way. Whose interests are served, I ask myself, by creating a fog of semantic confusion? Or is it sheer perversity?

  164. Robert says:
    Sunday, November 7, 2010 at 6:42

    Robert
    I think I accept all your points. However just because the majority of people believe something is not, I’ll use that word again, true does not make it any less true.
    I think Dawkins uses a similar argument with regard to belief in God. He is acutely aware of the damage that is done in the name of religion and so persists even though many think he is obsessed.
    In the UK I’m being told we need to cut jobs in order to reduce the budget deficit.
    I don’t see much difference.

    No-one is denying that private banks need a jackboot applied to their throats at the very least but surely we have to start by ensuring that the politicians and central bankers actually understand the monetary system we exist in.
    One immediate advantage of this would be to do away the government bond market that seems to underpin the whole financial economy. Maybe then we could start to rein in the banks.

    I’m not pretending to know much about the US position. I know things are bad there and the fact that the USD is the Worlds Reserve currency would I imagine have different consequences than say for the UK or Australia but I refuse to believe that there is no hope. If that were the case you might as well just curl up in a corner.

  165. Thanks to all who clarified my misunderstandings about deficits, debt, and government “borrowing” to spend. Also, and I have to say this, I was really happy to see Prof. Mitchell take the time to answer my questions. It’s incredibly generous of him to do this blog.

    For the benefit of afu (Nov 7 @ 4:07) who seemed to have a similar question about issuing Treasury bonds (debt), let me ask it again. Why would the government constrain its own ability to act (by requiring that debt be issued to “cover” spending) if it doesn’t have to? Debt sounds like something that has to be paid off sooner or later or there will be consequences. That’s the nature of the language!

    If there are no real-world reasons – that is, if the government can spend judiciously whenever it deems necessary with no economic consequences (remember I said judiciously) — then I would guess it’s because the budget is a governing tool, and voluntary limits are imposed so things don’t get out of hand. This sounds like a good idea.

    But it seems to me that having people believe government budgets are like household budgets really gets down to, like most things in society, a question of power.

    Ideological conservatives want to restrict government power so that individuals can conduct their businesses and their lives as they see fit, with minimum interference, which speaks to the notion of freedom. Ideological progressives want greater government power so that benefits and hardships can be shared and the general welfare can be advanced, which speaks to the notion of justice.

    In reality, since we have a government with monopoly control of the currency, the government de facto already has the power. Limiting how well the general public understands this keeps the government’s (real) power, out of the hands of the public and under the control of the technocracy.

    It’s the manipulation of people’s values that’s in play, I think, so as to keep a lid on what the public might demand if they understood that government could spend if it wanted to, with less impact on the economy than “natural laws” would imply.

    Having said this, I still don’t understand the economics of the issue, but that’s because I don’t understand economics. It’s nearly impossible to get my mind around the fact that money can just be created without upsetting some balance somewhere. But I guess I’m willing to suspend my disbelief for the time being because of what I think are the underlying politics.

  166. Barbara, try this:

    L. Randall Wray, “PAUL SAMUELSON ON DEFICIT MYTHS:TIME TO DROP THAT OLD-TIME RELIGION”

    Paul Samuelson: “I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say “uh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.”

    Can’t tell kids the truth about where babies come from, you know. They might get ideas they can’t handle.

  167. Barbara in NH “It’s nearly impossible to get my mind around the fact that money can just be created without upsetting some balance somewhere.”-

    My impression is that it is impossible to get our minds around it because it isn’t true :). I totally agree about this site being an incredibly generous effort from Prof Mitchell.

    “Ideological conservatives want to restrict government power so that individuals can conduct their businesses and their lives as they see fit, with minimum interference, which speaks to the notion of freedom. Ideological progressives want greater government power so that benefits and hardships can be shared and the general welfare can be advanced, which speaks to the notion of justice.”

    -To my mind it kind of is less cut and dry than that. If the goverment had the tax burden as a flat asset value tax and dished out money as a citizen’s dividend equally to every citizen, then would that be classed as “conservative” or as “progressive”? It would not involve the goverment deciding how money was spent or what activities should be encouraged. It would though ensure money was kept circulating and didn’t accumulate with anyone to a great degree.

  168. “But i have a claim on the 100”

    Which the country can tax away at 100% if it chooses. All savings in the currency are ‘claims’ – they are nothing more than voluntary reversible taxation. If you reverse it you can only use it to purchase thing in the country is the currency issuer allows you to via its permanent tax policy.

    And of course that is just financial. The country already has all the LCD TVs you imported to get those financial instruments.

    The country has to top up the amount of money due to ‘voluntary taxation’ (savings), and it may have to syphon off an amount of money if that ‘voluntary taxation’ is reversed by enough people.

    To which end there is no difference in what form you use to stock the currency. Bonds or savings accounts – it doesn’t matter.

  169. Robert

    >>I do however in general hold with Shaw’s dictum that “all professions are conspiracies against the laity” – and most especially so in regard to the banking profeesion.

    So if you believe that then see why a banker wants you to be confused by the meaning of the word deposit so the meaning is unclear to you.

    Please apply shaws dictum rather than attack me. You can then understand why the word is confusing. It is nothing to do with my “perversity.”

    Additionally “loans creates deposits” is misleading. I explained why.

  170. Stone,

    I’m not sure how to answer your question. I wasn’t talking about taxes per se, but about how much involvement people think the government ought to have in their lives.

    In your example, in addition to redistributing wealth by ‘dishing out a VAT tax equally to every citizen,’ would the government also run social welfare programs, fund infrastructure building, fund public education, run regulatory agencies? (Would it run a jobs program for when unemployment rises above 2%, as Prof. Mitchell proposes?) These are the things most conservatives want to restrict government from doing too much of, and most progressives want to support it doing well.

    As for taxes, I don’t know what the relationship is of taxes to government spending. I realize MMT says there is no direct relationship, that taxes don’t literally fund spending. But I’m sure the tax code isn’t as complex as it is because taxes are irrelevant, in a real-world sense.

    However, I suppose my post does presume an ideological opposition between government spending (i.e, power, interference) and private-money interests, which I can’t really explain.

  171. Barbara in NH “I’m sure the tax code isn’t as complex as it is because taxes are irrelevant, in a real-world sense.”

    My understanding was that taxes act to confer value to money, to direct how people spend money and to prevent money accumulating. There is a lot of politics involved in juggling those roles for taxation. I suspect the people who set up the tax system also try and make it more complex than it needs to be so that they can then get work as tax avoidance consultants. That certainly happens in the UK anyway.
    About government spending, personaly I’d prefer to have many things directly run by the goverment (such as police, water, electricity, roads etc) BUT I think it is important to seperate choices about how much government control their is from choices about how much wealth redistribution there is. In principle, wealth redistribution (by an asset tax and citizens dividend) could be done in a flat manner with no goverment “meddling”.

  172. Andrew:

    “Additionally ‘loans creates deposits’ is misleading. I explained why.”

    No doubt you did but as I told you your explanation bounced off me. I was under the impression that this phrase expressed a universally-held perception but if that’s not the case it’s no skin off my nose. I simply employed a phrase already in frequent use here; I didn’t coin it. If you want to pick a quarrel with someone over it, I’m not your man.

    I’m not clear what point you’re making. The only point I was making was that banks create money by making loans. In my experience, they do so either by creating for the borrower (if he doesn’t already have one) a current account containing the sum loaned or if he has by adding the amount of the loan to his existing account balance. “Current account” being the usual British term for what is also known as “checking account” or “demand deposit” I believe.

    Are you saying that that is not the case, or are we talking past each other?

  173. Robert

    All that you have just said is true.

    *But* we are talking past each other *also*.

    I can only say what i said before and see if you can ‘get my drift’

    A “demand deposit” is bank debt because the bank owes you money. All you have is a number. In law the holder of the deposit or number is an unsecured creditor of the bank who is owed money.

    A 1000 Loan creates a deposit for you because you are the creditor of the bank. If you were not the creditor the bank could not create the loan. Since you are happy to be owed money the bank can write down the 1000.

    The double dutch part (you said) is that the bank has a debt to you of 1000 and you have a debt to the bank of 1000. While that number 1000 is there you have no net debt.

    I know it sounds nuts, which is why i am saying loans creates deposits is misleading.

    if you get a bank loan of 1000 placed in your current account all you have is a promise.

    You get the same promise if you have a zero balance credit card with a 1000 limit.

    Only the interest costs and repayments are different.

    Things become clearer once you have received more than a promise because

    1. You have the goods and you have a debt.

    2. Somebody else is the banks creditor and they sold their stuff to you.

    If the bank does not have a creditor then it had to find more than a promise and has to get 1000 cash or have it already.

  174. “It’s nearly impossible to get my mind around the fact that money can just be created without upsetting some balance somewhere.” Barbara – it is not that hard to understand. All money is a form of credit / debit pair, an IOU from A to B – when it is created, there is always a balance: the + for B is balanced by the – for A. The most important thing to keep straight is who has the credit, who has the debit. (Government) Money like currency, coins, bank reserves ( the bank account banks have at the Fed) or government bonds – are things the government owes the holder. Government -, Private +. Taxes are what ordinary people owe the government, and are what gives government money value. The words highpowered money, vertical money, net financial assets, etc refer to government money. Bank money or horizontal money means IOUs from a bank or private entity to someone.

    Anybody has the same “loan creates deposits” power as banks – a loan is an IOU a borrower gives a bank, and in return s/he gets a deposit, which is an IOU from the bank to the borrower. Any two people could do this, exchange IOUS. In more detail one could say “My IOU I give the bank” (loan) creates the “bank money” (deposit in my bank account). The point of this foolish tit-for-tat is that bank IOUs = bank money are better than ordinary people’s IOUs, which is why they charge interest for loans.

    Banks have special relationships to the government’s central bank and taxing arms. Their deposits, the loans they receive from ordinary people, are government guaranteed. They can always borrow from the central bank if they need to give government money to someone. (they can always get a loan from the government to get reserves – government money). The government accepts bank checks for taxes. And so their IOU’s circulate as money: you can cash a check drawn on bank A at Bank B, or pay a merchant or your taxes with it, or use your bank credit card instead of cash. So Bank money, from the viewpoint of anyone but a bank or the government, is as good as government money, and actually makes up most money.

  175. Andrew: “I can only say what i said before and see if you can ‘get my drift'”

    OK, I get it now πŸ™‚

    Thank you for being so patient.

  176. Andrew – you now seem to be confused on the basics of MMT. I’d really urge you to digest some more of the intro papers – you seem a reflective individual so you may get something from them. Bond sales are a reserve drain, not a funding mechanism. Interest rates are set by the CB. Do the reading!

    Our stumbling block here is that you analyse money as if a metal commodity: the more ‘stuff’ there is, the less it will be worth. I agreed, but countered that the ‘stuff’ being increased by printing, narrow money, is not the same ‘stuff’ as that which inflation is based on. You have repeatedly ignored this distinction. If you think this is a false distinction then pls can you explain why?

    Best
    MMTP

  177. MMTP

    Do you know a place with forum software we can work this thru? We appear to be talking at crossed purposes.

    1. Bond sales via treasury to the public drain reserves. Agreed.

    2. Bond sales to the public that are then purchased *for ever* by the central bank fund the government *for ever* by that amount of spent money.

    3. Interest rates are not set by the CB. The CB announces its desired target and then works in the market to achieve it.

    4. You said “Our stumbling block here is that you analyse money as if a metal commodity: the more ‘stuff’ there is, the less it will be worth. I agreed, but countered that the ‘stuff’ being increased by printing, narrow money, is not the same ‘stuff’ as that which inflation is based on. You have repeatedly ignored this distinction. If you think this is a false distinction then pls can you explain why?”

    I am at a loss to understand how you can think there are not these different monies. Or are you saying something else?

    I have explained that central bank money can be called outside deposits that circulate outside of the private banking system and which can enter a private bank for the private banks operations. Reserve balances for example only exist electronically at the central bank.

    I have explained that deposit money or inside money is the stuff the banks customers are using between themselves only to buy and sell things.

    Obviously most of the money in the economy is privately created deposit money.

    So how have you managed to arrive at your belief??

    However on a point of information many transactions amongst the public are happening with base money.

    So you are evidently referring to one particular type of central bank money and that is reserves.

    Several times you have said things about what i am not explaining or i am ignoring. I cannot understand what is happening for you to say these things.

    Clearly in our economy increases in the publicly held money supply can only come about via increases in bank lending where most money is deposit money or e-money.

    However the banks themselves have the ability to buy vast amounts of things from each other and the other banks customers so it is not surprising to me that the things banks think are going to rise in price or do well as investments are rising in price.

    Maybe we can agree that these price rises are not sustainable but those price rises have happened.

  178. MMTP

    Some typos

    1. I am at a loss to understand how you can ******think I can******* think there are not these different monies. Clearly in our economy increases in the publicly held money supply can only come about via increases in bank lending where most money is deposit money or e-money.

    2. Clearly in our economy increases in the publicly held money supply can only *******mainly****** come about via increases in bank lending where most money is deposit money or e-money. *****unless the government directly spends cash into the economy which it does not drain by any other method*****

  179. Some guy

    “Banks have special relationships to the government’s central bank and taxing arms. Their deposits, the loans they receive from ordinary people, are government guaranteed. They can always borrow from the central bank if they need to give government money to someone. (they can always get a loan from the government to get reserves – government money). The government accepts bank checks for taxes. And so their IOU’s circulate as money: you can cash a check drawn on bank A at Bank B, or pay a merchant or your taxes with it, or use your bank credit card instead of cash. So Bank money, from the viewpoint of anyone but a bank or the government, is as good as government money, and actually makes up most money.”

    The idea banks cannot collapse and ruin depositors is a new one to me. It isa fantasy. You either get meaningless number out of a sytem wide bank failure or somebody somewhere has to pay for the mess.

    But what do you mean the government accepts bank checks for taxes?

    What meaning do you wish to convey by that? Scott several times said the same thing to me and i do not know what he meant by it dispite asking him several times

    Checks have to clear. Receiving a check only results in temporary relief from actual payment.

    What are these special relationships that banks have with tax arms??

  180. Andrew, central bank regulates and supervises commercial banks. The single goal of regulation and supervision is to make sure that bank money can be converted to government money (central bank money) at par. This conversion applies to any deposit because they have no colours. As soon as you bring your cash to your bank and leave it there then all you have is a bank’s promise (debt) which is bank money. Often there is also some type of deposit insurance which reinforces the goal of banking regulation and supervision.

    Government does not spend cash into economy. Government does not spend cash at all! Government spends by transferring reserves and commercial bank converts these reserves into own liabilities. Then central bank converts bank liabilities into its own liabilities and injects cash into economy at request of private sector. However this operation does not change the volume of financial assets in the economy because central bank does not spend at all! (Well in the sense of the banking system.)

  181. “But what do you mean the government accepts bank checks for taxes?”

    It means exactly that. Very simple. If you send a check drawn on your bank account to pay your taxes, the treasury accepts this as payment provided there are sufficient balances in your account at the bank to draw down. Just like anyone else that accepts a bank check in payment.

  182. Scott

    If I have an iou from a bank and send the treasury a cheque for 10000 they do not want an iou from the bank. You must already know that surely??

    Taxes paid by check give the bank no particular advantage over a private financier who has customers saving with him in return for interest payments – it is simply a time, velocity or interest rate issue.

    If i take a bank check in payment it is useless to me until it has cleared because i am the one taking the risk.

  183. Andrew

    Yet again, you are misunderstanding, which is why I have generally stopped engaging here, and probably should not have done so this time. The point is, you cannot send the Treasury a check drawn on your account with me in Scott Bucks. You can only send them a check drawn on an account that they have said in advance they will accept. Yes, the payment has to settle—duh!–that’s why I said “assuming there are sufficient balances to draw down.” That’s a big difference between me/you and a bank. It makes all the difference in the world.

  184. Scott

    Scott i can pay my taxes online. Anybody who had an account with me could authorise me to pay their taxes online by sending me an email. We each bank with the people we trust.

    The inability to issue a tax authority a recognised check is not a deal breaker making all the difference in the world.

    Do you really think that commercial banks are doing just a wonderfully competitive job that private financiers could not create their own buisinesses in their communities and do it honestly and reliably?

  185. Andrew: I was trying to sketch the normal functioning and structure of banking, and getting the terminology straight. Yes, banks could collapse and ruin depositors, but what does this have to do with what I said? In the modern world collapses generally don’t ruin depositors, because of government deposit insurance or actions. This is not a fantasy.

    The point of government accepting bank checks is that it is one more thing that makes bank money, bank credit or IOUs equivalent to government money for practical purposes. (If you are not the government, a bank, or a macroeconomist). Sure if a private financier could do all these things banks do, he could serve as a bank – he would be a bank. But that was the point of Scott’s explanation – answering, What is a bank? These things may seem trivial. But in any subject, it is the trivialities that are the hard part.

    Scott: I am sure I speak for everyone when I say that we are grateful for your posts and learn from them, no matter to whom they are directed.

  186. Private businesses cannot use their liabiliites to settle taxes if the Treasury says they can’t. Yes, they can settle your taxes for you as you say, Andrew, online or whatever else you can imagine, but only via their own deposits held at a bank (which are, of course the bank’s liaiblities but the assets of the one sending the taxes for you) from which the Treasury will accept payment. You can’t get around it.

  187. Scott i am still confused as to your meaning here. You seem to think this is very significant and i do not.

    A private bank cannot settle taxes with liabilities. I cannot settle taxes with liabilities.
    The private bank has to send assets. I have to send assets.

  188. No.

    1. I’m not talking about settlement. I’m talking about acceptance of the check in the first place that precedes settlement. You cannot send Scott Bucks for this. You cannot send a check written against your own liaiblities or the liabilities of anyone else. Only a check written against the liabilities of whomever the Treasury says it will accept a check from will work.

    2. If you want to talk settlement, then you’re wrong again. Final settlement of taxes only occurs with bank reserve balances held in accounts at the CB, since the Treasury’s account is at the CB. Only institutions with reserve accounts at the CB can do final settlement of taxes.

  189. Scott

    The point i am making is that it is not a big negative for a private financier that people cannot directly pay their taxes via savings held with him. He can easily do it for them if they want that done.

    My over arching point however was that a bank does not do anything particularly different to what any individual is capable of doing in a community of people.

  190. Andrew,

    “My over arching point however was that a bank does not do anything particularly different to what any individual is capable of doing in a community of people.”

    That’s pretty vague as well as uncontroversial, at least when properly interpreted.

    To my knowledge, that has nothing to do with MMT per se.

    Of course private credit can come from a “community of people”.

    Is such a mild statement really the source of a hundred posts?

    Here is how I interpret your point; I don’t think that Scott would disagree too much. I don’t think that you would disagree too much.

    If I lend you $100 on credit, you can pay taxes with it. The problem is that unless your IOU to me is liquid, then I am out $100 until you repay. I can’t spend that money, so it is a transfer, and therefore if I was planning on spending the money, then the tax will have suppressed aggregate demand. If I wasn’t planning on spending it, then the tax would not have suppressed AD. See, I am trying to bring the discussion back to a consideration of the economic effects of the loan, rather than the mechanisms behind the loan.

    The relationship between deficit spending and Aggregate Demand is complex, because it can be attenuated by private sector debt growth as well as private sector savings desires.

    On the other extreme, if everyone is always willing to pay $100 for the IOU, then my consumption opportunities are not reduced. I can sell the $100 to someone else whenever I want to spend, therefore the IOU becomes equivalent to $100 of cash — not operationally equivalent because you need the additional step of first selling it, but we posited that would always occur. So now, add expectations of repayment by “community of people” into the mix.

    In that case, the taxation of the $100 would not affect AD and the IOU is a perfect substitute for cash, at least until the assumption of perfect liquidity breaks down. Obviously if the government keeps draining, at some point it will break down. So Scott is arguing that cash (either currency or reserves) is needed for settlement of a tax liability, whereas as you are arguing that a “community of people” can grant credit to effectively settle the liability.

    Honestly, I don’t think that there is a lot of substantive disagreement here. The disagreement seems to be more whether emphasizing one effect is “misleading” because it does not emphasize the other.

    But I think MMT acknowledges private credit when they argue that if the government doesn’t deficit spend enough, then either the economy will contract or there will be private sector debt growth. So I don’t think MMT is misleading here.

    MMT proponents do not say “if the government doesn’t deficit spend, then the economy must immediately contract in all cases“.

    Bill/Scott can correct me if I am wrong, but the statements about lack of deficit spending forcing a contraction are assumed to apply to the current situation (in which the private sector has debt revulsion), or to the general case but over the long term, with an assumption that the private sector response will be unsustainable debt growth, rather than sustainable debt growth.

    If anything, I would like to see more elaboration of the latter assumption, hopefully with some numbers. If the private sector demands $2, and the government deficit spends only $1, then must this always result in ponzi borrowing or contraction? Why and what are the rules of thumb, if any. There seems to be a lot of factors at play here — how “rigid” are the savings desires, regulation, expectations, etc.

    But in light of current events, it’s understandable that Bill’s target is preventing people from flagellating themselves to death with household budget analogies. Spreading the word about that is much more important at present. It’s natural that he would harp on the need for immediate deficit spending in the current environment, and consequently emphasize that savings is not a pre-requisite for spending.

    I was personally shocked at the degree to which deficit mania has taken hold; comments by the world bank chief that we should go back on the gold standard; Obama saying “we are out of money”; prominent senators saying that government employees need to suffer because the private sector is suffering, etc.

    It’s depressing.

  191. Some Guy,

    Thank you for the +/- or debit/credit, asset/liability lesson — it clarified things. After reading several more blogs in the archive, some of it is actually beginning to sink in.

    If anyone would answer, I have a question about banks’ reserve accounts at the central bank. I understand that the required balance that each bank needs to maintain is some fraction of the loans it has outstanding, and that to keep that minimum balance positive, banks borrow and lend among themselves depending on whether they have more or less than they need in their accounts at the end of each day, or they can borrow from the Fed’s discount window. So far so good I think.

    Q1: When people talk about “reserves” at the Fed, are they always referring to these reserves I just described, the commercial banks’ reserves? Or does the central bank itself also have reserves of its own, apart from the banks’ reserves, and is that what the banks would be borrowing from at the discount window?

    Q2: In the quantitative easing the Fed recently announced, I understand that the Fed is basically causing money that is currently being saved in the private sector in the form of bonds to be converted into cash, which will be reflected in the banks’ increased balances in their reserve accounts. So no new money is entering the private sector in this action. The bonds are, in effect, being redeemed, paid off – a perfect example of the government paying some of its debt ‘out of thin air.’ This is not considered “spending” in terms of the budget, right? The deficit does not increase as a result?

    Q3: As those bonds get paid off, they are no longer outstanding debt. So does that mean government debt will be reduced by $6bn now?

  192. Barbara

    Q1. Reserves in commercial bank Federal reserve accounts are the same thing as the commercial banks earnt banknotes/cash/FRN notes where these 3 are the same thing – green folding stuff. Reserves are, however, only deposit records or numbers in a book. When the commercial banks get reserves from the discount window, the reserves are simply produced out of thin air in exchange for collateral. The feds do not keep these reserves in ‘storage’.

    Q2. When bonds are bought from the government the government gets one lot of existing money, and the buyer has less of the existing money. Net the same amount of money exists. If the feds buy the bonds then the government has one lot of existing money and the previous bond buyer has newly created money. So net the government just spent that money into existance in the economy, unless it balances it with taxes then it seems to me to be deficit spending. All the ‘feds’ had to do was print up a bond and create the money. The treasury and the fed is one government. They are money ‘printing’

    Q3 The government can pay off the entire national debt by printing money. 6 billion today every day. The question is then what consequences that will have. buying bonds with newly created money need not be inflationary in a globally present massively deflationary period. And those bonds can be sold again to vacuum up the excess money whenever that is required, if it is required.

  193. Andrew,

    Regarding your answer to Q2, QE is an asset swap. They are *NOT* money printing. That doesn’t make QE a good idea though.

  194. RSJ

    if you get shop credit then you can spend in the shops and owe the money

    If you get bank credit you can spend in the shops and owe the money and also the bank owes the money.

    >>If I lend you $100 on credit, you can pay taxes with it.

    So this is a ‘hard money’ loan rather than what i would call bank credit.

    But i can give you 100 credit to buy some things where i am only owing you the money and then i come to arrangements with you or others later when it is time to settle. This is what i meant by a private financier working in the community. I am not sure you understood my meaning.

    Anyway you also said:

    >>”I was personally shocked at the degree to which deficit mania has taken hold; comments by the world bank chief that we should go back on the gold standard; Obama saying “we are out of money”; prominent senators saying that government employees need to suffer because the private sector is suffering, etc.

    It’s depressing.”

    The situation of the UK is one of a high deficit but very good repayment schedule horizon for government debt where the average maturity is 14 years. In the USA the average maturity is now 5 years. In order to be able to use bonds as part of monetary policy, people have to believe the government will honour the debt without creating higher inflation.

    A government can always deficit spend by borrowing from the future but the consequences of that are not clear. What does seem clear is that America has been living beyond its means for decades rather than just in this crisis.

    MMT is clear that deficit spending can lead to inflation. At the moment since the government wants to prevent deflation that is not so dramatic a problem however. The problem comes later and this is what people are concerned about.

  195. Jeff65

    >> QE is an asset swap. They are *NOT* money printing. That doesn’t make QE a good idea though.

    The government prints a bond out of nothing. It gets bought for money. The Bond holder has a piece of paper. The government has the buyers money

    The government then buys the piece of paper and hands the paper holder newly printed money.

    The government now has the paper back and the economy has more money

    The governent swapped something printed up out of thin air with something else printed up out of thin air.

    Asset swap? Technically we can agree it is so

  196. Andrew,

    I agree completely except you’ve left out the very first step: you neglect where the money came from for the private sector to buy the bond. You just say: “It gets bought for money.”

    In order for the bond to be bought by the private sector, the government must have previously spent the money used to purchase it. If any inflation occurs it is at this point of initial government spending.

  197. Jeff65

    Ordinarily the government is not massively spending ‘out of thin air’ because it borrows and taxes.

    That is not inflationary. That spending just equals what is taken from the economy.

    So you have 1 trillion spent or whatever and 1 trillion received and whatever inflation was created was a one off
    then you spend one trillion and receive one trillion
    etc
    etc
    then you spend one trillion and receive one trillion

    There is no ongoing inflation

    Then the government comes along and buys the bonds with created money.

    now you have one trillion plus the bond purchase price which could be inflationary

  198. Dear Andrew (at 2010/11/09 at 22:14)

    You say:

    Ordinarily the government is not massively spending ‘out of thin air’ because it borrows and taxes.

    Please read today’s blog to disabuse yourself of these fallacies about the link between spending and the accompanying monetary operations. You should also go back and read all the posts in the Debriefing 101 category of my blog and ask questions if you are uncertain rather than make these unsubstantiated and incorrect statements.

    best wishes
    bill

  199. Bill

    Mosler says that government spending causes asset accumulation and bond sales are used as part of monetary policy.

    Perhaps you can direct me to the specific part of todays blog which can correct my understanding.

  200. Andrew,

    You’re too busy to read what Bill has to say, but not so busy you can’t post fifty messages to this thread?

  201. Andrew: “MMT is clear that deficit spending can lead to inflation. At the moment since the government wants to prevent deflation that is not so dramatic a problem however. The problem comes later and this is what people are concerned about.”

    And just why are they concerned about it? Perhaps it is because they still have a job and their stock portfolio is up nicely.

    Since I am cynical, I think that most of the avowed concern is fake, a rhetorical ploy for political purposes. Those harping on potential future inflation are content with current low inflation or deflation, and with the widespread suffering caused by the financial crisis and recession. Whose ox is being gored?

  202. Jeff65, I couldn’t have said it better myself, it’s frustrating and pointless to respond to this guy anymore. Well said and exactly to the point.

  203. Andrew:

    Saying that a government spends out of taxes is not a good way of saying things, but it makes some sense. Saying that it is not spending out of thin air when it deficit spends & “borrows”, or that it borrows from the future, makes no sense, and contradicts what you say earlier about exchanging two things created out of thin air in QE. Something is being “printed” out of thin air when deficit spending, whether it is associated with “borrowing” or not. Whether currency or bonds are being printed is immaterial on the first analysis. And in depressionary, low interest rate conditions, the ultimate difference is negligible. “That spending just equals what is taken from the economy” neglects that the economy gets the spending, and the newly printed bonds, while only the $ for the bonds are being taken from it. Deficit spending is then a 2 for 1 deal increasing net financial assets, the only way that this can happen, with possible inflation occurring at the point of spending. A later QE, or if one skips the bond sale in the first place, is less important. Building bank reserves is not inflationary. Mainstream macro has become obsessed by monetary policy. MMT realistically downplays its effect on the economy.

    Some readings posted here before in Teaching macroeconomics students the facts relevant to much of the prior banking discussion are James Tobin’s Commercial Banks as Creators of Money and Marc Lavoie’s A Primer On Endogenous Credit-Money ( partial finished version, at google books).

    Schumpeter’s History of Economic Analysis Part IV Chapter 8 Β§7 Bank Credit & the ‘Creation’ of Deposits, is very interesting on the (pre)history of this Post-Keynesian, MMT theory of banking & credit, founded by MacLeod before Keynes was born.

  204. Some guy

    if you lend me 100 and you get a valueable receipt you can use as money, like a bond or a spendable bank deposit, then money was just printed. Obviously i have money too. There are now two claims to one amount of money.

    The nature of borrowing is that it creates spendable claims. Increasing the number of spendable claims appears to me to create a one time inflationary pressure that has to be dissipated by other factors.

    If the government just spends by borrowing from the future it is doing no different to when it finds a creditor. If it spends by borrowing from the future the creditor is itself.

    We all agree that in a deflationary situation that inflation is not important

    But if meanwhile you create more claims to the available resources and dont dissipate that inflationary pressure by other factors then once deflationary forces have gone away you are going to get an amount of inflation.

    The issue here is one where we ask a question like ‘did something just happen to the economy like we all got a bit tired and it created deflation that more money can work against, so that when we go back to the same economy as before and we are more active, we can just remove the extra claims for the same price pressures’ or ‘did something happen to the economy that created a permanent deflationary force that we can permanently work against with a one time stimulus of new money.’

    As i see it, it is all about the power of multiple claims to the same resources and the influence that must have if other things are equal. Fairly obviously each new act of credit money creation has the power to increase demand. Borrowing from the future does the same thing.

    You guys are all fundamentally arguing that government can spend money wisely and i just dont see any evidence for that. Governments that believe they can spend money from the future inevitably spend it on pet projects and projects for their mates. Where their mates are the elite or the workers. To argue otherwise is to argue for communism.

    And judging by some of the comments here if a person does not agree with you guys then they are ‘neocons’, ‘asserting’, ‘lacking the correct understanding’ and just plain ‘annoying’.

    At the end of the day i am assuming MMT will be shown to be wrong by rising inflation, austerity, poverty and general unhappiness. It would be nice to be shown that i am a complete fool to believe that however.

    What would it take for you guys to see that inflation is rising and people in aggregate are no richer if that were to eventuate?

    What would invalidate the theory?

  205. Hi Andrew,

    ” money from the future ”

    Can I use your time machine some weekend? πŸ™‚ Recommend some caution here, remember this is all just about the accounting for the conduct of real transactions that occur in the present. ‘Borrowing’ to me is just establishing/committing to a liability at present, so that you can presently enjoy the use of an asset, said asset must exist in the present to be able to be enjoyed in the present.

    Settlement balances that may be provided to two transacting parties in the future have nothing to do with things going on in the present.

    I think Ive read what it seems you are drifting into termed as the fallacy of “intergenerational accounting”. Suggest try to search it up here at Prof Mitchell’s he’s probably already shredded it. Resp,

  206. Andrew, people get richer if real economy is growing faster than population. That is on average. How you get away from average is defined by political process. Money, amount of money, inflation, deflation, taxes, etc do not make people poor. They are just ways to distribute wealth. Do not like current distribution? Then change it. But please stop spamming and flaming here.

  207. Matt Franko

    “Recommend some caution here, remember this is all just about the accounting for the conduct of real transactions that occur in the present. ‘Borrowing’ to me is just establishing/committing to a liability at present, so that you can presently enjoy the use of an asset, said asset must exist in the present to be able to be enjoyed in the present.

    Settlement balances that may be provided to two transacting parties in the future have nothing to do with things going on in the present.”

    You are seeing it from the borrowers viewpoint.

    The lenders viewpoint seems very similar

    ‘lending’ to me is just establishing/committing to a liability (you might not get repaid) at present, so that you can presently enjoy the use of an asset (loan asset or repayments) , said asset must exist in the present to be able to be enjoyed in the present.

    But does it exist or is it an illusion created by inflation of asset prices?

    The savers or the creditors who sell to the borrower are then the losers unless the tax payer is the loser.

  208. Andrew from what I can see currency expansion is being absorbed by bubbling asset prices. I totally agree with you that currency expansion has to go somewhere. It clearly is not being absorbed by consumer price inflation and wouldn’t be expected to since median wages are not going up much if at all and new machines etc work better than old ones leading to idle capacity. It isn’t being absorbed by growth in the real economy because again people who used not to be able to afford piano lessons or whatever are not now able to afford them. Instead the extra money is going to the ultra rich and they use the money to push up asset prices because if someone is very rich they will already be spending as much money on piano lessons etc as they can be bothered to. Guessing which assets where in the world will bubble next has become the primary industry that employs the best and the brightest. Governments are in thrall to and in the pocket of the FIRE sector.

    “The savers or the creditors who sell to the borrower are then the losers unless the tax payer is the loser.”
    Some losers are the small scale savers who have small amounts of cash squirelled away and have the value of their cash eroded be subinflation interest rates. Other losers are those who need to buy houses or farms or whatever at bubble inflated prices. Also everyone loses because bubble economies lead to malinvestment meaning that houses are built that are never going to be sold or gold is mined just to sit in a vault rather than benefical work being done or free time enjoyed. Probably the biggest loss is the waste of talent and resources tied up in the pointlessly over-expanded FIRE sector.

  209. Andrew

    I doubt anyone here is arguing that govt spends wisely. But income has to equal expenditure; don’t you accept that govts need to accommodate, rather than fight, private desire to save, or else GDP will tank?

    Govts can easily ‘dissipate’ inflationary forces once the output gap shrinks, by increasing tax or bank reserve requirements.

    stone

    1. Remind me, why are you so sure the asset bubbles now result from QE, when the asset bubbles in 07-08 pre-QE were even bigger?
    2. Wasn’t the Japanese carry trade based on people borrowing in JPY and going long USD or AUD etyc? If so, how does this relate to the JPY private sector asset build-up which you deplore?

    Cheers
    MMTP

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