As I noted yesterday, last evening I accepted an invitation to speak on a panel…
Where do we get the funds from to pay our taxes and buy government debt?
I have been (involuntarily) copied into a rather lengthy Twitter exchange in the last week or so where a person who says he is ‘all over MMT’ (meaning I presume, that he understands its basic principles and levels of abstraction and subtlety) has been arguing ad nauseum that Modern Monetary Theory (MMT) proponents are a laughing stock when they claim that taxes and debt-issuance do not fund the spending of a currency-issuing government. He points to the existing institutional structures in the US whereby tax receipts apparently go into a specific account at the central bank and governments are prevented from spending unless the account balance is positive. Also implicated, apparently, is the on-going sham about the ‘debt ceiling’, which according to the argument presented on Twitter is testament to the ‘fact’ that government deficits are funded by borrowings obtained from debt issuance. I received many E-mails about this issue in the last week from readers of my blog wondering what the veracity of these claims were – given they thought (in general) they sounded ‘convincing’. Were the original MMT proponents really overstating the matter and were these accounting arrangements evidence that in reality the government has to raise both tax revenue and funds from borrowing in order to deficit spend? Confusion reigns supreme it seems. Once one understands the underlying nature of the financial flows associated with government spending and taxation, it will become obvious that the argument presented above is superficial at best and fails to come to terms with the basic questions: where do the funds come from that we use to pay our taxes and buy government debt? Once we dig down to that level, the matter resolves quickly.
The allegation raised in this Twitter exchange is that when MMT proponents claim that taxes and debt-issuance do not fund the spending of a currency-issuing government they are not describing reality and thus open themselves up to obvious criticism and rejection from pundits who note the existence of accounting arrangements that tie various bank accounts (such as Treasury Tax and Loan accounts or their equivalent in other nations, etc) and debt ceilings to public spending.
Various accounting conventions follow that suggest that the government cannot spend without tax revenue or borrowing from the non-government sector.
Apparently, the debt ceiling in the US or similar contrivances elsewhere clearly means that the funds obtained from issuing debt are used to fund deficit government spending.
Further, central banks will not allow overdrafts on the Treasury accounts which means that transfers from the TT&L like accounts into general purpose accounts held at the central bank, are directly involved in funding government spending.
That is the contention.
The contenders acknowledge that these institutional arrangements are political in nature (that is, imposed by legislation or regulation), which means they can be altered if there is a political will.
This 2014 article by a senior official at the Federal Reserve Bank of New York, Kenneth Garbade – Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks – documents the history of changes to the Federal Reserve Act in the US with respect to allow or withdraw authority for direct purchases of Treasury debt by the Federal Reserve bank.
I analysed this issue in this blog post – Direct central bank purchases of government debt (October 2, 2014) – just after Kenneth Garbade’s staff note was published.
So, all these accounting arrangements and restrictions are variable according to the whims of the government.
But the argument being made this week on Twitter is that while accounting arrangements stand they mean that the government has to spend tax income and funds from borrowing if it is running a deficit over its tax revenue.
When other Twitter users responded that these accounting smokescreens serve to hide the intrinsic capacity of a sovereign government, which can never revenue constrained because it is the monopoly issuer of the currency, the response was then something along the lines that if that was so then why is there all the angst, in the US context, about the debt ceiling.
The problem with this ‘obvious’ argument is that it fails to consider what is actually going on in a fiat monetary system at the level beyond the accounting arrangements.
The basic contention made that these ‘accounting’ arrangements mean that taxes and borrowing directly fund government spending and that MMT proponents should stop saying otherwise is incorrect.
It all comes down to abstraction layers and temporal causality.
Of course, if there is a rule that says that the Treasury can only spend if it has $1 in some specific account in some specific bank or another and cannot borrow another cent if some arbitrary debt ceiling is breached then as long as the government obeys the rule of law those rules will be binding.
A law to stop government spending can stop it. But that is a separate issue from understanding where the ‘funds’ come from that the government spends.
I have written about the role that these voluntary constraints play in placing political discipline on a currency-issuing government many times before.
For example, please read my blog post – On voluntary constraints that undermine public purpose (December 25, 2009) – for more discussion on this point.
First, consider what constitutes ‘government’.
In my blog post – The consolidated government – treasury and central bank (August 20th, 2010) – I make the point that beyond all the hoopla about who might own the central bank and whether it sets interest rates without political interference, etc, there can be no sense that the two macroeconomic policy arms are not part of government.
There are several links within that blog post that provide further elucidation.
I also recommend you read this paper (Levy Working Paper No. 788) by Éric Tymoigne – Modern Money Theory and Interrelations between the Treasury and the Central Bank: The Case of the United States – which shows how “monetarily sovereign governments have a very flexible policy space that is unconstrained by hard financial limits”.
It also contains several references to further material to help you understand the argument and avoid falling into the trap that the Twitter debate encountered this last week.
The notion of a consolidated government sector is a basic MMT starting point and allows us to demonstrate the essential relationship between the government and non-government sectors whereby net financial assets enter and exit the economy without complicating the analysis unduly.
A simple understanding that net financial assets can only be created and destroyed in the non-government sector through transactions with either the central bank or the treasury should disabuse you of the idea that the central bank is not part of a currency-issuing government.
Further, as I have outlined in some detail in the introductory suite of blogs – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3 – the way in which fiscal policy decisions impact on bank reserves, which directly influence the way the central bank conducts monetary policy, means that the two arms of macroeconomic policy are intrinsically linked and cannot be independent.
At this simple level – that the currency-issuing ‘government’ comprises the consolidation of the central bank and the treasury functions – makes it obvious that taxes and borrowing do not fund ‘government’ spending.
A central bank is always able to issue bank reserves and currency notes (in some nations notes and coin issuance is separated by department).
If you think about it, central banks, in addition to conducting monetary policy and engaging in asset swaps with the non-government sector, directly purchase goods and services from the non-government sector.
They buy things like office supplies, IT and other equipment including professional services and training, building maintenance services, and other items that are use to equip, train and provide for their operations and staff.
Large purchases usually require competitive tender situations. But that does not abstract from the reality – these purchases are equivalent to the treasury department buying goods and services from the non-government sector.
Where do the funds come from to facilitate these purchases? From the currency-issuing capacity of the ‘government’. The central bank would just credit bank accounts in favour of these orders and create bank reserves ‘out of thin air’.
This is a different operation from quantitative easing where no new financial assets are created in the non-government sector. QE just allows the non-government sector to alter its portfolio of financial assets – less government bonds (for example) and more bank reserves.
In both cases the wherewithal comes out of ‘thin air’ but the impacts on the net financial position of the non-government sector is different.
In the case of direct central bank purchases of goods and services, no tax revenue or debt issuance would be required. In doing so, new net financial assets would be created in the non-government sector and we would not think for one minute that the ‘spending’ was made possible by tax revenue or borrowing from the non-government sector.
When talking about the treasury department, things seem to get more complicated because there is an array of these accounting processes that give the impression to those who do not really understand the abstraction involved that tax revenue and funds raised by selling debt provide the ‘money’ which allows the treasury side of government to spend.
But, the reality is akin to the central bank purchases and the accounting arrangements are just smokescreens designed to present a false causality.
The government deficit (treasury operation) determines the cumulative stock of financial assets in the private sector. Typical decisions taken by the central banks, then determine the composition of this stock in terms of notes and coins (cash), bank reserves (clearing balances) and government bonds with one exception (foreign exchange transactions).
Any payment flows from the government sector to the non-government sector that do not finance the taxation liabilities remain in the non-government sector as cash, reserves or bonds.
Note the causality here – the government finances the taxation revenue.
A very simple example, which captures the essence of the relationship between the government and non-government sectors is an economy with a population of just two; one person being government (which issues the currency) and the other deemed to be the non-government sector (which uses the currency the other person issues).
If the government runs a balanced fiscal position (spends 100 dollars and taxes 100 dollars) then non-government accumulation of fiat currency (money) is zero in that period and the non-government budget position is also balanced.
Thus there is no non-government saving in the currency.
Also note, that there is no capacity in this economy for the non-government person to pay the government person the $100 in taxes until at least that much is spent into existence by the government person.
This is the same causality noted above: spending funds taxation revenue, rather than the other way around.
Say the government spends $120 and taxes remain at $100, then the non-government surplus is 20 dollars, which can accumulate as financial (monetary) assets and represents an increase in the non-government sector’s net worth or wealth.
The non-government saving of $20 initially takes the form of non-interest bearing money holdings.
The government may decide to issue an interest-bearing bond to encourage saving but operationally it does not have to do this to finance its deficit.
An interest-bearing bond is just a piece of paper that says the government will repay a certain amount (the face value) at some specified time (maturity date) and will pay an interest premium in addition (the yield or coupon rate).
The non-government sector exchanges cash for the bond if it wants to earn interest and has no use for the liquid funds, which may be held as deposits in private banks.
The government deficit of $20 is exactly the non-government savings of $20.
Now if government continued in this vein, accumulated non-government savings would always equal the cumulative fiscal deficits.
However, should government decide to run a surplus (say spend $80 and tax $100) then the non-government sector would owe the government a net tax payment of 20 dollars and would need to run down its prior savings, liquidate real assets, or sell interest-bearing bonds back to the government to get the needed funds.
The result is the government generally buys back some bonds it had previously sold.
Either way accumulated non-government saving (financial wealth) is reduced dollar-for-dollar when there is a government surplus.
The government surplus thus has two negative effects for the non-government sector: (a) the stock of financial assets (money or bonds) held by the non-government sector, which represents its wealth, falls; and (b) non-government disposable income also falls in line with the net taxation impost.
Some may retort that government bond purchases provide the non-government wealth-holder with cash. That is true but the fiscal surplus forces the non-government sector to liquidate its wealth to resolve its shortage of cash that arises from the tax demands exceeding current income.
The cash from the bond sales pays the government’s net tax bill. The result is exactly the same when expanding this example by allowing for non-government income generation, private firms and production, and a banking sector.
Now consider this economy with some new accounting rules. The government person might announce that it has decided that it cannot spend further funds into the economy until a ledger shows positive tax revenue.
Does that alter anything? Not really.
It just alters the timing of the government spending but not its intrinsic capacity.
The question you have to ask is this: where did the funds come from, which were paid by the non-government person to the government person to allow the government person’s ledger to show a positive tax receipt balance?
The answer is that the funds came from past government deficits.
Far from imposing limits on government spending, taxation places limits on non-government spending and creates the fiscal space in which governments can take command over the use of productive resources.
As the former Chairman of the Federal Reserve Bank of New York Beardsley Ruml noted in his January 1946 American Affairs article – Tazes for Revenue Are Obsolete – taxes do not “provide the revenue which the government needs in order to pay its bills”.
The same argument applies if another accounting rule was introduced – that government person deficits had to be matched by an equal amount of debt issuance to the non-government person.
Does that alter anything? Not really.
Where did the funds come from to purchase the debt and hold this portion of the non-government person in the form of bonds rather than cash?
The government person is just borrowing the net financial assets that were created when they previously had spent the funds into existence.
Its a wash!
It is true that the private sector might wish to spread these financial assets across different portfolios. But then the implication is that the private spending component of total demand will rise and there will be a reduced need for net public spending.
So we might have an accounting trail that looks something like this:
1. Government has a financial account with the central bank called Treasury General Account (using the US terminology). When the government spends it might account for the flow of funds using its TGA balances.
2. The Treasury department might also keep accounts with selective commercial banks called Treasury Tax and Loan Accounts (TT&Ls), which collect tax revenue and funds raised from conducting debt issuance auctions. They help even out the impact of fiscal policy operations on the level of bank reserves, which helps the central bank in its liquidity management operations.
Alternatively, the funds from taxes and borrowing could be kept within accounts at the central bank called Tax and Loans, which could be a consolidated account or separate accounts. It doesn’t really matter. In this case, accounting for taxes, for example, will immediately drain bank reserves whereas having an intermediately step – using TT&L accounts – means that the reserves are not drained upon the tax payments being made (see next point).
3. Government spending is accounted for out of the TGA at the central bank although accounting entries might see numbers transferred from the TT&L accounts into the TGA balance. The latter transfers serve to drain bank reserves – that is the tax revenue disappears from the banking system having remained within that system while the TT&L balances were positive.
4. The transfers to the TGA account thus come from funds in the TT&L accounts or directly from the Tax and Loan accounts held at the central bank. It doesn’t really matter which for our purposes here.
5. Does this mean that the tax revenue and/or borrowing fund the debt entries in the Treasury General Account? Answer: No.
6. The question that has to be asked (following our simple example above) is where do the funds come from that show up as positive balances in the TT&L accounts or in the Tax and Loan accounts held at the central bank?
The answer to that question – one level of abstraction below the obvious – gives a clue to what is going on and provides for an understanding of the one of the essential contributions made by MMT that the existing macroeconomic theories failed to elucidate.
While the accounting processes make it look as though the tax receipts or the funds from borrowing are the source of these positive balances, the underlying monetary reality is that the funds have come from prior government spending and associated reserve operations conducted by the central bank.
It cannot be any other way.
As Éric Tymoigne notes (in the paper cited above):
This must be the case because, leaving aside TT&Ls, taxes and bond offerings drain reserves, so the Federal Reserve had to provide the funds. The logical conclusion then, is that reserve injection has to come before taxes and bond offerings. More broadly, the theoretical insight that MMT draws is that government spending (by the Treasury or the central bank) must come first, i.e. it must come before taxes or bond offerings. Spending is done through monetary creation ex-nihilo in the same way a bank spends by crediting bank accounts; taxes and bond offerings lead to monetary destruction.
As the following shows, in practice, injections of reserves related to the Treasury have come in several forms: monetary creation by the Treasury, funding of the Treasury by the central bank, funding of primary dealers by the central bank, and maturation of treasuries. The injection of reserves allows banks to buy treasuries or to complete tax payments.
He also notes that when the government runs a fiscal deficit it is required by US law (and there are similar arrangements across most nations) to match the deficit with debt issuance – assuming the TGA and TT&L account balances are insufficient to match the net spending injection.
But he also notes that the “Treasury has at least four ways to bypass this budgetary procedure”. I won’t go into detail but suffice to say these bypass procedures make it clear that “if tomorrow nobody is willing to take treasuries, the Treasury, with or without the help of the Federal Reserve, has the means to bypass that problem if it chooses to use them; it becomes a political issue rather than an economic one.”
In simple terms, once you drill down below the obvious accounting relationships, the causality that is established shows that central banks, in one way or another, fund treasury operations.
What about the ‘debt ceiling’?
Debt ceilings or debt brakes are commonly imposed voluntary constraints found in many nations. In the US context, the ‘debt ceiling’ requires its Congress to approve some arbitrary limit and once reached the Congress must vote to increase the allowable public debt level.
Doesn’t the fact that politicians spit chips over the ‘debt ceiling’ in the US and similar arrangements in other nations mean that there is a financial constraint on government spending?
The rather blunt legislative constraint implied by the US debt ceiling, for example, can stop government spending if the rule states that spending has to be matched by debt issuance and the currently agreed ‘debt ceiling’ is binding.
But that is a separate thing to establishing that the funds received from the debt issuance cause the government spending.
It is like saying that a national leader has to stand on their head for 3 minutes each morning before government can spend a cent. If they cannot achieve that physical feat then no spending can occur.
All the ‘debt ceiling’ saga tells us, other than it is never really binding and just becomes a political stunt, is that under certain circumstances, law makers in nations can use parliament to stop the government from spending.
The inference that this legislative capacity tells us that the borrowed funds the deficit spending, however, does not follow.
We also know that that in the US context, the Treasury department can always issue what are called ‘zero-interest instantaneous maturity securities’ – a note or coin of any value which could be deposited with the central bank as a ‘credit’ against the government’s TGA balance.
No debt issuance would be involved. Debt ceiling thus become irrelevant even as a blunt instrument to stop public spending.
See the paper released by the US Congressional Research Service (November 2, 2015) – The Debt Limit: History and Recent Increases – for more information on the debt ceiling.
Conclusion
I received many E-mails about this issue in the last week from MMTers who expressed confusion.
I hope this detailed response helps those who have fallen in to the trap of conflating voluntary accounting arrangements as causality.
The causality is always that the government must spend its currency into existence to facilitate tax payments and bond purchases.
Logic 101 tells us what that means.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.
Logic 101 does not seem to be cognitively available to everyone, even to academics. I recently got into a dispute with someone whose field is highly data oriented who, seemingly intentionally, refused to deal with a similar discussion that you, Bill, have dealt with here and, again seemingly intentionally, misrepresented what I had written. I said in different words essentially what you have just said but only receive ad hominem rebukes. Not even counterargument. Frustrating does not adequately characterize this situation.
“A law to stop government spending can stop it. ”
Only if there is an entity that is prepared to enforce that law. There is no law without enforcement.
The way I deal with this entire debate is to get the other side to identify who is the person or entity that can enforce the condition and make it stick. Who gets to say ‘no’ and stay in a job. What backup can they call on?
With an individual that is obvious. The bank can bounce your cheques and the courts will back them up – all the way to jailing the individual for contempt if necessary. Now try doing that to a government, or even more so to a legislature. Will those running the bank really bounce the cheques in direct contravention of an order from the elected legislature?
To have any control, you have to identify the control point in the system and who has power and authority to enforce that control point and stop people ignoring it. Otherwise it is just words on a paper somewhere – or more accurately an implicit appeal to a belief and a God.
Probably also worth mentioning that any ‘constraints’ apply at the end of the day’s banking – after clearing has run and completed. That’s the only point that the checks are made.
And the reason for that is obvious – during the day payments and transfers occur at all sorts of different times from all sort of different institutions.
So intra day essentially everybody runs on an unlimited overdraft, and clearing eliminates that by the end of the day.
If you imagine spending happens in the morning and bond drains happen in the afternoon, you can see that the non-government sector has to breath in money before it can breath out. And from a government point of view that is the way around you want it – a system stuffed full of morning money ensures better bids for the bonds you issue in the afternoon.
Intra day the clearing system will run with a balance sheet perhaps some 10% bigger than it ends the day with.
I had the impression that the Troubled Assets Relief Program was the perfect example of government spending unfunded by anything. The total outlay was, IIRC, over 400 billion dollars. If the public had been taxed to raise that, the charge would have been over $1000 per inhabitant, and they surely would have noticed. The money couldn’t have been borrowed, because the outfits that could have loaned that kind of money were all broke; that’s why they needed TARP.
I suspect that that last holdout on Twitter was a troll, remaining purposely obtuse to keep the attention coming.
You can never explain things to people who are just unwilling to engage in an honest dialog. But there are people out there who are willing to talk but dubious about MMT’s position on things. I think Mel’s discussion about TARP is generally the way that works best for me with such people. If you can get them to see that the FED not only can, but has, generated very large amounts of money when the need arises (add QE to the list) without raising that money via taxation, then they begin to accept the possibility that this money generation facility could also be used to fund some part of government spending. As you proceed further in that discussion you get to the potential for inflation by doing that, but by then you’ve gotten them to the point that they will accept the potential for overt monetary finance (or whatever term you prefer). It’s a relatively short path from that point to the limitation or elimination of government issued debt. Reasonable people can be convinced, but take it in short steps.
First of all, let me just say WOW! This is a very special day to have MMT Royalty address me directly on Billy Blog. (I regret not making it to KC, by the way, for the 1st Intl Conference). You Professor, are first among them. (sorry Warren, Randy, Steph).
Second, my purpose in stirring up this hornet’s nest ad nauseum is to make MMT stronger and hasten its acceptance. I still think the narrative that MMT folk use to describe certain monetary/fiscal operations, and the constraints thereof, is inaccurate, harmful to MMT, and unnecessary. (I don’t remeber using the words “laughing stock.”)
My beef: The narrative: “Taxes and borrowing don’t fund spending.” I find to be clearly false under current US LAWS. These constraints, WHICH ARE GENERALLY ADHERED TO, currently make the narrative false, and trying to squeeze it into what should be plain as daylight makes MMT acceptance among civilians that much more difficult. You discuss these voluntary constraints in your articles. Yes indeed they are voluntary – for Congress, but they are current LAW. And if the LAW says that a national leader has to stand on his head before he spends – that’s a constraint. Of course laws can be changed, but until they are, they constrain.
The Self-Imposed CONSTRAINTS NOW in the US include:
• Congress Appropriates
• Congress Taxes
• Congress imposes a Debt Ceiling
• Federal Reserve Act prohibits significant overdraft at the Fed or Fed gifting or buying securities directly from Treasury and ambiguity on Trillion Dollar Coin (see: Obama).
In view of these constraints, every few years we have a Debt Ceiling drama. If the govt didn’t need to borrow or tax in order to spend, why the threatened Debt Ceiling shutdowns? Is it because RIGHT NOW the govt needs to borrow in order to spend? (Why did Obama make concessions?)
It’s semantics I’m sure. But words are important or you get eyes glazing over and non-acceptance of MMT. (see Bernie Sanders and popular acceptance of MMT significantly less than 85% where it should be). All I’m saying is:
• Instead of: “Taxes and borrowings don’t fund spending.”; which under current LAWS is FALSE, and consequently generates endless pushback from civilians.
• How about: “Right now taxes and borrowing fund spending. In order to fund…(Job Gty, etc)… the best alternative is to amend the Federal Reserve Act to allow the Fed to directly fund Treasury spending which it can’t right now.”
The alternate has the advantage of being true, and making total sense. My approach would be: Revise Federal Reserve Act so Federal Reserve Bank reports to the Treasury…Execute on national “To-Do List” (infrastructure…)…Fund through securities purchased by the Fed – either a loan or just have Fed “gift” it to the Treasury. (I think dealing with piles and piles of debt and Magic Coins is MUCH tougher politically.) Issue currency!
RE: “… If you think about it, central banks, in addition to conducting monetary policy and engaging in asset swaps with the non-government sector, directly purchase goods and services from the non-government sector. … …”
• Well that’s an interesting implication. If we follow that thought, what is to prevent the Fed, say at the direction of Treasury from spending say a $1 Trillion to fund Social Security and Defense. I bet legislation would have to be involved. (Eric?) But its not happening now. NOW, taxing and borrowing is funding spending.
I agree with almost everything in your posts, except for this “Taxes and Borrowing don’t fund spending” narrative.
I will post responses to some of your statements.
RE: “… I hope this detailed response helps those who have fallen in to the trap of conflating voluntary accounting arrangements as causality. … …”
• Again, perhaps they are voluntary for Congress in the not too distant future, but right NOW, they are not accounting arrangements. They are LAWS. Which keep Treasury from spending without taxing and/or borrowing. Let’s change the laws. Fine. But let’s not say falsehoods. Folks can see it and shake their heads.
RE: “… The causality is always that the government must spend its currency into existence to facilitate tax payments and bond purchases. … …”
• Actually I also have a beef with this. So lets’s say: new country, new bank, no govt spending yet, no money yet. Bank creates money out of thin air (by lending). What’s to prevent govt from taxing some of the money created and adding to its reservers? (Just a side note.)
RE: “… it will become obvious that the argument presented above is superficial at best and fails to come to terms with the basic questions: where do the funds come from that we use to pay our taxes and buy government debt? Once we dig down to that level, the matter resolves quickly. … …”
• The source of the funds is irrelevant (even if you believe the source is the sovereign). The point is that with the legal constrains outlined above, new spending have to be borrowed or taxed.
RE: “… A law to stop government spending can stop it. But that is a separate issue from understanding where the ‘funds’ come from that the government spends. … …”
• Again, not relevant to the discussion on where the money CURRENTLY spent has to come from in view of restrictions to: Fed funding, overdrafts at Fed, Debt ceiling, Coin.
RE: “… But, the reality is akin to the central bank purchases and the accounting arrangements are just smokescreens designed to present a false causality. … …”
• Not false. There are laws which force the causality. Causing the govt to have to tax and/or borrow in order to spend.
RE: “… Also note, that there is no capacity in this economy for the non-government person to pay the government person the $100 in taxes until at least that much is spent into existence by the government person. … …”
• Except for the new country with no govt-spending yet with bank-created-money which could be taxed.
RE: “… The answer is that the funds came from past government deficits. … taxes do not “provide the revenue which the government needs in order to pay its bills”. …”
• Sometimes it does. Even if it came from the sovereign, it needs to be taxed, borrowed – under current law and interpretations.
RE: “… 5. Does this mean that the tax revenue and/or borrowing fund the debt entries in the Treasury General Account? Answer: No. … 6. The question that has to be asked (following our simple example above) is where do the funds come from that show up as positive balances in the TT&L accounts or in the Tax and Loan accounts held at the central bank? ….. the underlying monetary reality is that the funds have come from prior government spending and associated reserve operations conducted by the central bank. ”
• Well they could come from previous deficit spending being taxed back or borrowed, ooorrrr… taxing or taxing of monies created out of thin air by banks. But again, why is this relevant to the legal constraint the US is currently operating under?
RE: “… The inference that this legislative capacity tells us that the borrowed funds the deficit spending, however, does not follow. … …”
• How can it not follow? If the Congress can prevent incremental borrowing, Federal Reserve Act (Congress) prevents direct funding of Treasury, the Trillion dollar Coin is legally unsettled, and deficit spending necessitates the shutdown of the govt (Debt Ceiling shutdown threats), then how can it not follow that borrowing (or taxes) doesn’t fund spending?
I think Bill’s point is that these constraints are self-imposed legal obligations and can be changed whilst yours is that these constraints have become so normalized that most people accept them as universal truths. The law makers are unlikely to change the rules of the game in the near future and so any MMT inspired policymaker has to operate in a constrained space.
I hope your being kind to each other because you both have a point.
“Only if there is an entity that is prepared to enforce that law. There is no law without enforcement.
The way I deal with this entire debate is to get the other side to identify who is the person or entity that can enforce the condition and make it stick. Who gets to say ‘no’ and stay in a job. What backup can they call on?
[and then]
To have any control, you have to identify the control point in the system and who has power and authority to enforce that control point and stop people ignoring it. Otherwise it is just words on a paper somewhere – or more accurately an implicit appeal to a belief and a God.”
Neil
I would hope that any Government agency would obey the law no matter how wrong headed the law may be. The rule of law is too important a principle to be treated in such an off hand fashion. Words on a paper somewhere enacted into law by a properly constituted legislature are far more than an implicit appeal to a belief and a God. They are the law and no Government agency should consider itself above it.
Hi Bill
You say: “As the former Chairman of the Federal Reserve Bank of New York Beardsley Ruml noted in his January 1946 American Affairs article – Tazes for Revenue Are Obsolete – taxes do not “provide the revenue which the government needs in order to pay its bills”.”
This quote you are providing within quoting marks is a complete fabrication. Also, Ruml’s point is not that taxes do not provide revenue for the govt but rather that thinking of taxes solely as revenue for the govt is an antiquated notion, which is a very different thing. Actually the article states clearly that “The borrowing of money, therefore, is an alternative which governments use to supplement the revenues from taxation in order to obtain the necessary means for the payment of their bills.” (p.35)
@Francisco
“• Instead of: “Taxes and borrowings don’t fund spending.”; which under current LAWS is FALSE, and consequently generates endless pushback from civilians.
• How about: “Right now taxes and borrowing fund spending. In order to fund…(Job Gty, etc)… the best alternative is to amend the Federal Reserve Act to allow the Fed to directly fund Treasury spending which it can’t right now.””
I completely agree with that.
@Francisco
If I make a personal law to the effect that I can only spend on ‘entertainment’ up to the amount that is in my ‘entertainment trust fund’ and that said ‘entertainment trust fund’ is to be solely funded by any income generated from online sales activities on Ebay I engage in, does that mean that I am actually constrained as to how much I can spend on actual entertainment other than by the total available monetary resources I have, in all my funds, accounts, etc?
What you do not seem to be getting is that there is a difference between saying “federal government spending is, at present, constrained not to exceed the number of U.S. Dollars in specified Federal Government accounts at the Federal Reserve Bank” and saying that “federal government spending is, at present, FUNDED by the U.S. Dollars in specified Federal Government accounts at the Federal Reserve Bank”.
All of these are ‘entries’ on balance sheets. There are no ‘objects’ moving, circulating, pouring into and out of anything. All of these are physicalist metaphors (some hydraulic, other locomotive, etc). Money is literally no(t an) object.
Also, you can attend MMT conferences till the cows come home. That doesn’t mean you’re “all over MMT” if you do not get it. You remind me of football (soccer) fans who, because they regularly attend matches home and away fancy themselves football (or club) sages. It doesn’t work that way. Learning does not happen by osmosis.
“I would hope that any Government agency would obey the law no matter how wrong headed the law may be. ”
Then you have never dabbled in politics – or for that matter law. Or have considered where the dividing line is.
Laws fall into disuse for a reason. There are lots of laws on the statute books that are never enforced. The UK Labour Party is renown for passing wide ranging legislation and then handing enforcement over to a set of bureaucrats who decide how hard to enforce something. Lawyers love them for it – it keeps them in clover.
The rule of law is man made and therefore a complex interplay of power and politics. It is not handed down from Mt. Sinai.
Laws do not constrain the U.S. Congress, since it MAKES laws and can thus change the laws. The U.S. Congress can override even Presidential vetoes of laws that Congress passes. The Executive cannot spend a single penny that has not been appropriated and authorized by the U.S. Congress. Nor can the Judiciary. The U.S. Congress is sovereign when it comes to ‘the purse’.
“They are LAWS. Which keep Treasury from spending without taxing and/or borrowing.”
It doesn’t – due to the way the dynamics of the intra-day banking system works. And there is no law without enforcement.
The only thing that bites is the debt ceiling, and as we can see once furlough starts to happen the legislature buckles. They won’t go so far as to cause a payment system collapse and a recession.
There is no borrowing. There is only saving. The causality is from receipt to deposit. The government ‘borrows’ in the same way that a bank ‘borrows’ when you place a deposit with it. Government has no need to tout around with a begging bowl. It turns up automatically as a function of how the banking system works.
You have your power relationships wrong. You don’t have a person that can say no and make it stick for a sufficiently long period of time for the effects to start to bite. Therefore it is all a charade.
“Actually I also have a beef with this. So lets’s say: new country, new bank, no govt spending yet, no money yet. Bank creates money out of thin air (by lending). What’s to prevent govt from taxing some of the money created and adding to its reservers? (Just a side note.)”
Where does the bank get the central bank money to pay the Treasury? It doesn’t have any. Who does it get it from. Answer: the government sector – and then only if the government sector offers a discount window for the assets the bank has created. Which is the government sector purchasing financial assets from the non-government sector – generally via repo arrangements.
Central bank money and commercial bank money are different currencies. They are linked together in a nation because the commercial banks ‘peg’ their own currency to the central bank with that nation.
@GrkStav
“All of these are ‘entries’ on balance sheets. There are no ‘objects’ moving, circulating, pouring into and out of anything. All of these are physicalist metaphors (some hydraulic, other locomotive, etc). Money is literally no(t an) object.”
There are such things as non-physical objects. Intellectual property can be the object of rights for example. It’s not the immaterial objects that move, it’s the rights and obligations attached to them. ‘Funding’ is never about moving physical objects around and it’s not just about ‘entries’ on balance sheets.
“So lets’s say: new country, new bank, no govt spending yet, no money yet. Bank creates money out of thin air (by lending). What’s to prevent govt from taxing some of the money created and adding to its reserves?”
What need would the govt have to confiscate the bank’s liability, its promissory note? Why would the government wish to have ‘reserves’ of bank-issued money? What can it do with it that it cannot do by issuing its own money? Who would want to borrow the bank’s money from the bank? To pay whom? Why would that party accept the bank’s money in lieu of the borrower’s own money (promissory note)?
Do you even understand what the purpose of a government issuing money is?
@wallflower: What is your point? Explain why, on earth, an entity that can issue its own liabilities at will and is guaranteed to have them accepted because it imposes, and collects on, non-reciprocal obligations payable ONLY in those liabilities it itself only issues (or causes to be issued) would ever NEED to confiscate or borrow those same, previously issued, liabilities in order to spend (using its own liabilities)? It can voluntarily bind and constrain its own spending, but it is not compelled in foro externo thereby.
“It’s not the immaterial objects that move, it’s the rights and obligations attached to them. ”
No, rights and obligations attached to immaterial objects do not move, either. The language is that of movement (convey, escheat, etc) but there’s no actual physical movement. Title ‘passes’ from entity A to entity B, even though no ‘movement’ in actual physical space occurs.
“‘Funding’ is … not just about ‘entries’ on balance sheets”
Yes, it is.
In the US, the debt ceiling, which was introduced by legislation, was put in place because some factions did not trust either the legislative or executive branches of the government not to spend without regard for consequences. This was introduced before a fiat monetary system had not yet been implemented. Since the debt ceiling was introduced by legislation, it can also be removed in the same way. The US Constitution only states that the government can always pay its debts. Therefore, it seems reasonable to conclude that the debt ceiling is a completely artificial restriction that has no relationship to the ability of the government to meet its payment obligations.
@GrkStav
“Explain why, on earth, an entity that can issue its own liabilities at will..”
First of all, if we’re talking US monetary system, it’s not about ‘an entity’, it is about two separate entities, two legal persons if you will (Treasury+Fed). Why on earth are things like that? I think Bill is right, ideology, fear of inflation etc. Secondly, currency&reserves are not ‘govt liabilities’. My point is that the so called ‘MMT consolidation hypothesis’ is wrong. MMT is not descriptive, is only normative, just as Francisco said.
You’re right, ‘passes/conveys’ is more appropriate than ‘moving’ when talking about rights and obligations. Still the focus is not on the objects or ‘entries on balance sheets’. Entries on a treasury
balance sheet could mean title in money or monetary obligations owed by the CB to the treasury (eg TGA). Two different things and two different kinds of monetary systems (consolidated vs non-consolidated). Which is it? You’d have to be aware of the effects of legislation to find out.
Neil
Nothing would destroy MMT’s credibility more than the Richard Nixonesque claim that “Its not illegal to issue and spend currency in breach of the rules if the law maker cannot enforce its laws.”
Which ever way you cut it it’s dangerous territory and I would hope you know it. You just don’t go there.
If we want to win, we have to change the rules.
Dear Francesco (at 2018/03/16 at 4:15 pm)
First, there is no MMT monarchy for there to be ‘royalty’.
Second, you said “The source of the funds is irrelevant (even if you believe the source is the sovereign)”.
I am sorry the nuance escapes you. That nuance is an essential insight of Modern Monetary Theory and is crucial to understanding the workings of the monetary system and what is and can be.
That is why I wrote the blog post.
It is like a neoclassical (mainstream) economist saying that capitalist ‘profit’ originates in exchange (a difference between sale price and unit cost). That is how it looks superficially but then we know to truly understand the source of ‘profit’ we have to analyse the production sector where surplus value is created.
I don’t intend to say any more on this topic at present except to conclude that it matters a lot what the source of funds is.
best wishes
bill
“The rule of law is man made and therefore a complex interplay of power and politics. It is not handed down from Mt. Sinai.”
Therein lies our differences.
Yes law is man made but once it is law it has been handed down from a constitutional Mt Sinai.”
Neil Wilson said:
Ellis Winningham describes this very well (among other aspects of MMT) in a series of videos in the “Real Progressives” YT channel.
I think he refers to commercial bank “money” (credit) being denominated in the Government unit of account, which is the USD in the USA.
Among the most difficult to convince of the reality MMT demonstrates, are those trained as securities brokers. These people seem to come from accounting backgrounds and have clearly absorbed the indoctrination that government spending is financed out of “Revenue” or “borrowing”. They seem believe that commercial banks are money issuers, alongside government.
Unfortunately, people coming from this background are highly influential in our communities and have a strong online presence as well. They present their securities credentials which the gullible accept as authority in these matters.
Most of them do not believe they are misleading people, they honestly believe the story they have been taught and really had no choice but to believe it in order to earn the credentials required to practice their occupation. The same goes for business and economics students who wish to earn a degree.
Prof Tymoigne, gets right down to the accounting and contractual details required to silence MMT criticisms from those with such training and indoctrination of the reality, both in the paper linked to above, and in his recent series of blog offerings on the new economic perspectives website.
It’s interesting that chiefs at the Fed knew exactly were the money comes from right from the start.
Laws do not constrain the U.S. Congress, since it MAKES laws and can thus change the laws. The U.S. Congress can override even Presidential vetoes of laws that Congress passes. The Executive cannot spend a single penny that has not been appropriated and authorized by the U.S. Congress. Nor can the Judiciary. The U.S. Congress is sovereign when it comes to ‘the purse’.
That is not correct concerning the USA. (It is much closer to the UK). Of course the US Congress is the primary sovereign, the strongest branch of government. But the Executive can and has spent money that was not appropriated by the Congress. It has done so at the order of the Judiciary.
The reason is that in US, unlike the UK, earlier congresses can bind later ones, if the earlier laws create obligations that are constitutionally protected. For instance, government debt or other obligations that judges have ruled are tantamount to government debt. Look up the 2004 Cherokee Nations case for one. There are precedents going back to John Marshall and the early 19th century.
Of course this makes the case for “the (voluntary) constraints don’t really exist” – better.
wallflower:First of all, if we’re talking US monetary system, it’s not about ‘an entity’, it is about two separate entities, two legal persons if you will (Treasury+Fed). … My point is that the so called ‘MMT consolidation hypothesis’ is wrong.
You can talk that way if you want. I think that legally speaking, the one legal person consolidation has a rather stronger case, but it’s a free country. But surely you agree one has to consistently talk about two entities or one entity. If one does so, one sees that the “consolidation hypothesis” is correct in either case. The only way to make the “consolidation hypothesis” false, is to surreptitiously think of the Treas + Fed as one in one area and two in another. This is not cricket.
Secondly, currency & reserves are not ‘govt liabilities’. That is just wrong or misleading. They’re one of these two entities’ liabilities. Saying the Fed is not part of the government isn’t really serious, the nonconsolidation hypothesis is more that the Fed is a part of the government that has mystical powers. And some currency is clearly Treasury liabilities.
Accounting as a discipline is dedicated to ensuring that every last penny in a set of accounts is truly accounted-for, and thus that (demonstrably) none is allowed to “disappear” illicitly into somebody’s pocket. In an imperfect world, it doesn’t always succeed (Enron?) but it earnestly tries to most of the time. To do this it has to adopt rigorous rules and conventions, some of which might appear artificial if not perverse if taken outside of that narrow context, but within it they serve an agreed common purpose nevertheless.
The problems arise when those, at least partly artificial and arbitrary, rules and conventions are applied unthinkingly and mechanistically in altogether different contexts and to make matters worse get politicised in the process. So we get bastardised or inappropriately applied accounting conventions being turned into political ammunition for use in inter-party slanging-matches and chest-thumping histrionics. All good entertainment for the public no doubt, but contributing little if anything to educating us in the realities of the public finances.
I don’t know what the answer is: we must have rigour in accounting but how are politicians to be stopped from behaving like politicians?
Some Guy, I would go further than you do in your riposte to wallflower. When the Fed was set up in 1913 by William Gibbs McAdoo, the Secretary of the Treasury, he made it quite clear that the central bank and its regional banks were parts of government. And that has always remained the case. They carry out distinct functions, but that does not alter the fact that both entities are arms of government. The UK case is a little different in the sense that the Bank of England did not become a government entity until it was nationalized in 1946. However, analogously to the US, the UK Treasury and the BoE carry out different financial functions. In the US, the legislative and executive branches of government, like their counterparts in the UK government, carry out different functions, but they nevertheless remain distinct arms of government. I honestly don’t see what is so difficult about this. I’m obviously missing something.
Mosler doesn’t say taxes don’t fund govt spending. Because obviously they do.
The finer point is that tax revenues don’t in any way determine or limit the govt’s capacity to spend, and when they do specifically fund something, it’s a political choice. Tax revenues are essential in the sense that the liabilities are necessary to drive demand for the currency. Taxing to stabilize the currency is the first reason Ruml gives.
The problems I encounter when discussing MMT are:
The notion that deficit spending debases the currency.
The notion that all jobs must be created by the private sector.
The notion that any and all inflation is the road to disaster.
The notion that the only stable trade model for a country is as a net exporter.
Sam:
Here is the thing though Sam. To say that “tax revenues don’t in any way determine or limit the govt’s capacity to spend”, is the same thing as saying taxes don’t fund government spending. Having said that, whenever in discussion with anyone I usually go the route of the former. To state the latter simply brings on useless argument and insults.
Of course, different countries have different monetary systems and arrangements. Where I come from, Treasury has a central bank overdraft. Therefore, at the start of a new fiscal year government is in fact deficit spending. I would think that such a situation lays to rest the “tax funding” argument.(in this case)
I’ll give you that (apart from what I struck out). Here is what he wrote in T7DF:
(The text is easily findable online)
The voters have to be educated in all this. That’s part of what Bill is trying to do, I guess. It might not stop politicians from behaving like politicians but at least they can be called out.
PhilipO
I’ll go with Mosler. If the other serves you well in discussion, fine. IMO, the purchasing power removed through taxation relates to the sectoral balances is therefore not irrelevant. The entire exercise is more abstract than “common sense”.
Mike Ellwood
Mosler stated that explicitly on a video. If I could recall, I’d cite. I know the seven myths well, thanks.
Francisco J Flores,
“My beef: The narrative: “Taxes and borrowing don’t fund spending.” I find to be clearly false under current US LAWS.”
Even under current US Laws, such claim is still valid. Yes, even with the Debt Ceiling and prohibition of significant overdraft at the Fed it is correct to say that taxes and borrowing don’t fund spending in the sense that the government can spend even without taxation or borrowing.
Of course, taxation is needed in order to create demand for the currency and in order to transfer labour, products and services from the private sector to the public sector. Also, the public debt is an interest bearing investment for the bondholders, which may or may not be something good to the society (who am I to know?).
The Debt Ceiling or overdraft prohibition doesn’t change the fact that the Treasury can issue debt to the Fed (via banks that act as intermediary). In return for the bonds, the Fed issues new money out of thin air and gives it to the Treasury.
The debt between Treasury and the Fed is just accounting jugglery. The fact is that any interest that Treasury pays to the Fed (through the bonds) will later be transferred back to the Treasury. As you can see, in practice, this debt “doesn’t exist”. Also, bonds held by the Fed are not accounted in the national debt.
As you can see, the Treasury doesn’t need to overdraft to get new money, and, because bonds held by Fed are not accounted in the national debt, such rules are meaningless. Actually, if you get some statistics, you will see that the federal government does issue a lot of money out of thin air each year.
The Debt Ceiling affects the capacity of the government to offer bonds to the private sector (not to the Fed) and to keep the interest rate at its target. The overdraft prohibition just make money issuance a more complex and opaque business.
@some guy
“I think that legally speaking, the one legal person consolidation has a rather stronger case”
Great. I’d like to hear that stronger legal case for that one legal person fulfilling the functions of the US monetary system. I say that, legally speaking, there are different legal persons, one of which is a creature of constitution (T) and the other the creature of legislation (Fed). The acts of one creature don’t bind the other. So legally speaking, pretty much independent agents.
What is your legal argument?
“You can talk that way if you want.”
I think I really should, unless you succeed in making your case for the US monetary system as one legal person. If you manage to do that, then I really shouldn’t.
“But surely you agree one has to consistently talk about two entities or one entity.”
Yes, I agree, as long as we stick to discussing the US monetary system and not wander into constitutional theory, international law, litigation against the federal govt etc. We can talk about ‘govt’ as a unit in all sorts of ways, without being inconsistent with our view of a non-consolidated T and Fed. In my comments I was talking about the US monetary system.
“The only way to make the “consolidation hypothesis” false, is to surreptitiously think of the Treas + Fed as one in one area and two in another. This is not cricket.”
I don’t cricket so I don’t know. Consolidation hypothesis states that there is no functional difference between a system where T does all the work and a system where the CB and T are legally and functionally independent. So the hypothesis would be wrong if there was a difference. I think there is, so that’s my point.
“Secondly, currency & reserves are not ‘govt liabilities’. That is just wrong or misleading. They’re one of these two entities’ liabilities.”
Let me state my point clearer. Currency and reserves are not liabilities whatsoever, regardless of their issuer (deposits at commercial banks are an entirely different matter). I respectfully disagree with the MMT doctrine on that, and I think it is a superfluous point for MMT, even more than the consolidation hypothesis. Although…they are closely related, aren’t they?
“Saying the Fed is not part of the government isn’t really serious”
Nobody is saying here that the Fed is not part of the ‘govt’. It clearly is. So is the Ohio Court of Claims, the US Postal Service and the Subcommittee on Immigration and Border Security as well as many, many other creatures of public law. What isn’t part of the ‘govt’ really? That’s not the issue. Statements about parts of government are not necessarily true for the government as a whole (beware the ‘fallacy of composition’). Eg just because the Fed is insolvency proof and can create ‘money’ out of thin air without being constrained by ‘revenues’ does not necessarily mean that the government as a whole cannot go insolvent or that it is not revenue constrained. Even in the trillion dollar platinum coin scenario, in absence of legislative intervention, the Fed would still have to want to buy it, I think.. (but who really knows?)
“…the nonconsolidation hypothesis is more that the Fed is a part of the government that has mystical powers”
I don’t follow.
@larry
“The UK case is a little different in the sense that the Bank of England did not become a government entity until it was nationalized in 1946.”
It doesn’t matter that much if it is nationalised or not. What matters more is whether that entity is vested with powers by the legislature. For example in the UK, the Financial Conduct Authority is still a private company judging by the ownership structure, but it still can function as a part of the government.
As for the rest, I completely agree with mr William Gibbs McAdoo.
As a youth on joining the Labour Party Young Socialists I was recruited into
the militant trotskyite entrist group.For them worse than than the reactionary
capitalists were the sects. In true Monty Python life of Brian mode the popular
front of judea are worse than the romans according to the Judean popular
front.
I have these flashbacks when i see these debates .’These people’ who have the
audacity to be broadly in agreement with MMT but do not agree on every point
in the program are vilified [like me] they just don’t get it, cannot see the holy grail.
Particularly galling is assertion that MMtiers are the true progressives especially
when some seem do not even agree with progressive taxation.
By the way I agree that the legal restraints on government spending are irrelevant
come war time or financial crisis they are ignored think QE as others have said.
Having said that no doubt Bill wants to change the law so governments do not have
to issue bonds to cover spending/tax deficits so there is very little between Mr Flores
and him in policy there.
Larry;
RE: “… Logic 101 does not seem to be cognitively available to everyone, even to academics. … I said in different words essentially what you have just said but only receive ad hominem rebukes. Not even counterargument. Frustrating does not adequately characterize this situation. … …”
• Don’t be a Dummy.
RE: “… In the US, the debt ceiling, which was introduced by legislation, was put in place ……. Therefore, it seems reasonable to conclude that the debt ceiling is a completely artificial restriction that has no relationship to the ability of the government to meet its payment obligations.
• Exactly. But the Debt Ceiling is current LAW. Which is enforceable until changed, and until then: “Taxes and borrowing don’t fund spending.” Is FALSE.
RE: … Some Guy, I would go further than you do in your riposte to wallflower. When the Fed was set up in 1913 by William Gibbs McAdoo, the …… out different functions, but they nevertheless remain distinct arms of government. I honestly don’t see what is so difficult about this. I’m obviously missing something. …”
• Laws. Don’t break them. They can force you to borrow or tax in order to spend.
Professor: (Bill):
I continue to disagree with you on what matters here. You are focusing on the nuances of where money comes from and what it is etc. I do understand all that. And I assume that your narrative and focus is due to your desire to bring home the point that the sovereign does not NEED to borrow or tax in order to spend. But in doing so you are glossing over the legal constraints in place NOW. Of course I understand the desire to minimize the hurdles to get to MMT-based policy prescriptions -> a better world. But in doing so MMT is getting the narrative lost in the nuance. In stating that “Taxes and Borrowings don’t Fund Spending” due to the primal source of money, MMT states a nonsensical-sounding assertion negatively impacting its acceptance among both non-MMT economists and the general population.
Neil Wilson:
RE: “… The way I deal with this entire debate is to get the other side to identify who is the person or entity that can enforce the condition and make it stick. Who gets to say ‘no’ and stay in a job. What backup can they call on? …”
• In the US the Control point is Congress. If say a Republican Congress was trying to force the first say Hispanic president to default on the debt just to embarrass him or her, and the President said F-You and forced the Fed to gift Treasury money, there would quickly be Congressional hearings and impeachment. There would be repercussions but it’s hard to say. We were pulling for our first Negro president to whip out the Trillion dollar Coin, and overrun the Debt Ceiling. That would have been the Baddass, mthfkin, negro, Kenyan thing to do. He would have been impeached, found not guilty, and won the Congressional elections by a landslide.
RE: “… Probably also worth mentioning that any ‘constraints’ apply at the end of the day’s banking – after clearing has run and completed. That’s the only point that the checks are made.
• Perhaps, but at the end of the day, there is a overdraft limit at the Fed – per Eric Tymoigne, I think $5 billion. That’s a rounding error. Hence, have to borrow or tax in order to spend. Say It!
RE: “… “I The rule of law is man made and therefore a complex interplay of power and politics. It is not handed down from Mt. Sinai. … …”
• Breaking laws makes you vulnerable to getting sued, arrested, or impeached.
RE: “..Where does the bank get the central bank money to pay the Treasury? It doesn’t have any. Who does it get it from. Answer: the government sector .
Central bank money and commercial bank money are different currencies. They are linked together in a nation because the commercial banks ‘peg’ their own currency to the central bank with that nation. … …”
• I think you are mistaken. Banks create money out of thin air and don’t need reserves or anything else to create loans and deposits. They simply Debit: Loan Receivable and Credit: Deposits.
• Now again: with new country, new bank, no reserves, no money. Bank creates $10 million in loans and deposits. Govt feels like taxing $1 million deposit holders just for the hell of it. (It doesn’t need to of course, they just feel like it because the holders were not obsequious enough.) Credit: Treasury Account at Central bank, Debit :Bank Account at Central Bank.
Mel:
RE: “… I had the impression that the Troubled Assets Relief Program was the perfect
I suspect that that last holdout on Twitter was a troll, remaining purposely obtuse to keep the attention coming. … …”
• TARP was funded through borrowings.
RE: “… You can never explain things to people who are just unwilling to engage in an honest dialog. But there are people out there who are willing to talk but dubious about MMT’s position on things. I think Mel’s discussion about TARP is generally the way that works …… the potential for overt monetary finance (or whatever term you prefer). It’s a relatively short path from that point to the limitation or elimination of government issued debt. Reasonable people can be convinced, but take it in short steps. … …”
• RIGHT NOW, the US govt Treasury needs to borrow or tax in order to spend. The laws can be changed of course, but RIGHT NOW, RIGHT NOW, the govt needs to borrow or tax in order to spend.
RE: “… I think Bill’s point is that these constraints are self-imposed legal obligations and can be changed whilst yours is that these constraints have become so normalized that most people accept them as universal truths. The law makers are unlikely to change the rules of the game in the near future and so any MMT inspired policymaker has to operate in a constrained space.
• The LAW has to be changed. I don’t need to be sold on MMT. But in order to implement it, the LAW has to be changed. The LAW is a thing. It has to be changed. UNTIL THEN, the statement: “Taxes and borrowings don’t fund spending is FALSE.
RE: “… I hope your being kind to each other because you both have a point….”
• He’s my hero.
RE: “… “Only if there is an entity that is prepared to enforce that law. There is no law without enforcement. The way I deal with this entire debate is to get the other side to identify who is the person or entity that can enforce the condition and make it stick. Who gets to say ‘no’ and stay in a job. What backup can they call on?…”
• Laws are enforced by men with guns.
As to the causality of taxes and government spending this is impossible to assert
in a dynamic interdependent system.Like the chicken and the egg taxes and governmnet
spending evolved together. MMT puts this best when it states that taxes DRIVE fiat currency
impossible for it to go anywhere without taxation.As Bill puts it so succinctly its a wash.
Abstract systems which economists are so fond of, Bills example of a government with one
user of its currency being an example, are totally irrelevant.Indeed it seems that the real
problem pure MMTiers have with Mr Flores is at the abstract level -he does not get the insight.
MMT as an occult [hidden] knowledge which he has failed to be truly initiated in.
Of course in the real world it comes down to power and the government always has the
power to spend its own fiat currency as long as it has the power to demand taxes in
that currency.
GrkStav:
RE: “… @Francisco
RE: “… If I make a personal law to the …… on Ebay I engage in, does that mean that I am actually constrained as to how much I can spend on actual entertainment other than by the total available monetary resources I have, in all my funds, accounts, etc?…”
• Your constrained by EBay revenue.
RE: “… What you do not seem to be getting is that there is a difference between saying “federal government spending is, at present, constrained not to exceed the number of U.S. Dollars in specified Federal Government accounts at the Federal Reserve Bank” and saying that “federal government spending is, at present, FUNDED by the U.S. Dollars in specified Federal Government accounts at the Federal Reserve Bank”….”
• There is a difference. Stmnt 1 is aconstraint, Stmnt 2 is a result – taxes/borrowing fund spending.
RE: “… All of these are ‘entries’ on balance sheets. There are no ‘objects’ moving, circulating, pouring into and out of anything. All of these are physicalist metaphors (some hydraulic, other locomotive, etc). Money is literally no(t an) object.
• If money is not an object – my congratulations to you Sir. If there are legal constraints, Fed Res Act, debt ceiling, Coin ambiguity – then they force statement: Taxes/borrowings don’t fund spending, to be FALSE.
RE: “… Also, you can attend MMT conferences till the cows come home. That doesn’t mean you’re “all over MMT” if you do not get it.. … …”
• Trust me, I’m all over MMT.
RE: “… Laws do not constrain the U.S. Congress, since it MAKES laws and can thus change the laws. The U.S. Congress can override even Presidential vetoes of laws that Congress passes. The Executive cannot spend a single penny that has not been appropriated and authorized by the U.S. Congress. Nor can the Judiciary. The U.S. Congress is sovereign when it comes to ‘the purse’. … …
• Exactly! And if Congress says: 1) Fed can’t fund Treasury directly (Federal Reserve Act), 2) Can’t exceed Debt Ceiling (Debt Ceiling Laws) , and 3) Coin is ambiguous, THAN: You have to borrow or tax in order to spend.
RE: “… “So lets’s say: new country, new bank, no govt spending yet, no money yet. Bank creates money out of thin air (by lending). What’s to prevent govt from taxing some of the money created and adding to its reserves?”
RE: “… What need would the govt have to confiscate the bank’s liability, its promissory note? Why would the government wish to have ‘reserves’ of bank-issued money? What can it do with it that it cannot do by issuing its own money? Who would want to borrow the bank’s money from the bank? To pay whom? Why would that party accept the bank’s money in lieu of the borrower’s own money (promissory note)?… Do you even understand what the purpose of a government issuing money is? … …”
• Because the govt felt like it. This is just a thought experiment to demonstrate that the statement heard over and over that govt has to spend first before it can tax is also not technically true. It should probably be fixed unless somebody can demonstrate its veracity.
RE: “… @wallflower: What is your point? Explain why, on earth, an entity that can issue its own liabilities at will and is guaranteed to have them accepted because it imposes, and collects on, non-reciprocal obligations payable ONLY in those liabilities it itself only issues (or causes to be issued) would ever NEED to confiscate or borrow those same, previously issued, liabilities in order to spend (using its own liabilities)? It can voluntarily bind and constrain its own spending, but it is not compelled in foro externo thereby. … …”
• The govt doesn’t need to —> unless it constrained itself through limitations on Fed funding Treasury. (See: Federal Reserve Act).
kevin harding says:
RE: “… As to the causality of taxes and government spending this is impossible to assert
in a dynamic interdependent system.Like the chicken and the egg taxes and governmnet
spending evolved … to power and the government always has the
power to spend its own fiat currency as long as it has the power to demand taxes in
that currency. … ”
• I get the insight plenty well thank you. My problem is with the wording. Many MMT folks keep repeating that “taxes and borrowing don’t fund spending”. This statement is FALSE in the US under current LAWS. Perhaps several layers down, in a nuanced, abstract, metaphysical dimension it can be considered true when looked at through a certain prism. But on its face, its FALSE. But of course if we are going to contemplate it at MMT lectures and exclusive blogs – fine. But if you are going to try to convince business people, working people, govt policy makers, politicians –> You better fricken speak English or else wait another century before you get wide acceptance.
PhilipR:
RE: “… Neil
Nothing would destroy MMT’s credibility more than the Richard Nixonesque claim that “Its not illegal to issue and spend currency in breach of the rules if the law maker cannot enforce its laws.”
Which ever way you cut it it’s dangerous territory and I would hope you know it. You just don’t go there.
If we want to win, we have to change the rules. …”
“… “The rule of law is man made and therefore a complex interplay of power and politics. It is not handed down from Mt. Sinai.”
Therein lies our differences.
Yes law is man made but once it is law it has been handed down from a constitutional Mt Sinai.”
• Exactly
J Christensen
RE: “…Among the most difficult to convince of the reality MMT demonstrates, are those trained as securities brokers. These people seem to come from accounting backgrounds and have clearly absorbed …….
Prof Tymoigne, gets right down to the accounting and contractual details required to silence MMT criticisms from those with such training and indoctrination of the reality, both in the paper linked to above, and in his recent series of blog offerings on the new economic perspectives website.
It’s interesting that chiefs at the Fed knew exactly were the money comes from right from the start. …”
• Can you point out Eric’s exact wording indicating that under current laws, Borrowing and Taxing do not fund spending:
http://www.levyinstitute.org/pubs/wp_788.pdf
http://neweconomicperspectives.org/category/eric-tymoigne/page/3
Some Guy
RE: “… Laws do not constrain the U.S. Congress, since it MAKES laws and can thus change the laws. The U.S. Congress can override even Presidential vetoes of laws that Congress passes. The Executive cann……….. century.
Of course this makes the case for “the (voluntary) constraints don’t really exist” – better.
… …”
• Laws constrain. Current laws make the Statement: Taxes and Borrowings don’t fund spending FALSE.
RE: “…wallflower:First of all, if we’re talking US monetary system, it’s not about ‘an entity’, it is about two separate entities, two legal persons if you will (Treasury+Fed). … My point is that the so called ‘MMT consolidation hypothesis’ is wrong.
You can talk that way if you want. I think that legally speaking, the one ……..es. Saying the Fed is not part of the government isn’t really serious, the nonconsolidation hypothesis is more that the Fed is a part of the government that has mystical powers. And some currency is clearly Treasury liabilities. …”
• The consolidation is a useful analytical tool. But it facilitates saying FALSE statements which causes MMT to lose credibility.
So if the current law required the president to stand on his head for three minutes before spending commenced we would have to conclude that standing on his head ‘funded’ that spending? That seems to be your argument Francisco. And when it is pointed out that sometimes the spending happened in the absence of that headstand what do we conclude? Probably that the ability is there regardless of the constraint of the current law. Why is that so difficult to understand?
Dear kevin harding (at 2018/03/17 at 3:18 pm)
You wrote in the context of this particular blog post content:
No one is vilifying anybody.
There is a body of intellectual work which the original developers determined to collectively refer to as Modern Monetary Theory (MMT). That body of work has requisite concepts, definitions, language and terminology, levels of abstraction, causalities implied or otherwise, and theories.
Much of it is derivative (the standing on shoulders argument). Some of it constitutes a new contribution.
But the body of work is coherent and stands as is.
One can disagree with its theory or praxis. Fine. The balance of argument sorts that out.
Others can choose to attempt to redefine it (bring it back into a mainstream paradigm, for example) – which will never succeed. The mainstream macroeconomics is built on a totally different approach to economic thinking.
Others can tinker around the edges and claim bits of the body of work they do not like particularly, for whatever reason, are not part of the body of work (viz: debates about the place of a Job Guarantee). They can do that but they cannot then say they are operating within the MMT paradigm – a body of connected knowledge (not a cult).
Then others can impose superficial observations that appear to negate statements made within that body of work, these statements being based on deeper levels of abstraction which are nonetheless binding on observational space. That is what this current interchange has been about. The originators of the body of work are entitled to impose standards on what goes for MMT and what doesn’t. You can disagree with those standards and call them cult reinforcement or whatever other derogation you wish to deploy.
But standards ensure the body of work is not diluted into meaningless statements, error-ridden statements, and other deviations which undermine the veracity and internal consistency of the body of work.
best wishes
bill
Francisco J Flores,
I think that I can see what the problem is.
Let’s start with a simple question. What is a dollar, the object of taxation and borrowing which do / don’t fund spending?
It is a piece of paper (in the US), printed with a green ink, etc… How does this relate to the questions you have asked? One may say that describing physical qualities of the currency is not relevant. I would say that the same applies to detailed legal arrangements related to debt ceiling. The question Bill answers is purely economic. From economic point of view the observation that the dollar is green is as relevant as the statement that the US government legally needs to tax or borrow (or mint a platinum coin) in order to spend.
We need to distinguish between currencies based on commodities (metals) and fiat currencies. Even if medieval European monarchs were able to mint currencies which face values would be above the value of the metal (by debasing the coins), this wasn’t “good enough” and they often needed to either borrow or plunder. In contrast, the first monetary system based on fiat money has been introduced in China in 11th century (and followed much earlier experiments with deer skin money). Currency is not the same as money as certain forms of debt contracts denominated in currency also act as a money but let’s concentrate only on transactions involving the government.
If a European medieval king wanted to hire mercenaries he had to acquire pre-existing gold (or silver). He could have borrowed (and later beheaded the banker or tried to sell his kingdom for a horse). Fiat money was introduced in Europe in 17th and 18th centuries to solve precisely the same problem – the governments wanted to pay for a war or for other expenses but had a difficulty acquiring precious metals so they forced subjects to accept paper object meant to have value and accepted returning these objects to extinguish taxation obligations. Without the second part (taxation) a paper currency would quickly lose its value what has been demonstrated during Civil War in the US. In the periods of peace and prosperity paper money would be made again convertible to gold (sometimes silver) at a predetermined price. If the value of paper money was anchored to the value of precious metals, the amount of paper currency would have to be limited. Governments would still need to borrow by issuing debt instruments (bills or bonds) and paying interests to encourage parting with the currency. Prices of existing bonds would fluctuate and governments could default. But if the governments needed to spend more they would issue more debt (like during WW1 or WW2) and the central bank would stabilise the price of bonds (and the long-term interest rate, the reciprocal of the discount). Was the American government constrained by lack of dollars during any of the recent wars? These debt instruments would actually be as liquid as paper money. From social accounting point of view currency and bonds are central government sector (bank+treasury) liabilities and debt instruments are close equivalents of currency. In the late 1960s some governments demanded gold from the US Treasury in exchange for dollars and this convinced Richard Nixon to end the era of gold standard for good. This marked the end of the transition to pure fiat money, only convertible to itself at a fixed rate.
From the functional point of view the causality is spending money (or other government liabilities) into existence first, taxation later.
I was actually born in a country called a “People’s Republic of …” and I could not imagine a non-fiat money. From my early childhood I remember aluminium coins stamped on both sides which I would insert into a ticket machine to get a train ticket, nobody would have asked whether the government would need to borrow these objects. This would have made zero sense. They could have minted more aluminium objects if they needed. But living in the capitalist West I can understand that people could have heard old stories or fairy tales about gold or whatever what has to be acquired by the King in order to be spent.
The actual issue is much more serious and convoluted. It is a theory called the loanable funds theory, killed and resurrected as an intellectual zombie several times. Last time it has been restored in a neo-Wicksellian form (see for example “Interest and Prices, Foundations of a Theory of Monetary Policy, Michael Woodford” which is one of the foundation text of the modern New-Keynesian school).
They claim that if the government “prints” money and the central bank doesn’t increase interest rates the inflation will follow as “printing” (or deficit-spending) would shift the interest rate away from the natural rate corresponding to rate of profit on physical productive capital determined by the marginal productivity of capital (what itself is not supported empirically). If the central bank lifts interest rates it effectively crowds out private sector borrowing. So effectively the government forcibly acquires pre-existing savings by the act of deficit spending – the same as taxation. I won’t spend a few hours debunking this theory – Bill has already written about it. Let me just mention that it hinges on invalid “rational expectations” hypothesis and in normal circumstances developed economies have enough spare productive capacities to absorb moderate deficit spending without any inflation so central banks don’t need to react with the Taylor rule to deficit spending. (Not only in a “liquidity trap”).
Anyway – this is what the problem is, not whether dollar notes are green or whether the members of the Congress handpicked by Koch Industries decide to lift the debt ceiling what would then allow the US Treasury to borrow more money from China in order to build new aircraft carriers meant to be targets to new Russian hypersonic missiles.
Bill’s intervention a few posts earlier strikes me as a brilliantly succinct elucidation of the MMT school’s “manifesto”. (“School” as in “school of thought”:- a self-referring body of theory possessing cogent explanatory power wherewith to abstract an internally-consistent depiction of the – far more complex – reality which is the real world, so as to be able to make its workings more (but never completely – that being impossible by definition) intelligible).
Another example would be the Austrian school’s. I once read Huerta de Soto’s entire volume through from cover to cover and found it riveting – for so long as I remained under its spell (the spell duly wore off).
Those two are chalk and cheese, But each of the other schools too is equally distinct although they often overlap. What is the layman (an averagely-literate politician for example – there are some) to make of all of this learned, painstakingly-constructed and cogently-presented scholarship (which is what it is)?
Bill is right:- s/he is not at liberty to command the scholar (the innovator, if you will) to adapt or abandon the foundations of the scholar’s theoretical structure, in favour of others which the critic happens to espouse. The critic is at liberty to propound different ones, ab initio, and to argue from those to different conclusions and, hence, different prescriptions.
But that still begs the question as to how wise it is of a scholar – if he or she has as an aim to persuade non-scholars as to the rightness of the political prescriptions the scholar arrives at – to adopt so completely “unbending” (as I recall one commentator on Bill’s blog once characterising it) a stance as Bill does – and other MMT luminaries too – in regard to the theoretical structure? That, it seems to me, is the question which Francisco J Flores is relentlessly hammering home, and I think he’s right to do so.
@ Adam K
“What is a dollar, the object of taxation and borrowing which do / don’t fund spending? It is a piece of paper (in the US), printed with a green ink, etc…”
No it isn’t. A dollar is never a piece of paper. I think you got this all wrong.
“The question Bill answers is purely economic.”
No it isn’t.
I don’t like appeals to authority as a primary argument but since Bill and others have already convincingly covered the logic maybe it’s worth hearing what the Bank of England have to say on the matter:
http://www.taxresearch.org.uk/Blog/2017/09/19/the-bank-of-england-admits-monetary-policy-does-not-work/
“Regarding whether taxation is necessarily required to finance government spending, the answer is no, it is not. Along with raising money via taxation, governments can borrow money and they can create money outright.”
This is a rather strange statement and I think it is so for good reason. The BoE spokesperson is under pressure from a member of the public to provide factual responses to their questions but also under pressure from the neoliberal elite to avoid admissions of reality that would amount to big wins for heterodox economics.
UK public sector communications rules are such that public sector bodies can be forced to tell the truth and reveal any documents relevant to any question following a Freedom of Information Request. Therefore UK public bodies, unlike politicians who lie all the time, can be put in very difficult spots if asked specific enough questions. It therefore behoves them to avoid FOI requests (and forced release of documents) by placating the public with reasonable answers. It also reflects badly on the organisation and individuals involved if their initial answers are proved innacurate by subsequent release of documents via FOI. So in this case, while an FOI has not been issued, the BoE is doing its best to cover itself in the event one is requested in future.
I think the BoE answer is deliberately given in the general case (“governments can…”) rather than “UK government can…” in order to give them wiggle room as to the implications in the specific UK situation while still allowing them to answer the question honestly.
In a similar vein the BoE was careful to say that while taxes aren’t necessary to finance spending it is nevertheless possible to finance spending via taxes and/or borrowing.
They’ve done a great job of being honest while protecting the status quo but, try as they might, they cannot avoid the inexorable logic that if, as they accept, a government can create money outright then the only thing that is necessary to finance that government’s spending is its capacity to create money outright. Logically tax and borrowing can only be incidental to government spending in that case.
The rest of the letter (see link) concerns UK Quantitative Easing. Therefore it is reasonable to suggest that, despite the careful wording referring to “governments may create money outright” BoE is implicitly accepting in the correspondence regarding QE that the UK Government is an example of a government that can create money outright.
The only place BoE can go to avoid this implication and thus avoid undoing the benefit of it’s careful wording would be to claim (correctly) that the reserves created to purchase the £435 billion of old Gilts (UK bonds) don’t amount to newly created financial assets but were merely an asset swap.
However, this then leaves them open to accepting this line of reasoning: if QE is an asset swap then any bond issuance is also just an asset swap which begs the question – where did the reserves to be swapped originate? The answer can only be the BoE as the monopoly issuer of BoE reserves (which they admit BoE is here: https://www.google.co.uk/url?sa=t&source=web&rct=j&url=https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf&ved=2ahUKEwjN_dLJjvPZAhVmC8AKHcBJDhwQFjADegQIABAB&usg=AOvVaw0-He_Xih1Kmt-s6mJg-RF3)
This leaves the argument that UK government needs to tax or borrow to spend hanging by a thread only one move away from checkmate. The only escape from this trap is for the BoE to claim that it is independent of Government.
Unfortunately for the neoliberals the reprieve is short lived. The killer blow comes from a look at the UK Whole of Government Accounts which conclusively demonstrate that financially the BoE is not independent from the Treasury (thanks Neil Wilson!):
http://www.3spoken.co.uk/2014/03/uk-whole-of-government-accounts-some.html?m=1
This is backed up by the fact that BoE only became nominally “independent” in the late ’90s and demonstrably has been instructed directly by government both to commence QE and then to transfer interest paid on its newly acquired Gilts back to the Treasury.
As far as I am concerned this then is absolutely irrefutable proof that the general case as stated by MMT defacto applies in the UK right now: a sovereign currency issuing government with a consolidated Treasury and Central Bank.
You can all continue your archane legal arguments vis-a-vis the US situation but I’m confident I can persuade any reasonable person in the UK that MMT’s general case applies.
Also Bill, please, if you have time, would you briefly outline (or link to) the different ways Treasury and Central Bank can circumvent self imposed constraints like: no-overdraft and no direct funding?
I’m familiar with the method by which the Central Bank creates new reserves and uses them in repurchase agreements (repos) in order to ensure sufficient private sector liquidity prior to Treasury issuing new Government Bonds via auctions. I find this is excellent ammunition for arguments with particularly stubborn people. More of the same would probably be overkill but if an audience are listening to your argument with an MMT sceptic then overkill can be good rhetoric particularly if some in the audience are not fully following the logic.
Many thanks!
Bill ,hopefully not for a very long time, but one day you and other originators of MMT
will sadly be no longer be around and your ideas will still be around. Ideas once born
escape ownership.Coherence is a matter of opinion.
I do not claim to be an MMTier although i do agree with the insights of Chartalism
about the nature of fiat currency[vertical and horizontal transactions etc].I also agree
with advocating a political economy an economy which serves people other than the
other way around.
I hope your political and economic ideas gain real traction at government level
if they do now doubt many in the future many will lay claim to your legacy but they
will still be arguing over your bones.
But when you add a new installment to your ‘with friends like these ‘ series of blogs
I will groan inside with sectarian trotskyite deja vu .
Francisco J. Flores:
“I think you are mistaken. Banks create money out of thin air and don’t need reserves or anything else to create loans and deposits. They simply Debit: Loan Receivable and Credit: Deposits.”
Almost. They create bank liabilities out of thin air, that we use for “money”. They are different from reserves or currency, which banks can’t create from thin air. I’m pretty certain you know this.
wallflower,
It looks that you have taken the bait regarding dollar as a piece of paper. Let’s say I have one Australian dollar in front of me. It is a metal object. Can you disprove this? We can therefore talk about multiple aspects of the same object, category or phenomenon.
Of course you can find legal arguments that fiat currency is not a liability and that the Treasury and the Fed cannot be aggregated into one Government sector. It well might not be the case in a legal sense. From legal point of view waterboarding was not a torture and people who organised it have been promoted – this is how much the American democracy and the legal system are worth to me, sorry about this.
The issue whether taxes and borrowing fund government spending or whether spending drives taxation is macroeconomic – how the fiat monetary system works from the functional point of view, whether A causes / determines B or B causes / determines A. Whether the government needs to acquire pre-existing assets in order to exchange these assets for goods and services from the private sector or whether by spending (which may be offset by borrowing) it creates assets for the non-government sector and simultaneously exchanges these assets for something else. We need to look at what the monetary systems in China, Russia, Iran, Japan and the US have in common. Legal arrangements determine how things are supposed to work – all these countries have quite similar arrangements, they have their own currencies, central banks and treasury departments or equivalents. However sometimes things do not work as intended for example both Russia (see Novokmet, F., Piketty, T., Zucman, G. From Soviets to Oligarchs: Inequality and Property in Russia, 1905-2016) and Iran are affected by endemic capital flight (rich people save in foreign currencies and invest abroad because they don’t want their financial assets to be seized or debased). We can then identify this as a very interesting economic phenomenon seriously affecting what respective governments can do as they constantly fret about limited foreign reserves, to the extent they may want provoking foreign governments to impose sanctions on their own citizens abroad. So looking at the layer of legal arrangements does not tell us enough about how the system really works.
An interesting argument about causality in regards to private sector investment, profits and saving has been presented by Michał Kalecki in Theory of Economic Dynamics (1954) (Keynes also wrote about this issue but I like Kalecki’s explanations more). Kalecki states that “it is clear that capitalists may decide to consume and to invest more in a given period than in the preceding one, but they cannot decide to earn more” (p. 46). Governments plan spending for the year ahead but how much taxes will be collected can only be forecast, not determined in advance. How then can one claim that taxes and borrowing fund spending? Are physical dollars collected and borrowed in 2017 spent in 2018? Obviously, if there is a shortfall in collecting taxes in 2018 and the private/foreign sector’s portfolio allocation at the currently set interest rate / exchange rates does not include more currency, then the government has to flog more bonds – and it will always succeed, maybe with a little help from the central bank (even if this help is indirect).
The issue with New Keynesians is that they might kind-of agree with all of this. Paul Krugman admitted that a government can “print” money (even if this is not the most appropriate term). But for New Keynesians the system “in the long run” behaves “as if” saving financed investment and taxation + borrowing financed government spending. These are purely neoclassical assumptions stemming from the loanable funds theory. Debunking these myths is far more relevant that fruitless legal debates stemming from the American litigation culture. Again sorry about this, it is not personal.
@Francisco J Flores
“Laws constrain. Current laws make the Statement: Taxes and Borrowings don’t fund spending FALSE.”
No, it doesn’t! The Fed creates new money of thin air and gives it to the Treasury even with current US laws.
I seems you understand most MMT claims, so it makes me wonder why you can’t see that… Maybe that is happening because of all the unecessary complexity that such laws impose in the system.
With a vertical reference to a consolidated approach of government spending (Tr,CB). A driving feature maybe to draw a distinction at the most basic level of separation.So if the gasoline car is the economy,then Taxes are the friction component (Brakes). In so Gov spending (adding fuel,fiat) in this case could be seen as the Accelerator pedal.Where and Gov borrowings is the forward air flow to cool the motor. And not a necessary component to operate as the electric fans can do the cooling.
Given then it would be irresponsible to use a car safely without Brakes and impossible without the Accelerator.Where as the former’s subtract/erase speed which is not stored,only measured/recorded on gauges to an operational effect.
In-noting-This gasoline car example will not explain the whole understanding of Macroeconomic functions.Nor will it work for a full electric car as they store braking as charge.
But one could look at a Hybrid car, where the horizontal battery/electric motor side is the private sector that has to store savings or credit more to move,and can run out of both.
But best read Bill’s complete writings for a complete understanding.
@Adam K
“It looks that you have taken the bait regarding dollar as a piece of paper.”
Yes, you got me, I’ve taken the bait in calling your statement wrong.
“Let’s say I have one Australian dollar in front of me. It is a metal object. Can you disprove this?”
If I forge a virtually identical metal object and exchange it for your dollar, would you still say you have a dollar? If tomorrow the Australian govt effects a currency reform and your coin is no longer good to pay for your taxes, would you say you still have a dollar? And since we are talking about having a dollar, what exactly do you mean? You don’t own that metal object. That is govt property, and if you destroy it you will commit a crime. So then what exactly do you own when you own a dollar? There, I’ve disproved that.
“How then can one claim that taxes and borrowing fund spending?”
Well if the TGA balance is $1 million and the Treasury wants to spend a trillion dollars on infrastructure but doesn’t want to tax or borrow, how does it go about it?
“Obviously, if there is a shortfall in collecting taxes in 2018 and the private/foreign sector’s portfolio allocation at the currently set interest rate / exchange rates does not include more currency, then the government has to flog more bonds”
Well, that’s borrowing alright. However, mind the debt ceiling (and that’s a legal matter btw)…
“From legal point of view waterboarding was not a torture and people who organised it have been promoted – this is how much the American democracy and the legal system are worth to me, sorry about this.”
No actually that’s wrong. We digress, but US had a lease on Guantanamo from Rep of Cuba which is the residual sovereign. The issue was whether the protection of the US Constitution apply to foreign individuals outside the US. It is not a failure of the American legal system as much as it is a failure of international law (prohibition of torture is an ‘erga omnes’ peremptory norm of international law). No valid analogy here either.
“Again sorry about this, it is not personal.”
No offence taken whatsoever. I am only interested in arguments. I welcome civil disagreements, I think they are healthy and help us learn.
“An interesting argument about causality in regards to private sector investment, profits and saving has been presented by Michał Kalecki in Theory of Economic Dynamics (1954)”
Sounds interesting, I will check it out. Thanks for the recommendation.
Adam K, you seem to be missing the fact that the US has laws prohibiting torture like waterboarding and that therefore the US government can not possibly have done such a thing since those laws were in existence. That is all you need to look at- the laws that are written- those laws determine the extent and the range of possibilities of what can be done. You should disregard any reports of Americans waterboarding captives or delivering them to other places for worse treatment. Because the reports are obviously inaccurate since the current law describes how my government is capable of acting. The only thing these reporters are doing is confusing people by stating that the US government HAS tortured people, when obviously, within the framework of the current law that is impossible. And they are weakening their case about the evils of war and all manner of other things by reporting what they have been told (or seen) to a public that believes it can’t be so because the law says so. So what the reporters really need to do is to modify what they have seen so that it fits into the context of what is permissible under the current law. It is clear that most of the time the US does not torture people so it is both impractical and irresponsible to point out what really happens. Even though it is true.
Well, that is an argument that I hope doesn’t convince you or anyone else.
I’m sure you do, although I find when I re-read things, I often notice aspects which I either hadn’t noticed, or properly remembered. e.g.
To some extent, we are quibbling about wording here. He expresses the same basic idea in slightly different ways throughout the book, and in various presentations & interviews that one can find on YT.
Or
I could go on, but do I need to? Even if Mosler didn’t literally write “taxes don’t fund government expenditure”, what he has written amounts to the same thing.
As an Englishman, I take mischievous pleasure in quoting that American Rebel, Ben Franklin with:
(Well, only metaphorically hung, I hope, but perhaps hung out to dry on the washing lines of economic & political history).
It would be good if we could concentrate on what unites us, and be less hung up on semantics. Bill says “spread the word”, and I agree, but even more important, spread the essence of the word, the meaning behind the word, and different audiences may need it to be explained in slightly different ways. You don’t address a public meeting of voters in quite the same way you might address a conference of bankers.
On the question of QE, I learned a lot in a couple of long videos featuring Ellis Winningham on “Real Progressives”. (His style might not be to everyone’s taste, but I got used to him). He reminded me (or taught me, perhaps) that QE did not represent a creation of new money (something which I have occasionally claimed, mea culpa), but was an asset swap between Treasury bonds and Federal reserves; the reserves would remain there, unless and until the Consolidated Government decided to reverse the process. And I’m quite sure it did not disobey any law, but what it was (and fully admitted) was an unconventional process, in comparison to the way the Fed and the Treasury usually conduct monetary & fiscal operations.
I can’t prove it, but from all I’ve learned about MMT (and I’m the first to admit, I’m still learning – unlike some, I’m not “all over MMT” (whatever that means 🙂 ) I am pretty sure that both US and UK governments could actually do the kinds of things that Bill Mitchell and Warren Mosler advocate without any laws having to be passed in Congress or Parliament. However, it might require a few more “unconventional” processes to be carried out. It could all be done behind closed doors (and I’ve been tempted on occasional to advocate that).
But in the long run, the voting public needs to be fully educated about all this stuff, and full, public and honest political discourse needs to happen, so that it all happens openly and above board.
Only that way can the neoliberals be kept at bay for any length of time.
Mike Ellwood,
I strongly agree that the public needs to know how our money system actually operates behind the smoke and mirrors. If we don’t understand reality we cannot have meaningful democracy.
Also, as a fellow Englishman I get increasingly frustrated by the lack of decent MMT analysis of the UK system. It’s no good to me discussing the convoluted shenanigans of the Federal Reserve and US Treasury with British voters and Labour Party members. They need the details on the UK system if they’re going to be convinced.
If anyone has links to anything good on the UK system please let me know.
Governor Jerry Brown
RE: “… we would have to conclude that standing on his head ‘funded’ that spending? That seems to be your argument Francisco. … …”
• Not in the least. You are putting words in my mouth. And building a straw man. A law requiring headstanding is a CONSTRAINT, not a CAUSALITY. So I would never say standing on your head funded spending. I would say that the govt necessitated borrowing/taxing/headstanding in order to spend.
RE: “… And when it is pointed out that sometimes the spending happened in the absence of that headstand what do we conclude? ..”
• Such spending is fairly insignificant. Perhaps there is a loophole, perhaps not. (See Debt Ceiling Drama; Obama making concessions to limit govt shutdown; Upcoming Debt Ceiling drama)
Andre:
RE: “… No, it doesn’t! The Fed creates new money of thin air and gives it to the Treasury even with current US laws. … …”
• Yes it does! Fed funds Treasury. Really? Can you be more specific on Treasury GIVING money to Treasury?
Francisco Flores,
A fiat monetary system–legal constraints and all–can be mathematically conceived and understood as a currency issuance/revocation regime. Every time the US government releases a unit of currency, it is issuing that unit ex nihilo. Every time it receives a unit of currency, it is revoking its prior issuance. All operations–both fiscal and monetary–can be viewed through this framework. When the government pays an employee, it issues currency to the employee. When the employee is taxed, it revokes currency. When the government purchases a good from the private sector, it issues currency to the business it purchases it from. When the government fines an individual or business, it revokes currency. When the government sells a bond, it revokes currency. When the government pays a bond, it issues currency.
It necessarily is the case that issuance of currency precedes revocation of it.
There are rules that require the government to sell bonds (revoke currency) in an amount matching its positive net currency issuance (deficit spending). This does not mean that bond sales are “funding” anything. Legislative rules that impose conditions on the government’s issuance or revocation of currency do not turn these currency issuance-revocation operations into “funding” operations. Stated differently, they are no different, conceptually, from legislative budgets. Instead of these budgetary constraints being stated outright in an annual budget as X dollars, they are operationalized on top of that budget. But it still amounts to legislative prescription of the government’s currency issuance-revocation powers. In other words, the government is always “funding” itself, even if it wants to create rules that make it appear as though it were not.
But I confess your posts confuse me. On the one hand, you seem to be insisting that these rules do mean that taxes and borrowing “FUND” the government (March 17, 2018 at 16:14 post). But on the other you also deny that you are speaking to causality (your March 18, 2018 at 3:44 post). The problem is that to speak of something “funding” something absolutely implies causality. The problem is not that your argument is wrong, it is that your use of the English language is wrong. In a fiat monetary system, it is a fact that taxes and borrowing do not fund spending, regardless of what other rules are in place.
Mike Ellwood
Found it https://www.youtube.com/watch?v=rCPZtevQKvc
He says he doesn’t like to say it because the word “fund” is ambiguous, and because the govt, while it doesn’t need taxes to spend, it needs the population to *not* have it. So it’s not exactly wrong, but not entirely right.
BTW, I’m not associated with and don’t agree with the poster of that clip.
@Francisco J Flores
“Can you be more specific”
Yes, I can, but I have limited space here in the comment section. You should find MMT material out there (there are plenty)
Those are your pints:
“- Congress Appropriates / Taxes
– Federal Reserve Act prohibits significant overdraft at the Fed or Fed gifting or buying securities directly from Treasury
– Congress imposes a Debt Ceiling”
First, Congress may and do allow nominal or primary deficits. It means that the Congress indeed does allow more expenses than revenues. Actually, the US federal government has run annual deficits in 36 of the past 40 fiscal years, with surpluses from 1998-2001. If expenses are greater than revenues, either the government will have to issue debt or issue new currency out of thin air. I don’t know whether everyone in the Congress knows that, but that’s how it has worked for the past decades.
Second, the Treasury indeed is not allowed to issue debt and sell it directly to the Fed (which makes things more complex and opaque). Instead, the Treasury do it through the banks, which act as intermediaries (and of course earn a certain percentage in the process) between the Fed and the Treasury. Hence, such prohibition is ineffective and unnecessary. The Treasury issues bonds to the banks, and then the banks sell the bonds to the Fed.
Third, each year the Fed remits to the US Treasury its net income. It means that whatever income Fed earned with interest bearing bonds, it will be remitted to the Treasury. Hence, if the Treasury paid, for example, $ 50 billion in interest to the Fed, than, eventually, the Fed will transfer back those $ 50 billion to the US Treasury. The treasury bonds held by Fed are not even accounted in the national debt, hence such kind of government “internal operations” do not affect Debt Ceiling legislations.
The amount of debt that the private sector wants to hold depends on the monetary policy (interest rates). The government controls directly those interest rates, but does not control directly the amount of debt. The debt volume will be dictated by the private sector demand at the prevailing interest rates. If such debt is not enough to cover the government deficit, the Treasury will issue bonds to the Fed (indirectly via banks). The Fed will issue the new money of thin air. The Treasury will pay interest, but will receive such interest back eventually, because the Fed remits its net income to the Treasury periodically.
As you can see, none of those legislations you commented affect the capacity of the federal government issuing money at will.
Bill,
Why haven’t you approved my post? I’m concerned I’ve misunderstood something vital now!
It’s your blog so you can do what you like but an explanation would be helpful to me.
As an economics layman I’m doing my best to spread the word in the UK. It isn’t easy though. There just isn’t the body of academic research available on the UK system that there is for USA and Australia – or at least I can’t find it.
There also don’t seem to be any MMT academics for me to correspond with in the UK and get feedback/advice/corrections. You yourself confirmed this to me when we briefly met at Labour Conference last year.
Obviously you owe me nothing and you’re busy and you’re already doing more than your fair share. Nevertheless your input and support would be much appreciated if you have the time.
Francisco Flores,
Board of Governors of the Federal Reserve System press release January 11, 2016
“The Federal Reserve Board on Monday announced preliminary results indicating that the Reserve Banks provided for payments of approximately $97.7 billion of their estimated 2015 net income to the U.S. Treasury. In addition, the Federal Reserve transferred to the Treasury $19.3 billion from Reserve Bank capital surplus on December 28, 2015, ….”
When the Fed buys securities from the private sector it creates the money used to purchase those securities. Almost all of the ‘profits’ the Fed realizes on these securities are remitted to the US Treasury. According to the Fed this amounted to about $117 billion in 2015. Not exactly pocket change even as a percent of US government spending. I wouldn’t call it insignificant.
And JT @ 4:34 answered your other question and accusation of straw man better than I could. Not trying to put words in your mouth- just pointing out the problem with your argument as Bill did in his post.
@André
“The treasury bonds held by Fed are not even accounted in the national debt”
Can you provide a source for this?
I share your frustration. I can only think of 3 possible UK-based candidates for getting academic support for helping us to get definitive UK-specific information, and two of those are not really pure MMT and have their own particular emphasis and (dare I say) idiosyncrasies, and the other spends have his time criticising MMT and the other half professing to support it, so not exactly much help.
There are a lot of BoE documents online, but first you have to fight the arcane language, and even allowing for that, it’s always going to be couched in mainstream, essentially neoliberal terms, or at least hardly sympathetic to the approach that we here want to promote.
I believe Bill knows a lot more about the UK setup than his American colleagues, but I’m not sure if he’s written about the nitty-gritty nuts and bolts, in strictly UK terms. Also, I suspect, the details probably change over time. We need some friendly BoE & Treasury insiders, who are good at explaining complicated details.
@Adam Sawyer:
What do you think of this?
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
To be fair, it’s not written in arcane language. It’s mostly about commercial bank credit creation (what they refer to as “broad money”). But there are references to “central bank money” (aka high powered money, I suppose). I don’t think MMT would disagree with much of it regarding commercial bank credit creation.
Some interesting stuff about QE there. (Maybe MMT gurus would disagree with some of that).
This is interesting (and no doubt, arguable):
Would be good if there were some documents written in equally accessible language about fiscal deficits and injection of central bank money / high-powered money/whatever into the economy.
Does anyone know what the “the effective lower bound” means? I know it’s a rate of interest, but how does it come about?
I believe it’s in “The Seven Deadly Innocent Frauds of Economic Policy” by Warren Mosler, which is available online.
wallflower,
This is actually an interesting issue:
“If I forge a virtually identical metal object and exchange it for your dollar, would you still say you have a dollar?”
If you look up “Ephraimiten” on the Wikipedia there is a fascinating story how Frederic the Great funded his war effort during Seven Years’ War – further weakening the economy of Poland-Lithuanian Commonwealth and Saxony. So the answer is – from the legal point of view a forged dollar may not be called a dollar but from the point of view of economic history circulating a large amount of forged money may have a sizeable economic impact. We can still debate which word is the most appropriate to describe these objects but we cannot ignore their existence.
“Well, that’s borrowing alright. However, mind the debt ceiling” – we need to distinguish between “ex-post” and “ex-ante”. From social accounting point of view for any period of time the following identity must be true “ex-post” as a matter of stock-flow consistency:
(G-T) = ΔH + ΔB + ΔBL
where (G-T) is a budget deficit, ΔH is the change in high-powered money (currency) “in circulation”, ΔB is the change in non-government sector position in short-term debt (“Treasury bills”) and ΔBL the same in long-term debt (“Treasury bonds”).
The question is – what is determined “ex-ante”? The loanable funds (neoclassical) approach assumes that G has to be funded “ex-ante” by T, ΔH, ΔB and ΔBL and that effectively there is an equilibrium on the market for loanable funds where the interest rate is the price allowing for that equilibrium, that if the government spends more, the private sector has to spend less (so-called financial crowding-out). This point is confused as the “classical” LFT does not apply to the world with endogenous money (what can be easily demonstrated) but the indestructible “zombie” Wicksellian Loanable Funds Theory (Mk 1, 2 or 3) tries to find a workaround to this problem – and in my opinion fails miserably.
On the other hand the “proper” post-Keynesian (and MMT) position is that G is determined “ex-ante”, T depends on Y (GDP) and (X-M) (trade balance) and can only be forecast while ΔH, ΔB and ΔBL are determined by actions of the central bank and portfolio allocation of the private and foreign sectors. Ignoring the foreign sector, what will happen if the private sector net-saves less (what might be caused by private sector borrowing)? “Y” will increase leading to higher T and the budget deficit (G-T) will fall. The sum (ΔH + ΔB + ΔBL) can therefore only be forecast.
If the “debt ceiling” drama leads to a longer-lasting default of the US government then yes this will have an economic impact by reducing G (the state apparatus as a whole – the government and the Congress decide to spend less) and undermining the trust in the US monetary system as a whole.
@Adam Sawyer (mainly):
I’ve previously posted a comment including a link to a BoE paper, which has caused it to await moderation, as will the link in this post:
https://www.forbes.com/sites/francescoppola/2017/10/31/how-bank-lending-really-creates-money-and-why-the-magic-money-tree-is-not-cost-free/#3fbbffeb3073
Needless to say, Positive Money seized on that BoE paper to support their argument. Part of their argument (which MMT agrees with) is that commercial banks create credit when they make loans (we don’t usually call it “money”, although the BoE seems to call it “broad money”). In turn, it seems Zoe Williams of The Guardian seized on it to further accuse the commercial banks of all sorts of nefariousness. The article linked to above is quite interesting. I don’t know who the author is, but she does at least know about central banks creating “real money” (if you’ll pardon the term).
I wonder if the following is true though:
wallflower and André, it is my understanding that most discussions concerning the US Federal debt do include the Treasury bond holdings of the Fed as part of that number. But that depends on how and who is reporting it. Here are the numbers from the Treasury website-
03/15/2018
15,356,367,776,113.95 (debt held by public)
5,674,699,228,652.30 (intragovernmental holdings)
21,031,067,004,766.25 (total Federal debt)
The debt held by the Fed is included in the “intragovernmental” category. (Imagine that, it seems the US Treasury considers the Fed to be part of the government…wonder why that is)
I will provide a link that may show up sooner or later.
US Treasury Direct link-
https://www.treasurydirect.gov/NP/debt/current
Francisco J Flores.
“I continue to disagree with you on what matters here. You are focusing on the nuances of where money comes from and what it is etc. I do understand all that. And I assume that your narrative and focus is due to your desire to bring home the point that the sovereign does not NEED to borrow or tax in order to spend. But in doing so you are glossing over the legal constraints in place NOW.”
Francisco, I`m Puzzled. If you do indeed understand “the core”, or that which is intrinsic to the fiat money and tax narrative, then why do you continue to argue that which is tangential? Do you not see legality as a valid,yet entirely different discussion?
It’s sort of interesting reading people’s comments about how laws work who clearly have never spent any time in a law firm or been to court. There is no lightning strike and they are routinely ignored – particularly at the aspirational level in government where the enforcement is weak and largely political.
There is no god who will punish every transgression. Within a sovereign system there is nobody who will cripple the system because of mere rules. Unlike in Greece where the ECB is quite happy to threaten to switch off the clearing because there is no political comeback for doing so
Nobody in the US system will contradict congress appropriations. Nobody. Instead they will all rally around to make averything look like it hit all the marks even if it doesn’t. The Fed is the agent of Treasury as Bernanke pointed out under oath.
Adam,
Is there anything I’ve missed in the Uk analysis?
@Jerry Brown
“The debt held by the Fed is included in the “intragovernmental” category.”
Actually that is wrong. Check again, it’s on the “Debt Held by the Public” category.
From the Treasury website:
“The Debt Held by the Public is all federal debt held by individuals, corporations, state or local governments, Federal Reserve Banks, foreign governments, and other entities outside the United States Government”
JT:
RE: “… All operations-both fiscal and monetary-can be viewed through this framework. … …”
• You can certainly view it through this framework. But there are other frameworks, like the framework noting what is legal and not legal, forcing certain actions if you want to spend -> like borrowing and taxing.
RE: “… It necessarily is the case that issuance of currency precedes revocation of it. … …”
• So how do you you explain the hypothetical example where a new country which hasn’t issued currency, and only one bank, which bank then creates money out of thin air by making a loan, and then govt taxes that money (because it feels like it) and credits its reserve account at the Central Bank?
RE: “… There are rules that require the government to sell bonds (revoke currency) in an amount matching its positive net currency issuance (deficit spending). This does not mean that bond sales are “funding” anything. … Legislative rules that impose conditions on the government’s issuance or revocation of currency do not turn these currency issuance-revocation operations into “funding” operations. …”
• There is no such rule. There are rules that say Fed can’t Fund Treasury directly and Treasury can’t overdraft its account at the Fed. These rules MAKE the govt have to fund its spending with bond sales and taxes.
• Yes they do. Again, rules on direct Fed funding of Treasury and prohibition of Treasury overdrawing its accounts at the Fed.
RE: “… In other words, the government is always “funding” itself, even if it wants to create rules that make it appear as though it were not. … …”
• You can say the govt is “funding itself, but again and again and again and again there are LAWS prohibiting Fed from funding Treasury directly and Fed paying on Treasury overdrafts at the Fed. LAWS, LAWS, LAWS. LAWS which force the Treasury to borrow or tax in order to spend. Because taxing and borrowing fund spending UNDER CURRENT LAW.
RE: “….The problem is that to speak of something “funding” something absolutely implies causality… The problem is not that your argument is wrong, it is that your use of the English language is wrong. In a fiat monetary system, it is a fact that taxes and borrowing do not fund spending, regardless of what other rules are in place. … …”
• Causality. The CONSTRAINT doesn’t necesarily CAUSE the taxing funding the spending. But if you want to spend under these constraints, then it NECESSITATES having to borrow/tax IN ORDER TO SPEND.
RE: “… it is a fact that taxes and borrowing do not fund spending … …”
• This is absolutely wrong. How do you explain the Debt Ceiling drama?
• Here is the issue: MMT looks at a wider lens and concludes that since the currency comes from the sovereign, than the sovereign doesn’t need to borrow/tax from the non-gov sector. Which seems to make sense, but with a narrower perspective, looking at the govt sector, we note various LAWS which: prohibit Fed direct funding of Treasury and Treasury overdrawing of its accounts at the Fed. In view of these constraints, the govt can’t just issue its currency to spend. It HAS to borrow or tax. Making the statement FALSE. Again I understand the argument about perspective etc. But the statement is FALSE under current law – and is damaging to MMT.
Andre:
RE: “… First, Congress may and do allow nominal or primary deficits. … …”
• Of course. This is called deficit spending, and is not the issue at hand.
RE: “… If expenses are greater than revenues, either the government will have to issue debt or issue new currency out of thin air. … …”
• But the Fed is prohibited from gifting money to Treasury or buying securities directly from Treasury.
RE: “… The Treasury issues bonds to the banks … …”
• ..and gets money from the said banks. What’s another name for this transaction…..Hmmmmmm….Its at the tip of my tongue…… Oh Yea! —–>BORROWING! See? The govt HAS to BORROW!
RE: “… The treasury bonds held by Fed are not even accounted in the national debt, hence such kind of government “internal operations” do not affect Debt Ceiling legislations. … …”
• YES they are.
• So explain to me what the periodic Debt Ceiling drama is all about again?
RE: “… the Treasury will issue bonds to the Fed (indirectly via banks). … …”
• Again, this is called BORROWING, the amounts which fall under the definition of BORROWING in the statement: Borrowings and taxes don’t fund spending… making said statement FALSE.
Governor Jerry Brown says:
Sunday, March 18, 2018 at 5:15:
I’m not follwoing what your point is.
Dear Adam Sawyer (At 2018/03/18 at 5:15 am)
You asked:
I sometimes sleep!
Any comment with an external link in it is immediately held for moderation and that requires me to be awake and check that the link is: (a) relevant; (b) not promoting a site I do not wish to promote (clickbait sites etc); (c) otherwise undesirable (porn etc).
best wishes
bill
PhilipO says:
Sunday, March 18, 2018 at 7:24
RE: “… Do you not see legality as a valid,yet entirely different discussion? … …”
• I’m all about the WORDS, as in statements being TRUE. The legalities make the statement: “Borrowings and taxes don’t fund spending.” —> FALSE. Perhaps the monetary/fiscal operations and legal constraints are tangential, but they are still a part of the analysis. And folks repeating this false statement over and over in channels designed to spread MMT to the population in general, I believe, severely harms MMT. Folks just shake their heads and don’t buy in. (see: Bernie Sanders).
@Neil Wilson
“There is no lightning strike and they are routinely ignored – particularly at the aspirational level in government where the enforcement is weak and largely political.”
Weak enforcement of what laws and where’s the evidence for that?
“It’s sort of interesting reading people’s comments about how laws work who clearly have never spent any time in a law firm or been to court.”
Do you spend much time in court or at your law firm with the Federal Reserve Act or with the internal Treasury and Fed regulations, Neil?
“Nobody in the US system will contradict congress appropriations.”
Nobody is contradicting this either.
“The Fed is the agent of Treasury as Bernanke pointed out under oath.”
No it’s not. And even if it were, it wouldn’t be on the basis of apocryphal anecdotes or folklore.
Six says:
Saturday, March 17, 2018 at 21:49
RE: “… … …”
• As I wrote right after my sentence above:
Now again: with new country, new bank, no reserves, no money. Bank creates $10 million in loans and deposits. Govt feels like taxing $1 million deposit holders just for the hell of it. (It doesn’t need to of course, they just feel like it because the holders were not obsequious enough.) Credit: Treasury Account at Central bank, Debit :Bank Account at Central Bank. That’s Federal Reserve Deposit creation out of bank deposits.
@Adam K
“If you look up “Ephraimiten” on the Wikipedia there is a fascinating story how Frederic the Great funded his war effort during Seven Years’ War”
That’s a fine story, I like it. However, it sounds to me more like a case of seigniorage. Also, Frederic the Great was a sovereign, I am not.
“we need to distinguish between “ex-post” and “ex-ante”.”
Why? The issue is how to credit the TGA without borrowing or taxing. How’s that distinction relevant?
Mike Ellwood and Neil Wilson,
My post above:
Saturday, March 17, 2018 at 20:49
Was held in moderation for ages. Not sure why but I was hoping to get others’ take on it. It is something I want to use when talking to Labour Party members to try to persuade them of MMT ideas. I’m not totally sure of my logic so feel free to criticize!
Mike, I think the passage you copied and didn’t know if it was true or not is just BS. Not got time to think about properly now and haven’t read linked article (will tomorrow) but …
…I don’t know what they mean by “technically insolvent” but it sounds like someone trying to comprehend central bank money creation from a mainstream perspective and making a total mess of it. Central bank money is not asset backed, they’re getting that entirety upside down – the assets they talk about were created by the central bank in previous rounds of deficit spending. A sovereign government can always tax it’s population – if it can’t then it defacto isn’t a sovereign government: either the area in question is a failed state (no-one has the real physical power to demand tax) or some other entity(s) is contesting the power of the state within its borders (civil war, invasion, coup, internal political manipulation, manipulation by a more powerful foreign power etc…). The author also don’t realise central bank isn’t really separate from government – as if a government would ever stop backing their own central bank lol!
The BoE’s two “Money in the Modern Economy…” documents are pretty good in a mainstream sort of way. If you read between the lines you can see they largely agree with MMT. I like to use them to back up my logical explanations with appeals to authority on…
1) money is an IOU
2) loans create deposits
3) BoE is monopoly issuer of reserves
4) how QE works
I have a lot of spare time and I’m more than happy to ghost write a UK specific “MMT for Dummies” style basic, plain English guide. I feel this is essential because vwe likely cannot persuade economists and politicians in the UK, even Labour’s leaders are sticking with an essentially neoliberal frame of reference. If we convert enough normal people, particularly within the Labour Party web might build enough grassroots support to push MMT into the mainstream inspight of elite opposition. I just desperately need a little help from some experts to get me on the right track. I’ve approached Richard Murphy to see if he could help point me in the right direction for technical research purposes.
My vague plan is I do the donkey work research and copywriting to save the experts’ time and then check stuff with as many experts as have time to talk to me. I figure it can be published online for free easily enough. Anyone who doesn’t think is an entirely stupid idea please let me know! Anyone else with spare time more than welcome to assist…
@Francisco J Flores
“…and gets money from the said banks. What’s another name for this transaction…..Hmmmmmm….Its at the tip of my tongue…… Oh Yea! –>BORROWING! See? The govt HAS to BORROW!”
First, the Treasury issues $ 100 in bonds. Can it sell directly to the Fed? No. It will offer such bonds to banks. One of two things will happen:
1) Banks do not have $ 100 to buy the bonds.
What will they do? The banks will borrow $ 100 from the Fed. So the Fed will issue money out of thin air and lend to the banks. Then the banks will use the borrowed money to buy the bonds. Then they will sell those bonds to the Fed, for $ 101. With that $ 1 spread earned the banks will pay the interest of the loan and also earn a profit.
As you can see, it is not “borrowing”. Banks are just a middleman earning a free spread.
2) Banks do have some spared money.
They simply will buy the bonds for $ 100 and resell them to the Fed in the same day for $ 101 and earn a free profit of $ 1.
Either way, the Treasury employed the banks as mere intermediaries in order to circumvent the prohibition of direct bond issuance to Fed. The banks did not actually lent money to the Treasury. They just charged some fee for acting as intermediary.
This sort of operation is not lending. At the end of the day, the Treasury is borrowing money from the Fed. And, again, any interest that the Fed earns will be remited back to the Treasury periodically.
After you understand it, it is simple: the government is actually issuing money out of thin air. There is a lot of unecessary complexity and money going back and forth, but, at the end of the day, the government issues money at will.
Bill,
Sleep! There’s no time for that. You’ve got to save the entire world from economic illiteracy immediately!
Seriously though, I didn’t mean to rush you, I was panicking it was held back because it was just too wrong for the internet (that’s a special kind of wrong). I’ve got various talks to do for my local Labour Party and didn’t want to mistakenly mislead anyone.
Apologies and thanks for all the hard work helping us all understand this stuff.
Francisco,
When you say that taxes and borrowing fund government spending, what you mean to say is that the Congress has imposed legal constraints on the government’s issuance of currency. The former is simply incorrect to say (as a matter of English) in a monetarily sovereign country. There is even another way to conceive of this. Consider that bonds are just a different form of government currency. The government issues non-interest bearing dollars we call “dollars” and interest-bearing dollars we call “bonds.” To be sure, one can’t spend a bond in a supermarket, but one can easily enough exchange a bond for dollars to spend in a supermarket. So what we see is that the government sometimes engages in swaps of one form of its currency for the other, per arbitrary rules. Nothing at all is being “funded.” It’s just changing forms and composition.
Regarding your hypothetical: “Now again: with new country, new bank, no reserves, no money. Bank creates $10 million in loans”
A bank cannot do that. In your hypothetical, the new country has no currency, and there is no national unit of account, so the bank cannot create any “dollars” by loans. It can only issue its own notes (IOUs), which it can call First National Notes. It is unclear what 10 million of these First National Notes represents in real terms or why anybody would want them. What is the bank’s purpose in creating these IOUs? What is the bank promising to do when presented with its IOU and what is it receiving in exchange for its promise? What does it owe?
The government can have a fiat currency because it can use force to put people in cages. What it promises when it issues its currency is that it will refrain from putting you in a cage if you present it with the amount of units it demands each year. It is happy to receive (extinguish) its own IOUs in payment because the purpose of them has already been served when it issued them–to obtain labor and goods from the private sector for public use. The government can create a demand for its note by imposing a tax. The bank cannot.
Back to your example. While the government could impose a tax payable in First National Notes, that would be a terrible policy choice. It would certainly create demand for First National Notes. But, importantly, it would not be a fiat monetary system of the type MMT is concerned with, which is currency issued specifically by the government that is not convertible by demand into a commodity. In this situation, the government is a mere currency user, not a currency issuer. It would be like Ecuador, which imposes a tax in US dollars. MMT does not consider Ecuador to a be a monetarily sovereign nation, and thus its framework does not apply to it.
So the short answer to your hypothetical is that you are describing a monetary system to which MMT’s do not apply.
Neil Wilson,
You’re blog is excellent, it has really helped me get my head around stuff. In particular I really liked all your stuff on international trade. I really didn’t get that at all till reading your stuff.
You may have already covered it but I’ve just failed to find it. What I was looking for was MMT analysis of the specifics of BoE/UK Treasury coordination in the same vein as Stephanie Kelton, Eric Tymoinge, Randall Wray and others’ analysis of the US system. I know most laymen don’t really need to know that stuff to understand the MMT perspective but I’ve found that it helps in terms of persuading people that MMT is accurate.
I guess it makes sense – if I’m telling them stuff is basically opposite to how they thought then they are naturally suspicious. Even if they don’t fully understand the detail they find it reassuring if I can explain how the charade of “government borrowing from the markets” works and how some people benefit politically from this sleight of hand.
The other thing is just the real basics of money as an IOU, how tax first became a thing and how commodity money and the gold standard worked in the UK in the past. I’ve tried to incorporate some of David Graeber’s stuff on history of money and debt and also UK specific monetary history.
Maybe I’m overthinking it all but I feel like to sell MMT I need to basically completely cover all possible angles of disagreement in one go. A kind of economic theory equivalent of “shock and awe”.
JT,
Great reply to Francisco.
Hole Mole! I think I just figured this out!!!!! Is this about the Coin? Everybody here is in on this except for me??? Bernie Sanders is fully on board MMT but he’s keeping it to himself? And once he wins the White House in 2020, he becomes the bad-ass, mthfkn, Ninja, Commie-Socialist-Anarchist and whips out the $20 Trillion and deposits it at the Fed! And I’m the only one in the dark about this? OK. Forget everything I said.
wallflower,
Minting debased Polish / Saxon coins was a case of economic warfare against nominally neutral Poland (which was in personal union with Saxony under king Augustus III) and a “solution” to the problem of financing the war which at some point was nearly-disastrous to Prussia (Russians took Konigsberg and got to Berlin). I don’t think it can be qualified as a clear case of “seigniorage” which would be if king Augustus himself had minted debased coins.
The distinction between “ex-post” and “ex-ante” meaning of a social accounting identity allows us to highlight the causality and is critically important from the macroeconomic point of view. This is the actual difference between setting up neoclassical / New-Keynesian and post-Keynesian dynamic models. The MMT perspective offers clear understanding of the processes involved.
Personally I have no problem stating that under the current arrangements taxation and net issue of government debt has to “ex-post” fund or offset government expenditure. This is just re-stating of the so-called “government budget constraint” which is the equation I wrote in the previous comment (to be strict we may need to disaggregate Treasury and the central bank).
I would never say that the government has to fund its expenditure “ex-ante” by levying taxes and borrowing but this is what is assumed in neoclassical /New Keynesian models.
This may look too technical but DSGE models based on the assumption of “ex-ante” funding generally underestimate spending multipliers – in the long run (when the frictions resolve) these models assume / predict that there should be no net gain in terms of real GDP from increasing budget deficits. In contrast, Stock Flow Consistent models (such as one presented in “Monetary Economics” written by Godley and Lavoie) would show a greater-than-one spending multiplier effect even in the “long run” – at the asymptotic level as the trajectory shifted upwards – as long as spare productive capacities have not been exhausted.
This difference in the behaviour of the models and the reason why we need to look at the causation “ex-ante” from spending to saving / taxation is caused by the shape of the consumption function of the private sector, not accounted for in models based on rational expectations / intertemporal utility maximisation and on the investment function depending mainly on the forecast of capacity utilisation and prospective profits not just past profits.
Econometric research clearly demonstrates that spending multipliers are greater than one (about 1.5) as long as central banks do not perform monetary tightening (Blanchard, O. J., & Leigh, D. (2014). Learning about fiscal multipliers from growth forecast errors. IMF Economic Review, 62(2), 179-212.). We can then ask a question why we recently have had less than full utilisation of productive capacities (so-called “secular stagnation”). A reasonable answer has been provided by Bhaduri and Marglin in their growth model where the distributional shift from workers to capitalists leads to stunted economic growth (shifts the growth trajectory downwards, the long-term growth rate is still determined by productivity growth). The rich have higher saving propensity. The bias point of the whole US economy has shifted since the mid-1970s. There is simply no such a “degree of freedom” in models based on rational expectations and intertemporal utility maximisation.
If you are interested I can provide further references but I think that we are getting into too much detail.
Dear Francisco J Flores (at 2018/03/18 at 10:19 am)
It has nothing to do with the ‘coin’.
It is just about basic principles of a fiat monetary system.
Your most recent responses exude a certain desperation (private banks creating some ‘currency’ which a government without a currency suddenly accepts; and then the Bernie Sanders nonsense).
I think we have probably exhausted this topic. I thought by providing a more detailed account of how the system works rather than how it appears to work to the layperson, that I could help advance understanding for those who were embroiled in the Twitter debate on the topic.
It seems that all I have done is import the unproductive (and error-ridden) Twitter exchange into my blog and the positions haven’t changed one bit. As they say, one can only ‘lead a horse to the water’!
So for all readers, please do not post any more comments on this topic.
best wishes
bill
Professor:
• The Coin/Bernie Sanders comment was a joke.
• No Desperation. It was a mind experiment: I didn’t say, “no currency”. I said “no money”. In other words the new economy has a sovereign currency, say the Mitchell Dollar, but the sovereign hasn’t spent any of it into the economy yet. To demonstrate that banks don’t need money from the sovereign in order to create and lend money out of thin air. And since they’re able to do so, it can be taxed to create reserve deposits – all without relying on the govt to push it into the non-govt sector.
Since you don’t want to continue the discussion here, please allow those who want further clarification to the following blog:
http://mmt-inbulletpoints.blogspot.com/2018/03/not-porn-do-taxes-and-borrowings-fund.html
Thank you,
Francisco
Francisco …
“Now again: with new country, new bank, no reserves, no money. Bank creates $10 million in loans and deposits. Govt feels like taxing $1 million deposit holders just for the hell of it. (It doesn’t need to of course, they just feel like it because the holders were not obsequious enough.) Credit: Treasury Account at Central bank, Debit :Bank Account at Central Bank. That’s Federal Reserve Deposit creation out of bank deposits.”
I have no idea what you’re trying to say here, but your imaginary bank in an imaginary country that doesn’t exist has NOT created any government currency or government issued reserve balances, just as real bank are unable to create government issued currency or government issued reserve balances in the real world.
We have the coexistence of taxes, government spending and government bond
issuance .A historical analysis of their evolution does not prove causality.
We have to look where the power lies .Who does the spending the taxing and the
bond issues .Does the private sector use fiat currency, money by government decree.
The debt ceiling quirk of the US government is something a government which wishes
to raise fiscal stimulus has to deal with by raising it ,abolishing it ,minting a large
denomination coin whatever .It does not change the nature of the currency.
Who seeks to gain by bond issues debt ceilings all the smoke and mirrors which obscure
monetary sovereignty ? It is the very wealthy who wish to have first pick of the worlds
resources and the labours of their fellow humans.
The power of the state IS a threat to the wealthy and their hangers on.
Mainstream economics is a fig leaf for their interests.
They wish to fool everyone else that their control of resources and labour
is best for everyone.
I see Bill has asked us to stop commenting, but I’ll crave his indulgence to make this last comment:
Thanks for that great comment there. If you want to co-operate on your “MMT in the UK for Dummies” document, and would like to get in touch, could you possibly email me at
MWE [at sign] fastmail.co.uk
I’ve found some MMT sympathisers not too far from where I live, and there is the germ of a plan to organise some sort of talk/lecture/teach-in in our area. A document such as the one you propose would be a superb handout, or at least could serve as input for our own handouts. Thank you.
[Bill, if you prefer that my email address should not appear in your blog, I hereby give you permission to pass my email address on to Adam Sawyer, if you would be so kind. This is part of “spreading the word”! 🙂
Dear Mr. Mitchell,
You are saying that digital reserves facilitate the paying of tax and bond purchases. Are you saying that the government is financing itself? That the taxes and bond values that are lowered in our personal accounts count for nothing? That they do not add into the TGA liability account balance and are decremented when there is a FED payout with reserves? If so, as you say, then the personal funds do go quiet while they are in the TGA account (they have no reserve effects) but they are reborn when the FED spends into some other place in the economy where the funds facilitate the creation of personal account balances (inside money). Or are you saying that taxes and bonds don’t fund the government – that our personal funds are useless and the government is self-financing as clearly as if it created a trillion-dollar coin?