Responses to Blog 41: MMT, Austrians, and Ideology

By L. Randall Wray

Sorry for the delay. I will respond to comments on my blog and also to comments on Dan Kervick’s excellent piece on MMT (part one—if I have any comments for part two I will post them after I get time to read the post and comments).

Since many comments then led to discussion that I think sorted things out, I will be choosey, commenting only where I have something (useful, I hope) to add. I’ll reword comments to suit my purpose—no disrespect intended, I just want to focus on what I think is important.

Q: Philip: Austrians use a bait and switch operation—denying that what we have is capitalism and comparing it to some sort of ideal utopian capitalism.

A: Agreed. That makes it easy to blame all of real world capitalism’s problems on its deviation from utopia. It is fundamentally an anti-scientific approach. Let’s analyze what we have and try to make it better. We cannot have utopia. We’re dealing with human society, after all.

Q: PH: 2+2=4. Science but no ideology.

A: Mitch did a great job answering this, and Joe supplemented. Let’s try this. 2+2=4 is a definition, not science. 2 cows + 2 cows = 4 cows moves us a bit closer. But what is a cow? We need some sort of view as to what qualifies. We need classification: do we count baby cows? Dead cows? We need a theory of species: ability to mate and produce a viable offspring. Ok then—as I told the MMR people—we are beyond cow plus cow and into bulls. So we need a view of gender. And then we’ve got nominal bulls who self-identify as females. And we’ve got donkeys and horses that happily mate and produce mules but their offspring cannot reproduce—although modern science will no doubt resolve that problem.

And then as Mitch said we want some sort of universal representation of value so that we can go beyond 2 cows + 2 bulls = 4 calves (maybe 5) and on to 2 cows + 2 bulls = 1 donkey cart. That is a tremendous ideological leap that literally took a million years for humans to make. But even then we’ve probably not advanced beyond accounting—which has some science behind it but what we really want do with science is to solve problems.

For that reason, we need to separate science from mere accounting and mere categorization and mere technique. For example, one objection often raised to my formulation is that Nazis used “science” to turn human skin into lampshades. In my view that is clearly false. Science must be purposeful and progressive, to serve human kind. Science does not refer to techniques used to perfect mass murder.

Q: Abram: Reality has a liberal bias.

A: Exactly. I love it.

Q: PG: Marx-Engels odes to first 100 years of capitalism is a myth.

A: Well if you don’t like that, what about the past 100? Or do you believe those stories about interplanetary travel by our ancient ancestors. You do not have to love capitalism to recognize its progress and advance—as Marx demonstrates. If I wanted to quibble with the odes to capitalism, I’d instead point to the remarkable progress of the Soviet Union in its first 2 decades, or to China in the past 2 decades—both of which deviated substantially from the capitalist model and still succeeded—rather than poo-pooing  capitalism’s success at increasing the material means of  expanded reproduction.

Q: PH: MMTers have different political positions.

A: Yes. My point exactly. There is substantial room for disagreement over what government should do. Any self-respecting Austrian ought to adopt MMT—just as she ought to accept evolution as well as global warming. It is science. What should we do about global warming is a different question entirely. What should we do with our sovereign currency issuing government is different from understanding what it can do. Now, I realize that much of the dissension in recent months has been over the question of JG/ELR—is that a “core” part of MMT. I won’t answer that today except to say that in my view MMT points the way to policy-making but does not seal the deal.

Q: Paul: Accepts that taxes are one important driver of money but the derivative uses of money (ie to buy junk) are as important in creating demand for government’s currency.

A: From inception you need obligatory payments in the currency to drive it. Once you’ve got a heavily monetized economy, the “derivative” uses can easily swamp the taxes in sheer number of transactions. But you cannot create a demand for money from inception by voluntary transactions—the reason is that there are no “virgin” Robinson Crusoe societies. All of them have an alternative method of production and distribution that does not require use of money. So you need to insert money into an already functioning society—and that requires disrupting existing relations and creating a demand for an institution that is entirely foreign. Taxes. Money.

Q: Peter: MMT is progressive; does that require a BIG government.

A: Progressive, yes. Big enough is enough. How big is big enough? Depends. What do you want government to do? That big.

I cannot see any simple way to answer this. It depends. Lots of young? Probably need a big government to provide all the stuff a society with a baby boom needs. Lots of old? Need a big government to take care of the elderly. Mostly agricultural economy living in the Sacramento valley? Small will probably do. Under continual attack by armed and hostile neighbors? Bigger is better.

Q: Dan/Joe: If G>T then government fills the hole by borrowing. Deficits are a good thing, and are not entirely endogenous.

A: Sovereign government never “borrows” as that term is normally used. It spends by crediting bank accounts. Keystrokes. Taxes by debiting. When G>T there are net credits. End of story. Is that “good”? Is it discretionary? It takes two to tango. The nongovernment sector can choose to reduce its spending, which will likely increase the government’s deficit. The government can choose to spend more (or cut taxes) and that might increase the deficit but it depends on the private sector’s reaction. I actually think that worrying about this is not very helpful. We ought to look at something that is important: for example, are there people willing to work but unable to find a full time job? If so, government ought to create a job for them. Take a devil-may-care view of deficits. Or, an owl view.

Both on my MMP blog and on the front page in response to Dan’s blog Phil posed 4 questions. Let me briefly tackle them:

Phil:  1. Do you think that MMT might be compatible with small government and low taxes, or is it inherently biased towards big government and high taxes? (I’m assuming that MMT would always involve some form of the ELR if it were to be fully implemented).

A: OK so let us say we have ELR in place, do we need big government? No. ELR by itself will probably run 1% maybe 2% of GDP. That is exceedingly small. ELR workers will do a lot of the things we want government to do. Is it enough? I doubt it. But, again, this is mostly a political matter. Now there is a question about instability. As a rule of thumb, Keynes and Minsky lead us to conclude swings of the budget ought to be big enough to offset swings of investment (adjusted by swings of the trade balance). That gets us up to a minimum government budget of 10% to 20% or more, depending on the amount of countercyclical swings you build into the budget. Still quite small. Add more and season to taste. I want good wine flowing from all fountains. So add another few tenths of a percent or two. What do you want? I think we will end up with a government that is 20%-50% of GDP depending on taste.

2. Does MMT require a degree of nationalisation (i.e. of banks/ corporations) and strict regulation, or is it compatible with no nationalisation and a more hands-off approach to regulation?

A: We need a sovereign currency. We could have a government-provided payments system as well as government community banks and development banks. Probably a good idea. But that does not follow from MMT. You could get by successfully with more public-private partnerships (which is what banks in all the developed countries really are) but you’ve got to regulate and supervise all the damned vampire squids. It isn’t easy. I don’t think the arguments for a big financial sector have ever been convincing. We could downsize it by 99% or more and greatly improve the operation of the capitalist economy. I would say that even if you adopt MMT + Minsky you’ve still got plenty of room for experimentation. Recall he argued there are 57 varieties of capitalism. At least. Maybe one of those would work. Or maybe we need to come up with a 58th.

3. Would you say that MMT economists have different political and ideological positions, or are you all more or less the same?

A: I mostly answered above. Boy I sure hope we’re all not the same! What a boring world that would be. But I do think we share the view that science—and MMT—are progressive in the sense I have discussed. And I hope my Austrian friends will also join the progressive camp.

4. Do the main MMT economists have different understandings of what MMT is or of how it could be implemented?

A: Depends on what “main” means. If you mean all of us old geezers who have been there from the beginning I think the answer is yes. To be sure we do have different visions regarding how much government ought to do. But if you mean all the main themes, up to and including JG/ELR then certainly the answer is yes. I’ll begin to explain why next week. I realize this last response might seem inconsistent with what I argued above.

But let me just preview the argument: as most of you by now recognize the greatest fear about MMT and “fiat money” is that it will cause inflation. No other fear comes close. To deal with that fear we must have an anchor. Our gold bug friends have got their anchor. Our deficit hawks have theirs. MMT needs one. And we’ve got it.

Let me close with a comment on Dan’s excellent blog on the front page. I agree with almost everything. But readers of the MMP will have noticed one deviation.

I argue that government currency as well as treasuries (bonds) are indeed debts, IOUs denominated in the state money of account. Dan wants to argue they are not debts. I understand the “framing” issue. People are scared to death of debts. It sounds much more user friendly if we can deny our government is in debt. Of course, by identity, if it is in debt we nongovernment types are in credit. The clock at Times Square is a credit or wealth clock, not a debt clock. Don’t think of the elephant and all that. Agreed.

But I’m afraid it is a big misleading and confuses our understanding of what debt is all about.

As I argued in the MMP all IOUs share one common requirement—Innes’s universal law of debt—that the issuer must accept it back in payment. Banks must accept back their own IOUs (demand deposits) in payment of bank loans. Likewise, government must accept back its IOUs (currency) in tax payments. I call this “redemption”.

Many conflate this with the promise to convert. Banks promise to convert demand deposits to cash on demand. Governments might promise conversion, too—but MMTers distinguish convertible currency from nonconvertible currency. That is the difference between Greece and the US.

And many conflate the fundamental law of debt with the usual prohibition against retiring one’s own debt with one’s own debt: you must use a second or third party debt to retire your own IOU. You use a bank IOU to repay your own. This is normally agreed upon on advance: your creditor agrees to accept a bank IOU or some other IOU or even a real asset to redeem yourself—cancelling your debt.

But sovereign government that signs a contract to “pay later” can deliver its own IOU to “redeem”. It remains in debt but it owes nothing more. It is done. You can present its IOU to pay taxes, or to exchange it for another IOU of the government. Nothing more. Unless government promises more. But sovereign government never needs to promise more than that: it will accept its own IOU in payment to itself.

So there is a difference in the nature of the IOUs of sovereign government and nonsovereign “users” of the currency. But in my view they are debts just the same. And in both cases, the issuers of IOUs must take them back. Refusal is a default.

44 responses to “Responses to Blog 41: MMT, Austrians, and Ideology

  1. “So there is a difference in the nature of the IOUs of sovereign government and nonsovereign “users” of the currency. But in my view they are debts just the same. And in both cases, the issuers of IOUs must take them back. Refusal is a default”

    This is where we move from academic to politics. Tell that line to a political marketeer and he’ll be jumping up and down shouting “No, no no!”

    The definition we need to use for selling this idea is that debts are only ‘DEBTS’ in the sense that ordinary Joes understand it if they have to be settled in a third party liability.

    Debts that are denominated in and settled in another of your own liabilities are just some other form of liability.

    We need to differentiate scary DEBT from non-scary debt with a word so that we can get it across on Talk shows.

    I would say that sovereign government debt is not really DEBT; it is a mere liability.

  2. Whoops, there are several typos due to typing quickly and late at night. Most are obvious and not confusing. But there is inconsistency between the following question and the way i answered it:
    4. Do the main MMT economists have different understandings of what MMT is or of how it could be implemented?

    A: Depends on what “main” means. If you mean all of us old geezers who have been there from the beginning I think the answer is yes.

    AND RESPONSE TO NEIL: liability, debt, IOU, debit seem all to mean the same thing to me and I don’t think you’ll find people less worried about government “liability” than government “debt”–except for those who do not know what liability means. I know there is a whole group (AMI) that argues for “debt free money” and they say this is government money that is issued that does not show up on the liability side of the government’s balance sheet. I say this is just an accounting error. So the fear shifts from use of the word “debt” to fear that these people don’t understand the basics of accounting and definitely should not be involved in policy making. My view: honesty is always the best policy, and so we must settle the fear through clear explanation.

  3. Oh, and calling it “debt-free money” as AMI does immediately puts the elephant in front! I think you can usually explain things by talking about “credits” to bank accounts and so on, avoiding using the elephant word. In many cases you can call it a “tax credit” but of course even “tax” is an elephant word. Keystrokes and credits. Use whenever possible.

  4. I love this question of whether the money issued by the government is a liability of the government, because my background is in philosophy. Philosophers love to discuss the nature of things, and this is a question about the nature of money, debt and credit. I defend the idea that the money issued by government is not a liability of government, and Randy Wray defends the claim that it is a liability of government. And Randy has the great A. Mitchell Innes on his side.

    But setting these interesting philosophical questions on the nature of money aside, I think it is important to recognize that the most important aspects of the MMT framework probably don’t depend on which model is used, because:

    1. Whichever model we use, we can explain why the government is the supplier of net financial assets to the non-governmental sector.

    On my view, when the government produces an additional unit of currency and spends or transfers it into the private sector, it has created an asset with no offsetting liability at all. I see money as occupying a kind of middle station between conventional “double-sided” financial assets on the one hand and commodities on the other. On Randy’s view, the issue of the additional unit of currency is an asset of the person who receives it and also a liability of the government. But either way, the non-governmental sector has not acquired a liability along with its asset, and so its net assets have increased. And I believe that’s the fundamental point that Warren Mosler, Randy, Bill Mitchell, Stephanie Kelton, Scott Fullwiler and other MMTers have made. So, unless I am wrong, this question of whether the government’s money is a government liability is an intramural side-debate within MMT, and not crucial to making sense of the MMMT view of things.

    2. Whichever model we use, we can see that there is something very special about the government money.

    Even if we accept that government-issued currency is a liability of the government, it’s still a fact that the government can create these liabilities unilaterally, and pile them up. Having these liabilities doesn’t mean that the government has to seek external funding to pay them off. As far as I can tell, there are no economically meaningful reserve requirements, capital requirements or regulatory constraints on the Fed in the same way there are on the commercial banks. The Fed can’t go bankrupt. The only constraints on its creation of additional money are the policy constraints: does the creation serve or fail to serve the goals of monetary policy – price stability and full employment. If filing up a mountain of so-called negative “equity” at the Fed, then there should be nothing stopping them. So the government role is unique and special, and that’s what gives all the MMT talk about the government’s power to “credit accounts” it’s theoretical oomph.

    Neil makes the interesting suggestion that we might say that the money issuance by the Fed constitutes a liability but not a debt. But my understanding is that a liability is supposed to be something that by definition represents negative value and a future loss to its owner. The Oxford Dictionary of Economics defines a liability as either 1. the legal obligation to make a payment, or 2. the legal obligation to pay debts. So my question is this: Suppose you are in possession of a dollar that the government has given you in exchange for some other good, or else as a transfer payment. Does that mean the government owes you something? I don’t think so. If they paid you with a dollar, then they have already paid you completely, and not just given you an IOU for future payment.

    Innes argued that all money was credit, and that there was no fundamental difference between the government’s money and anyone else’s money – including a bank’s bill or another business’s bill. It’s all just different people issuing IOU’s. His view is that there is something like a pure circle of credit. When we have a promise to pay, and make a payment to fulfill that promise, we always do so by conveying something else that is also a promise to pay. We might pay for our car with a bank IOU which we possess, which is the bank’s promise to pay. But we or a bank might pay with a government IOU which is the government’s promise to pay. A piece of physical currency is such a government IOU, but so is a commercial bank demand deposit balance, a personal check etc. Innes’s view, as I understand it, is that the dollar is just an abstract standard of account for measuring the amount of a debt, credit or payment.

    But I think he is missing the fact that “dollar” is also the name of the entities that have been established by government as the final means of payment. There is not just an endless circle of debt obligations, and there are some means of payment that are not just transfers of debt from one creditor to another. So I would say that when you offer one of these entities to someone as a payment, and they accept the payment either willingly or because the law compels them to, then that particular debt is completely discharged from a social point of view. Nobody owes the payee anything. This is still true in a world in which some dollars exist in a virtual or electronic form as credits to a bank reserve account.

    If we go with Innes’s picture, then it seems to me that when we say that the national government is the net supplier of financial assets to the non-governmental sector, we don’t mean much more than when we say that Bank of America is the net supplier of financial assets to the non-Bank of America sector. But it seems to me there is something asymmetrical in the relationship between the bank and the government that still has to be accounted for. By law, the bank’s money is a debt for the government’s money, since anyone can go to their bank and demand that the bank exchange its demand deposit commitment for the government currency, and hand the currency over. But you can’t go to the government and make a similar demand that they convert your government-issued currency into something else. The government guarantees deposits, so that those deposits do all in some way represent government liabilities. But when you get your currency from the government, the government hasn’t given you something that is in effect just another IOU requiring that they still ahnd over something else in the future.

    Innes didn’t like the idea that the government is the monopoly issuer of the currency. He wrote:
    “ … and of all the false ideas current on the subject of money none is more harmful than that which attributes to the government the special function of monopolizing the issues of money.”

    And he argued that all forms of money are identical in their nature:

    “The notion that we all have to-day that the government coin is the one and only dollar and that all other forms of money are promises to pay that dollar is no longer tenable in the face of the clear historical evidence to the contrary. A government dollar is a promise to “pay,” a promise to “satisfy,” a promise to “redeem,” just as all other money is. All forms of money are identical in their nature. It is hard to get the public to realize this functional principle, without a true understanding of which it is impossible to grasp any of the phenomena of money. Hard, too, is it to realize that in America to-day, there are in any given place many different dollars in use, for the fact is not so apparent in our days as it was in former times. Let us suppose that I take to my banker in, say, New Orleans, a number of sight drafts of the same nominal value, one on the Sub-Treasury, one on another well-known bank in the city, one on an obscure tradesman in the suburbs, one on a well-known bank in New York, and one on a reputable merchant in Chicago. For the draft on the Sub-Treasury and for that on the bank in the city, my banker will probably give me a credit for exactly the nominal value, but the others will all be exchanged at different prices. For the draft on the New York bank I might get more than the stated amount, for that of the New York* merchant, I should probably get less, while for that one on the obscure tradesman, my banker would probably give nothing without my endorsement, and even then I should receive less than the nominal amount. All these documents represent different dollars of debt, which the banker buys for whatever he thinks they may be worth to him. The banker whose dollars we buy, estimates all these other dollars in terms of his own. The dollar of a first class banker is the highest standard of credit that can be obtained generally speaking, though the standard of a first class banker in a city like London or New York may be worth to a provincial banker somewhat more than his own money. The dollar of government money in America is equal to that of bank money, because of the confidence which we have come to have in government credit, and it usually ranks in any given city slightly higher than does the money of a banker outside the city, not at all because it represents gold, but merely because the financial operations of the government are so extensive that government money is required everywhere for the discharge of taxes or other obligations to the government. Everybody who incurs a debt issues his own dollar, which may or may not be identical with the dollar of any one else’s money. It is a little difficult to realize this curious fact, because in practice the only dollars which circulate are government dollars and bank dollars and, as both represent the highest and most convenient form of credit, their relative value is much the same, though not always identical. This apparent stability of government money in our day obscures the phenomenon which was familiar to our forefathers.”

    But Inness was writing just at about the time the Fed was created, and I think he therefore doesn’t recognize the existence of the government monopoly that was in the process of being created, and would develop further. I think Keynes developed Innes’s and Knapp’s views further by insisting on the idea that the government doesn’t just write and re-edit the dictionary, but has the power to determine what things/i> will answer to the definitions.

    My views on these issues have been heavily influence by reading Wray’s many writings on Innes, Knapp and Keynes, but also by Warren Mosler and Matthew Forstater’s “A General Analytical Framework for the Analysis of Currencies and Other Commodities.” One of the arguments of that paper is that “while modern money does not derive its value from its status as a commodity, once a token is declared necessary for the payment of taxes it can be analyzed like any other commodity.”

    I think that a fruitful way to look at the government’s money – the money of the monetary base – is not as a liability of the government, but a sort of manufactured product, whose manufacturing cost happens to be vastly lower than the value that can be obtained in the market by exchanging that product for something else. Government can create various obligations falling on its citizens – especially tax obligations – that create a demand for that product and give people a need to acquire it. But that doesn’t mean that the dollars they acquire discharge the obligations because they represent an offsetting government debt.

    Randy cites this passage in Innes:

    The parties can, of course, agree between themselves as to the form which that satisfaction shall take, but there is one form which requires no negotiation or agreement, the right of the holder of the credit (the creditor) to hand back to the issuer of the debt (the debtor) the latter’s acknowledgement or obligation, when the former in his turn be¬comes debtor and the latter creditor, and thus to cancel the two debts and the two credits. A is debtor to B and gives his obligation or acknowledgement of debt. Shortly afterwards, B becomes debtor to A and hands back the acknowledgement. The debt of A to B and of B to A, the credit of B on A and that of A on B are thereby cancelled.

    I tried to deal with that in my story of Peter and Paula. I don’t think that when someone pays there tax obligation with dollars, we should see that as a case of the taxpayer using the government’s debt to the taxpayer to cancel off the debt of the taxpayer to the government. If that were the case, then if a court canceled the taxpayer’s obligation, the government would still have a debt.

    I think the “debt-free money” proposals are a different question. While I agree with those authors in thinking that the government’s money is not a government debt, nothing follows from that about the best way to issue money into the private sector. Once could argue that even though the government’s money is not debt, the best way to issue it into the economy is to have people borrow bank money – demand deposits – from banks, which in turn requires banks to borrow additional government reserves from other banks and the government, or to sell securities, which are government debts. This process introduces money in the process of creating private sector debts. But I personally think, and believe the MMT economists tend to agree with this, that there is also a major role for the government spending its money into the economy which is debt-free issuance.

    This is a fun theoretical discussion, and I hope it is helping to advance the goal of clear-thinking about our monetary system, but I hope it doesn’t detract from the two points I listed at the beginning that it’s a little bit of a side-issue with respect to the key elements of the MMT framework.

    • Dan Kervick:
      “On my view, when the government produces an additional unit of currency and spends or transfers it into the private sector, it has created an asset with no offsetting liability at all. I see money as occupying a kind of middle station between conventional “double-sided” financial assets on the one hand and commodities on the other.”

      Under the rules of double-entry accounting, every transaction must be recorded at least twice. One account will receive a “debit” entry, another account will receive a “credit” and the credits must equal the debits.
      The basic accounting equation is:

      Assets = Claims

      When the government spends money into the private sector there is created both an asset held by the private sector & a corresponding liability held by the government.
      This true by accounting identity.

      For example:
      The Federal Government spends $10 on goods from the private sector.
      This creates an asset in the form of a non-interest bearing IOU of the government held by the seller and a corresponding liability on the books of the government.

  5. Glenn Ierley

    Following on the basic MMT hypothesis (quoting from above) “From inception you need obligatory payments in the currency to drive it.”, a theoretical question on a fiat currency of a sovereign government that has crossed my mind a number of times is whether this is a stable arrangement in the limit of a very small government relative to the private sector? If the obligatory payments drop to the level of noise, it seems as if they must lose their effective force at some point.

    Incidentally, kudos on the slick new layout of the NEP page!

  6. Oh dear …. Neil and Dan have expressed disagreement with the MMTers. What lies ahead? Will Neil launch Modern Monetary Liability (MML), pilfering 15 years of academic work and pawning it off as his own? Will Dan jump ship, re-branding an entire body of work as Modern Monetary Manufactured Product (MMMP)? The suspense is killing me.

    On a serious note, Dan says, “Innes argued that all money was credit, and that there was no fundamental difference between the government’s money and anyone else’s money – including a bank’s bill or another business’s bill.” But, of course, Innes DID see a fundamental difference, as Randy pointed out. The government’s IOU is fundamentally different. It is special. And, because it is special, it occupies the coveted “top spot” within the hierarchy of money (or debt pyramid, as Minsky called it). Like all of the money in the hierarchy, the government’s money is an IOU. A promise. An obligation. A debt. A credit. What is the promise? To accept it back in payment to itself. When is the obligation fulfilled? When the government receives its own money in payment. Until then, the government’s IOU/liability/debt remains an asset/(tax)credit to its holder.

    I’m no philosopher, but I enjoy these discussions too. Thanks for the wonderful contributions, Dan. They’re a great benefit to us all.

  7. Q: Philip: Austrians use a bait and switch operation—denying that what we have is capitalism and comparing it to some sort of ideal utopian capitalism.

    This is the mirror image of what the communists say about Stalin, that a real communist could do Marxism correctly and we’d see that the theory really does indeed work.

    Greenspan was to libertarian capitalism what Stalin was to Marxism/Leninism, one who held the most power to implement the theory that either ideology is likely to realize, yet was unable to shoehorn reality into the theory.

    Both ideologies fail to account for human nature operating at either extreme, that there is greed and compassion but both have their limits. An accurate theory of human economics lies somewhere in the middle and accounts for extremes in human behavior without trying to deny the wide range of normal.

  8. Stephanie Kelton

    US Government issues UOME’s?

  9. IMHO, Dan seems to make a subtle mistake of conflating real vs nominal in making his arguments against the USD being a govt. liability. This may be a bit of a semantic argument, particularly since it in many ways may pertain more to accounting than economics.

    Dan says: “On my view, when the government produces an additional unit of currency and spends or transfers it into the private sector, it has created an asset with no offsetting liability at all. I see money as occupying a kind of middle station between conventional “double-sided” financial assets on the one hand and commodities on the other.”

    I think that the insight that Dan wants to highlight is that the USD imposes no real economic burden on the govt., hence his argument that it is ‘an asset with no offsetting liability’. I disagree. This is where I believe that the line between real vs nominal (or financial) is being blurred. While I am sure that Dan has a firm grasp of the difference, his argument seems to me to be grounded in the conflation of the two. It is pretty obvious that real (physical) assets have no offsetting liabilities but can the same be true of money? I think not. This is as Dan writes “a question about the nature of money”. Is money the unit of account, medium of exchange, store of value, etc. Since I think the founders of MMT would agree that MMT is concern with money as the unit of account above all else, that’s where we should focus. The notion that the USD is an asset with no offsetting liability to me means that if the US govt. ceased to exist tomorrow that the USD Sould still be an asset the way that my favorite arm chair is still an asset even if the manufacturer is no longer in business. I think that perhaps the most basic deference between real assets (Dan’s house, Ron Paul’s gold coin and my favorite arm chair) and finacial assets (USD, demand deposits and Apple stock). Finacial asset are a cliam against the the issuer in one form or another.

    Dan says: ” Suppose you are in possession of a dollar that the government has given you in exchange for some other good, or else as a transfer payment. Does that mean the government owes you something? I don’t think so. If they paid you with a dollar, then they have already paid you completely, and not just given you an IOU for future payment.”

    A dollar does mean that the govt. owes you something. It owes you the right to retire your dollar obiligation to the govt. It has given you an IOU for future payment. Functionally the govt. payment is complete when it excepts that dollar back as payment.

    Thats my take on just a few of the points raised in this discussion so far. I am interested in seeing this further hashed out.

    • Sorry for the spelling errors. I accidentally posted before I could proof.

    • Another way to think of this is that the public has the ultimate determination of whether wealth has been created. And the government is the agent by which the public’s determination is expressed via net wealth/government debt issuance.

      If we believe that wealth is a universal relationship (albeit expressed in an almost infinity of particular forms), then wealth can only be realized via a social/public process.

  10. The notion that the USD is an asset with no offsetting liability to me means that if the US govt. ceased to exist tomorrow that the USD Sould still be an asset the way that my favorite arm chair is still an asset even if the manufacturer is no longer in business.

    PJ Pierre, I don’t think that is really true. The fact that the value of x depends on the existence or actions of y does not mean that x is a liability of y. A musical performance depends on the actions of the musicians performing it, but that doesn’t mean the performance is a liability of those musicians.

    Also, even if y has an obligation to preserve the value of x, I don’t think that means that x is a liability of x.

    • This analogy does not seem to fit. Are you implying that you would still find value in tickets to a musical performance if the performers ceased to exist?

      • No, not at all. But the fact that the value of the performance depends of the musicians doesn’t mean that the performance is a debt or liability of the musicians. So I’m saying maybe we should think of dollars in the same way. They are a good produced by the government, part of a monetary system that is a service of the government. The value of the dollars depends on things the government does. But that doesn’t make the dollars a debt or liability of the government.

        • Again we come back to real vs financial. A musical performance, like an Ipod or my favorite arm chair are real assets with no offsetting liability. Indeed, MMT has always made this distinction clear. By extending this characteristic of real assets to the dollar, you are conflating real and financial and in doing so, you lose one of their most fundamental distinctions. Money is a product of accounting, a book keeping record. The USD is always a means to an end, while a real asset is at times, in and of itself, the end. MMT solves the infinite regress (why did the musicians except dollars in exchange for their wonderful performance, and so on). The solution to the infinite regress lies in what I believe Prof. Wray once called ‘original sin’, the state imposed tax obligation. Suddenly the reason that there would be demand for that states IOU becomes clear ( the more the state owes me the less I owe the state). The way I see it, the MMT argument is not that because a dollar retires that much of your liability to the state that it is therefore the states liability. It is that because the dollar is a state liability, it therefore retires that much of your liability to the state. It is the direction of causation that MMT espouses. So to think of dollars in the same way that we think of musical performances would gloss over the subtle nuances (the devil is in the details) that make them distinct and our analysis suffers because of it.

          P.S. While I am also no philosopher, I do enjoy these discussions as well.

          • By extending this characteristic of real assets to the dollar, you are conflating real and financial and in doing so, you lose one of their most fundamental distinctions.

            Yes, I know this flies in the face of some standard conventions where dollars are a financial asset par excellence, and so are supposed to correspond to an offsetting liability. But it seems to me there is something fundamentally different about financial assets that are IOUs corresponding to a promise of payment or redemption, on the one hand, and the those financial assets that are established as a final means of payment that redeem all other financial assets.

            I’m taking the Mosler and Forstater idea that once the government establishes a tax that generates demand for its dollars, then you can analyze currency like a commodity.

          • Unfortunately it seems that this discussion may have reached a point of infinite regress. I think it is obvious that we all have the right to think of the dollar how ever we see fit no matter how it may fly in the face of established conventions.

            What appears to be at the crux of the issue is that the govt. is not burdened by its so called liability the way non govt. agents are so therefor how can it really be a liability? The key to this absence of burden lies in the fact that the govt. creates its so called asset (the tax obligation) out of no where.

            Never the less, don’t think we will come to agreement here.

          • Abram Larson

            I know I’m a few days behind (damn work and all), but for what it’s worth, just want to comment on the discussion between PJ an Dan.

            In the musical performance example, I think Dan missed (sorry Dan) the point PJ was trying to make. The dollar here is more like a ticket purchased by someone in advance. In that case, the ticket is a promise by the musician to play for the ticket holder on a certain date and time. That ticket doesn’t have any value other than the expected performance of the musician. As PJ was trying to point out, if the musician kicks the bucket before the performance, the ticket has no value. Similarly, the dollar would lose it’s value quickly (but probably not right away) if the US government lost the ability to collect taxes.

  11. David Graeber in his book “Debt” has suggested that human beings see their obligations to each other as a form of debt. Stephanie Kelton has reminded us that Innes argued that all money was credit or debt. It would seem to make sense to ask ourselves just exactly what are these “obligations” we feel we owe to each other. The most rational answer to me seems to be that they are about meeting our “needs” both private and public or individual and collective.

    Prior to the arrival of money in human societies, hunter-gatherer bands were greatly concerned about fulfilling obligations to each other for the sake of mutual survival and this depended greatly upon the ability to trust each other. As the British anthropologist Robin Dunbar has argued the capacity of the human brain’s memory limits us to about 150 persons we can know really well and form stable relationships and build trust to meet obligations.

    The arrival of money on the scene greatly expanded our ability to get our “needs” met through “obligation” by a substantially greater number of persons thereby over-coming the memory limitation. Accordingly I would argue that amongst its various uses money can be seen as a “Need Agent,” a tool or technology, that is mutually sanctioned (brought into existence) through the Social Contract. In other words we collectively agree to “lend” it into existence and back our mutual consent through taxation and legalistic coercion. In this sense we have bound ourselves by a “Social Contract Liability” which Stepanie Kelton argues we do through the state having to accept back its own money for taxation purposes. However, Dan Kervick also rightly argues we as the state can bring money into existence without a financial obligation or debt to others. Both views are, therefore, correct.

  12. Glenn Ierley

    In his reply to the query above on the general accord among MMT practitioners “up to and including JG/ELR”, Prof. Wray remarks that, among the general public, fear of inflation is hands down the overwhelming concern about fiat money.

    Hearing Ron Paul hold forth, for example, it seems clear (to me) that Paul’s understanding of what money *ought* to be is, among other things, a unit of account that is perfectly invariant over time. And certainly I have heard acquaintances rail about inflation as an evil, though perhaps not surprisingly, most often from older people concerned to preserve the value of their nest egg, and not from young people, who have very little at stake.

    But the same people that have this fear are also apt to feel the government should be run like a household, that government debt is a burden on future generations, and so on. That is, their belief that government has a positive obligation to maintain a currency of fixed value (and hence the value of personal savings) is typically grounded in a misconceived notion of what money is in the first place.

    By contrast, the MMT argument for JG/ELR, so far as I understand it, is not responsive to that purpose in the narrow terms stated, but rather is advanced because of the general (price) stabilizing effects for the economy of having a linkage to a broad commodity anchor like the minimum wage for labor. In this, the argument is motivated in much the same way that Prof. Wray notes above a minimum government size of say 20% of GDP is desired in order to have a sufficient economic counterweight against oscillations in the business cycle, irrespective of what social choices one favors to compose the 20%. But this purpose — to have a well functioning economy, with built-in stabilizers — doesn’t preclude that an optimally running economy might well require a weak target rate of say 1% or 2% inflation, a result that would of course be anathema to Ron Paul, who wants the answer to be 0.00% and is sure that gold can bring this about.

    This may all seem splitting hairs but, in an environment where fear of inflation runs so deep, the difference between zero tolerance for inflation and any more nuanced position can easily be made to seem a chasm. Nonetheless MMT, JG/ELR notwithstanding, oughtn’t be sold as a zero tolerance position, no?

  13. I’ve never quite understood what the objection would be for government to make available an index linked savings deposit capped at a certain maximum value. Such a savings deposit would be greatly welcomed by retirees who’s capacity and will to work to maintain adequate income and savings is not great. Under current monetary arrangements it seems acceptable for government to pay interest on bank reserves and bonds so why not government savings deposits. Obviously the financial sector rentiers are not going to be happy and will do their best to use their tame politicians to stop it happening but such an arrangement then makes it more feasible for society to then move against the hyper-inflating power of the banks and shadow banks.

  14. I’m going to chime in here in favor of Dan’s plea for distinction between debts and the issue of currency by a currency issuer. I believe trying to shoehorn a non-convertible currency issued by a sovereign nation into the “debt” straitjacket contradicts a lot of the discovery that MMT has made about how monetary operations work. Yes “debt” has a pejorative tinge but I don’t think Dan is engaging in just political positioning or window dressing.

    In some sense I think the “shoehorning” comes from a couple sources:

    1) A too-rigid adherence to stock-flow consistency a la Godley. As a non-economist and a non-accountant maybe I am not understanding this correctly but it seems as though balancing flows gets one to a largely a-dynamic picture of how the economy works: it is, in the end, an equilibrium model. The economy is a non-equilibrium system and one of the sources (or representations) of dynamism in modern economies is both the creation of endogenous money by banks and currency issue by sovereign governments. Inventing “debt” for currency issue seems to be an effort to create a balance sheet where there is none.

    2) An entirely “vertical’ story about the origin of money. While I think MMT is a great answer to the erasure of the role of the state in money in neoclassical economics, I don’t think that money can be entirely reduced to its vertical component (i.e. money as a means to pay tax obligations). So just because the “bad” neoclassicals have an entirely horizontal story about money it doesn’t mean that you don’t need to pay attention to horizontal functions and uses of money. “Debt” has many horizontal components that are not collapsible into the vertical story.

    So I think it would be a help to use the word “debt” in a more restricted sense, as Dan suggests and find other ways to describe obligations of government that are not specifically debt.

    • I think that the founder of MMT have always made clear the distinctions between the sovereign currency and all other assets, both real and financial.

      • Then why the claim that the issuance of non-convertible currency de novo is a “debt” like other debts? Being obliged to take the currency as payment for something (not necessarily taxes) is not the same as a “debt”. If we take Warren’s metaphor for issuing currency as a form of “score keeping” the scorekeeper is only obliged to recognize that what he or she has issued means something in terms of the game. By putting up a score, the scorekeeper has no “debt” to the players. Obligations, yes, debt, no.

        I think we are encountering the clash of a number of systems of thinking that have not been entirely thought through.

        • I believe this stretches Warren’s metaphor beyond its intended meaning.

        • Michael Hoexter
          “Then why the claim that the issuance of non-convertible currency de novo is a “debt” like other debts? Being obliged to take the currency as payment for something (not necessarily taxes) is not the same as a “debt””

          I’m not sure anyone says it is a debt like other debt.
          In fact it is often acknowledged that money is indeed a very special type of debt, different from other debts.
          It should be made clear when one is referring to money as debt, that one does so from the perspective of Accounting.

  15. Don’t know if anyone has said this, but monetary base is not a debt or liability of the govt / central bank machine in that the “machine” can simply confiscate base dollars from the private sector whenever it chooses – via tax.

    Much the same goes for govt debt, i.e. Treasuries. If the private sector was short of monetary base, but did have Treasuries, it would try to sell Treasuries. That would raise interest rates, so the Fed would buy the Treasuries to keep rates down. Then the machine could confiscate the money dished out in exchange for Treasuries. In effect, the machine would be confiscating Treasuries.

    • Ralph Musgrave – “If the private sector was short of monetary base, but did have Treasuries, it would try to sell Treasuries. That would raise interest rates, so the Fed would buy the Treasuries to keep rates down.”

      How would this raise interest rates on Treasuries if the Fed sets the rate?

      • golfer1john

        Mass selling would ordinarily drive the price down, and the rate up; the way the Fed sets the rate is by offering to buy in unlimited quantity at a fixed price, so that the selling does not drive the price down, and the interest rate up. The Fed rate target is actually a range, and the selling would move the rate, but only within the range.

  16. Sometimes I wander who’s indebted to who since government does not need public’s money for anything, but non-goverment sector needs government’s money to, say, as a store of wealth, and to faciliate commerce and trade. Would it make more sense to say that the public “borrows” (leases?) money from the government and the debt is actually non-government sector indebted to the government?

    On the other hand I get the concept of money as our common liability since we have to provide real resources and services to those who posess it and want to spend. Here I would prefer word liability over debt since word debt brings in to my mind image of some kind of clearly defined explicit promise, while, when you think about it, no actual promise has been made. We just bear the burden.

    And why is goverment debt counted only as financial assets it has issued? By this definition any promise should be counted as debt because it is our common liability just in the same way money is, we have to provide real goods and services to make good that promise. Instead of running deficits to fund pension savings, governments could simply promise to make equivalent payments to the seniors when time comes due. This would not count towards “government debt” as commonly defined. But would it not be too government debt just as much, our common liability? Does MMT concept of “government debt” encompass these “promises made to deliver when time comes due?”

    And in this “real resources” definiton of the debt it is not really the government that is indebted, it is the society at large. Money, like any wealth sloshing around elevates those who have it above those who don’t. But should we really say that poor are indebted to the rich?

    • PZ, if they would go to deposit banking instead of reserve banking, I think the government could buy all the debt and run the government off the interest. The extension of credit, which is an entry on the right side of the accounting ledger is the root of most financial problems in an economy. All private lending should be done at risk. The maintenance of all exchange accounts by the government would be an idea worth looking into, with lending done outside the system, basically between accounts. The current system of credit banking has run its course, as there is no longer the capital to support it or the capacity to redeem the debts.

  17. A reminder of Geoffrey Ingham’s Chartalist “Money Is A Social Relationship” argument which is in effect money as promise or obligation to meet need:-

  18. At least it isn’t MMSR (Modern Monetary Surrealism).

  19. H. D. Mcleod’s theory of commodity money as social credit:-

  20. Heinrich Moltke

    I am a fan of Michael Hudson’s, and now I am turned on to MMT.

    Some initial observations: the whole vertical and horizontal schema for money movement…it can’t be overlooked that this is a visual metaphor. It may be attempting to depict a qualitative difference between two systems (government and private sector) or more precisely characterizing the money movement across this system boundary as qualitatively different than money movement that takes place intra-private, i.e. internal to the private sector. But it is still a metaphor: there is no ‘horizontal’ or ‘vertical’ per se, and this has to point to a limitation of the theory yet to be developed.

    Second (at a glance) regarding the qualitative difference above — it is assumed to exist. In other words, because the Gubmint is the creator of currency (fiat, etc.), the locus or site of currency creation, it is *assumed* that the purpose of created currency is to return to the Gubmint. To the extent that MMT postulates that governments create money supplies or currency in order to define their terms of payment, i.e they define the terms of their compensation and this is called, for example, the Dollar, MMT is able to close, organizationally speaking, the system under consideration: the money supply. But it seems to me this involves a semantic aspect. Because we “know” the Gumbint creates money (whether Treasury or Central Bank) we suppose that the “purpose” of money is to come back to it because this closes the system. But while this definition of money may work and yield wonderful analsyses, it is a definition. I guess I am a constructivist when it comes to definitions in economics: they are not the things themselves.

    There are all sorts of empirical instances where the money created at the Source does not return to it. For example, I can burn a dollar bill. That dollar bill will never return. Likewise, pallets of millions and millions of dollars unloaded in Iraq do not necessarily return as tax revenue. Some might, if used to pay U.S. companies and contractors. Some might never return. If I expatriate, and withdraw my savings overseas as Euros, the bank will siphon off some of that in fees, and presumably somewhere down the line the “dollars” will be settled in terms of “euros” by somebody, somewhere. But by then, the value may have changed so that either dollars or euros were destroyed in the process. This raises the issue of the *value* of the currency in question. If the semantic similarity between Gubmint as currency creator and Gubmint as tax collector is to be sustained, are we to believe that the Gubmint creates money in order to receive it back at a different and potentially lesser value?

    What I’m getting at here is that the money-in/money-out Gubmint model apparently involved in MMT (top the pyramid) provides a semantically closed system for the *meaning* of money, but empirically in practice it remains to be seen whether a nation’s money supply is truly organizationally closed or open. A good metaphor here might be the water cycle: it rains, and water on the ground evaporates and returns to the sky **but not as rain**. It returns in another form (e.g. water vapor). In the real world, taking the printing of currency as the source (electronic or paper) that money may simply run downhill and disappear (e.g. a million-dollar home burns down) or take other forms on the way down. Whatever makes it back to the Gubmint has a different form, has a different value, etc., making it nowhere near as neat and tidy a circle as MMT’s operational definition of money would have it (at a glance).

    • The problem with natural metaphors is they usually have an implicit conservation aspect to them that makes them fundamentally resemble solvency constrained money. The sky must first obtain moisture before it can rain. To describe fiat money we must introduce unnatural miracles where the sky miraculously manifests water from nowhere and can also annihilate it from existence .

      The awkwardness of introducing miracles to nature is probably why MMT tends to prefer metaphors which, like the fiat being described, are man- made abstractions such as the scorekeeper, ticket taker, business cards, etc.

    • Take another glance. MMT deals with financial assets. Houses are real assets. MMT is not about real assets.

      MMT allows for open systems, including a foreign sector. It also allows for destruction of currency, but it is rarely mentioned because its impact is negligible.

      Government does not intend to confiscate (destroy) by taxes all the money it creates. It cannot, if the economy is to grow and thrive. There is no circle of money in MMT, like the circle of rain.

      Pay particular attention to the difference between individual actions and aggregate results. Yes, a person can trade his dollars for euros, but that does not change the number of dollars or the number of euros, in the aggregate.

      • Heinrich Moltke


        If MMT has no descriptive power when it comes to ‘real assets’ it doesn’t sound much like a general economic theory. But I suspect this isn’t true.

        Here is a comment from John Carney in his CNBC article called “Modern Monetary Theory and Austrian Economics:

        “Government financial assets may be unlimited but real assets available for purchase—that is, goods and services the economy is capable of producing—are limited.”

        This suggests MMT includes real assets in its model, if only as a limit. Of course, the MT in MMT stands for “monetary theory”. But it cannot be silent or unaware when it comes to real assets.

        As for government intending to confiscate all money, the point here I believe — and as I think I wrote above — that the potential for the money to be confiscated, i.e. as legal tender for paying taxes, is central to MMT. At least according to the Wikipedia article:

        “Taxation is employed to establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that can only be met using the government’s currency.” And then: “An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value.”

        If the above isn’t clear, it should be. For MMT, it seems, the fact that a nation’s currency (e.g. the dollar) is how the tax bill is settled is how the currency obtains its practical value.

        My comment above said that this latter stipulation is how MMT closes the system of value when it comes to currency: money gets made by the Gov’t, and it comes back into the Gov’t. The “semantic” aspect of money, the concept of a currency’s value, is constructed and closed by MMT this way.

        It sounds as if the rain metaphor works even better than it had appeared before. Water droplets come down (dollars) which disappear into the earth, into plants and animals (real assets). On the surface, water gets exchanged around as animals consume other animals and plants, and groundwater is drunk. Some of that water escapes back into the air where with regularity, but on its own timeframe and for its own separate but related reasons, more money gets printed.

        • I don’t know of any MMTer who says MMT is a “general economic theory”. They say it is a description of how modern money works. MMT does not deny the existence and importance of real assets, it is just about other things. I suppose MMTers would accept the current conventional wisdom regarding real assets, whatever that may be. I don’t know of any controversies involving economic theories of real assets.

          MMT says that taxes give the currency its value. But you said

          “it is *assumed* that the purpose of created currency is to return to the Gubmint.”

          MMT assumes no such thing. MMT says that the purpose of created currency is for government to buy the things it wants and needs. Governments create money in order to spend it into the economy in exchange for real goods and services. It is not intended to “return to” the government. If that were all they wanted, they could have kept it in the first place.

          • Heinrich Moltke

            So what: there is no relation between gov’t creating currency and gov’t receiving same currency back to satisfy tax obligations? I could have sworn from my ‘glance’ that this idea was pretty central to MMT. In fact, that it is because the currency is designated by the gov’t as acceptable means to discharging tax obligations that the currency has value. You’re talking yourself into a corner.

            My point — or speculation — is that when it comes to the definition of value for a given currency, from a meta-theoretical point of view, MMT closes the loop by allowing Gov’t-as-money-printer and Gov’t-as-tax-collector to be equivalent. I am not saying, and did not claim, that every single dollar printed, for example, must also be collected as tax. But when it comes to the *value* of currency, it sure sounds like MMT postulates that generally speaking a government will allow a certain currency to predominate — to have value — and even promote its value and utility on the basis of the fact that in principle it can come back as tax revenue. It would be ridiculous is a gov’t authorized one legal tender for everyday use but then required tax debts to be settled in another form of currency that citizens had no access to.

            So I conclude that for MMT on the basis of governmental authority (‘fiat’) a certain currency is created at least partly with an eye to future tax obligations being settled in that currency.

            Though that raises an interesting thought-experiment: what if government had one currency, and the private sector another?

            • “So I conclude that for MMT on the basis of governmental authority (‘fiat’) a certain currency is created at least partly with an eye to future tax obligations being settled in that currency.”

              As monetary systems are, by nature, creatures of state, it follows that any & all theories of money must involve the recognition of governmental authority and power.

              Money is a transferable non-interest bearing debt of Federal Government.

              Anyone can issue debt as money, but its another thing to get others to accept it.

              Human existence necessitates some form of government, the question is which form (structure, institutions, etc).

  21. The system might as well be MMT, because it is going to implode either way, as there isn’t much difference between a country putting currency out there and one putting it out there disquised as debt they are going to pay some day. The only difference is the debt provides a return over time of something besides paper and ink. There isn’t a currency ever existed on Earth that was worth more than paper and ink that wasn’t tied to debt. When you find this out too late and the capacity of international trade goes to zero, what will save us from the catastrophe? The only thing that gives the dollar value is the decree “This note is legal tender for all debts public and private”. Because there were already more debts in existence than could be paid in 1933, it worked. You blow it up, we will have to go back to gold to get something that works if we don’t want to have something forced on us by the barrel of a gun. The mechanism of debt allows for protection of a currency’s value. We will witness a run on the Euro before it is all over due to the junk the ECB has behind the surplus it has put on the street. All the current printing has done is allow bankers to cover their crimes.

    • mannfm11:
      “The only difference is the debt provides a return over time of something besides paper and ink. ”

      Not all debt provides a return.
      Non-Interest bearing debt (eg: a dollar bill) is still a debt.