A Communication from Your Central Bank

By Dan Kervick

Nick Rowe recently argued that there can be certain types of products for which the market might allow multiple equilibria.  This can happen because the willingness of an individual to buy some product might depend on how many other people buy that product.  The upshot, Rowe suggests, is an unusual, non-functional shape to the demand curve characterizing the market for the product in question, resulting in two distinct equilibrium demand quantities corresponding to the same price.

Rowe applies this model to cases in which the supply of a product is determined by a monopoly supplier.  Rowe says that in most cases it does not matter, for theoretical purposes, whether we think of a monopolist as setting the optimum output level and then letting the price go to the equilibrium determined by the intersection of the demand curve with that output level, or as setting the optimum price and then supplying output until it reaches the level the market demands at that price.  In each case, we get the same result.  But if a non-functional demand curve describes the market for some product, then it does make a difference, he claims, whether the monopolist targets a price or targets an output level, because there might be multiple equilibrium output quantities for some prices, but only one equilibrium price for each output quantity.

The kind of case Rowe is discussing, which he illustrates with an example of a hypothetical electronic communications device – a “gizmo”, is theoretically interesting in itself.  But what I want to focus on is an application he makes of it, an application which appears to be his main reason for offering the model in the first place.   Appealing to some 1970 work by William Poole, Rowe applies the multiple equilibrium model to the central bank, which they view as a monopolist setting either the “price” for money – an interest rate – or the quantity of money.  The monopolist in this case is constrained by a “money demand” relation that might be non-functional in the manner described above.

Rowe then says this:

Should we economists think about central banks setting a nominal rate of interest or a target for NGDP? Should central banks think of themselves as setting a nominal rate of interest or a target for NGDP? How should we best communicate to the public what it is that central banks do? It matters.

“NGDP” stands here for nominal gross domestic product, the total amount of spending in the domestic economy, measured in current dollars.  Rowe and others have argued that the central bank should set a desired growth rate for NGDP as their primary policy target, and should carry out monetary policies mainly aimed at hitting that target rate.  They also argue that the central bank should practice level targeting of NGDP growth, which essentially means that if the target is not hit in a given period, the bank should aim for an NGDP growth rate in the immediately subsequent periods that brings the overall NGDP growth trend to the target level.

But Rowe’s question about how economists should think about NGDP targeting seems to come out of the blue following the previous discussion about multiple equilibria.  Even if we think of the central bank as the monopoly producer of money, with the ability to target either the price or quantity of money, why should think that this power extends to the ability to target not just the amount of money in the economy, but the amount of spending of that money?

And in fact, the central bank is not the monopoly producer of money.  The central bank produces only one form of money – the narrow form of money in the monetary base: mainly the reserves in which banks conduct their own business among themselves, and the decreasingly important vault cash that banks order from the central bank to meet customer needs that those banks have identified and developed.  And as research by MMT economists like Scott Fullwiler and others has increasingly shown, the quantity of broad money in the economy is endogenously determined by a host of factors.  There is no technique by which the central bank can reliably target the supply of broad money through its control over the monetary base.  Instead of driving the process of broad money creation, the central bank is constrained to react to changes in broad money by adjusting the monetary base to support its primary operational target: the interest rate on interbank lending.

So it’s like Rowe has told a story about the monopolist who produces gizmos, and then followed that story up by asking, “Should we think of the gizmo producer as setting the nominal price of Christmas trees, or as targeting the total volume of exchanges involving Christmas trees?” The fact that the gizmo producer is a gizmo monopolist doesn’t mean the gizmo producer can monopolize other, non-gizmo markets like the market for Christmas trees.  Similarly, there is no reason to think that the central bank can target the quantity of broad money, much less that it can target the actual level of total dollar spending in the economy.

But Rowe is right that the message a central bank communicates to the public is important.  That message does matter.  So what should that message be?  This is the kind of message I personally think would be best:


“Dear citizens:

“We are the central bank, which means our job is to serve as a bank for bankers, and to regulate and stabilize the banking system.   We do not run the whole national economy, or even set the main macroeconomic parameters for the whole economy.   Despite the existence of some strangely popular macroeconomic theories to the contrary, we cannot determine the level of aggregate demand, the level of employment, or even the general level of prices.

“Money exists in different forms.  The broadest form of money is the kind used by ordinary households and companies to transact business of all kinds, and consists predominantly of balances in commercial bank deposit accounts.  It can be thought of as points on a scorecard.   These points are exchanged in the economy for real goods and services, often without ever being reduced to the physical form of old-fashioned paper currency and coins.   A narrower form of money is used by commercial banks to transact business among themselves, and can also be thought of as points on a scorecard.   Just as individuals, households and firms have accounts at commercial banks which they use for transacting business of all kinds, commercial banks have accounts at the central bank for transacting business among themselves.

“The broader form of money essentially consists of IOUs for the narrower form of money.  Commercial banks introduce and recirculate money in its broadest form into the real economy in response to their own assessments of real economic opportunities for growth and profit.  We have some influence on that process but by no means control it. Our job is to accommodate these commercial bank initiatives by supplying and regulating the more narrow form of money that banks use to settle payments among themselves, while applying brakes if we think the banks are becoming too exuberant in creating the broader form of money.  We can also let off the brakes if we have been applying them too tightly. The commercial banks take the lead and we are bound to follow, regulating the process but not driving the process.

“We control the brakes on the economic car, but not the accelerator.  If the driver is trying to accelerate, and we let off the brakes, the car will go faster.   But if we have released the brakes all the way, and the driver does not want to accelerate, there is nothing we can do to make the car speed up.  The driver is the commercial banking system, and the brakes are the interbank interest rates that we control.  The banks can accelerate lending if there is strong demand for spending on consumption and investment in the real economy.  But, especially in a struggling and indebted economy, the ability of households and firms to generate demand for products leaks out of the economy as these households and firms save substantial portions of their income.  If there is weak demand, banks will not find many profitable opportunities to loan.  And if there are few profitable opportunities to loan, we at the central bank cannot make loans happen.  And, mysterious statements to the contrary notwithstanding, we don’t have any other ways of making spending happen except by influencing the rate of bank lending.

“Again, we don’t run the whole economy.  Our ability to influence general trends in the broad national economy is seriously limited – especially in circumstances in which we have already released the brakes on the interbank lending market as far as they will go. We have no established and approved mechanisms for pouring money directly into the real economy of households and firms outside the banking sector.   We do our work and exert our influence in and through the banking sector.  It would thus be absurd for an institution with our circumscribed powers to profess to “target” total spending in the whole economy, and so we won’t insult your intelligence by professing to aim at such a target. The only target we can sensibly establish and hit is the rate of interest that banks charge other banks in the system we supervise.  So that is the kind of target we’ll stick to.

“If you are dissatisfied with the performance of the national economy, you have two choices: First, you can wait patiently until private economic activity repairs itself, slowly and haltingly, over many years, understanding that there is no reason to think the economy will ever achieve full employment by private sector means alone, or generate the level and scope of national investment necessary to keep the economy from declining over time and falling behind its more aggressively investing neighbors.

“The second choice is less passive: you can demand that the most powerful economic actor in the economy – the national treasury controlled by the legislature that is filled with representatives that you, yourselves elect – is vigorously mobilized to do some significant buying, investing and production of its own. This government activism can restore the economy to full employment in short order, and also accomplish some very important long-term public investment in the process.

“Any schoolchild who has studied the democratic and republican form of government knows that the central bank does not have the “power of the purse.”  We at the central bank cannot invest in new school buildings, hire teachers, build roads and tunnels, build new energy systems and distribution grids, or hire the unemployed in great numbers.  We do not have the unilateral authority to simply give money away to households and firms; nor would any self-respecting democratic country want to give that awesome authority to a secretive panel of unelected bankers.

“But although we cannot initiate such spending ourselves given the constitutional structure of the national government and the central bank’s circumscribed, law-governed role in those institutional arrangements, we guarantee we will accommodate bold economic activism by the national legislature. That is, we will buy up massive quantities of the government’s debt instruments in support of expanded government spending, and roll those debts over indefinitely – making sure the treasury never has to draw on tax revenues to pay it back, effectively just creating money for the government to use at the people’s behest.  We can turn big government debt totals into meaningless bookkeeping figures.   And because the economy is currently running so woefully below capacity, we believe we can assist you in this way without causing damaging inflation.

“It is possible our future successors at the central bank might have a different mindset, and might go into a conservative crouch to battle inflation. But even if our successors don’t have the enlightened attitude we have, it is important that citizens understand their own power in this sphere.  This central bank was created by congressional legislation.  It operates according to rules established by that legislation, and operates under the constitutional money-making authority of the legislature, authority which was only delegated to the central bank.  If some future central bank administrators put the brakes on an economic recovery, or hamstring an energized, mobilized public eager to put the power of the government to work building a brighter future, the public can assert greater control over the central bank.  You and your legislators make the rules.  The so-called “independence” of the central bank is a mere operational practice that you and the legislature have chosen, and that can be modified or reversed any time you decide to choose differently.”

“So there it is.  It’s in your hands.  Organize yourselves, pressure your legislators, and take charge of your own economy, and don’t look superstitiously to magical wizardry from the central bank to control economic events that only the political branches of government can control.

“We are, as ever, your servants,

“The Central Bank”

55 responses to “A Communication from Your Central Bank

  1. Awesome Dan, simply awesome. This should be saved somewhere in an archive so central bankers of the future can use it at their behest.

  2. Dan, with all due respect, this reads like a letter that one MMTer has written for the benefit of other MMTers. The public wouldn’t get past the third sentence. And this sentence — “Any schoolchild who has studied the democratic and republican form of government knows that the central bank does not have the “power of the purse” — assumes facts not in evidence, as they say.

    IMHO, MMT has to move beyond ever more examples whereby we show one another that we’re right — or, even less productive, whereby we try to persuade a hopeless economics profession that has so disgraced itself that it no longer has any credibility that we’re right.

    The case has to be taken to the public — to the 99%. That requires a highly simplified message in a highly reduced form without jargon. Maybe a contest to explain the tenets of MMT, in 100 words or less, to one’s father-in-law (who voted for John McCain) is in order? Or has this been done already?

    • Robert Rice

      Nice to hear someone else singing this tune, too, although I’m afraid it’s largely falling on deaf ears. It’s kind of sad people like Peter Schiff are so much more effective in disseminating their message. In recent years, MMT’s message has been making more progress, although ironically that has little to do with the academics and a lot more to do with someone many regard here as an apostate. They’re riding his message spreading coat tails if nothing else.

      You might follow Warren Mosler’s site, the ground seems more fertile for progress, although there are noteworthy exceptions here.

  3. Paul Krueger

    Dan, I always like your perspective, but I’ve never really liked the “money is like points on a scoreboard” analogy very much. I understand the point being made, namely that money is created out of thin air by banks, but the analogy breaks down because I can actually make use of the “points” in my checking account. Points on a scoreboard are only a record of something and cannot otherwise be used for anything. Money has a value, points on a scoreboard have none. You can’t give them away or save some up for use in a future game or use them for anything really. Trying to help people understand money using this analogy may ultimately cause problems because people innately understand that money has a utility/value that points on a scoreboard do not. So they may reject the whole analogy outright on just that basis. I wish I had a better analogy to offer (I don’t), but I’ve seen how creative you are at that particular pursuit, perhaps you can generate one.

    • “Trying to help people understand money using this analogy may ultimately cause problems because people innately understand that money has a utility/value that points on a scoreboard do not.”

      Yes. In my opinion, people do not have to understand money to be converted to MMT. In fact, if one can convert them to MMT first, they then themselves will deduce what money really is.

      “So they may reject the whole analogy outright on just that basis. ”

      This is the potential trouble with using analogies to make converts to MMT. Analogies work on a personal basis. But an analogy about architecture, for example, may not persuade a truck driver to consider MMT. One must work backwards from common goals to ways that MMT can help achieve those goals — and to an understanding of what about the way the world is currently organized stands in the way and must be changed.

      We don’t have to drag the novice through each and every agonizing step that we had to go through to fully understand MMT. Most folks won’t sit still for that. But YMMV.

    • Dan Kervick

      How about points in a video game, Paul? I’m from the pre-gamer generation, but can’t you exchange the points you’ve accumulated in those games for virtual ammunition and other virtual goodies?

      • Paul Krueger

        Dan, I suspect I’m at least as old as you are as I am now retired. Perhaps your suggestion would work, but I have some doubts. I’m not a gamer either, but aren’t those “points” often represented as some form of currency? So the fact that they can be used for something just means that they act like real money. So the virtual-world/virtual-money relationship is familiar since it mimics the real-world/real-money relationship. And of course people are now finding ways to convert between virtual and real money as well. I guess my point is that I’m not sure that will provide any real insight into the nature of money although I suppose you could just say that banks (Fed and others) make real money in exactly the same way that virtual money is created for the game world.

        econobuzz, I generally agree with your concerns about how we should be teaching others this stuff. I’ve been writing a blog for a couple dozen friends and relatives with the objective of educating them about macroeconomics. Although I’ve tried to make it easier for people to go through the learning process than it was for me, I’m not sure I’m being all that successful. Every time I start to compose a small post on what I think is a limited subject I find myself dividing it into a separate topics to eliminate misunderstandings that I know I had while I was learning. The result is a series of longer, more drawn out posts that I know are not all that easy for everyone to absorb. I get some positive feedback, but also a lot of “I haven’t really absorbed it all yet” comments. Macroeconomics really isn’t for the feint of heart. I have a real sympathy for Wray/Mitchell textbook effort. The only other thing I’ve considered is developing an app that could provide better intuition in people using a graphical depiction of what is going on. But that also gets pretty complex in a hurry.

        paul, if the scoreboard analogy works for you to make whatever points you want to make to others, then more power to you. Based on my own experience trying to relate these concepts to others, I just personally think it misses the mark in terms of informing people about the nature of money and am searching for something better.

    • Different_Paul

      I never liked this scoreboard idea either. It defies accounting logic and creates real problems for MMT. A number of commentators have highlighted this problem on other websites (I won’t redirect to the enemy!), but I think MMT should stop oversimplifying things to make them easier to digest. As Paul noted, these balances in accounts don’t just represent fictitious numbers in the air. They represent real numbers in real accounts and you can’t debit something without it first being credited. To get this wrong is to get the accounting wrong and to get the accounting wrong in economics is to get everything wrong. My 2 cents.

      • Yes, it’s good to continue to remind people that just because money can exist in in the form of a mere balance in an account doesn’t mean that there are no constraining rules governing how money can be added or deleted from those accounts in the monetary system. I have often inveighed against the misconception I sometimes call “free lunch MMT” – the idea that because money can have a virtual, low-cost electronic form rather than a more costly material form means that everything is free now.

    • The example I’ve taken to using instead of points is video game money. Pick whichever video game you want. I hear World of Warcraft is popular. Now you don’t lose any explaining power in the analogy. All the NPCs (Non-play characters) in the game are the government. In order to inject money into the economy, they have to first pay players for performing some actions (killing things, selling things they acquired by killing things, etc.). The solvency argument becomes, “where does the game get the money it gives you for doing these activities?” Any layperson automatically knows it just creates it. It doesn’t have to borrow from anyone, it just ups your amount.

      By design all the money is just digital record keeping. The amount of gold you have in no way corresponds to any physical gold stash anywhere. Once spent into the in-game economy, the gold is usually freely transferable between players and they can trade it for in-game items between each other. Inflation scenarios are easy to posit to. Any good game designer purposefully puts “taxes” in their game. In the case of WoW, the biggest “tax” is repair bills on damaged equipment. These scale as you level up and get better equipment so that those players who have the best equipment (and likely the most money) end up paying more “taxes.”

      One difference thought is that there is typically no private debt. The entire economy is funded through deficit government spending on the part of the game. I’d like to see Blizzard’s debt level for World of Warcraft. My guess is it completely dwarfs the US National Debt.

  4. @Paul K.

    Points on the scoreboard are used for something – when tallied up they determine who “gets” the win.

    • Dan Kervick

      But I see Paul K’s point. The Yankees and the Red Sox can’t exchange runs in a game for hot dogs, a player to be named later or extra bats.

      • @Dan

        I see his point too but these arguments can become too literal. I can’t exchange money directly for health. There are limitations in any process.

        The boundaries of a game are pretty narrow but the analogy holds if you expand the “game” to a larger scale.

        It all comes back to understanding systems, otherwise literal understandings will not be translatable to real-world processes.

        I am beginning to see why those pesky word problems in algebra were so frustrating to much of the class.

  5. To be more persuasive, MMTers need to talk less about “solvency” and more about currency value, inflation and price structure.

    • Yes. And they need to talk more, and in simpler terms, about jobs, equality, and the social safety net — things that Americans care about . Either MMT helps the nation achieve our goals or it will be seen as just another academic exercise. (This is not meant as a criticism of any particular person or post — just an observation.)

      • Why “they”? How about you if you have some ideas? Most of us are ordinary people, not economists. Try to come up with some persuasive examples.

        Also not intended as a criticism. The “hive mind” can get a lot done.

        • Ordinary people have an important advantage over most economists. For example, they don’t even know what the loanable funds model is, and are certainly not obsessed with crowding out. So it’s not necessary to communicate with ordinary people as if they need to understand what all of that so-called “theory” means and why it is all nonsense.

          My sense is that MMTers usually have their critics in mind — and everything that those critics might say in response — when they’re trying to communicate with ordinary people. So they defensively put this heavy front end of academic complexity and jargon up front in their communications.

          It seems to me that a much simpler manifesto is needed. One that ordinary folks can understand and agree with. The complexity and jargon has to be pushed to the back. It really doesn’t matter what most economists think. Or the 1%. They’re both a lost cause. For MMT to have an effect, IMHO, it has to ignore what most economists think and what the 1% will say in response. It’s all nonsense — and nothing’s going to change that.

          Time to take MMT to the streets.

      • Golfer1john

        “jobs, equality, and the social safety net” sounds more like what most Europeans care about. The quintessential American values are freedom and opportunity. MMT can help with those, too.

  6. I continue to be amazed at the MMT construct of modern money.
    How is it that the participants fail to recognize that when it comes to the real economy, the so-called central bank plays no role whatsoever in providing circulating media that perform any accounting – scoreboard or otherwise – in the summing of the national economic throughput(again NGDP or whatever).

    “Hi, I’m nominally called the nation’s central banker, but I play no role in the real economy of this country where you all live and work. I merely enable the nation’s money supply(purchasing power) to be created and rented to you all through the private profit-seeking motive, and then I pretend to hope that they do a decent job in achieving our economic growth “potential” while preserving the value of that purchasing power. So, how are we doing?”

    This is the system that MMT describes and defends as the endogenous money system.
    And MMTers are the good guys.

  7. Warren Mosler has emailed some comments about my post, which I will relay here.

    I wrote (in the voice of the fictional central banker who authored the communication):

    “Instead of driving the process of broad money creation, the central bank is constrained to react to changes in broad money by adjusting the monetary base to support its primary operational target: the interest rate on interbank lending.”

    Warren responded:

    “No, the CB adjusts the price of reserves – the cost of funds for its banking system – and not the quantity.”

    “It’s always about price, not quantity.”

    I wrote (in the same voice):

    “Our job is to accommodate these commercial bank initiatives by supplying and regulating the more narrow form of money that banks use to settle payments among themselves …”

    Warren responded:

    “No, to establish price, not quantity”

    I wrote:

    “… while applying brakes if we think the banks are becoming too exuberant in creating the broader form of money.”

    Warren responded:

    “There is only the presumption that raising or lowering rates will ‘apply brakes’ and little theory or evidence that credit is a function of rates. ”

    I emailed some responses and questions to Warren which he replied to. I’ll post that exchange momentarily.

    Warren also added:

    “The problem with NGDP targeting is that NGDP isn’t a function of the application of any of the fed’s tools, at least not in the direction they imagine.”

    I agree with that statement 100%. The NGDP level targeting defenders have a very definite story about what to target, but no convincing story about how to target it, and tend to assume Fed powers that, in my opinion, do not exist.

    • Here are my queries to Warren and his responses. (These were not a series of separate email messages with responses, but a single message I sent to Warren to which he replied with the interspersed responses):

      DK: Warren, I don’t understand why the price-not-quantity point is inconsistent with what I said. If the banks need more reserves, they seek to acquire them.

      WM: You have to drill down to what the word ‘need’ means. When I do that i discover it means they already have the reserves, worst case via overdraft in their fed account, and the ‘need’ that drives the bank is to lower the cost.
      again, comes down to price.

      DK: Doesn’t the CB maintain the target rate by supplying additional reserves to the banks so that the increased demand for reserves doesn’t drive up the Fed Funds rate?

      WM: The banks ‘already have’ the reserves if they ‘need’ them. The fed just prices the reserves.

      DK: How else does the bank set the price other than by injecting or draining reserves?

      WM: By pricing the marginal cost of funds if the banks are net borrowed, or by paying interest on reserves
      if the banks are ‘long’ reserves.

      DK: Is it enough just to state the price?

      WM: Yes!!!

      DK: Do the IOR rate and discount rate do the trick all by themselves now by setting the floor and ceiling?

      WM: yes, as above.

      DK: I’m not saying that the CB targets a quantity of reserves. I know the price is the target, not the quantity. I’m just saying that when the quantity of reserves goes up or down, that happens as an automatic response to endogenous changes in the quantity of deposits.

      WM: It happens simultaneously as loans create both deposits and reserves (as an overdraft in the first instance) so in that sense banking creates its own reserves, and the fed prices them.

      DK: So the causation goes from changes in deposits to changes in reserves, not from changes in reserves to changes in deposits.

      WM: right.

      DK: If aggregate bank deposits go up and there are no excess reserves, isn’t it fair to say that the CB must supply additional reserves so that banks can make their increased volume of payments without pressuring the FF rate upward?

      WM: as above, deposits (as well as check clearing) can create overdrafts which *are* reserves.

      DK: I didn’t realize that you were skeptical about the “brakes” point. Can’t the bank dampen the pace of lending – if they think it is too hot – by driving up the price of reserves?

      WM: My experience tells me the propensities are such that rate hikes have added to demand and inflation via cost channels and income channels. the govt is a net payer of interest, etc.

      DK: Wouldn’t that force banks to increase their own rates to at least some extent, and price some borrowers out of the lending market?

      WM: Yes, but the higher interest income allows the economy to pay higher rates.

  8. Dan,
    This is excellent. As far as influencing the masses (99%) as pointed out above, you might want to keep the letter from the CB and build a much simpler introduction that grabs the attention of those less erudite.

    Thanks for the great work!

  9. Thomas Bergbusch

    Very interesting. One sentence caught my eye: “Any schoolchild who has studied the democratic and republican form of government knows that the central bank does not have the “power of the purse.” I understand that this is consistent with America’s republican traditions. Yet, might it not make sense to broaden this principle slightly to include the role of the Central Bank in other forms of representative democracy (obviously, I am thinking of parliamentary democracy and constitutional monarchy, as Nick Rowe is a Canadian). Since the time of King Charles II, one of the key principles underlying responsible parliamentary government is that the House of Commons holds the “power of the purse”.

    So how about something like “Any schoolchild who has studied representative democracy knows that the central bank does not have the “power of the purse”, but rather the legislative branch of government (in the US, Congress or more specifically the House of Representatives).

    • Good idea. Occasionally some of the monetarists let slip that they would be cool with the central bank usurping legislative authority by conducting a unilateral fiscal policy. I take it that most of us living in democratic countries learned somewhere along the way that spending is supposed to be approved by a democratically elected legislature.

  10. Dan, thanks for posting the DK-WM dialogue. It helps to probe a little WMs view of reserve accounting, the lynchpin for his overall view of understanding MM. It still doesn’t make sense to me.

    The scoreboard analogy is one step below the train-ticket analogy – none of them explain anything to the uninformed listener of how money works. We purport to have a government monopoly on “currency” – really circulating media in the national monetary system – yet the government creates none of the money we use to exchange goods and services in the national economy.

    So, our monopoly issuing power is non-extent, and in its place we have a theoretical monopoly of the price of money – except that everyone agrees that pushing the interest rate string is economically ineffective, often blamed on policy lag.
    One just needs to take a look around and see how our “price-setting powers” are achieving our societal objectives.

    Another thing is that ‘schoolchildren’ do not study nor understand anything about the role that the central bank plays in doing anything. Neither do 99 percent of University graduates.

    Right now, I only see Kucinich’s full-employment Bill as having the necessary reform construct that is capable o f achieving what MMT advocates.

  11. Interesting post

    It’s not always “not about quantity”

    Pre 2008 IOR, the central bank could drive the overnight rate from X – 10 basis points to X + 10 basis points purely through quantity, without necessarily forcing marginal reserves into the system through window borrowing, so quantity could totally drive price

    Nice to see a bit of MMT self-reflection on the scoreboard analogy

    • Thanks JKH,

      On the price/quantity issue, it seems to me that it is still important to emphasize that even if a central bank adjusts interest rates with quantitative operations, the impact on commercial lending – if one occurs – occurs only because the bank has changed the interest rate – the price of the reserves. The MMT and post-Keynesian insistence that bank lending is not constrained by the quantity of reserves still holds. It is still the case that the bank will lend first at a given rate, and acquire additional reserves later if needed, so long as the price of the reserves means that the expansion of lending is profitable at the price the Fed Funds market is charging. So when Warren insists that it is price not quantity that matters, I take it that is what he means. Bank lending isn’t constrained by the quantity of reserves that bank already possesses, but it might be constrained by the price it will have to pay to get more.

    • JKH | July 10, 2012 at 1:07 pm | Reply
      Interesting post

      It’s not always “not about quantity”

      ***yes it is

      Pre 2008 IOR, the central bank could drive the overnight rate from X – 10 basis points to X + 10 basis points purely through quantity, without necessarily forcing marginal reserves into the system through window borrowing, so quantity could totally drive price

      ***huh??? by what logic?
      adding q would drive the price to 0% if the Fed allowed it to persist and didn’t pay interest on reserves.
      debiting q would drive the ff rate to the discount rate plus a tad, but not alter total reserves.
      just shift them from non borrowed to borrowed, maybe.

  12. Very good Dan. I could never understand how smart guys like Nick Rowe could stick to the NGDP targeting story after It’s been explained to them that central banks control the price of reserves.

    • I think it’s because they believe it all depends on expectations, Kristjan. So long as a lot of people believe – correctly or mistakenly – that the central bank exerts a significant amount of control over gross spending, then if the bank says something about what they want spending to be, a lot of people will form expectations of spending on that basis, and will then spend more or less themselves on the basis of those expectations, thus turning the central bank statement into a self-grounding prediction.

      My view is that a much, much smaller percentage of people in the economy take their signals from the Fed than the MMers think. So this expectations-managing channel for influencing spending is not very powerful.

  13. How about discussing a real life situation???.. Red Cross personnel are set up about 2 miles from my home. Numerous “feeding stations” where I live in West Virginia in response to the Recent storm which knocked out millions of housholds in a 4 state area.. Anyway I just came from a resteraunt with no customers.. The owner expressed to me the disaster may push her into bankruptcy. Hmm.. Wouldnt it make more sense to issue food vouchers to local resteraunts as an option vs meals being handed out? This is not a Katrina like disaster. Structural damage to buildings is realitively light..Mainly power outages covering huge geographic areas.,which now have been restored to heavily populated regions.

    Just a thought…in a small way putting the Accelerator to the floor through Federal government spending. A prime example of Government spending/deficits = private sector assets. If indeed a few viable small businesses go down the tubes because of the recent disaster..what a waste. Disaster capitalism benefits the too big to fail instutions (such as International Fast Food Chains vs the local restaurants in my area) So i say this to the Federal Reserve/US treasury… How bout printing a few IOU’s for the little guys??

  14. Any time I have tried to use the “scoreboard analogy” I always end up having to modify/stray from the analogy shortly after introducing it because people start looking at the free-lunch aspect – and then you have to discuss inflation-constraints…then they will bring up “injecting points” into the economy (a la fiscal operations) and they complain that a scoreboard doesn’t work that way…it just tallies what is being done on the field…I am sure some of it is my understanding/explanation, but there has got to be a better analogy out there.

    • Golfer1john

      Analogies never correspond completely. The only point of the scoreboard analogy is that the scorekeeper doesn’t “have” points, he creates them from nothing. And can take them away, if the Referee says to, and then they no longer exist. That’s all. And the scorekeeper can create as many points as needed, without limit. The government creates and destroys money in the same way, from nothing, by manipulating their computers. They don’t have to dig gold out of the ground, and there is no relationship to any real assets. No constraints on the amount of money they can create (except self-imposed ones, such as laws), so no solvency issues. Beyond that, the analogy isn’t useful, so don’t let people force you to extend it beyond its applicability. Don’t try to force inflation into the scoreboard, there is no analog for it.

  15. Well it makes sense to me Dan and I don’t consider myself that erudite whereas Nick Rowe even when he is being simple makes absolutely no sense to me. And Joebhed I don’t understand your debt-free money either and I’ve watched your YouTube videos as MMT shows all money is debt/credit but that doesn’t seem to be what you mean, so then I thought you meant without bonds and such but that doesn’t appear to be what you mean, so that only leaves money backed by something and MMT has shown the futility of that constraint. So I have no idea what you mean and therefore I cannot make any sense of what you say. A little off topic to this post I know – sorry about that.

    As for making MMT easier to understand, I think that is a mistake, we are assuming people are dumb, they are not.
    Not perfectly MMT but if you can get people to understand the value of a ten dollar note is the value of ten dollars because the government says so, you are most of the way there. Taxes and inflations shouldn’t be too hard from there. It is when you bring in the central banks and reserves you are going to throw people but really other than what the cost of a mortgage or a fixed term deposit what do average people need to know about central banks? Nothing, that’s for traders and co & in my personal world view all traders are wealthy – not to the extreme but if they can afford to trade, they have a lot more than the average joe. Most average joes wouldn’t look twice at the stock market except maybe what to check up on their 401k once in a while?

    • Senexx, I’m surprised by your comment.
      OK, so you don’t understand debt-free (at issuance) money.
      I’ll start with one word – GREENBACKS.

      Now, do you understand publicly-issued, debt-free at issuance money?
      A.k.a., REAL money. I honestly hope so.
      I provided a link to the Kucinich monetary reform Bill HR 2990.
      Have you read that?

      Funny thing is all the vogue about the $6 Trillion Dollar coin.
      THAT would be debt-free (at issuance) money.
      That would be money issued into existence PERMANENTLY without any corresponding debt.

      As to MMT’s construct of money BEING debt(Wray, Mosler) based on Innes, yeah, sorry. But it’s wrong.
      Here is American Monetary Institute’s historian Stephen Zarlenga’s critique of Innis’ work.

      I hope some higher echelon MMTists will respond to it.

      So, in essence I mean much more than issuance without Bonds, I mean issuance without debt. And, believe me, I spend just as much time in discussions on the MisesBlog, Hayek Café and the Cobden Austrian sites in debate as I do on MMT sites. It’s all constructive.

      If there’s something in particular that you don’t understand, please feel free to write me privately.

      • Scott Fullwiler

        We don’t agree with Zarlenga, obviously. So that’s a non-starter for us.

        • Scott Fullwiler

          Zarlenga’s piece is mostly an opinion piece, anyway, not any sort of academic rebuttal of Innes. And note that Wray/Kelton said in their foreward to the Innes book that there were errors in some of his details.

      • Funny thing I don’t live in the USA and would not want to and thus the term is meaningless to me.

        Debt free at issuance so therefore you must be talking about bonds and things either that or you don’t understand the simplest MMT explanation of what money (unit of account) is. And it can be demonstrated we don’t need things like bonds, etc, as it can be managed in other ways.

        Money (the unit of account) is a credit and a debt at the same time. Yeah we can do without all the backstops like central banks and government issuing it until it hits the fan (and it will) and then we will have to establish all these institutions again.

        I disagree on the $6 Trillion coin because all money is an IOU, the very nature of it is debt/credit, so it is impossible to make sense of what you are talking about.

        Essentially money is a social relationship not one of something real.

        My email is freely available on the web, if you want to email me a clear explanation of what you are talking about I’m all for it or if anyone else here can understand what Joe is saying and make it clear for this not quite erudite layman aka me – feel free.

      • I previously posted the following as part of a longer comment on Jobhed’s comment on Warren’s recent post. Joe:

        I’m not advocating a $6 T coin, I’m proposing a $60 T coin to pay off all the debt subject to the limit and also to pay for all new “deficit spending,” and also demonstrate to people that no more debt instruments need to be issued ever again, as long as the 1996 law isn’t repealed, and even if it is the $60 T coin should pay for 15 years of deficit spending at least.

        And third, the platinum coin doesn’t conflict with the notion that all money is debt at all. Since both Warren and Randy point out that high-powered money IS a debt of the Federal Government in the precise sense that the Government is obligated to accept its own money in payment of taxes. No doubt reserves and other high-powered money is different than TSY securities in certain ways since the Government owes no interest on it ad there is also no term on it. But it still represents a Government financial obligation and in that sense is “debt.”

        • Joe,
          So, regarding the benefits of the coinage option…………
          First, we agree on the goal of using any legal means necessary to promoteg the national economic well-being.
          As Lincoln said:
          “The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers.”

          I wish the coin-seigniorage route were more realistic.
          Even the Dems would abandon any administration effort to take the broad policy action of a $6 TRILLION coin, let alone one of ten times the value, or even one-tenth.
          A quick amendment to the end of 31 USC § 5112 “to the maximum denomination of $10,000.” And we’d be right back here. Given that the technical aspects of design, etc. would need to be worked out, there is just no way that is going to happen, though I wish it could.

          But more important, your statement regarding the status of the coin as a $60 TRILLION DEBT is wrong, if not outrageous.
          Hello, Mr Obama, you just created another $60 Trillion in debt.
          From where did you glean this pearl of wisdom?
          What definition of “debt” are you using, Joe?
          I pray it is not an accounting norm.
          Accounting norms are neither capable of establishing the existence of a debt, NOR of the creation of money.

          Let me be clear.
          On Warren’s thread I described the simple steps that would be taken were the coin to be minted.
          It goes by train to the Treasury’s NYFed TGA account, as a cash deposit (like if it was a Quarter).
          The electronic money balance is there, immediately available for spending. Done.

          You say – (on what basis?) – that it IS a government obligation.
          To WHO? (whom?)
          And, HOW did it become a government obligation.

          It is he opposite of a government obligation.
          It is a government cash investment of the coin’s value as purchasing power into the national economy.

          Interestingly, Joe, you hit upon a couple of the unique characteristics of debt-free money when you tried to shoehorn the coin into MMT’s mistaken idea of money as debt.
          Gee, it’s a new kind of debt – one without interest and, yikes, it is permanent.
          Joe, how come the bells and whistles didn’t go off when you tried to square Coinage-as-Debt with your own cogent observations.

          I apologize for how this might sound.
          You can stop repeating Warren’s ill-found observations about the national monetary system.
          Money is not debt.
          And, for all practical purposes, as I said in one of my videos a long time ago, there is no such thing as high-powered money, and the concept of reserve-based banking is outdated.

          MMTers ought to start thinking about the NEW money system, and stop trying to fix the present, piece of crap, private, debt-based money system through the application of accounting and technology.
          Cause things are starting to get pretty serious.
          And that dog don’t hunt.
          Joe B.

          • Joe, I still think you’re missing the point about the $60 T or another very high value coin. The President has it minted in secret, so Congress doesn’t know about it. Designs for it would take very little time. It’s a 1 oz. platinum coin. Coins of that type are being produced all the time with lower face values. The face value has to be changed, a minor matter, a face has to be chosen. beowulf’s suggested Reagan to rub the R’s face in it. I’d personally prefer FDR or Thomas Paine myself. FDR would probably be most convenient. Minting of the coin can be done in a day. It gets to NY in a few hours and is deposited in the PEF. Credit is immediate. The Treasury sweeps the PEF on the second night into the TGA after the President give the order to mint it. the TGA. On the third night the President makes a speech like this one about a $60 T rather than a $30 T coin.

            Now, I think Ds will react very well to this speech and the minting of the coin. It ends the debt ceiling crisis permanently. It stops Congress from holding the safety net and needed programs hostage. It’s a strong action, reminiscent of FDR. Most of all it’s perfectly legal. So, no impeachment for it is possible. The Rs will scream of course. They will try to amend the law. But it will be too late, the $60 T will be there. Also, they won’t be able to pass any such law for reasons I’ve outlined. try to picture it! Tery to envision the President’s narrative about it! try to imagine the progressives going on the offensive behind it: calling for another $2 T in a jobs program to end unemployment, calling for Medicare for All and telling people that it will save people $900 B per year with no increase in taxes and also create 2 million net jobs, calling for major infrastructure projects to rebuild all our roads and the whole nation to wind power within three years, and the conservatives not being able to respond by saying we’re going to run out of money. Within 3 months of the minting of the coin our whole politics will be changed and the conservatives will be totally on the defensive. If the Administration starts serious investigations of Wall Street the following week, the fight will be out of the conservatives completely. They’ll be out of the picture as a serious political force for years.

            Moving to the debt question. The MMT position on this is a technical and theoretical one. it isn’t common sense and won’t be used in framing debates. If the Treasury issues a $60 T coin and deposits it at the NY Fed, then technically, if the coin were turned back to the Treasury it would have to redeem the coin with another of equal value. So, to make sure it can do that, it would have to create a second coin of equal to allow for the very unlikely event that the NY Fed tries to redeem the coin. This is to provide for an empty ritual which will never happen because the coin is just a trick to force the Fed to issue credits to the Treasury.

            When the Treasury spends its credits out there, MMT says that the Treasury incurs an obligation to accept credits in equal amounts back in payment of taxes. It is only in that sense that the money created in spending is debt. It is not public debt subject to the limit as Congress defines it. It is not debt that must be redeemed in reserves as Treasury securities are.

            So, in the political framing it won’t be called “debt.” It will be called Treasury reserves in the TGA. Note that in the speech I propose, it is not referred to as debt. As far as this is concerned:

            “You can stop repeating Warren’s ill-found observations about the national monetary system.

            Money is not debt.”

            Well, I agree. It’s not like the debt I may owe somebody that has to be repaid with money I don’t yet have. However, from the MMT point of view no Government debt is “debt” in the normal sense of this term, and Bill Mitchell has a great piece on this.

            As for the present banking system, I’m all for changing it, but I’d just like to nationalize the banks and place them under Treasury. It will be some years before politics allows that. It will also be some years before politics allows something like the AMI reforms. Both alternatives would be brought closer to the President, if the $60 T coin is done within the next few months because coining it will bring home to people that the Constitution allows the people’s government to make money as needed.

            • LetsGetItDone
              I think I get the point about the great benefits that $60T in debt-free money can bring to our national economy, and I wish that this “coinage” scenario that has been laid before us could come to fruition.
              But I don’t believe it. It’s like – which of the Obama advisers can secretly convince the Prez to dare to pull something like this off? There are none, and even if there were, he would never do it.
              To me, the Trillion-Dollar-Coin itself is just a vehicle for discussing the embodiment of the power of the Treasury to create the nation’s money without debt.
              So, on the question of debt, again….
              First, it is really silly to conjure up the “return of the coin” by the Fed to Treasury, with the backup coin. Can I share some of what they’re smoking?
              “”When the Treasury spends its credits out there, MMT says that the Treasury incurs an obligation to accept credits in equal amounts back in payment of taxes. It is only in that sense that the money created in spending is debt.””
              I know that is what MMT says, but its wrong.
              The legal tender obligations of the government are the same as everyone else (public and private), to receive payment in the currency of issue, regardless of form or the source of the issue.
              The Treasury’s credits today are exclusively from bank-credit origination, not Treasury origination.
              If any MMTer wants to prove that wrong, I invite them to do so.

              Put another way, the extension of Knapp and Innis’ views, also Hayek’s, that the government’s power over currency derives from its insistence on receiving legal tender for tax payments DOES NOT DEPEND upon the government issuing the legal tender in the first place – merely defining the media and authorizing its issue is sufficient.

              It is that “tax-return” construct that has driven a great deal of unnecessary and erroneous work by MMTers. You cannot fabricate the construction and destruction of the nation’s money stock through the nuances of Central Bank accounting. That is not what accounting norms do.

              The creation and destruction of the nation’s ‘capital’, as Friedman put it, takes place within the banking system. Even he was against it. But that is an aside.

              The reason that the “coinage” proceeds cannot be called debt is because upon issuance no obligation is created for repayment of anything by anyone to anyone – which IS the definition of debt.
              While sovereign government debt of a true monopoly issuer of currency( NOT the USA today) is unlike other forms of private-issued debt, due to a lack of solvency, default etc. considerations, it is otherwise just like all other debt.
              Upon issue, an obligation is created for future re-payment by the issuer to the holder, and during its term the issuer must pay the coupon premia. It is debt.

              I don’t understand why MMT monetary economists FAIL to see the benefit of debt-free money creation for its PERMANENCE in the national economy. There is no need to repeatedly create more debts in order to have money. Once those proceeds of “coinage” are utilized, there is no mechanism available to anyone for removing the currency’s purchasing power. Ever. Nobody “owns” it.

              A quick read of Jefferson, Paine and Madison on indebting the new nation to the private First United States Bank should show the perils that we entertain with public debt for no good reason.
              I am not for nationalizing the banks. I am for nationalizing the money system.
              Banking should be a private occupation.
              But as long as banks control the privilege of issuing the nation’s money, none of the reforms that MMT envisions will come to fruition.
              Only the Kucinich Bill solves for the present debt-money crisis.

  16. As if central bank bond purchases financed government, as if…

    Why just not tell the truth? That bond sales are for interest-rate management purposes.

  17. As a Canadian, I have become interested in the causes of the financial crisis. I started in 2009 by reading everything I could about Goldman Sachs as they seemed to be at the centre of the problem. Finally, I came across MMT which seemed to have a definite take on how money works in the economy. I have just about finished the MMT Primer and I know I will have to re-read some lessons that I did not fully understand.

    I would like the MMT theorists to know that what they are saying is very important to the average person like me. Maybe some more simple explanations would be helpful, but I do not think they are really necessary once the basic concepts are understood. It is helpful that you have made the concepts applicable to the present financial problems. When I am finished I hope I will fully understand how corrupt and fraudulent the financial system has become and maybe have some idea how it can be corrected. I know that the Canadian electorate has to be very vigilant when Conservatives come to power.

    I’m not just focusing on the US banks. Our PM and finance minister have been crowing for months now about how well our Canadian banks did in the crisis. Well, that is not entirely true: the top five Canadian banks were given about $75 billion from the central bank just after the crisis. Then, when US documents became available, I saw that the Canadian banks were indirectly bailed out by the bailout of AIG. I also found out that the Canadian banks borrowed immense amounts of money from the US Federal Reserve window. That sure sounds like bailout to me or at least shows weaknesses in our banking system.

    When you talk about “the power of the purse,” I can identify with that. When PM Harper finally got his majority government (60% of the people voted for other parties though) he began his power play. All of parliament is supposed to get the financial estimates for anything purchased by the government and since Harper refused to tell parliament what the cost of new airplanes would be, the parliament found him in contempt! That didn’t bother Harper one bit. It should have bothered the voters.

    Recently, Harper passed a budget bill that is only supposed to have budget items in it. However, there were a proposed changes to 70 laws most of them having to do with the protection of the environment that had been made law over the past few years. He is seeking to make these laws weaker (or nonexistent) so that the extraction from the tar sands can go unabated. We are headed for bad times when the Prime Minister and the Finance Minister do not tell the truth to the people.

    That is why I think it is very important to understand the information contained in MMT. Thank you very much.

  18. This is to Scott, who first wrote:.
    We can’t discuss that with which we disagree.
    More disappointment.
    I am always hoping for a greater spirit of intellectual engagement, rather than engagement in the spirit of ‘non-starter’-ism.

    If Zarlenga was wrong about any point in his critique of Innis, it would be simple to point that out and destroy HIS credibility, instead of having four fingers pointing back at MMT.

    I only found today the two articles that Warren has on his site about both HR 2990 and Kucinich’s full-employment Bill.
    I hope it’s not to late for a discussion.

  19. To Scott’s Second point – it is unclear if, or how, Zarlenga’s critique relates to any of the non-specific Innis errors covered in Wray-Kelton’s intro.
    Zarlenga’s position is more directly related to how Innes’ mis-reading of history led him to attach the true failures of debt-based money to metallism, leaving zero understanding of the true role of money, that as the essential means for exchange of goods and services in a modern monetary economy.

    THAT is the issue that the best-intentioned MMTers leave unspoken.

    Wray’s history of money merely attaches modern modern methods and technology the form of accounting norms and electronic management to Innis’ failed observations.

    The debate should not really be about who properly read, understood and applied Aristotle.
    That is merely history.
    It should be about WHAT is wrong with the money system today, and what NEEDs to be done to correct it.

    MMTers seem to believe that the problem with the money system is simply a huge misunderstanding of fiat money, awakened since 1971, one that can be remedied by modernizing its technological management.

    It’s great that MMTers are pursuing social justice through the monetary system ( in principle).
    It’s a pity that MMTers lack a foundation of the reality of the modern monetary economy characterized by private money creation for the past hundred years.

  20. This is to Senexx
    I would rather pursue your position on your IRONIC website and show how false your understanding of Modern Money Mechanics really is.
    Please merely open a thread there.

    While living in Canada for ten years I often questioned my economist friends about why they never spent any time understanding the ‘more-or-less’ public central banking ideas of Gerald Grattan McGeer, which were being devoured by the private bankers in the 70s, and also the record of Major Clifford Douglas presentation to the Parliamentiary Committee on Banking and Currency in 1923 – which showed the frailty and consequences of debt-based money and compounding interest.
    This somewhat staged speech by 12-year old Victoria Grant shows that 35 years after I asked those question, some younger Canadians may finally be getting it.

    If you were trying to make any point about the Greenback being uniquely “American” and thus globally irrelevant, a study of its history would quickly show how wrong that is.

    Being adults, it is not very possible to, neither should we ever try to, change the others’ conclusions.
    But we should be very open to discussing our understandings of the facts upon which those conclusions are drawn.
    I am here because I am so open.

  21. Joe, Bonds is just another form of debt and you asked for it without debt instruments – again that is possible under MMT.

    If you were offended, it was not my intention, but the term greenback to my knowledge is peculiar to the US lexicon.
    I thus cannot understand your difference beyond that with MMT. Now I’m just a layperson and if you can’t make me understand, I imagine you will have trouble with others as well.

    I wish you the best of luck in your endeavours and thank you for your time.

    • I admit to being confused by this.
      Yes, bonds are debt.
      Are you saying that I asked for bonds without debt?
      I asked for money without debt.
      Which, I believe you are now saying is possible with MMT.
      There’s an unsubstantiated tenet in MMT that government creates money when it spends.
      Were it true – and it definitely COULD be true that government COULD create money when it spends – then that money so ‘created’ would be money creation without debt.
      But again, not sure what point was made here.
      Thanks for the best wishes. Backatcha.