New Sense—Common Sense


The principal dilemma of the progressive cause is that it has allowed a bedrock conservative premise to go so long unchallenged; indeed the progressives themselves have either overtly or implicitly agreed with the premise, making it virtually impossible for them to effectively advocate their goals:

PREMISE: The money for federal government spending must come from the Private Sector, either through the collection of taxes and fees, or government borrowing.

This belief seems to derive from the instinctive logic of Common Sense—the same logic that causes us to believe that if we hold up a rock and let go, it will drop to the ground. How else could a federal government get money? It is the people, after all, who work and earn money. Federal governments only spend money. How else could a federal government possibly have any money to spend, except by borrowing from or taxing the people who earn it? This is what sovereign governments have always done, and what they will always continue to do. The irrefutable sensibility of this logic is simply overwhelming.

This premise, and the Common Sense logic behind it, is used by the conservatives to guide the public discourse inevitably towards certain conclusions which form a narrative about how the federal government should be managed:

  1. First and foremost, the premise gives reason to want to keep the federal government as small as possible. The smaller the government, the fewer things it does, the less money it will spend and, it follows, the less money it will need to collect in taxes. Lower tax rates mean the people get to keep more of the money they earn, rewarding rather than penalizing their efforts.
  2. A smaller government, spending less, will have to borrow less from the Private Sector. This means more capital will remain in the Private Sector, available for investment in the businesses and entrepreneurial ventures that actually create jobs and grow the economy. It also means future generations will have a smaller debt to repay—and fewer taxes will have to be collected to pay off that debt.
  3. The premise leads one to believe that if a government spending program is beneficial—as, for example, the federal interstate highway program, or the social security system—it is essential to set up such a program as a trust fund with a legislatively mandated income stream to cover the costs. Thus, highways are paid for by gasoline taxes. Social Security is paid for by payroll taxes. This inherently limits the tax dollars that will be collected—and prevents the federal government from borrowing to make up any shortfall. If the income stream supporting the trust fund falls short, the program, by law, must be curtailed to align with the income available
  4. The premise causes one to focus attention on the measurement of certain things which otherwise would be of little interest. For example, one must be extremely cognizant of the difference between the amount of money the federal government spends and the amount it collects in taxes. Because the logic says this “deficit” must be financed through borrowing from the Private Sector, it becomes a measure of the failure to keep government small, and a measure of the threat to future financial stability. (If the deficit becomes too large, the Private Sector could not earn enough money to pay off the debt—the tipping point of economic collapse.)
  5. The premise also leads one to be mistrustful of the sovereign central bank, and creates a longing for hard currency—money convertible to gold. This is because fiat currency (paper money not pegged to the value of gold) is subject to manipulation by the central bank, allowing the federal government to “pay” its debt by printing money and creating inflation—in effect, stealing from the Private Sector by devaluing the currency.
  6. Finally, and most unfortunate, the premise forces one into a position of callous indifference to human suffering. Because there is clearly NOT enough money in the Private Sector to finance relief for all those in need, one must stiffen up to the fact that the suffering is unavoidable. This is made ethically manageable by imagining those in need as people who have simply not tried or worked hard enough; or who failed to help themselves by living unhealthy lifestyles. Minimizing federal government aid to those in need is justified by the notion that doing more would steal their freedom and turn them into dependents of the state.

This conservative narrative is a drum-beat the progressives have great difficulty counteracting. The primary reason for this difficulty is because the progressive position embraces exactly the same fatal premise: federal government spending must be paid for with dollars obtained from the Private Sector, either through taxes or borrowing. Given the fact that progressives hold this belief with the same irrefutable Common Sense logic as the conservatives, it is impossible for them to avoid the same conclusions that inevitably follow. The best they can do is simply adjust the narrative to allow a federal government that is somewhat larger, a bit more proactive, a modicum more compassionate. Thus, the progressive arguments focus on:

  1. Increasing taxes on the wealthy (who can easily afford to pay more taxes without negatively impacting their lifestyle) in order that the federal government can have a little more to spend.
  2. Making the case that federal spending for the right things is actually an investment that will pay dividends. Spending on education, for example, will create a more productive workforce that will benefit Private Sector entrepreneurs.
  3. Making the case that federal spending for even more of the right things, such as research and development, will actually assist the Private Sector and help it grow the economy, ultimately generating a net gain in tax revenues that will help the government reduce its deficit.
  4. Making the case that government workers, paid with tax dollars, provide private citizens with real services that they need and benefit from.
  5. Declaring that a minimum safety net providing assistance to those in need is not something that is optional in a modern society—it is ethically essential.

These modest responses to the conservative drumbeat are pathetically inadequate and ultimately ineffective. Instead, the progressives ought to be blasting forth with both barrels, firing at the fatal premise itself. Everything they want to achieve—universal health care, full employment, free pre-k through community college education, affordable housing and home-ownership, free after-school and day-care programs, sustainable green-energy systems and smart electric grids, modern public transit systems—all these things and much more are entirely feasible because the basic premise that underlies the conservative narrative, and the progressive’s dithering response, is demonstrably false.

To see this, let’s return to the Common Sense logic we began with: People earn money. The federal government spends it. Therefore the federal government has to tax or borrow from the people to get the money it spends. But Common Sense has left out something important: Where does the money come from that the people earn in the first place? If we add that to the equation, the picture changes in a surprising way: The money that people earn, it turns out, is created by the sovereign government itself. In the modern U.S. economy, this is paper fiat money that is issued by the Federal Reserve as the legal exchange currency of the Private Sector. And what is central to the progressive’s cause is the little understood and seldom discussed fact that to get this fiat currency into the Private Sector—where the banking industry can leverage it with loans, and businesses can use it to make payrolls, and households can earn it for their daily transactions—the sovereign government first has to spend it.

Let’s give a moment here for Common Sense to process this information. This is not being proposed as a new way to do business and run the monetary system. It is, in fact, the way the U.S. monetary system—and all modern monetary systems throughout the world—are operating right now. Money is no longer printed as the representative of a fixed amount of gold or silver locked away in a vault. Money is created by a sovereign nation as a living “stream” to support the exchange economy of its people. To get the dollars into the Private Sector exchange economy, the sovereign government has to spend the dollars it creates. This spending takes many different forms: The federal government directly purchases goods and services and assets from the Private Sector—enabling the Private Sector to earn the dollars; it issues entitlement checks to retired and disabled citizens, enabling them to be active consumers; it pays interest on treasury bonds—which are the “savings accounts” the Federal Reserve provides the Private Sector as a way of managing and balancing reserves in the banking industry.

When the federal government levies taxes, it removes dollars from the Private Sector—and it does this primarily to prevent the build-up of excess inflationary dollars in the system. On its face, taxes are NOT collected because the federal government needs the dollars for spending, since it is capable of creating fiat dollars any time it needs them—and since it has to spend the dollars before they’re available for anyone to pay taxes with. In the same way, when the federal government sells bonds to the Private Sector, it is NOT because it needs to borrow dollars so it has them to spend. Taxes and bonds are tools for managing the monetary system; they have nothing to do with “financing” federal spending.

If this is true—and I, for one, believe it has been shown to be irrefutable by a growing list of economists—what becomes of the conservative’s bedrock premise, and the conclusions and narrative that so logically follow it? What we seem to have now is this:

 NEW PREMISE:  The sovereign government issues fiat dollars and spends them into the Private Sector, giving the banking system a franchise to leverage the dollars with loans to entrepreneurs and businesses, enabling the entrepreneurs and businesses to create jobs and citizens thus to earn dollars.

 What does Common Sense make of that premise?

  1. Does it still make sense that government should be as small as possible? That it should spend and do as little as possible? If so, Common Sense can see it is the Private Sector that will be starved of dollars, the people deprived of the opportunity to earn money.
  2. If the federal government isn’t selling bonds because it needs to borrow money, is it really removing investment capital from the Private Sector? And who is actually benefiting from those bond sales? Is it possible the Private Sector actually wants to buy the sovereign’s bonds because it is a safe way to earn interest while money is parked, waiting for a more entrepreneurial investment?
  3. Is the federal government really running out of money to make Social Security payments, or is the legislatively mandated trust fund simply reaching the limits of its actuarial mathematics? Is there really not enough federal money to repair the highway system and its bridges—or is the highway trust fund simply inadequate to meet the developing needs? Common Sense can now see these kinds of trust funds are just arbitrary limits that once got established and now need to be revisited—or eliminated entirely.
  4. Does calculating the difference between what the federal government spends and what it collects in taxes (the “deficit”) measure anything meaningful? If the sovereign doesn’t have to borrow from the Private Sector to “make up” the deficit, what does the deficit mean? Common Sense can see now it doesn’t mean anything at all; it is simply a number—like the total number of points scored in the history of baseball.
  5. Does it make sense to mistrust the Federal Reserve and long for a return to the gold-standard? How difficult is it, in a transparent democracy, to require the Federal Reserve to avoid creating inflation, and to monitor the steps it takes to accomplish that goal? As far as the central bank “printing money” to pay off federal debt, Common Sense now can see that’s not even a sensible proposition, since the “debt” is merely a “savings account” the Federal Reserve provides the Private Sector. And going back to the gold-standard? Why would we ever want to return to a situation where the amount of exchange currency in our Private Sector is dependent upon the amount of metal that can be dug out of the ground in a foreign country?
  6. Finally, is it really necessary to stiffen up against the suffering in our nation by pretending the people suffering somehow deserve it? Isn’t it possible to actually do something? Not just some little thing, some “safety net” gesture, but a big thing that would actually make a difference? Because Common Sense can see now quite clearly: it is no longer meaningful to frame this issue as a burden on tax-payers. It is not. And surely it could be argued that nothing would be more broadly stimulating to the economy as a whole than paying people to build and learn and teach themselves out of ignorance and poverty.

Does this mean the federal budgeting process itself becomes meaningless? That the federal government can simply spend dollars without restraint? Actually, it means the opposite: unlimited power requires the most careful and reasoned restraint possible. Federal spending has consequences, and those consequences should be analyzed and debated with great care. But it should be noted how different that debate would be from the one we’re having now: Instead of arguing about which national program we can no longer afford, we’d be debating which national program should be expanded, why it should be expanded, how it should be expanded; we’d be debating about what we want to become, rather than about who’s to blame for what we cannot be.

So what are the progressives waiting for? Why not summon a trumpeting fanfare: Common Sense has a NEW sense, and it tells us we actually do have the dollars necessary to make the world we live in a whole lot better for everyone.


54 Responses to New Sense—Common Sense

  1. Agreed. You don’t make progress unless to dismantle and render irrelevant the first fatal premise.

  2. Thanks again for another of your MMT explanation contributions. You write very logically for the non-economist (the common man, me,and hopefully politicians). I will save this article to pdf so I can distribute it as I have your “Monopolis Monopoly”. In any citizen to citizen discussions on the economy, the neo-liberal ‘common sense’ is always the first volley launched. Thanks for more and better MMT ‘common sense’ ammunition to combat neo-lib ‘common sense(?)’. You and NEP are providing valuable tools for the troops.

  3. On the point of banks leveraging U.S. government spending:

    Leaving aside the devastating impact, if the U.S. National Debt were eliminated and all deficit spending stopped, could banks still create money? What I’m getting as is: does a banks ABILITY to create money dependent on sovereign issuance? Or, do banks just need deficit spending by the sovereign in order to constantly “refresh” the non-government’s balance sheet, due to the ‘house of cards’ nature of compounding interest?


    • If by “money”, you mean IOU’s denominated in the government’s money of account (the dollar), then yes, obviously. But this is not high powered money. If someone wants to write you a check and their bank establishes the IOU with your bank to make sure you now have a deposit, then that’s fine… but from the moment you decided that you want to execute an ATM transaction against that deposit, that “money” ceases to be merely a “horizontal” IOU between banks. You want the government’s money in the form of Federal Reserve notes. This is why the Fed is the lender of last resort; this is why every dollar of “inside money” is backed by Fed reserves. Because unless (and regardless of the degree to which) these dollar denominated IOU’s are just “ping-ponging” back and forth between banks, real (government) money has to be created to back those transactions.

      • Most people do not want cash. They want numbers in their bank account. They want inside money. Cash is a very small portion of the money supply and becoming increasingly insignificant as electronic transactions take over.

        • I think my explanation below is better. It’s about denomination. If you are denominating your IOU’s in a money that is only issued by another entity, then (to me) it stands to reason that in order to honor/satisfy the claim, you need to have monies issued by the denominating authority is some measure – making allowances for reserve requirements and so forth. In a fiat system, money is not issued by anyone but the government. I mean, if you wanted to, you could (have banks) play all along with the funny money until there was a “run”. Is that what you are saying? That gov’t should just allow banks to generate the “funny money” as they need; not require reserves to be created (no open market operations etc); aaaaand then what? We just get to live with the false premise that we have made things better because there is “less debt”. In such a world, I think we should all start our own banks really.

      • Marley, thanks for the response..

        What I mean is… let’s say we didn’t actually use dollar bills and coins, would sovereign currency issuance be necessary?

        This is one MMT issue I have trouble wrapping my mind around.

        The “leveraging goverment money” position seems an odd way to describe the process. It sounds like fractional reserve banking. But regulars here are familiar with the notion that Loans Create Deposits.

        It seems like banks do most of the “money” creation, and mostly what the sovereign does is:

        1) Provide the bills and coins based on the public’s demand for them
        2) Constantly refresh the non-government’s balance sheet by shifting the liability to the sovereign’s balance sheet, and then reinjecting the asset back into the non-government sector (thereby creating new net financial assets).

        I guess my question is: if (1) ceased to exist, could the monetary sustainably function without (2) ?

        • The government issuance of currency is not just in the form of bills and coins. It also happens when the government directly credits banks’ accounts at the Fed. I guess my question to you is, does it not matter that the government backs private banks’ IOU’s? Your (1) and (2) are not dependent on each other. (1) is just a physical manifestation of (2).

          • ” (1) is just a physical manifestation of (2).”

            Couldn’t the U.S. government provide bills and coins based on the public demand to hold tangible currency, without ever creating new net financial assets? So, how is (1) a manifestation of (2)?

            Your question: “I guess my question to you is, does it not matter that the government backs private banks’ IOU’s?”

            I would think the fact that bank IOU’s are denominated in Dollars makes for a much more smoothly functioning economy.

            What I’ve been trying to get at: is all or most money creation endogenous? I know the U.S. government physically “makes” the bills and coins, but isn’t their existence 100% dependent on the private sectors desire to hold tangible currency?

            Also, although the U.S. government has shown an unlimited ability to deficit spend… is deficit spending actually “creating” money? It seems like it’s recycling bank created money, and in the process shifting the liability to the sovereign’s balance sheet (the national debt), and injeting the asset back into the non-government (thereby creating “new” net financial assets).

            What am I missing?

            • ok… I now see where you are going.

              Well, if you veer more to a purely Chartalist view of money (as I do), then every dollar in circulation has been spent/loaned into existence, but I understand the genesis of your point, so I will say no – because lots of horizontal transactions cause shift in reserves (like me getting paid), and my desire to withdraw cash from my available balance creates no new NFA. When I said (1) was the physical manifestation of (2), I did not mean to confuse horizontal & vertical, but rather meant that a physical dollar was the manifestation of one dollar of reserves.
              Deficit spending is creating new money because the money to credit reserves is not coming from the Treasury. This was a sticking point for me earlier in the MMP, and Dr. Wray clarified. In normal Treasury operations, when the private sector buys bonds to “fund” gov’t spending, these transactions are essentially moving money from one entity’s account at the Fed to another. When the Fed is adding/draining reserves, the Treasury is not involved at all, but rather just the Fed directly crediting/debiting accounts as it (re-)buys and sells bond in open market operations.

            • No, it is recycling government created money, not bank created money. Only the government can create its own money, its own liabilities. The treasury bonds the banks buy have to be paid for with with reserves from their accounts at the Fed. Banks IOUs are not accepted for final settlement by the government for Treasury bonds.

              That would be like you printing up a “ten dollar bill” with your face on it, taking it to a government office or bank & getting a ten dollar savings bond for it, and having the transaction end there. Then you would have the savings bond, which you could trade with someone else, or wait to mature and spend. I’d like things to work that way, but my hypnotic powers are not that strong.

              In the recycling-government-money deficit-spending process, what happens is there is a new liability to the sovereign, by definition being the same thing as a new NFA asset to the non-government. While there are about the same amount of reserves in the accounts of the banks and of the Treasury at the Fed. That’s what it means that all the bond folderol being just a reserve drain. Drains from the government spending reserve-addition, down to the “National Debt” reserve drain.

              It’s entirely parallel to a bank employee with an account at the same bank.
              In the bank parallel, the bank is like the Government. The employee is like the banks/private sector.

              The bank credits the employee’s checking account. He doesn’t need the money right away, so he puts it in his savings account and earns interest. (= buying a bond with reserves) There was an addition to checking, followed by a drain from checking, but with an addition to his savings account, so the employee has more money in the bank than before.

  4. Sorry while I play devil’s advocate here. Most of the money in the US monetary system is created by banks who are not reserve constrained. New loans do not require new deficit spending. Pardon me if I am wrong, but the money system in the USA is privatized. It is not controlled by the state. What am I missing here?

    • You are not considering the power of the U.S. Treasury to issue bonds, bills and notes, not only to foreigners, but locals as well, which happens to be far in excess of the Federal Reserve’s power to increase economic activity…
      And btw, Treasury is under Executive control, if Obama would just use this power, as did Roosevelt, back in the `30′s and `40′s__Bretton Woods was a U.S. Treasury action, not a Federal Reserve action…
      The Treasury powers the Fed, not vice versa, as Alexander Hamilton was well aware…

      • Very good point. I wonder why the government has decided to borrow its own money. Why do we let the banks rule the monetary system? It really does make no sense. Is there any logic to this arrangement?

        • Skeptic: I wonder why the government has decided to borrow its own money. Why do we let the banks rule the monetary system? It really does make no sense. Is there any logic to this arrangement?
          Two reasons, I think. One, politics and power. Hamiltonianism, as described by old-school libertarian Albert J. Nock, Jefferson, Chapter 5. The Constitution was once seen as a “coup” by w0uld-be Govt creditors.

          Two, to sidestep the Constitutional rules that the Treasury may only COIN unlimited money and BORROW unlimited money by ISSUING unlimited bonds, but not merely PRINT paper legal tender.

          The Wikipedia description of Lincoln’s “Greenbacks” is a clue. These were IOU’s paid to Union soldiers, and they came to be used AS money, but they were officially considered NOT money, presumably so Lincoln would be in compliance with the Constitution while paying for the war to preserve it.

          Ergo, rather than a new Constitutional Amendment to change “COIN” to “ISSUE”, a combination of stealth and politics led the various developers of the Federal Reserve system (Aldrich plan vs Vanderlip plan, others, and this was planned and hashed out in broad daylight for nearly a decade), decided to create this “kludge” system where the Treasury ESSENTIALLY borrows from it’s own Govt Central Bank, but the Fed is prohibited from buying Govt Debt EXCEPT via the Secondary Market after “Primary Dealer” banks (domestic and foreign) get the first shot, and it is mandatory that they participate in Treasury auctions.

          None of this is 100% spelled out, but there’s a lot of strong hints in various writing that lead me to this conclusion.

          • Your postulation on Greenbacks is off.
            They were not issued as debt.
            See changes in government debt.
            They were money.
            That’s why they remain in circulation.
            And are not listed as government debt.
            We could issue Greenbacks today.
            Had we the courage and understanding required.

    • Banks don’t create “money”. Banks extend credit denominated in the government’s money of account (the dollar). Yes, this expands the “money supply” endogenously, but only because every dollar represented in their IOU’s is backed by an equivalent dollar of reserves, which is government issued money. It’s like this: your neighbor can ask you to borrow a cup of sugar and give you a slip of paper as an IOU which could say:
      a) I owe Skeptic a cup of sugar
      or b) I owe Skeptic $1US (for argument’s sake the price of a cup of sugar denominated in the governments money of account)
      In scenario a) your neighbor is not obligated to acquire real government money in order to pay you back (he or she might trade some cashew nuts for the sugar with another sugar-bearing individual!); in scenario b), however, your neighbor IS obligated to provide you a government dollar to extinguish the claim.
      By denominating their IOU’s in the government’s unit of account, banks are obligated to then acquire the government’s money in the form of reserves (by having an account at the Fed) to support the claims against them.

      • Banks create money.
        That’s all there is to it.
        They increase the money supply when the make loans and reduce the money supply when the loan is repaid.
        What happens with reserve accounting is irrelevant to whether banks create ‘money’ or not.
        Money represents purchasing power in the national circulating media of the system of money.
        Banks are required to hold a percentage of their loans/deposits as reserves against the quantity of the loans, which create deposits of credits which serve as money.
        I suggest a reading of the Fed’s Modern Money Mechanics publication with a view towards what serves as money and who creates money, for use in comparison to modern theories of money mechanics.

        • “What happens with reserve accounting is irrelevant to whether banks create ‘money’ or not.”

          I dunno…. If today or tomorrow, all private banks stated that they were no longer doing business in US dollars but their own, new, non-Federal-Reserve-backed private currency called “bankies”, I’d like to see how your notion of “irrelevancy” would hold up. For you money is the “money-thing”, for me it’s the state imposed money of account. There is a difference.

          • Yes, there is a difference.
            The state-created national money system provides a means for exchange of goods and services in the national economy, and denominates its system of money in a unit of account as part of the development of that state money system.
            For me it is the state system of money, including its power of issuance, and not the state unit of account, that is relevant.
            Hoping here to make it clear that that my ‘notion’ is that in this ‘state’ system of money, the banks create the money.
            And that, in fact, it is the issuance of money that is the relevant money-thing.
            The point about irrelevance was limited to the reserve accounting.
            The relevant difference is between private banks creating money and the government creating money.

            The measures of the national money supply, the use of which creates national wealth, all originate with private money creation, coins excepted.
            Having banks legally create the money as ‘bankies’ leaves the banks creating the money, so there’s still no difference, and still no relevance to reserve accounting.
            So, to be clear and relevant to this posting and the supposed new progressive movement in money – No, the sovereign government does not issue fiat dollars and spend them into the private sector.
            Rather, the sovereign government abdicates its right to issue the money TO the private banks.
            Reserve accounting notwithstanding.
            And that is the problem.
            Of course the federal government COULD do that, but they do not, and cannot without changing the laws.
            You cannot change the structure of something legally existing by achieving a new understanding of how things are.
            Rather, you need to change the way things are so that the new understanding can be REALized.
            For the Money System Common.

            • OK… I get where you’re going here too, and I’d be splitting hairs to further elucidate my point of view which you do appear to get. The hair splits this way: you say “abdicate” where I would say “allows the private sector to participate” … If the US were to nationalize banks (for example, as Bill Mitchell advocates), it would (partially?) meet your criteria for solving the problem, and I could go either way on that. Being a follower of Bill Black, I believe in trying to “right the ship” as much as I may believe in “re-possessing” it. Cheers.

              • Great. I hope you do understand where I’m coming from.
                The Chicago School economists’ plan for FDR, Lincoln’s Greenbacks and Public Money Administration.
                Not splitting hairs,either.
                No, banking is a private sector activity.
                I don’t oppose public banks, only fractional-reserve public banking.
                I oppose nationalizing any banks.
                It is unnecessary.
                The instability brought about by fractional-reserve debt-money creation, a.k.a. endogenous money, can be righted by ensuring that the Captain of the ship is on your side rather than on the side of the greedy issuers of purchasing power.
                That would be the proper placement of ballast required to right the ship.

    • As stated, not all money is of the same hierarchy. Banks create their own money, lower in hierarchy than state money. Further on, when banks create money they create an asset for the holder but they also create a liability for themselves. All money is simultaneously both asset and liability. The key term here is net financial assets. It is convenient to assign positive values to assets and negative values to liabilities. What all this means is that private sector can’t create net financial assets, it all amounts to zero. For every asset, there is a corresponding offsetting liability. This is where the state steps in. The state creates top hierarchy assets for the private sector, keeping the liability. The result is a negative score in net financial assets for the state and positive for the private sector, which is necessary for the economy to function.

      MMT primer is up for quite some time on this site, it’s all explained there. Hope I’ve transferred it clearly enough. :)

      • When we are all reduced to thinking of money in term used by the financiers, while being skewered on the notion of progressive monetary economics, it is clearly time for a reality check.
        While this modern theory strives for progressive goals, it uses arcane anti-progressive structures and methods for achieving those goals.
        There is zero need for boiling down an understanding of the monetary system into terms of net financial assets.
        I would suggest a reading of Alexander Del Mar’s “A History of Monetary Systems” for a more wholesome foundation of how our modern monetary system has evolved.
        The fact of double-entry bookkeeping does not require that money IS debt.
        Greenbacks should prove the error.
        The liability side of any balance sheet includes both debt and equities.
        Money created without debt is equity money.
        Greenbacks were created as equity money and because they were equity-money they remained in existence no matter how many times they were saved and lent.
        Pity the modern monetary progressives cannot find the merit of permanent debt-free MONEY, and are instead reduced to embracing the monetary asset identity of what serves as money.
        Neither is there ANY need for the state to become the owner of the liability in order for the private sector to have money for commerce.
        That is quite frankly as anti-progressive a money construct as you can get.
        Public money is the alternative.
        And the IMF paper in review of the Chicago Plan Reform proposal of the ’30s shows the true macroeconomic advantages of such a system.

        The real ‘common’ sense is found in the money-system common.

        • Okay, I see you’re a “debt-free” money proponent. What you could find argued in the MMT primer is that all money, now or ever, is and was credit money. “Modern” in MMT is somewhat misleading, it actually stands for the last 4000 years. It’s meant to explain all forms of money, ever. Privately created or by some government, whatever the actual form of money may be. Greenbacks were also credit money. Asset for the holder and obligation for the issuer. It doesn’t matter if you call it liability, debt or equity money. The fundamental obligation for the issuer is that it has to accept it back. An additional requirement could be a promise to convert it to something like gold or to money issued by somebody else , but that’s not a fundamental property. Blogs 12 and 13 among others are a worthwhile read. Also in particular, the ending comments in response to blog 41.

          As for the notion that private banks fund USA, I’ll respond to the last post you made on this page.

          • First, I’ve read the ‘primer’ and the comments.
            Second, ‘modern’ as used in MMT usually refers to the post-1970′s Nixon abandonment of the Bretton Woods standards for current-account exchanges, so a little more modern than 2000BC.
            Ostensibly, this “frees” the fiat monied government from constraints tied to issuance vis-a-vis hte amount of gold in the vault. I don’t agree with that either.
            Third, it matters whether money is issued as a “debt” or an “equity”, even IF it is issued as a liability, which it is only due to accounting norms.
            More later.

            • Yes of course, MMT is mostly applicable for the post Nixon period. But having read the Primer, you know I’ve also quoted the 4000 years claim from there as well.

            • Quite right, mfernezir.

              Joe: Neither you nor anyone else have ever presented any argument about money not being debt, the way ordinary people, ordinary dictionaries & MMT use the word “debt”. If you don’t call greenbacks “debt”, we just aren’t using the word “debt” the same way, and you really should provide the definition you are using, or accept the MMT/ordinary one for purposes of communication with MMTers. & the main MMTers are on record as saying that “modern” means last 4000 years.

              Third, it matters whether money is issued as a “debt” or an “equity”, even IF it is issued as a liability, which it is only due to accounting norms. Nope, it doesn’t matter how the issuer issues his money, what he is thinking he is doing. It only matters what he DOES. “issued as a liability, which is only due to accounting norms” is wrong too. It is accounted for as a liability because it is a liability, because the issuer accepts it back in return for something the issuer gives or does. If the issuer didn’t why on earth would anyone ever exchange things of real value for such non-redeemable non-money?
              Saying that it is accounted for as a liability “because of accounting norms” is like saying objects only fall down because of Newton’s law of gravity, rather than Newton’s law describing the real world.

              Why make things more complicated & confusing than they really are? (It’s a late 20th century academic disease, one sees it everywhere.; there are signs of recovery recently though) The reality is so simple. True, there are plenty of pointless gymnastics in the way current fiat money systems are operated, in order to confuse people into thinking that governments do not for all practical purposes issue their own money, just as you would like, but the difference is “only” psychological.

              Of course it would be much better to “issue greenbacks” – but only because it would be clear to everybody what is happening then, and they wouldn’t vote in suicidal ways; not because it would be a real, material change that practically, structurally affected day-to-day business.

              • Money is Money
                Debt is Debt.

                It would be really helpful for you to provide us with the LEGAL definition of debt that YOU use because as Knapp pointed out, in a modern monetary economy, by definition all money is the creation of a state legal mandate.
                It’s in the law.
                What is money is in the law.
                What is a debt is within the law on money.

                I cannot answer completely as I am visiting family and without my copy of F.A. Mann’s The Legal Aspect of Money – as these discussions ultimately end with the present legal definitions on such matters.
                Suffice to say that a legal debt does not exist except based in an instrument that establishes the debt obligation as mutually agreed between the parties.
                I am a week from home and THE official definition, but in the meantime…

                The most basic and oft-repeated dictionary and thesaurus references to debt I find on the webs are as follows:

                1 : something owed : obligation
                2: a state of owing
                3. something that is owed, such as money, goods, or services
                (Economics, Accounting & Finance / Banking & Finance)
                4. an obligation to pay or perform something; liability
                5. the state of owing something, esp money, or of being under an obligation (esp in the phrases in debt, in (someone’s) debt) (Economics, Accounting & Finance / Banking & Finance)
                6 debt – the state of owing something (especially money)
                7. Financial obligation, indebtedness, liability – an obligation to pay money to another party
                8. debt – money or goods or services owed by one person to another

                national debt – the debt of the national government (as distinguished from the debts of individuals and businesses and political subdivisions)

                9 debt – an obligation to pay or do something
                10 a legal agreement specifying a payment or action and the penalty for failure to comply

                debt noun
                11 . (Formal) indebtedness, obligation
                12 in debt owing, liable, accountable,
                “Debt is the worst poverty” [Thomas Fuller Gnomologia]

                n debt [det] what one person owes to another
                n debtor – a person who owes a debt.
                in debt – owing money.

                Hoping that is more than adequate regards non-legal definitions, it is still patently obvious that Greenbacks were not issued AS a debt, nor via issuing a debt.

                This is verified first in the GOVUS accounts of the national debt during the period in which they were issued. You will find no reference to any change in US debt related thereto.
                Second, each of the legal statutes authorizing the issuance of Greenbacks contains no requirement for a debt-issuance in connection therewith.
                So, if I may, quickly, there is no accounting for Greenbacks as debt and there is no legal foundation for Greenbacks to be IN ANY WAY connected with any debts.
                Lacking the accounting(national debt) and the legal(Statutes Creating Greenbacks) basis, it is painfully YOUR burden to show how debt-free money creation has anything to do with DEBT.
                Finally, as the GOVUS has zero indication of the existence of any debt associated with Greenbacks, you can look to the balance sheet of the Fed, where currency responsibility lies today, by definition.
                You will not find Greenbacks there as a debt.

                When you move further into what is a liability – you are in accounting norms.
                Greenbacks are the equity of the federal government.
                When one lists the assets and liabilities of AN ECONOMIC ENTITY, then the real earnest money of the shareholders are the capital stock of the ENTITY and are listed as Equity, Under Liabilities on the Balance Sheet.
                But the ENTITY here is the United States of America.
                It is OUR Equity.
                It is OUR Capital stock.
                We owe it only to ourselves – in the very real, legal sense of the accounting norms.
                It is OUR money.

                Were it a debt-liability, we would owe it to another who provided it.
                WE provided it.
                WE created it through our issuance powers.

                Money is not debt.
                I invite you to put forth the rationale of Innes in postulating that money must be debt so that we can deal further with this matter.
                Hoping that you have seen Stephen Zarlenga’s critique of Innes’ What is Money?



        • It’s all pretty simple really. Coins, paper notes, electronic reserves and government issued bonds are all forms of state money and as such real liabilities of the state that issues them. The liability is twofold. The government is obliged to convert one form of its money to the other. Second, you can get freedom from your tax and fine burden. This is also convertibility, but an abstract one rather than a more easily understood one to gold or some other currency. It’s taxes what’s sufficient to drive fiat money. The notion that one form of money is more debt than the other is what’s muddling the matter and casting confusion.

          Greenbacks are not equity money. When you mention a balance sheet of some entity, the assets on the balance sheet are liabilities of somebody else. Liabilities are somebody else’s assets. Finally, the equity you mention is government’s liability. In order for the greenbacks to be an equity of the government, some other government would have had to issue them. No form of money is equity for its issuer, that’s complete nonsense.

          • Actually, nothing that has to do with monetary economics and government finance is simple, this being especially true with regards to definitions and language.
            And , you’re mostly wrong about all that.

            It is YOUR notion that all forms of liabilities are equal that is confusing the matter.
            DEBT and EQUITY are what make up the liability side of the BS.
            If you think they are the same and equal, I suggest consideration of the term “capitalization ratio”.

            I have already explained the “equity” nature of Greenbacks, both legally and accounting-wise.
            Your totally fabricated contention that one entity’s liabilities must have been created by some other entity flies in the face of BOTH governmental accounting and MMT’s ‘public-sector’ construct that joins the Fed and Treasury. WE are the joined entity.

            On the government’s balance sheet the equity is represented the same as shareholder paid-in capital on any corporate BS. Since WE are the shareholders of the government corporation, WE are the providers of the capital, and since we OWN the corporation, it is OUR equity capital.

            Of course if you believe that all money is debt, you are soon convinced that all debt is money, and therefrom that all forms of so-called money must be debt-type liabilities of the state..
            Much of what is held true is merely in the eye of the beholder of those truths.
            Like, what you wrote about the ‘things’ you call ‘state money’.

            United States Government Debt, for instance, is NOT money.
            It is a financial asset not able to legally serve as a means of exchange except in the market for that asset.
            In exchange for the government issued debt in that market, the government receives ‘money’.
            Some money-creator, mostly the private bankers ultimately, create the money by which the government is ‘funded’ in that transaction.
            The “debt” becomes money to the government when somebody buys the debt with money in an exchange transaction.
            It should not need to work that way, but it does.

            Neither are reserves government-issued money.
            If they WERE money, they would serve as an exchange media for goods and services.
            They serve no monetary function. They serve a bank-accounting function.
            They are not money.

            Since you are still without any definition of money nor any form of accounting for that money howsoever defined, you can call whatever you want money, and debt, and liabilities.

            However, our issue is not on the matter of what is money, but what is debt.
            Further clarified by what is a liability and yet not a debt.
            I have already explained that Greenbacks were issued without debt and remain in circulation some 150 years after they were issued debt-free, and thus represent the REALITY that money is not debt.
            I have explained that both by government accounting – that for BOTH the Fed and Treasury – do NOT list the Greenbacks issued as a debt to the government.
            For some reason, you choose to ignore this reality as it does not fit the shoe-horned definition of “money as the unit of account – therefore a liability and therefore a DEBT” that MMT has adopted.

            So, gee. If money is debt, and if Greenbacks are money, then Greenbacks MUST BE debt.
            But alas, they are not.
            So, either Greenbacks are not money – which they ARE.
            Or, money cannot BE debt, which it is not.

            • Blah, blah, blah. Your logic is flawed and you do not listen. And what’s with the caps anyway?

              If you let the Treasury print out its greenbacks or platinum coins or whatever, they are not equity for the Treasury. Period. I could print out 100$ coupons with my name on it and keep them at home. How much equity have I created for myself? You can list greenbacks as an equity of a firm, but not as an equity of the government that issued them. The entire notion of “equity money” as you presented it is meaningless. WE are the joined entity? It’s OUR money? No, the government issues state money, not you and me. And can’t list it as its equity.

              In exchange for the government issued debt in that market, the government receives ‘money’.
              Some money-creator, mostly the private bankers ultimately, create the money by which the government is ‘funded’ in that transaction.

              This is entirely false. Government debt can only be bought with banking reserves or other forms of state money which I’ve stated. Banks can’t create that level of money through fractional reserve banking mechanism, only the government can.

              “Neither are reserves government-issued money.”
              And you claim to have read the Primer? If you go to some ATM machine to get $100 in cash, your bank’s account at the FED will get debited and the bank will pay the FED with bank reserves. Banks have to pay with reserves to get cash. Similar happens if you want to pay your taxes: your bank will have to provide bank reserves to the government.

              Cash, coins, reserves and government issued bonds are all interchangeable. It’s a closed system with only the government being able to create them. How is a government issued bond more of a debt than a 100$ bill? It isn’t. You are simply promised to get another form of government money for each regardless of the form.

              It’s all defined in the Primer, what is money and what are different levels of money. It could be state issued in various forms, bank issued, private firm or household issued. This is money in the broad sense.

              Anyway, I won’t bother to continue this discussion anymore. You’re a man that just wants to push its own agenda and people like that tend to stay blinded in their views no matter what. Let’s respectfully agree to disagree and leave it at that.

            • Hoping that is more than adequate regards non-legal definitions, it is still patently obvious that Greenbacks were not issued AS a debt, nor via issuing a debt.

              No, it is patently obvious, once you think about it enough & deprogram yourself, that Greenbacks were (to be precise, were money-things that physically represented a) debt, in the senses say: 1. something owed : obligation or 4. an obligation to pay or perform something; liability . What you said was “patently obvious” is utterly wrong.

              If there were some reason for it, people could be told that ducks are not birds, and if everybody insisted on it, most people would go along & believe it, and might say it is patently obvious. But then looking at a duck & looking at a dictionary definition of bird would inevitably lead to a rational conclusion that ducks ARE birds after all, even though deprogramming yourself from the “ducks aren’t birds” belief might take time.

              What is the difference between having a Greenback & a Green piece of paper? Why can you get good stuff for one, and not the other? One way or another, a Greenback meant that you could get something good from the government for it, that the government owed you something for it, and considering the reach and power of the government, thus from everybody else. That & that alone meant it was debt in the dictionary, universal, understood by children sense.

              It can be worthwhile to think about money as equity once in a while. They are both some sort of claim. But equity is a junior claim, while an issuer’s money is always the most senior claim. In the case of money, it is the measure of all other claims, particularly other debts.

              The truly important thing is to realize the categorical nature of money, that money is a relationship, not a commodity, a thing. An abstract relationship between an issuer & a holder. Then you realize that the usual word for such a relationship is “debt”. (Or credit, or liability or asset, or obligation, or favor owed, or favor due you, or brownie point, or many other synonyms) An arrow, not an object.

              Of course if you believe that all money is debt, you are soon convinced that all debt is money, and therefrom that all forms of so-called money must be debt-type liabilities of the state.

              The last clause is remarkably wrong. It is precisely the understanding of money as debt, a relationship between A & B, e.g. the state & a saver, that avoids such confusion. A debt from C to B is not the same as a debt from A to B. A bank debt is not at all the same thing as a state debt. Even if you want to think of equity, “stock in USA, Inc.” is not at all the same thing as “stock in a bank”.

              So you would not imagine things like banks creating all our money, creating the money which funds the government. Having an account at Chase Manhattan, having a friend at Chase Manhattan, is not the same thing as having a dollar bill, having Uncle Sam be your friend. This is violently inaccurate accounting. Banks cannot commit that sort of forgery, though they try, and sometimes successfully corrupt the government by their TBTF control frauds. I explained the accounting errors here in another reply above, starting with “No, it is recycling government created money, not bank created money.”

  5. The US National Debt actually resides in the people’s pockets. If you try to eliminate it or reduce it ( through increased taxation and less government spending – think entitlement payments ) you’ll be picking the people’s pockets and having less money to spend always tips an economy in to recession since income allows spending but spending creates income. Welcome to the Mad Hatter’s World of Neo-Liberal ( Neo-Conservative ) Topsy Turvy Austerianism!

  6. Can we say simply that government is in fact a bank?

  7. This is perfect. It’s brilliantly expressed in terms that are easily understood. I love it when someone simply shows that the emperor is wearing no clothes. Thank you!

  8. The paying of compound interest merely shifts money around from one pocket to another but in the non-government sector financial assets must equal the sum of financial liabilities. In other words sum or net to zero. Because there is a desire to save for unforeseen eventualities such as a hike in taxes and a need to provide sufficient reserves for the payments clearing system the money has to come from somewhere. Since it can’t come from the non-government sector because of the above accounting identity it has to come from the government or the foreign sector or a combination of the two.

  9. When the federal government levies taxes, it removes dollars from the Private Sector …

    Don’t overlook taxes as a means to encourage spending of income earned as an offset to tax payment as opposed to the accumulation of savings. Yachts, for example, can be holes in the water into which the owner pours money and once were deductible expenses against sizable incomes (plus keeping a vital industry from disappearing). Where savings may not necessarily add to economic activity, spending certainly does and taxes can assure that income is spent rather than accumulated.

    Not so long ago (1968, why I remember it like it was yesterday), when only three hours credit studying university economics would place the student in about the 85th percentile of the educated, to have studied 6 hours achieved about 94th percentile mark for the student, a PhD in economics was truly an elite, not so long ago. Of all the vital studies for a complex society, the study of economics is so sadly neglected. Along with that neglect another phenomenon where specific meaning is being divorced from words; those words used without discrimination, much as the Red Queen in Alice in Wonderland stated to the effect, my words are what I want them to mean. The impairment to communication is considerable, the impairment to understanding is incalculable. Until education is widely established with a specific vocabulary that precludes ideological abuses camouflaged as economic rhetoric, I fear there will be little advancing any rational economic thought and even less ability to address economic problems.

  10. Why do we have to cling to the illusion of a sacred ‘private sector’ anyway?’ After all, the private sector is driven by research and development in the state sector – from pharmaceuticals to parallel processing. The real dynamism comes from the state. The so called private sector don’t do much beyond marketing and copyrighting of intellectual property developed at public expense. The whole thing reaches absurd heights, with the ‘threat’ from terrorism going up and down with the needs of domestic industry for subsiday and innovation.

    Let’s be honest, we’re living in a highly coordinated, state capitalist system, run on the basis of intense collaboration between the corporate and state sector (the Pentagon system), with losses socialised and ‘profits’ privatized.

  11. As others have noted, JD fudges a bit on how banks create money. It is my understanding that banks can create money independent of government spending, though only because they are backed by government. But that’s not the point of JD’s article. The article is intended to be an introductory piece for the unwashed masses, and it serves that purpose well.

    To drive your point about fiat money home, I wish we had a video of an IRS office shredding cash receipts. As they say, a picture paints a thousand words.

    • “I wish we had a video of an IRS office shredding cash receipts.”
      So do I.
      I’ve sent several unanswered questions on this to my local IRS offices that accept cash and have not gotten a response. Perhaps they just don’t want us to know.
      The claim about the “government” destroying the monies received in taxes goes beyond cash.
      And seems to fly in the face of both accounting convention and the law.
      Keep us posted on the video.

    • To drive your point about fiat money home, I wish we had a video of an IRS office shredding cash receipts. There’s a late 19th century / early 2oth century picture – guys with mustaches & bowler hats (?), woman with long dress, putting old money to be burned in a container in the foreground. Seen it at Wikipedia or Warren Mosler’s site. Should be posted more often!

      But it should be about as surprising as an usher shredding the little tickets as you go into a movie theater, or an attendant doing the same at an amusement park rid; maybe some don’t do that any more I guess.

  12. Pingback: Freeing Progressives From Their Deficit-Fear Shackles | Evolving Human Systems

  13. Marley,

    I’m following about needing reserves for ATM withdrawals.

    How do I square this with Peter Stella and others quite forcefully saying that reserves don’t enter the economy. Sorry I don’t have the links handy.

    • Hmmm… I think they might be referring to reserves as they pertain to QE. A link might be helpful. I’ve just googled Peter Stella and saw his recent comments which align with MMT as per “banks don’t lend reserves” but rather, “lending creates reserves”. When talking about reserves, I like to say that they are a “special kind of money”. You only get access to reserves if you already have money (deposit account) or if you’ve been extended credit by a bank… which is why QE is crap for supposedly “stimulating” the economy. If I’m Joe or Jane Doe from Main Street US, how do I get access to all those reserves that Uncle “Helicopter” Ben is flooding the banks with? Answer: I don’t! That money is just sitting as numbers in a computer and has no way of getting to me as additional disposable income unless a bank (with those reserves) loans me some money. As we have seen throughout the GFC, banks have not been lending, but instead mostly sitting on these reserves. This is why MMTers talks about things like direct job creation and giving the middle class a “payroll tax holiday” instead of engaging in QE. This put money directly in the hands of people who can spend into the economy.

    • Adam: reserves don’t enter the economy.

      I don’t FULLY understand stuff on that level, even though I’ve read over it. But I think Mosler does, and one point he made to me was that Canada’s central bank does not require the banking system to maintain 10% or I think any % of reserve balances. Operations must be handled differently.

      In the US, the magic 10% reserve ratio that is treated as a hard basis for “fractional reserve” banking has only been hit once for a short period in the 90s.

      In the US, reserve requirements were partially eliminated @ some year in the mid-90s (or mid-80s), so only certain TYPES of accounts require reserve balances. I can’t remember which now, but it’s either household bank accounts or commercial bank accounts which are exempted from reserves requirements. I vaguely recall thinking that this was such a tiny number, so it’s probably only household.

      From Mike Norman, quantitative easing increased reserve balances by purchasing Tbonds from banks, adding cash to reserve accounts, but this change in mix did not “spur” lending, because for one thing, banks have a two-week delay in a rolling window to rectify any reserve shortages, so reserves do not add to a pool of “available money” for banks to lend. (That’s been made clear by others.) That’s why QE was practically a huge waste of time, and the farthest thing from hyper-inflationary. QE did nothing to “encourage lending” and certainly cannot force banks to lend, which means the Fed’s monetary levers are like pushing a string.

      All I know is NET financial assets, savings, must be created by Govt, while banks’ “credit money” can certainly add to immediate liquidity in the economy, or at least the feeling of liquidity (unclear), like for loans to drive up house prices in a credit bubble. Now we KNOW that credit money disappears when loans are paid back, which is why there’s a $12 Trillion shortage since credit-money dried up and home equity values vaporized.

      Instead of saying the Govt should “print money” recklessly, I say the Govt must print enough to make up the $12 Trillion shortage. Mosler & others then explain “demand leakage” from excess savings, but that’s a topic I leave alone.

  14. “NEW PREMISE: The sovereign government issues fiat dollars and spends them into the Private Sector, giving the banking system a franchise to leverage the dollars with loans to entrepreneurs and businesses, enabling the entrepreneurs and businesses to create jobs and citizens thus to earn dollars.”

    The banking system leverages dollars enabling ordinary citizens to buys their homes. Combining all those homes creates the largest asset class in our country. Consumer credit is not far behind. Imagine how stagnant any economy would be without this credit system in place. (Although without proper regulation, it can get a little out of hand.)

    “unlimited power requires the most careful and reasoned restraint possible. Federal spending has consequences, and those consequences should be analyzed and debated with great care.”

    Here’s the rub. Who do you trust with analysis and debate? Certainly not the representatives currently assigned to the task. How do we get representation to understand how the monetary system actually works? (Term limits and UMKC congressional advisors would be a good start.)

  15. John Zelnicker

    J.D. — Great essay. There is an ongoing discussion at Mike Norman’s blog, about the nature of the misinformation held by the public and how to go about countering that misinformation. Your original Premise and the subsequent ideas that develop from Common Sense being applied to that Premise indicate perhaps a new way to attack the ignorance. Explaining the operational aspects of MMT can make people’s eyes glaze over. We need a short, concise statement of the source of the misinformation and I think you have provided a good one. It is straightforward and easily understood. To counter this Premise, there is only one step needed, i.e., to understand the original source of the “money” that people earn for their efforts. It is fiat money that the government spends first in order to ensure that there is enough in the system to satisfy the needs of transaction-clearing, government provisioning, international trade, and non-government savings desires. Once people understand the order of operations (spending first) we might be able to move the discussion off of the concept of “affordability” and start talking about how to allocate the real resources needed to provision those who are unable to do so themselves (the aged and disabled), rebuild our national infrastructure, provide adequate education for all, and continue (and expand) the research and innovation that has been a major component of the success of the American Experiment.

  16. Starting out small.
    IF the government MUST have money in its account whenever it makes a payment, then how does it create money when it spends?
    Reserve accounting notwithstanding.
    The appearance is certainly that either taxation or debt FUNDS the balance in the account and the government payment merely transfers the balance to another account.
    It seems we want to destroy a huge economic paradigm about government spending and yet very little causal explanation is offered.
    Of course, the premise that the government COULD spend money into existence is well-established, but that it DOES is another matter.

    • New state money is created when the goverment deficit spends. The Treasury has an account at the FED which funds the reicipient’s bank with bank reserves (state money). The recipient’s bank creates a deposit for the recepient (bank money). Along with this, the Treasury draws from its bank accounts used for tax collection. The reverse is happening there: bank money gets destroyed and reserves transfer from banks to Treasury’s FED account. Now, if everything balances out, there is no new money creation. When the goverment wants to deficit spend, it’s first obliged to issue a bond. The FED buys it indirectly, creating state money from thin air in the form of bank reserves. Later on, the FED will sell the bond to drain excessive reserves, preventing their price to fall down below the desired value. The end result is that somebody in the private sector holds the goverment bond, another form of state money. The form which brings interest. It’s worthwhile stressing here that you can only buy one form of state money with another form of state money. Private banks can’t create their own money to buy bonds or reserves. So, it’s not possible for somebody else to fund the USA deficit bonds, it’s all payed with the money that only USA goverment could have created in the first place. And it does create it every time when there is a deficit.

      This is best explained in blog 23. The link is apparentlyy broken now, but I’ve found a copy on another site:

      • I know the rip on bonds and debt.
        I promise a more detailed reply later.
        Suffice to say that the rationale provided is ludicrous on its face.
        We the people of the United States are $16 Trillion in debt in order to satisfy the liquidity preferences of the traders in the securities we issue.
        Yeah, that’s all well and good for the bond dealers.
        But, it’s OUR money system.
        And all the BS debt is not necessary.

        • Of course it’s not necessary and of course it could and should be improved. However, people should first get a basic understanding of how the system works as it is. Making false claims like “We the people of the United States are $16 Trillion in debt” will hurt your cause. We the people don’t owe anything and don’t have to pay for it. We the people, well guys holding the bonds at least, hold $16 Trillion in risk free government assets bringing interest.

          A legitimate attack would be to say it’s needlessly convoluted and that giving interest and free profit to the middleman isn’t necessary. On a side note, as you might know, MMT advocates zero rate for reserve prices:

          In that arrangement, it’s not necessary for the central bank to sell back the bond. With central bank holding the bond, it doesn’t count for the public debt figure. Naturally, since it would be an internal debt from one part of the government to the other. It would also make sense to sell the bond directly to the central bank, cutting out profit to the middleman. Or one could just let the Treasury overdraft from it’s account in the FED with the same effect.

          You might want to check this interview with Bill Mitchell where he hints some reasons why the system is as it is:

          One reason is misunderstanding and atavism from the gold standard, but I think it’s fair to say that it is mostly deliberate delusion, fearing politicians to ramp up the money printing machine.

  17. Every dog has its’ day as they say and Neo-Liberalism’s day is now ending to a large extent. Just take a look at Wikipedia’s article on Neo-Liberalism and go to the “Policy Implications” section. Any MMTer will very quickly find much that seems dated and curiously old-fashioned in its understanding of how things work. Understanding has certainly moved on as it always does and it doesn’t seem too far-fetched to suggest that we are now moving out of the age of “Neo-Liberal Capitalism” to “Modern Money Capitalism.” In reality we are moving into a far better understanding of the inter-connectedness in the use of money in economies and between economies. How in fact we have to make a better job of restraints based balancing and how we need to make a better job of avoiding electing dinosaur politicians like Obama and Romney still fronting the increasingly decrepit Neo-Liberal Capitalism.

  18. Kudos to Mr Alt again – it’s hard to see how this piece could be more lucid or more convincing. I would congeal the central point this way:

    To the extent that it is properly set up and is operating as it should, the purpose of the private sector is to create wealth – real wealth – as in, real goods and services, like cars, houses, dry cleaning and corn-on-the-cob.

    The indispensable function of the public sector is to provide society with a healthy monetary and payments system.

    In shorthand:

    The private sector creates wealth. The public sector creates money.

    I know that there are non-trivial exceptions, as when a country operates a nationalized railway system or when a CCC-type program builds a nature trail. But the exceptions serve to demonstrate and underline the rule. Governments *occasionally* elect to directly create wealth. Companies and individuals *never* (except criminally) create money.

    I also know that the scheming and swindling that comes under the rubric of “financial innovation” purports to spin money-a into more-money-b without ever sojourning in the land of living, breathing human beings, but it’s all just what Marx called “fictitious capital” – just scheming and swindling. That’s the purpose of the “properly set up” clause in paragraph one.