An Alternative Meme For Money, Part 7: Framing Deficits

By L. Randall Wray

Deficits and Debt are probably the most terrifying topic that MMT addresses. We need to be careful. We are treading on moral (or religious) grounds. We know that one should not be a debtor (or, a creditor)—most religions tell us so. One who proclaims that deficits and debts are OK is automatically engaged in blasphemy of various sorts, not least of which is a crime against morality. Let’s try to frame the discussion.

When government spends more than it taxes, we not only get the services and infrastructure that we need but we also get to accumulate net financial wealth. We are richer in both real terms and financial terms. Government also offers to pay us interest on that financial wealth if we prefer to hold treasuries rather than HPM.

Government spending greater than taxing should not be called a “deficit”, rather, it is government’s contribution to our saving; government bonds are not “debt”, they are our net financial wealth.

Deficits and debts are bad framing; saving and wealth are good framing.

The clock that used to sit in Times Square doesn’t record our national government’s debt, rather, it shows our net financial wealth. President Obama has added trillions and trillions to our financial wealth, making up for some of the losses Wall Street imposed on us. Thanks Uncle Sam!

Of course, as discussed earlier, government can spend too much—even if it balances its budget. It might not leave sufficient resources to promote the private purpose. It might cause inflation and currency depreciation.

But there is no automatic causal sequence running directly from a budget deficit to inflation. Indeed, to a large extent the government’s ex post budgetary outcome is not discretionary as it depends on the nongovernment sector’s actions.

At the aggregate level, a government deficit is offset by (and identically equal to) a nongovernment surplus; and a government surplus is offset by a nongovernment deficit. The government’s budget can “balance” (spending equals taxes) only if the nongovernment sector’s budget “balances” (spending equals income).

The nongovernment sector’s balance is complexly determined (and indeed depends partly on the government’s actions) but we can take it as at least somewhat discretionary. To the extent that the nongovernment sector (which includes the domestic private sector plus the “rest of world” that includes both foreign governments and private sectors) exercises discretion over its budget it means the government’s budgetary outcome is not discretionary.

Let me repeat that: if we believe that the nongovernment sector has discretion over its budgetary outcome, then we believe the government does not have discretion over its deficit.

The government and nongovernment are thus inextricably bound in an inescapable balance. It makes no sense to talk about a government deficit as either imbalanced or unsustainable.

A government deficit will result if the nongovernment sector has a surplus—a perfect balance—and can persist as long as the nongovernment sector wills it to be so—a perfectly sustainable balance. Balances balance! Of course they do.

Balances balance. A meme that bears repeating.

Calls to cut the government’s debt are, equivalently by identity, calls to cut our net financial wealth.

Fiscal Austerians are, by definition, wealth destroyers. And they are not just any wealth destroyers: they destroy the safest and most liquid kind of wealth we can hold—government IOUs.

We like it when the government owes us. Why on earth do the Austerians want to turn the tables, reducing the number of “Government-Owes-Me’s”?; would they be happier if we all owed the government? Holding a Government-Owes-Me is like holding a “Get out of Jail Free” card—if worse comes to worst, I can pay my taxes or other bills and stay out of jail.

Deficit cutters are profit destroyers, too. As we know, government deficits mean nongovernment surpluses. For Households and for Firms. In the case of firms, that is gross profits (receipts less spending). (We could get into the Kalecki profits equation, but we shall hold off on technical details.) Cutting deficits means cutting profits.

Deficit hawks are profit destroyers. They are the worst enemies to the capitalist system. They would destroy it but have nothing with which to replace it.

At least the Bolsheviks had an alternative!

MMT recognizes the important role that government plays in protecting profits. Budget deficits mean private profits.

What’s wrong with that?

60 Responses to An Alternative Meme For Money, Part 7: Framing Deficits

  1. ” government bonds are not “debt”, they are our net financial wealth.”

    Fine. But that’s not a reason to auction bonds at the market’s interest rate. Let the Treasury sell bonds as a safe haven for individuals and foreign governments, but at the Fed’s chosen rate. Preferably, at the projected average long-term interest rate. A safe haven, not a profit center! Beyond future need’s, don’t hoard it! Invest wealth in something useful.

  2. Absolutely brilliant!

    • Saeid; Agreed; but that is not right either. The rich should be made to invest in the business of a country, not in some guaranteed scheme of the rich to enslave the rest of us. The country needs investment in jobs to produce goods, not some rentier ethic no risk wallstreet style “service economy” model project as it is now. Then we get to the real problem of money creation, which should be by the government via the Constitution, instead of bypassing it …art. 1, sec.8. par. 6…conterfeiting; which the federal reserve has done for 100 years, and needs to be stopped. The government needs to be able to issue money, DEBT FREE, unlike the fed, but must be controlled by new legislation to whit, and as i would have it with the states with their powers of nullification, AWA congress to keep printing in line with at least the GNP to prevent inflation/deflation, which was the fed’s original calling and claim, but at which it has totally “failed” or should I say flaunted ? Sovereign money must replace the frn, much as Iceland is doing right now for prosperity to return and doom the expatriate republicans with their “frns” to abandonment by the world for our new US dollar, much as Ben Franklin, Abe Lincoln and JFK did, with the attendant prosperity, until bankers hijacked the system, for which laws must also be enacted to prevent this time.

  3. “MMT recognizes the important role that government plays in protecting profits. Budget deficits mean private profits. What’s wrong with that?”

    This is a dangerous and unproductive meme IMHO.

  4. I agree all of that bar one small quibble. You say “Government also offers to pay us interest on that financial wealth if we prefer to hold treasuries rather than HPM.”

    Why have government (i.e. taxpayers) pay any interest to anyone? Both Milton Friedman and Warren Mosler have advocated having government issue no interest paying debt at all. That is, the only liability they should issue is HPM.

    Borrowing stuff which you yourself can create at zero cost (and paying interest for the privilege) is the definition of madness.

    A monetarily sovereign country can cut the rate of interest it pays on its debt anytime simply by funding more government spending from tax rather than borrowing. That might easily be deflationary, but the latter is easily dealt with simply by funding some of the reduced borrowing from newly printed money. The latter has a stimulatory / inflationary effect, which if government gets it right, would counter the above deflation.

  5. As I commented earlier in this series, if the $16T in debt were held in reserves earning 25bp, debt service would be $40B instead of $360B. If people had a firm understanding that the deficit dollars were first created and then encumbered in bonds, we could be yelling bloody murder about the creation of new debt in the amount of $320B a year in payment of tribute to the financial sector.

  6. I would rather go with term private surplus for public deficit instead savings and wealth since explaining how it is savings is further down the argument.
    Since private surplus as savings and wealth are equaly affected by trade deficit it has equal strength and justification but it is further down logic path. And private surplus is good framing with positive emotions, and you need only one chart to prove that private surplus = public deficit.

  7. I’m not an economist, I only play one on the Internet, but if a person holds the view that income/wealth inequality has negative effects on society, then it seems intuitive that to mitigate the inequality some wealth needs to be removed from the system. According to MMT, cutting the Federal deficit should have that effect; with the result being a more balanced income/wealth ratio.

    • How would that happen Michael? Cutting the deficit either by increasing taxes or decreasing spending might have some impact on the distribution of wealth, but it wouldn’t necessarily result in a more equal distribution. That would all depend on which taxes are increased and which spending outlays are cut. On the other hand, there are certain ways of increasing the deficit that could make the wealth distribution more equal- for example, if you cut taxes on the less wealthy and increased spending on that population at the same time.

      Of course, part of Wray’s point here is that the government is limited in its ability to manage the size of its deficit, since the ultimate deficit that results form any particular combination of existing taxes and spending policies depends on both the savings desires and spending decisions of people throughout the non-government sector, and these can’t be micromanaged.

  8. Robert Lavergne

    So, what is the more important framing – protecting profits or the majority interests? Some of us actually understand the relationship between electrons and photons or profits and exploitation, yet you ask “what’s wrong” with protecting profits? I prefer the Bolshevik’s (that is Marx’s and Engels’s) more accurate meme when it comes to exploitation and the role of the state. The worst enemies to private profits aren’t deficit hawks, it is workers, especially those who are organized in unions. The state may issue the currency, but in order for the state to procure the things it needs, there has to be production of real tangible goods – everything begins with production. With no production or industry, there is no state.

    Also, although Keynes didn’t disapprove of capitalism as an economic system, he would have probably asked the same sort of question about your implicit admiration of the profit motive. That is, he held reservations about it being the most efficient means of allocating resources – to him, private vices were public benefits, so that capital yielded a return not because it was productive but because it was scarce. Unlike Marx, who did mankind a great service with a very detailed historical analysis of the relationship between profit and exploitation, and who knew that capitalism’s greatest enemy was its’ essential product – workers. However, unlike most contemporary economists, who don’t want to get their artistic noses too close to, Marx saw the toiling masses and their vile, half-starved conditions, as the new potential revolutionary class who would build socialism and a more just and moral future.

    Socialists can accept MMT. However, don’t expect us to accept the framing that says the state’s essential role should be to protect profits.

    • Also, although Keynes didn’t disapprove of capitalism as an economic system, he would have probably asked the same sort of question about your implicit admiration of the profit motive. Robert Lavergne

      The Bible has an interesting (no pun intended) take on “profits” … profits are good but profit taking is not. Usury (ANY positive interest rate) necesarily involves profit taking and is forbidden between fellow countrymen (Deuteronomy 23:19-20). But common stock (“shares”) as a private money form requires no borrowing, much less at interest.

      So why aren’t we discouraging usury and encouraging the use of common stock as private money?

  9. This is not the series to argue over policy or MMTheory. This series is about framing. Whether govt OUGHT to pay interest is about morality. Clearly it CAN AFFORD TO pay interest. But since you all brought it up, my position is this: zero rate target on overnight funds; whether we want to offer savers some retirement accts (in Treasury Savings Bonds) with positive interest is open to discussion. I can see a public purpose in that. The argument about deflationary impact of encouraging saving is moot if we understand that it gives govt the opportunity to cut taxes (or spend more in the public interesst).
    Econobuzz is riding some hobby horse that I don’t follow. Budget Deficits mean Private Profits. This is capitalism. Get over it.

    • I would not recomend teaching advanced courses to those that did not pass beginners courses. Beginners requier simpler terms and less nuanced wording in order to comprehend new paradigm.
      Private surplus is easy to prove as equal to public deficit and carries positive conotations. Private profit is for advanced or medium level courses.

    • … whether we want to offer savers some retirement accts (in Treasury Savings Bonds) with positive interest is open to discussion. LRWray

      Let’s save government welfare for only those who need it, eh? Moreover, the debt of a monetary sovereign is regressive in that the rich may buy much while the poor may not be able to buy any at all. Instead, let’s gaurantee everyone a decent retirement and health care (i.e. the “safety bet”) and let those with surplus income invest it privately.

    • With that statement, you convinced me I don’t belong here. Bye, bye.

  10. Another example of the fiat currency merry go round argument and pseudo Keynesian claptrap. Trust me. It will all end in tears and gold valuations in the stratosphere. We are caught in the fractional reserve banking spiral. The wealthy are buying tangible assets rather than saving devalued currency. The poor who have no access to this kind of protection will, once again, pick up the tab. It may be impossible to run a balanced budget but the excesses that we have seen from the world’s leading economies can only lead to currency debasement. Whatever twisted argument is put forward debt is debt. Not wealth.

  11. For MMT to “frame” its understanding of money in a more acceptable way it has not only to explain that money is a social technology but to explain how it can be used in a prosocial way. It struggles to do this because of the “agency” or “free-rider” problem. Whilst many citizens do not fully understand that the Federal Reserve acts as a money cartel in the sense that it repeatedly fails to deter the creation of money by private banks to blow asset bubbles that undermine the carrying capacity of the real economy leading to recessions citizens find it easier under a barrage of right-wing propaganda to think that giving government free-rein to create money will lead to the “agency” problem of politicians using this for personal and wasteful ends as opposed to prosocial advantage for society as a whole. The conundrum of how a society can create money to satisfy individuals and groups needs without sabotaging a society’s broad and long term prosocial needs is the “framing” problem that MMT has failed to satisfactorily address so far and in my view this is because it’s an understanding social biology problem as well as an economics problem. See the “The Myth of Self-Interest” chapter in Peter Turchin’s 2006 book “War and Peace and War” for an update on current thinking in regard to the inter-relationship between individual and collective interest.

  12. Of course, as discussed earlier, government can spend too much—even if it balances its budget. L. Randall Wray

    Because government money has a de facto monopoly for the payment of private debts. Who ordered that? Why is that monopoly necessary given that government money has a proper (cf. Matthew 22:16-22 “Render to Caesar”) monopoly for the payment of government debts?

    If genuine private money alternatives for the payment of private debts ONLY were allowed then if government overspent relative to taxation then only government and its payees would necessarily suffer the resulting price inflation. And as you say, government may overspend even with a balanced budget but that requires high taxation relative to real output and is unlikely to be popular with voters while the “stealth inflation tax” is more likely to avoid their wrath.

    • F,
      It’s not that “anyone ordered that” …. iow (to me) the Scriptures do not “order” a “right” way or “wrong” way …. To me, here the Lord is simply pointing out that Caesar was set under authority to operate the state currency system of the nations… he was recommending that the Israelites simply comply with the associated institutional requirements (ie poll tax) of the seated civil govt… same thing we should do today imo… not much has changed here in nations since then in these regards imv… we humans (outside of the House of Israel) have been given authority from above to figure out how to do this in the way we collectively decide works best for ALL OF US …. back then the Romans used the nomisma system (state currency) which operated in conjunction with a poll tax, we can certainly do the same thing or thereabouts today if we come together thru the institutions of contemporary civil govt and decide that is what we want to do … only now being able to recognize from Whom this authority we have been given comes from …. rsp,

      • Yes, God is the source of authority but He also removes it from those “weighed in the balance and found wanting.” We would be wise, therefore, as Gentiles to be guided by His Word, the Bible.

        • Agree, and (to me, a non-Israelite) for the nations it sounds like His Son is approving of a system of state currency spent into circulation for govt provision and a small tax established for us to exhibit our subjection to the righteous authority of civil govt. rsp,

  13. The framing I’m having trouble with is MMT’s scope. Because we can issue as much currency as we want, and any other sovereign with a floating exchange rate can as well—is this a slippery slope? Early last year JJC copper spiked to $60—the rumor was China was stockpiling. Then it crashed to $40, now back to $46. Copper was $18 in early 2009. If every sovereign currency manufacturer started stockpiling real resources by issuing as much currency as they wish to pay for it— isn’t that the ultimate inflation threat? And why conservatives balk? Of course, perhaps China has let the genie out of the bottle, and now any country that doesn’t issue currency in sufficient amounts to raise their populace out of poverty is what, asleep, uncaring, dogmatic, old fashioned, moronic?

    • “now any country that doesn’t issue currency in sufficient amounts to raise their populace out of poverty is what, asleep, uncaring, dogmatic, old fashioned, moronic?”

      Or ignorant. I think it is interesting to imagine what would happen if all the major countries adopted MMT, and mercantilism were abandoned by such as China and Germany. Currencies float, so if they all go “down” how could you tell?

    • I think Stephanie said it best, “inflation is the constraint.” The proposition Randy and the others make is a simple one that get’s contorted by everyone under the sun. The only real limit on spending is the ability to create real goods and services. If every soveriegn started stockpiling real resources, it would produce inflation if the amount left over for the private sector was not enough to meet the demand. So, yes there is always an inflation threat. But that argument is absurd because there is always an inflation threat. If the everyone in the whole world suddenly decided that they all needed to eat 10 apples a day, we’d see huge inflation in the price of apples, because supply wouldn’t be able to keep up with demand. When everyone suddenly decided to buy copper, or houses, or internet stocks you see the price go up. However, Randy has pointed out time and again that inflation only occurs when demand outstrips supply. When you are running under production capacity, there is room to increase output to meet the increased demand, thus increasing quantity supplied, not price.

      • Assume a government that one year just spends by crediting bank accounts of the entire population. No work required in exchange. Assume also that in that year the government does not tax (just to keep things simple). Finally, assume that there is unemployment and capacity that is not utilized in the economy. The net result of this simple thought exercise is that society as a whole will have more money to spend, demand will increase, more jobs will be created, and everybody will be happier. Inflation in this simple example will not arise given the slack in the economy.

        A question: does the above carry no negative consequences… is it really that easy? All the government has done is credit bank accounts… and presto! Put differently, a boost in the supply of money has created real benefits with no inflation.

        On the one hand, and strictly on a theoretical level, prices could have come down in my simple example, before the government spending, and achieved the same result for society. Therefore, and again, just focusing on this simple example, government spending has not caused inflation, but it has impeded market prices to adjust downwards. That is not necessarily a good thing. Nobody wants deflation, but to the extent a country wants to make its products more attractive to a foreign sector, for example, the “market route” would have been better that the “government spending route”. Moreover, once the slack in the economy is used up in the case where the government has spent, there will be more money in the economy, all other things equal, and there will therefore be a greater tendency to suffer from inflation in the future.

        At this stage I am sure that numerous holes can be poked in what I have stated above. The simplicity of the example is excessive I have to admit, but it does help to make the point that things are not that straightforward. Inflation is a constraint for sure, but even if inflation does not immediately rear its ugly head on the spot, there may be negative consequences if a government is unethical.

        I have lived many years in Latin America, and my views may be thwarted as a result, but for me fiscal policy has mostly to do with the allocation of real resources. The aim is for a society is to have its government allocate those resources effectively, and in order to meet the needs of the public. At the end of the day, MMT, it is my belief, is most effective when it comes to arguing against those that say: “we cannot afford” or TINA. However, the tough debate still has to come after, and it is largely a political one.

        • “Assume a government that one year just spends by crediting bank accounts of the entire population. No work required in exchange. Assume also that in that year the government does not tax (just to keep things simple). Finally, assume that there is unemployment and capacity that is not utilized in the economy. The net result of this simple thought exercise is that society as a whole will have more money to spend, demand will increase, more jobs will be created, and everybody will be happier. Inflation in this simple example will not arise given the slack in the economy.”

          Except for not taxing, that is pretty much what the conditions were, and what the Bush rebate did, and what the result was at the very start of the GFC. No inflation, and recession was staved off for a short while.

          It would help again right now.

          • OK but one can see an argument being made that this could have negative side effects down the road. Even if inflation does not materialize in the short term, negative forces could be built up into the system that could surface in the future. I agree when you say “It would help again right now”, but I am also trying to rationalize why someone would not agree.

            • The basis for not agreeing is monetarism, which holds, implicitly, that money once created stays around forever. M1, M2, etc. And that these M’s, different ones at different times, are the relevant quantity to consider in the idea of too much money chasing too few goods. Thus the Fed can add $2.9T to the monetary base (which was under $1T when they started) and not cause inflation now, because velocity is depressed, but when the economy picks up, hold on to your hats.

              MMT defines (or evaluates the quantity of money) differently. In MMT money is destroyed by taxation, so when the economy picks up the automatic stabilizers quickly adjust, and the deficit shrinks. Just since 2009, taxes have increased by $470B a year, and we’re still not in a robust recovery. In our progressive tax system, it doesn’t take much economic growth to greatly increase the amount of tax collected. That has always put a damper on the recovery before full employment and demand-pull inflation have appeared.

  14. In Islam neither deficits nor debts are prohibited but fixed interest on invested capital is however considered forbidden. But some liberal scholars opine that fixed interest on loans for personal use is only not permissible and for business purposes profit sharing is positively considered.

  15. It might be a good idea to explain what “non-government surplus” means. I expect people will say, “Ya know, we still had money in the economy when Bill Clinton balanced the budget, so what’s the problem?”

    Okay, that was me saying that. I have trouble understanding what a non-government surplus is and I have trouble understanding how Clinton’s government surplus caused a recession.

    • It’s simple, to create public surpluses, private sector had to expand debt which provided for government surpluses.
      Deregulation of credit condition and deregulation of financial sector enabled expansion of debt.
      If government run deficits instead of surpluses, private sector would not have to provide taxes with debt.
      You can see this chart to notice almost perfect corelation of government debt to private surpluses, corelation somewhat offset by trade deficit.

    • A non-goverment surplus would be the net financial savings of the private sector (households, businesses), on a year to year basis in this context. Banks lend out money to us, but there is no net savings there because if I take out a mortgage to buy a house from you for 200k, you now have 200k but I am in debt 200k+.. so that’s a wash basically.

      The only way the private sector can net save would be for the government to run a deficit or for the country to run a trade surplus (which the US does not do). If, in addition to a trade deficit, the government runs a surplus like it did in the Clinton years, that’s a lot of money being pulled out of the private sector (you and me) each year. If people want to sustain the kind of spending they had, they will have to take on very high levels of debt in response.. enter the housing crisis.

      • It seems the best way to end recessions is to reduce private debt. Giving the banks 30 trillion dollars didn’t do much to accomplish that. The next time the banks need a bailout, we should let them fail and give $30 trillion to the poor.

        Ending this recession seems pretty simple: abolish the payroll tax and raise the federal minimum wage to $13.

  16. “When government spends more than it taxes, we … are richer in both real terms and financial terms.”

    Is this always true? I would argue that this sort of statement risks putting off non-MMTers early on in a debate, and I would therefore suggest that a meme that includes this train of thought needs to be reinforced.

    I ask the above question because in proposing MMT, I have often found myself unsure about how to react when presented with a rebuttal in friendly debates. Fortunately this is happening less and less over time, but it is not easy for us non-economists to always have a counter-argument ready. One comment often mentioned by my conservative friends is that if I am in favor of MMT, I must think that the Government is an “alchemist”. I know that this is not what MMT is about, but I do think that statements such as the one above are easily open to attack along those lines.

    Based on my experience with these “neighborhood” debates, it may be more accurate to say that: “When government spends more than it taxes, we … are richer in both real terms and financial terms, if and only if, that public expenditure is destined to a cause that serves public purpose, and especially if that cause is not currently being addressed by the private sector.”

    It is all about the people in the end. We have George and Gary in Government, and Paul and Peter in the Private Sector. Fiscal policy has a great deal to do with allocating real resources. If Gary diverts real resources to build bridges to nowhere, and does so by contracting George’s father’s construction company, and in doing so, Gary causes less competition to bid on a private sector (Paul & Peter) initiative to build a hospital, then the above statement may not be true. That does not mean that Paul & Peter can do no harm. If they are top managers of a too-big-to-fail bank that aims to trick its customers into overly risky products, then almost whatever Gary and George may do to divert resources away from Paul & Peter will lead to a better society. People are people, and they can be good or bad whether they are public officials or private citizens. At the end of the day it boils down to the quality of those people, and how they use their power and influence to mobilize real resources.

    I am not a fan of complicating things, and memes should include catch phrases that are short and sweet. However, the flip-side is that the simpler the statement, the easier it sometimes is to poke holes in them… especially when 99% of the population will tend not to initially agree with MMT arguments. Non-economists keen on spreading the MMT word have to be aware of this in order not to get stuck in debates.

  17. Like the government surplus/deficit, the private (non-government) surplus occurs when its income exceeds its spending; that is, when it is able to save some of its income. In the Clinton surplus years, the private sector was spending more than its income, which can only happen when it borrows the difference (or spends from its previously-accumulated savings). That cannot continue forever, and when it stops, aggregate spending goes down, and that is what caused the recession. Had Clinton run deficits, the private sector would not have had to run deficits, and would not have had to cut back when it did.

    • Of course it can continue forever. As long as banks create enough money to cover interest payments, debts can continue to increase. The problem is one of distribution. When too many people who owe don’t have the money to repay, things get ugly.

      The government isn’t the only money creator.

      • No, Golfer1john is right. The Clinton surpluses could not go on forever, even theoretically. Banks can create money, bank money, which trades at par with government money. But they cannot create government money, reserves, currency, dollar bills. Only the government can. The government is the only government-money creator. The Clinton surpluses diminished the finite nongovernment stock of NFA, the national debt. This cannot go on forever. You can’t keep taking dollar bills out of a finite stack of dollar bills forever. That’s what “finite” means. A corrupt government and central bank might disguise how it is surreptitiously feeding dollar bills to its cronies’ stacks, but that is the only way it could even for a moment look like this could happen.

        This is different from a balanced budget situation – which theoretically could go on forever, even with ever-increasing private debt levels, e.g. just more people owing more money to more people, say, which is what you might have been thinking of.

        • Can’t create dollar bills? So what? Are reserves that are “bank money” any different than reserves that are “government money”? How do you tell the two apart? I don’t think you can. I’ve heard over and over that banks aren’t reserve constrained, they are capital constrained. Are you saying that there won’t be enough capital flowing to banks to allow them to continue to create money through loans?

          So confused.

          • Andrew, reserves consist of vault cash and balances in the account of the bank with the Federal Reserve. The bank cannot create these things, but the Fed can, by loaning money to the bank when its reserves are low. The bank can borrow reserves from the Fed or from another bank that has more than it needs, but it cannot create them and the banking system in aggregate cannot create them, only trade them. Government (The Fed) can create them.

            Banks can create deposits, by making loans. But deposits are liabilities of the bank, and reserves are assets. Loans are also assets of the bank, but they are not reserves.

            The reason banks can continue making loans, even though the making of a loan increases their reserve requirement, is that the Fed will always supply all the reserves demanded by the banking system, in aggregate. They set the price (interest rate), and let the quantity float. Thus, banks are not reserve constrained. They will always have enough reserves available to them, because the Fed will always supply them.

            Capital is different. Capital is the net worth of the bank, assets minus liabilities. When a bank makes a loan, it creates an asset and a liability, but capital doesn’t change. Thus loans reduce the bank’s capital as a percent of assets. If the bank is required to have a certain amount of capital, it may not be able to make additional loans; thus is it capital-constrained.

            I may have some of the terms slightly wrong, but that is the gist of it.

            The private sector includes both households and banks (and businesses). Additional bank loans do not change the net financial assets of the private sector, just shift them around. But loans do enable additional spending by households. When households spend more than their income, their net savings is reduced. Maybe they drew down the balance in their savings account, or maybe they took out a loan. If that were to continue, then eventually their savings accounts would be empty, and their loan balances would be such that nobody would extend additional credit to them. At that point they would be unable to continue to spend more than their income, even if they wanted to. They don’t want to get to that severe point, though. During the Clinton surpluses, households spent more than their income for a while, and there was a government surplus even though there was also a foreign sector surplus, but when households began to net save again, the government surplus disappeared. Non-government sector deficits are not sustainable. If there is a trade surplus (foreign sector deficit), then the private domestic sector and the government can both have a surplus at the same time. Germany or China could do that. In the US, the foreign sector has a surplus, so it is not possible for both government and the domestic private sector to also be in surplus. At least one of them must be in deficit.

            • Thanks for this. Questions:

              1) Is capital counted as reserves? If not, why not?
              2) What do reserves (provided by the Fed, as you say) have to do with a government surplus/deficit? The Fed can make money and give it to banks without regard the the treasury, can’t it? Isn’t that what QE was all about?

              • 1. No. Capital is just a mathematical difference between two accounting constructs, each of which is made up of several different kinds of real entities. Bank A might have $1M cash in the vault and $500K deposits, thus capital of $500K and reserves of $1M. Bank B might have no cash and no reserves, but assets (loans) of $1M and $500K of deposits, thus also capital of $500K.

                2. Nothing, yes*, and yes.

                * They didn’t “give” it for nothing, they bought assets (T-bills, MBSes) from the banks, or more likely from people who had bank accounts. The money was created from nothing, and added to bank reserves.

              • I have nothing to add to Golfer1john’s excellent explanations but some page numbers from Wray’s 1998 book, Understanding Modern Money. p.80, also p.114 (“What is the money equivalent of a crop failure?”) & p.157-158 explain the unsustainability of surpluses or “fiscal prudence” in general. Note also p.79 on central bank “gimmicks” that might hide what is really going on.

              • I’m still missing something. Reserves aren’t just borrowed from the discount window or other banks. Reserves are strictly classified as borrowed and non-borrowed. So other assets can be reserves. When a bank sells stock, it acquires capital. Those dollars can be deposited with the Fed, no? Doesn’t that then count towards the reserve requirement of the bank. The same could be said of retained earnings, right?

                Maybe the disconnect here is one of net financial assets vs. dollars?

                I did look through “Understand Modern Money” last night. The index is awful. And it really doesn’t describe things like “reserves” well. It sure seems like it would be good to define it carefully if you’re going to go on and make arguments about how the world works based on the concept.

                Thanks to both of you for your help.

              • Reserves counting toward the required reserves are just bank accounts that a bank has at the Fed (+vault cash). Reserves are always “government money” “state money” “currency” “high-powered money”. There are a lot of synonyms and near synonyms to keep straight. Really, they’re just FR notes, dollar bills. For the last few years the Fed has paid interest on them, that’s the main difference.

                When one says “bank money” or “government money” or “X money”- the X generally indicates who this kind of money is a liability of, who issues the money. So bank deposits (owned by a household or firm) are bank money are just the same thing as old-fashioned banknotes, which is pretty much the same thing as a cashier’s check (to cash) issued by some bank. (Which might be exchanged or endorsed and end up in the hands and account of someone different from the original owner.) Reserves, government money are exactly the same thing, except that the government – the Fed or the Treasury “issues the note”. Reserves are a bank’s government-money. Dollar bills and coins are a person’s government-money, because only banks are allowed to have accounts at the Fed.

                Money is credit is debt is always a relationship not a thing. The main thing to keep straight is always who it is a relationship between. Who is the creditor, who is the debtor = who holds the asset, who issued the liability. That’s even more fundamental than the amount, interest, maturity, denomination, etc. But nonsense spewed about the National Debt in the MSM often seems to reverse who owes who!

                Reserves are a particular, specific type of asset of the bank, but banks can get them from several sources. Banks may acquire reserves (or capital) in various ways, but it only has reserves when it liquidates, sells, borrows and gets some “ready money” (another near-synonym). A Treasury bond is NFA, and is easily convertible into reserves, by using as collateral or selling, but it is not “reserves”. A savings bond is not a dollar bill, although they’re very close.

  18. Any dollar issued by a MS is a dollar of inflation. Period.
    But inflation is in itself a necessity in that as more goods and services are produced or applied, more sovereign currency is needed. It is only when more currency is in circulation than what is available to be redeemed by the good faith and credit of the sovereign society. When there is more “money” (Nothing)
    which the society gets for its goods and services (Something) in order to get (Anything) (Soddy)
    This problem manifests its ugly head when the issuance is “called for redemption, which becomes a systemic failure if the goods and services are not available to fulfill total demand-panic occurs since all then try to redeem. ” making a collapse inevitable” (von Mises).
    Please read my other comments to read the solution, if correct or to be corrected.
    We must stop “fictitious lending” creating non existent goods and services, start “true lending” and true fair taxation.
    Please, L R Wray,Wm. Black , Michael Hudson state your positions along with Keynes, Minsky re private for profit banks and “credit expansion”.
    Improve MMT.

  19. Deficts are countered by the specific powers guaranteed by the governments I.O.U for each income dollar that exists. The value of the I.O.U is not money, the user has that in hand. The guarantee is that government will enforce the equal value of this currency dollar for dollar in public and private transactions. It will establish this by law or force if necessary and this negates deficits if the government retains this power. As long as it does the currency will have equal exchange value and the government’s cash flow is of secondary and a different compartment of concern. What do you think about this as either a bold faced lie or alternative meme?

  20. This framing is not a re-framing. MMT has been saying that a public deficit is a private surplus (or whatever term you choose) forever. You seem to miss the point that as long as the deficit is called a deficit, you’re in trouble. It’s in the word. You can’t explain this simply enough to win the hearts and minds. Eliminating treasuries would do the trick, and is probably a good idea anyway. Eliminating bank-creation of money wouldn’t hurt either. The closer that things really are to people’s vision of how they are, the easier time you’re is going to have of making changes that people will understand and endorse.

  21. I’m on a roll. Deficits are one indicator that we still own our government, and it is legally required to offer this protection as a matter of contract. Surpluses on the other hand though they are indicators of inefficient economic policy also indicate that we have lost our fiscal control of the government in power at a given point in time. In other words, if government doesn’t need our revenues it is a free agent unchecked by dependency. This attempt to frame a meme uses the ideas that government will protect your money and that government must be limited which are both conservative morals.

  22. There is weakness in MMT’s argument – “MMT recognizes the important role that government plays in protecting profits. Budget deficits mean private profits.”

    While Budget deficits may mean Private sector Surplus. The Private sector Surplus has been decoupled from “Main Street”. Yes, there is a Big Govt deficit which may well be Private sector Surplus. The problem is VAST majority of that Surplus ends up in the pockets of top 1%. From income distribution to ownership of assets, bottom 90% of Population is witnessing their share shrinking fast while top 1% is seeing their share piling at geometric rates.

    So when MMT’ers make this argument that they wanna keep Private Sector in profit. They do not convince bottom 99%, more precisely those who are being crushed in economic disparity. To someone in bottom 99%, they are not real getting fruits of Private sector Surplus.

    I am sure MMT’ers argument is valid and they are making the argument in good faith. But the argument that “Deficit is not big enough” doesn’t convince people who see the present economic disparity and how top 1% has gotten the grip of majority of Assets and income in economy.

    MMT needs to address the problem of economic disparity with more striking proposals. I feel Jobs Guarantee Program and economic rights are good ideas. I am also eager to hear MMT’s proposals on progressive taxation. How can progressive taxes can help reduce economic disparity and make system a “level playing field”.

  23. Well, probably nothing, if the profits were not all distributed to the financial and corporate interests and stripped from ordinary citizens who are then taxed at high levels (unlike high-income earners and those receiving capital gains treatment) to pay the interest on the debt to the various holders of Treasury Securities (mainly issuing banks and foreign governments). This process is doubly devastating in that it dramatically increases the disparity in wealth while at the same time reducing employment by placing the economy into recessions and depressions.

    The real question which needs to be answered is how to prevent the “giant squid economy” of financialized capitalism from evolving in the first place. Once financial interests are able to engage in regulatory capture, as they did prior to the Great Depression and once again from 1980 through 2007 (actually through today, since nothing has been done to effectively put a stop to this process). In this situation, it doesn’t really matter how you deal with accounting for deficits – whether one counts it as wealth, as is suggested here, or the death-knell of society as do the neoclassicals and the Austrians, since all of this so-called wealth is absorbed by the financial elite and the rest remain impoverished or on the road to being impoverished.

  24. Here is the meme in a short paragraph. Deficits are not a condition of insolvency as many would have you believe. The most conservative idea (we all agree on) is that government will protect the value of your money by law and force are insured by expenses on its account. These deficits reflect government need for revenues and dependency on the electorate, who themselves set the limits of it’s public purpose. Maintaing the control of deficits is discretionary yet very flexible and makes all of our economic tools useful in guiding positive returns. Above all they insure we own our government.

  25. So many opinions, so little space/time.
    Just as commercial banks use enforceable contracts to lend money, so to the government spends money through a lawfully constituted process as well as collecting money through constitutionally mandated taxation. There is no constitutional limit to either process outside of political decisions of governance.

    Commercial banks have restrictions as to how much contract they are allowed to honour. It is necessary to comprehend the dynamics of economy to understand this limitation and how effective it actually is; all else is noise. Investment banking had no like limitation to risk. Political decisions were made that conjoined these banks without regard to safeguard and the result is widely known and will be felt for generations in the loss of economic potential that error generated.

    MMT points out governments range of economic action is constrained only by its ipso facto constitutional and lawful mandate to issue currency and level taxes to achieve economic ends and to moderate this process through input from that sector having the greatest information concerning economic requirements of their region through consensus. What is amiss is the public perception, colored by political charlatans, obscured by ignorance, preferring beliefs to knowledge, and accepting moralistic judgmentalism as education.

    [Please note: nowhere in the above were the words debt nor deficit used]

    One of the great functional deficits in public education is the dearth of instruction into the basics of contract law.

    Another matter generating heat but no light is the term interest. Basic economics is: Interest is the income accruing to capital. Like wages are income accruing to labour. Or rent is the income accruing to land. And finally, profit is the income accruing to the entrepreneur. Interest comprises of two parts; first part is a fee for the use of value; second part is a charge for the risk involved in the loan of value. There is no moral issue in either part and anyone who tells you there is has their head up their ‘place the sun doesn’t shine’.

  26. Brilliant. Perfect. The best short distillation yet.

  27. Sooner or later, MMT supporters will have to think about the mechanics of an MMT administration. We can speak theoretically about using tax policy and a printing press to control M2, but we should be practical about the mechanism. There will come a day (have faith!) when we will be asked to offer specific legislation. It’s never to soon to be prepared. Semper paratus!

    In that spirit, consider that Congress will never reset tax levels as one sets a thermostat. What to do? I suggest that Congress would first have to set a very high tax schedule and then give the Fed the power to control tax rebates, subject to objection by Congressional vote and Presidential veto. Put all the players in the position of making a case for something between inflation and recession (Goldilocks!).
    For spending, how does an MMT government “print money”? I repeat here my previous suggestion: We should overturn whatever stupid law prevents the Fed from buying zero percent perpetual (Zero Forever!) Treasury bonds on such a schedule and in such a quantity as will, without causing harmful inflation, maximize employment and minimize the time required to create the world’s best infrastructure (meaning anything not private property: public education and health care, police and fire stations, FEMA , courts and prisons, maglev railways, seawalls, nuclear power plants, national forests, aircraft carriers, etc.) This implies full employment and ELR without getting into “moocher” questions.

    Framing is important but messaging is even more important. The two essential (and no other!) reasons we should give for creating the world’s best infrastructure are (1) “to provide for the common defense” according to the Constitution’s preamble (anyone who disagrees should be shot) and (2) to “…promote maximum employment…” according to the Federal Reserve Act (anyone who disagrees is in favor of both moochers and collapsing bridges).

    This concept should be easier to sell than “printing money” (or forging multi-trillion dollar coins ) because a similar approach was tried during WW II with great wartime and post-war success . It’s not just some professor’s bright idea. We need only overturn a stupid law.

    • I have noted in several places a plan for a new monetary system which I think should be consdered for the benefit of the nation and the world in general, ie. NO DEBT money, printed by the government and strictly controlled by the congress and especially the states with their powers of nullification (as they MUSt balance their books also) to keep from having the over-printing problem arise. this would lessen the inflation/deflation problem as well. Also, public state or private vetted banks would apply to the government for this money for valid loans as with the bank of north dakota, the banks living on just the interest and fees. As the loan was paid back, this principal part of the loan would re-enter the US treaury general fund for normal activities, or be given back to the people of the contry as tax refunds or lowered tax rates…why haven’t I heard of this before ?

  28. Will Richardson

    The government spending surplus funds non-domestic government saving thus filling the output/expenditure gap.

    Austerian, or in the UK Osterians, are Prosperity Deniers.

  29. Erik Jochem

    By substituting “saving and wealth” for “Deficits and debts” instead of figthing the deficit-concept as such we very much appear as if we wanted to hide the ugly truth of the deficit behind a nice looking curtain.
    It might seem odd as a way to present MMT to the public but MMT has to stop talking about budget-deficits and deficit-spending as if there was a corresponding reality to that. The very notion of deficit is inapplicable to a sovereign currency government. It is a concept taken from the private sector where the concept of comparing inflow and outflow makes perfect sense. Also a government balance with entries and exits clearly does not reflect the reality, as for a sovereign currency government there are no entries (where to ?) and no exits (where from ?). You cannot correct a wrong conception by using the terms going along with this wrong conception. Money only comes into existence if spent by the government and it ceases to exist as soon as as it is paid to the government. It just doesn’t make sense to talk of money inside the government sector. To break the link between entries and exits of money in the govnernment sector is the main issue for MMT. If MMT goes on to discuss whether deficits are good or bad instead of insisting that there are no deficits but only flows out of the economy and flows into the economy the government being a black box MMt cannot win the argument. By accepting to talk about budget deficits you admit their existence. It’s as simple as that.

  30. Erik Jochem

    let me add: if capacity of the consolidated government to create the currency is unlimited then we have the following equations:
    incoming taxes + unlimited currency “stock” = unlimited currency stock
    unlimited currency “stock” – outgoing expenditures = unlimited currency stock
    You cannot add to or substract from the infinite.
    This sounds ridiculous as a political statement but it’s the core distinction of fiat money. Taxes don’t enter the government sector but only leave the private sector. Government expenditures don’t leave the governement sector but only enter the private sector. No link between the two. No money inside the government sector. Only numbers and paper.