By J.D. Alt
One of the strangest things to understand about Modern Money Theory is why, if government doesn’t need your tax dollars in order to spend, does government tax at all? Here is an attempt at a new and “better” explanation. It is based on the insight that the government DOES, in fact, need to collect taxes, but the “taxes” it collects are not your “tax dollars.” This may sound like gibberish, but stick with me a moment and see if the following doesn’t make sense—and cast a new light on OTHER things as well (like, for example, the “national debt”).
A paper dollar, printed by the sovereign U.S. government, is nothing more—and nothing OTHER than—a tax I.O.U. which states, in effect: “The sovereign U.S. government owes the bearer one dollar of tax credit on the day taxes are due.”
Because of this I.O.U. pledge, the government is able to use the paper dollar, in the MEANTIME, to purchase real goods and services from private citizens and businesses. The citizens and businesses are willing to exchange their real goods and services for the paper dollars because they will NEED the I.O.U.s (dollars) to present to the government on “tax-day”. The mental “trick” here is to realize that the ACTUAL taxes are collected when the government purchases the real goods and services—those goods and services being, in fact, the actual taxes paid. (This is perfectly logical, when you consider it, because what the government WANTS are the goods and services—NOT its own paper I.O.U.s which it can print up any time it wants.)
What happens on “tax-day”, then, is the citizens present the sovereign government with the paper I.O.U.s they have earned providing goods and services to the government (and/or to each other), and their taxes are extinguished. Again, the mental “trick” here is to realize that the transaction that takes place on “tax-day” is not actually the PAYMENT of taxes but, instead, is the citizens declaring they have ALREADY paid their taxes (the real goods and services they provided earlier)—and the paper I.O.U.s are the PROOF of that payment.
By logic, then, what does the government do with those I.O.U.s presented as proof of taxes paid? They are simply destroyed because owning a piece of paper that says you owe YOURSELF one dollar of tax credit is meaningless. The I.O.U. is only of value to the citizen who is required by law to pay taxes, and once it is used for that purpose, it is extinguished.
This perspective supports and, I think, clarifies the general Modern Money propositions that:
a) Taxes drive money—in other words, private citizens are willing to provide goods and services to the government in exchange for government’s paper dollars because they NEED those dollars (government I.O.U.s) to pay their future taxes.
b) The government must create and then SPEND its dollars in order for the private citizens to earn the dollars they need to pay their taxes.
c) When the government collects “tax dollars” it is NOT collecting something it “needs” but, instead, is simply collecting back (or cancelling) its own I.O.U.s (The ACTUAL taxes are the real goods and services it had previously received in return for those I.O.U.s).
d) Because the government imposes a continuous, outstanding tax liability on its citizens and businesses, the paper I.O.U.s (dollars) have value in the private market and become the standard currency of exchange for goods and services between private citizens and businesses.
e) In order for this private sector economy to grow, the government has to spend MORE I.O.U.s (dollars) than it collects back (cancels) on tax-day. If it does NOT spend more than it collects, the private citizens and businesses will have no “net” dollars for private commerce and, as a consequence, there will be fewer real goods and services for the government to purchase. The more I.O.U.s the government spends, relative to what it collects back in taxes, the MORE net dollars remain in the private sector economy and, assuming the real resources are available to put those dollars to work, the economy will add jobs and produce more goods and services.
f) Because the government must spend MORE dollars (I.O.U.s) than it collects back (cancels) on tax-day, it appears to be “deficit spending”—spending more than it “earns”. This terminology is logically MISLEADING, however, because the only thing the government can “earn” by collecting “tax dollars” is its own I.O.U.s which cannot be a form of “earning” in any meaningful sense of the term, since it is meaningless to own a piece of paper that says you “owe yourself.”
This brings us, then, to the question: If a paper dollar is a tax I.O.U., what is a Treasury bond? The common understanding is that Treasury bonds represent a “debt” which the government must “repay” in the future. But look how our new perspective requires that view to shift:
Let’s say a private citizen “buys” a Treasury bond. What takes place? The citizen exchanges say a hundred paper tax I.O.U.s for another piece of paper (the Treasury bond) which is…what? It is another government tax I.O.U. pledging to pay, at a specified time in the future, a hundred and SEVEN paper tax I.O.U.s (the original hundred plus 7 percent interest.) What is unique in this transaction is that, while it appears the government is in “debt” to the citizen, what it “owes” the citizen is nothing more than its own promise to accept these I.O.U.s (dollars) as tax payments. There is no logical sense I can think of in which that can be considered a meaningful debt.
The national “debt crisis” which our enlightened politicians and economic pundits flail us with on a daily basis—demanding our obeisance to their schemes of imposed austerity—cannot, therefore, really EXIST. It is a figment of their overwrought imaginations. Simple reason tells us that—so long as the sovereign government has the authority to declare that its citizens shall pay taxes—it is an effortless exercise for that government to continuously and FOREVER issue pieces of paper which simply state the government will accept that paper as payment of taxes due to itself. The implications of this for a TRUE national prosperity are enormous.
This is too logical for the illogic of politico we see in WashingtonDC!
I’m with you up until step f. The mistake here, IMO, is that you are equating Money Creation with Deficit Spending. It is possible, under Greenbacking, to create money without debt. Now, I hear you, if you object to this on the grounds that then there would be no reason to collect taxes and therefore no reason to accept government money either; people could just go off and live off LETS, like Berkshire Bucks or something. So, let’s say we will still need to keep SOME kind of taxation in place to force acceptance of the national currency. This is necessary because government services and goods are necessary. That is, if we accept the premise that government, at least in theory, produces things we want (or, at least pays other to produce them), than it can’t be paid off in Berkshire bucks and a thousand other currencies (and maybe a chicken and a pig) or we will have chaos, not to mention none of our foreign creditors would ever accept that.
But the advantages to having government produce a PUBLIC option for money (USNs) while the private banks produce a PRIVATE one (FRNs) are that:
1. Government never has to pay an idle class of creditors for doing what government could do itself – “coin Money” (Art. 1, Sec. 8)
2. The dependency of government on the private sector (read: banks) to fund its operations would be broken, forever, because it would never have to borrow again. This would greatly reduce bribery and other forms of corruption.
3. Government could be of, by, and for, the people, instead of the banks.
4. We would not have other industry bribery, like the M.I.C. to go off and create wars.
5. We could have a sane and sustainable form of taxation, like Land Value Taxation, pollution taxes – in short, taxing bads, not goods.
6. 3/4 or more of the insanity in Washington would go away, along with the Public’s all-time low opinion of lawmakers and leaders (Americans rate Congress about 14% favorably)
7. We could afford to employ people to rebuild our infrastructure, pay off social security (without the regressive payroll tax).
I know MMT is espousing some of these same things, but it can only do some at the end of the list and the ones it can’t do, prevent it from being accepted, I believe.
Scott, it seems to me that the real point of disagreement between MMT and its critics centers around the question of whether the government (Treasury) or the Federal Reserve “creates” new money in circulation. I can’t resolve this issue for others, but to me, when the Treasury issues a bond, that is the creation of new money. As I understand the process, primary dealers buy the Treasury bonds with reserves, but the FR creates these reserves with key strokes if the primary dealers existing reserves are not sufficient. Now one could argue that it is the creation of the reserves by the FR that is the new money created, but without the Treasury bonds to purchase, the reserves would just be reserves, sitting in a computer spreadsheet just as the banks’ clearing reserves do. Until there is something to buy (a bond) there is no new money created no matter how many keystrokes the FR adds to the reserve accounts.
The anomaly with this discussion about reserves seems to ignore the fact that the reserves are part of the fractional reserve system. The private banks can create loans up to 10 or 12 times the amount of reserves held by the Fed.
The other anomaly of the fractional reserve system is that the Bank’s reserves always include “money’ created as loans. As far as I can see, the only way the interest can be paid on any funds borrowed is through the issue of additional “new money.” That doesn’t mean the particular borrower takes our an additional loan, but further down the track, most of that “money’ the first borrower pays back as interest ultimately comes from someone else who has taken out a loan – whether it is the company that pays the wages or a customer that buys a product.
So called fractional reserve system is a mainstream economic theory. MMT does not include fractional reserves in it’s model, rather process of bank lending is much simpler.
Borrower pledges to pay to the bank money and bank pledges to pay to borrower money. Bank makes an bookkeeping entry to borrowers account that is actually record of banks debt to borrower. When borrower goes to the ATM to withdraw this cash, bank pays it out of the reserves that it has. Bank’s debt to borrower has been reduced, so borrowers account is debited.
If borrower deposits this money to another bank, his account there is credited, again because of bank has become indebted to the depositor. Bank gains his money that is converted into bank reserves that bank can lend to other banks, or to the government to earn interest payments.
There is no need to calculate complicated “money multipliers” and fractional reserves.
Sunflowerbi0: Basically right, but it is when the Treasury spends that it creates new money, not when it sells a bond, which is just a drain of the reserves the Treasury created when it spent. Kelton’s great paper Can/Do Taxes & Bonds Pay For Government Spending amply repays the effort of reading it, as I recently rediscovered. The Treasury – not the Fed – effectively lends the banking system the reserves to buy the buffer stock of bonds / reserve drains that are purchased through the Treasury Tax & Loan accounts that the Treasury holds at the banks. Withdrawals from which, the Treasury attempts to synchronize with its spending to avoid reserve effects of its spending flooding the banking system. Read the paper, and the above should hopefully be clear(er).
Calgacus, thanks for the reference and (partial) confirmation. What I was responding to is the claim by MMT critics that the Treasury cannot deficit spend until it has the funds in the TGA, and the way it acquires funds for deficit spending is by issuing bonds. It’s all seems rather circular, especially if Treasury spending is not dependent of taxes collected.
What reason banks would have to accept payments made in reserves if they could not exchange those reserves for interest-earning assets, or they could not earn interest on reserves as they do now? I strongly suspect that even US notes deposited at a bank lead to credits in bank reserves, since reserves are bank asset that offsets that deposit liability.
As I understand it this was the problem in Japan when they tried to lower interest rates too low. Reserves are supposed to be asset of the bank. At too low interest rates they become a liability since banks have operating expenses associated with this money. After that banks have basically no desire to accept deposits anymore.
I’ve tried and tried to understand this justification for taxation, and it falls flat every time. Once demand for dollars has been created, it doesn’t matter if the government taxes or not. If the government decided to suspend taxation for five years, I’d lay every cent I have that people would go right on exchanging dollars for goods. When hard money became scarce during the depression, people used all kind of other things as money (buttons, stamps…). We’re conditioned to want SOMETHING to use for exchange, and US dollars are as good as anything else.
Please, call a spade a spade:
1) The government still taxes because it thinks it needs the revenue, though it doesn’t.
2) Taxation is justified in that it has the potential control inflation and it serves to redistribute wealth.
“Once demand for the dollar has been created”
Taxes are the mechanism for creating the demand. Sure the dollar would go on being circulated without taxation, at least for quite a while, but how would the initial demand be crated w/o taxes?
There seems to be something missing in this argument about the demand for the dollar – maybe it is the recognition of what the ‘dollar’ represents. To me, the “dollar” is really just a “ticket” that serves as a very convenient medium of exchange in the buying and selling of good and services. That is the fundamental purpose of a “money system”, and essentially, it has nothing to do with taxation. If the dollars disappeared tomorrow , society would soon create a replacement to facilitate trade. The barter system has been tried and found wanting – a universal “ticket’ system is far more convenient and versatile – taxation doesn’t enter into the necessity for such a universal and accepted “ticket”.
Part of the problem is that the notion of “taxes drive money” is about the origins of money, and another part is about the acceptance of it.
Re the origins, pre-Columbian societies in the Americas had large populations, sophisticated astronomical and engineering abilities, and conducted extensive trade with each other, travelling great distances to trade, but had no money. Their trade was done by barter. At the same time, European societies had been using money for centuries. Why? The Europeans had a feudal society, with kings and various other sovereigns, and the Native Americans did not. They had nobody imposing taxes, and thus no need for money.
Re the acceptance, there are examples of other types of debts and credits that are somewhat, but not universally, accepted as payment. Bitcoins come to mind. They serve the same purposes as unit of account and medium of exchange that dollars do, but they are not universally(/strong> accepted like dollars are. One difference is that the government will not accept bitcoins in satisfaction of a tax liability.
That’s quite true that the Government won’t accept anything else except dollars, but I don’t see that as being the fundamental purpose of the “money system”. Taxation isn’t the reason people use dollars and it isn’t the reason the government creates dollars. It is well known that many earlier cultures used the barter system, and current international trade still does to a certain extent, but barter eventually phased out because of the versatility of a “money system” irrespective of what was used as money.
The fact that the government will not accept bitcoin in lieu of dollars to satisfy tax obligations has nothing to do with its acceptance or lack thereof. People aren’t paid in bitcoin, they’re paid in dollars. Bitcoin isn’t in wide circulation. In order to obtain bitcoin, you generally have to trade real money for it — is there a mechanism by which bitcoin is provided to entities who provide services as with government spending?
The dollar will reign until there is some real reason why it loses real acceptance. We’re way past the point of “establishing demand,” so please stop suggesting that taxation is currently necessary for dollar acceptance. It’s not.
I’m not in a bitcoin environment, but from what little I’ve read I think people are paid in bitcoin for goods and services. They don’t just trade bitcoin for dollars among themselves, they use it for payments.
I don’t see how the dollar would survive if government accepted other things and not dollars in payment of taxes. Gold, for instance. If government purchases were paid for in ounces of gold only, and if the tax was expressed in terms of gold, with no reference to any amount of dollars, I think dollars would become worthless quite quickly. I sure wouldn’t accept dollars as wages anymore. How would an employer even pay the withholding tax, if the wages were not in the same unit of account as the tax? OTOH, if the government set some sort of exchange rate and honored it, then dollars would be “as good as gold”, so to speak.
Or are you asking about what might happen if government decided not to collect taxes at all anymore? Just spend dollars, and hope that it remained the unit of account and medium of exchange, so that it could continue to buy the stuff it needed? That might be interesting, since there are other currencies out there. If dollar inflation rose, and there was an available alternative, perhaps Canadian dollars, and prices of things in Canadian dollars were more stable, then maybe the US society would become a user primarily of Canadian currency. I’ve been in some countries where US dollars were not only accepted in payment but preferred to the local currency, even though the local currency was the unit of account for taxes. Their access to dollars was limited, though, just to American tourists or military. Nowadays, a retail vendor could probably put a Canadian bank’s ATM in his store and demand payment in Canadian dollars, rather than raising prices each week, and let the customers deal with the exchange rate. He’d probably still pay his employees in US dollars, though, and be as slow as he could get away with in raising wages.
I don’t know, I don’t see how it could work out well.
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This is beyond-brilliant in my opinion. I’ve never seen this non-intuitive point about “taxes driving money” or “money is just a tax credit” made half so clearly or simply before. I’m going to read this again, and if it still makes sense I’m going to send it to everyone I know.
Thanks!
This is how Eric Tymoigne explained it to me:
“ [a United States dollar not owed to any bondholder] is a debt because the issuer (government) must accept it back in payment. It owes the holders of the monetary instrument the promise to accept its monetary instrument in payment.”
I know that all debt is borrowed into existence in our system, as the Fed creates reserves to purchase bonds issued. and bank credit is created (loaned) and backed by these reserves.
But the paper dollars is what always confused me, and the dollars you have in assets that aren’t debt-related at all or based on expected cash flows. Until I he explained it such that all dollars are still IOU’s because they’re a promise by the government to receive them for taxes paid, and the government, in order to give value to the currency, has to has a valid regime that requires taxes paid from enough of the population that it retains coercive power.
That is the angle that helped me at least to understand that “equity dollars” (non-debt-related dollars like dollar bills, silver dollars) are still IOUs in the sense that the government gives them value by them being a promise to accept payment of taxes with them.
As for the strong tone of your article, I take issue especially with excerpts like:
“The I.O.U. is only of value to the citizen who is required by law to pay taxes, and once it is used for that purpose, it is extinguished.”
Dollars are valuable to people who don’t have to pay taxes.
Sure, the taxability and the need to have dollars to pay taxes gives an element of value to the dollar, but it goes far beyond that, and it seems you’re overly focused on the role of taxes.
I agree that this is central to the value as well.
However to diminish the value of the dollar as being only of worth to those who need it to pay taxes doesn’t show appreciation enough to the value it has in being an established trade currency and medium of exchange for real goods.
It’s not unusual for people these days to actually demand dollars to pay off private creditors before they bother to pay the tax man.
Perhaps a Federal Reserve note is only a debt because the government promises to redeem it for COINS. This is perhaps what was originally intended by the term “lawful money” in the US Code:
“Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal reserve banks through the Federal reserve agents as hereinafter set forth and for no other purpose, are authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank.”
http://www.law.cornell.edu/uscode/text/12/411
Note that COINS are issued directly by the Treasury and are not a form of government debt. They are treated as EQUITY.
So it could be that a Federal Reserve note is only a government debt because the government promises to redeem it for COINS, which are EQUITY, and not because the government promises to accept the notes in payment (of taxes).
I mean – what kind of a debt is that? “I promise to accept this in payment”. That’s not a debt.
y,
Where does it say COIN(s) in this?
“lawful money”
The Constitution states that the government can “coin money”, and also that it can “borrow money on the credit of the US” and issue securities.
Well, Federal Reserve notes are US government securities:
“The term “obligation or other security of the United States” includes all bonds, certificates of indebtedness, national bank currency, Federal Reserve notes, Federal Reserve bank notes, coupons, United States notes, Treasury notes, gold certificates, silver certificates, fractional notes, certificates of deposit, bills, checks, or drafts for money, drawn by or upon authorized officers of the United States, stamps and other representatives of value, of whatever denomination, issued under any Act of Congress, and canceled United States stamps.”
http://www.law.cornell.edu/uscode/text/18/8
In other words Federal Reserve notes are government debts because they represent borrowed money.
And the money that has been borrowed is the money which the government is allowed to create: COIN.
So if you have a $10 Federal Reserve note, that means the government is borrowing $10 in COIN from you. But most people don’t bother to redeem the notes for coins because there’s not much point.
Federal Reserve notes represent debts of the Federal Reserve, which is a private bank and hence they do not represent government debt. But if you want to trade in your surplus dollar bills to the Federal Reserve, they will just give you new notes for old. You can however, use these self same Federal Reserve notes to buy goods and services.
Treasury Bills represent government debt, not Federal Reserve notes.
See the quote from the US code above. Federal Reserve notes are US government obligations/securities.
Here are some questions worth thinking about:
If the purpose of taxing dollars is to generate a demand for dollars that the government can then exploit to provision itself with goods and services, why doesn’t it just use the same power that it uses to enforce the tax obligations in order to tax the goods and services directly from the public? That is, if what the government needs is jet fighters, sticky notes, gasoline, desk chairs and laptop computers, then why doesn’t it just demand that its citizens turn over a certain quantity of these items, and forget the business of swapping tax credit tokens for the items it wants and then taxing back the tokens?
To answer this question, I think we need to say more about the public purpose of fairly distributing the overall burden of provisioning and maintaining our government, and about the related administrative inefficiency of taxation in kind. Not everybody has or makes jet fighters or laptops, and so if you just tax those things away from the people or firms who happen to make them, the tax burden will be unfairly distributed. Some will be handing over a great deal to the government, while others hand over nothing. So what you can do is demand equal (or justly distributed) amounts of tax credit tokens from everyone. Then you must permit the tokens you exchange for goods and services to be transferable. The engineered demand for the tax credits means that the firms that first receive them in exchange for the goods and services they hand over to the government are able to exchange them it turn for other goods and services and thus recover a large part of what they handed over. If you are a maker of pin cushions and the government is not in need of pin cushions, you still end up contributing to the provisioning effort, because you have exchanged pin cushions with other people or firms for dollars that you then have to hand over to the government.
Even in a society in which everyone had or made some of the stuff the government needs, and so the tax burden could be fairly distributed in principle by a complex system on in kind taxation, such a system is still logistically unworkable in practice for a complex modern government. It makes no sense to send out armies of tax collectors to each home and office to determine what they have that the government might need, and then through a massive process of coordination and elimination of redundancy to assess the taxes and collect the goods at a million different collection points. Instead you just offer tax credits for the goods and services, let the purveyors of those goods figure out how to deliver them to you, give them the tax credits which are very easy to distribute and collect back, and then let the market take care of the details of exchanging and reallocating the tax credits among the population.
However, I think we also have to recognize that the government’s purpose in issuing money and running a monetary system is not just to provision itself. The government is an agent of the public and the public wants a well-governed and stable monetary system – because a universal and well-governed medium of exchange is an extraordinarily useful thing to have. The public utility of the monetary exchange system is so great that modern economic life is virtually unimaginable without one. And the public interest would suffer if people were required to run a constant gamble on the stability of numerous privately issued exchange media. A universal, government-run monetary system whose unit values do not wildly fluctuate as do many other financial assets, but are stabilized through sophisticated monetary policies with comprehensive social reach, is a pretty amazing thing to have and the existence of such systems is a foundational element of modern economic prosperity.
So even if we imagined a government that owned a sufficient amount of the nation’s resources and means of production to be able to produce for itself all of the goods and services it needed to provision its operations, and so didn’t need taxation of any kind, would we then expect that government not to run a monetary system? I doubt it. We would still want such a system.
Governments pass and enforce a variety of other laws related to the monetary system – not just tax laws – and these laws all help to maintain and stabilize the currency as a medium of exchange. Some of these are the laws that turn the currency into a kind of universal debt-discharger. No matter what kind of debt you have, for whatever kinds of goods and services, if you are unable to discharge the debt in its original terms, a judge will permit you to discharge the debt with the currency, perhaps with some damages added to the market value of the goods and services that you are unable to provide. So the currency is a very valuable thing to have as a backup reserve for debt discharge.
Also, even if dollars are tax credits, I don’t see why we should want to avoid saying that Treasuries are debts. If I own a $1000 T-bill then the government owes me $1000 in tax credits. If they don’t pay up, I have a case against the Treasurer. I can take him to court and demand payment of my tax credits.
Dan: Entirely agree with what you say in this thread (perhaps rare with me & you!)
If the purpose of taxing dollars is to generate a demand for dollars that the government can then exploit to provision itself with goods and services, why doesn’t it just use the same power that it uses to enforce the tax obligations in order to tax the goods and services directly from the public? That is, if what the government needs is jet fighters, sticky notes, gasoline, desk chairs and laptop computers, then why doesn’t it just demand that its citizens turn over a certain quantity of these items, and forget the business of swapping tax credit tokens for the items it wants and then taxing back the tokens?
John Henry’s paper on Egypt, particularly Old Kingdom Egypt, in the Mitchell-Innes volume, is enlightening in this regard IMHO. (There’s another by Kelton & Henry too, forget where.) It did work like that back then. OKE had money, but no markets. In-kind taxation by the Pharaoh, which added to each village’s balance at his Treasury, by the Pharaoh’s price system. Up to each village how they would produce for themselves and him. He used the stuff he got for his public purpose JG of making the Sun rise, the Nile flood, and Pyramids to take naps in. We can still consider the private sector as one big village, and the government as the Pharaoh, but both much stupider ones nowadays.
Excellent point.
It seems the taxation isn’t the proximate force driving the acceptance of the dollar, but it is merely one factor amongst many that contribute to our modern monetary system.
Your insight is always valued even if I don’t agree with it all the time 🙂
I’m reminded of the analogy of European colonisers trying to force indigenous groups into wage-slavery, which was most successfully accomplished through ‘monetising’ the region. Once taxes and fees and so forth were imposed, then the indigenous populations viewed those obligations as less of a coercion and hastily set about working to earn the necessary currency to settle those obligations.
I’m also reminded of Dr. Michael Hudson’s analysis on various occasions, which reminds us what truly backs the US dollar is the US military. We can nitpick over the details, but it doesn’t seem MMT prescribes taxation. It only describes taxation. It is true, people who don’t pay taxes, also need and value dollars. But the point is the mass of the population doesn’t perceive, nor acknowledge, the reality of the purpose of taxation and, therefore, of monetary policies.
The operational details are well-described in books and papers. It seems we must focus on conveying to the broadest audiences the reality of what money (sovereign currency) really is (and debunk the big myths). We can debate the details, but, meanwhile, we face an uphill battle in lieu of media democracy. This article is another noble effort to chip away at the myths we’re drowning in.
This is from “Taxation: a Secret Of Colonial Capitalist (So-Called) Primitive Accumulation” by UMKC Economics Professor Mathew Forstater [Working Paper No. 25]:
“A variety of methods were employed by the colonial powers to force colonial subjects to become wage -laborers. These included forced labor and varieties of methods to create a property-less class. But creating a landless, property-less class was not always preferred by colonial governments. Maintaining ‘reserves’ of some kind was beneficial to capital, for a number of reasons. If labor was seasonal, workers could return to home in the off-season and live off the subsistence base. In this way, wages did not have to be high enough to support workers and their families year-round, and profits could be higher. Even without seasonal labor, maintaining a subsistence base could supplement wages, which again would not have to be high enough reproduce labor-power. The problem was that if the subsistence base was capable of supporting the population entirely, colonial subjects would not be compelled to offer their labor-power for sale. Colonial governments thus required alternative means for compelling the population to work for wages. The historical record is clear that one very important method for accomplishing this was to impose a tax and require that the tax obligation be settled in colonial currency. This method had the benefit of not only forcing people to work for wages, but also of creating a value for the colonial currency and monetizing the colony. In addition, this method could be used to force the population to produce cash crops for sale. What the population had to do to obtain the currency was entirely at the discretion [page 7] of the colonial government, since it was the sole source of the colonial currency. This method was widespread and important enough to be called “a secret of colonial capitalist primitive accumulation” (since it was not the only method, it must be called “a” secret). This practice is extremely well documented, yet it has hardly ever been mentioned as an important method of primitive accumulation. If, as Marx stated, “accumulation of capital is…multiplication of the proletariat,” then direct taxation (and the requirement taxes be paid in money) was, in the colonies, ‘a secret of so-called primitive accumulation,’ especially because of the other associated effects, including monetization, marketization, and commoditization.” http://www.cfeps.org/pubs/wp-pdf/wp25-forstater.pdf
What is unique in this transaction is that, while it appears the government is in “debt” to the citizen, what it “owes” the citizen is nothing more than its own promise to accept these I.O.U.s (dollars) as tax payments. There is no logical sense I can think of in which that can be considered a meaningful debt.
Whatever you call it, it’s a contractual obligation that makes it more difficult for the government to manage the money supply.
Your argument J D, is OK – IF – the government were the monopoly source for the creation of “money”, but they are NOT. The private banking system is the major source of credit creation every time they make a loan as an interest bearing debt. They create this “new money” out of thin air, dump it in someone’s account through punching a keyboard and then cancel out the “new money” as the debt is repaid. Effectively, that has nothing to do with the Government apart from the government’s acquiescence and endorsement of this huge “ponzi” scheme. The problem which is not addressed is, “Where does the extra money come from to pay the interest on the original advance?” As we are all well aware, the compound interest on a, more or less, routine house mortgage loan over 25 or 30 years, amounts to something like 200% more than the original advance. That extra “money” can only be generated by the ongoing creation of perpetual debt to the private banking system.
As far as I can see, MMT seems to completely ignore the “money” creation function of the private banking system.
“As far as I can see, MMT seems to completely ignore the “money” creation function of the private banking system.”
I have to agree.
“the ongoing creation of perpetual debt to the private banking system.”
Which they’ll then gladly hand over to the government if/when the bundled debt becomes essentially worthless. And, the government will gladly pay face value for the crap.
(GUGGZIE) “The problem which is not addressed is, “Where does the extra money come from to pay the interest on the original advance?” As we are all well aware, the compound interest on a, more or less, routine house mortgage loan over 25 or 30 years, amounts to something like 200% more than the original advance. That extra “money” can only be generated by the ongoing creation of perpetual debt to the private banking system.”
Exactly the question I have been wrestling with….until now (literally), This is just coming to me so I’d like to get some feedback. The logic feels right but of course I don’t have the math. Guggzie, its the last sentence in your quoted paragraph that I think is the key….”That extra “money” can only be generated by the ongoing creation of perpetual debt to the private banking system.” I don’t think thats the whole story, follow my logic below and see if this doesn’t make sense…
As far as I can tell, there is no inherent contradiction between MMR and MMT. Its absolutely true that banks create money on demand. Its also true that the Fed must create the reserve money to satisfy the credit money. The Treasury also creates deficit money when it net spends. Its precisely this deficit money the treasury must spend in order for the non govt sector to continue paying the ever increasing amount of interest the banks make as rentiers for creating the credit money. This is why demand cratered during the Great Depressions and Recession.
Lets try and work through what happens when private debt levels reach critical mass before crashing into a depression (only prevented this time because of the more sophisticated nature of our society and safety net today than in the 1920’s) …..over 300% of GDP….below is the graph
http://blogs.reuters.com/rolfe-winkler/2009/12/14/americas-debt-burden-starts-to-shrink/
During the run up to the crash, 1997 to 2007, the incredible amount of income the public made from asset price increases (stock market and and housing) allowed them to continue to fund the exploding “debt to the private banking system” interest costs AND maintain enough spending power to drive full employment and high GDP growth. Its really incredible to think about just how powerful the asset bubbles are in terms of being able to drive money and economic activity.
At the same time as this is going on, the govt thinks budget surpluses are an inherently good thing. So what do they do? Brilliantly…. the govt runs a surplus at first, and then even after 2001 it maintained a much lower average deficit than it had since before Reagan.
Predictably the combined weight of the interest cost overhead and the shrinking supply of the all important NEW DEFICIT DOLLARS, the bubble bursts and all of a sudden the assets are generating anywhere near enough additional income to pay for the interest and still keep everyone employed buying goods and services. Ironically, this part of the cycle is actually helped by govt policies which allowed the deficit to grow large enough to stop the fall and put a floor under the economy. Of course they need to do much more, and if they don’t, like Prof Keen says, we’ll be in for at least another slow decade or more as the public deleverages as fast as bankruptcy and society’s depressed income will allow.
So I think I have it, the connection between the three types of money
1. Private credit money (banks)
2. Reserve money (Fed)
3. Deficit Money (Treasury)
Without Fed accommodation, the banks cannot autonomously generate the financial liabilities that are needed to validate the interest payment obligations generated by previous rounds of liability emission. As the transaction account liabilities of the banks and the interest payment obligations of their borrowers grow, the volume of interbank payments and the volume of Fed notes held by the public has to grow along with them. If the Fed were not continuously accommodating this process by injecting its own liabilities into the economy, the interbank rate would soar and then the payments system would break down. The sector consisting of the banks and their customers is not an autonomous, self-sufficient sector. It is part of a very hierarchical structure of credit, debt and payment assets with the Fed at the top of the pyramid.
Dan
That is definitely a much more technical description than the one I gave. The only problem with the Fed creating those reserve dollars is that yes it keeps the private banking system functioning, its not adding NEW net non interest bearing dollars into the system with which the public can use to help offset the interest overhead. Reserve money cant leave the Fed. This is my understanding at least
Well, some reserve money leaves the Fed, Auburn. A bank’s total reserves consist of its reserve account balance plus its vault cash. It can always exchange vault cash for reserve account balances and reserve account balances for vault cash. And the bank’s customers are always free to exchange some or all of their deposit account balances for vault cash. Once that cash is in the customer’s hands, it is no longer part of the bank’s reserves. Also a borrower is free to ask for the borrowed funds in cash, rather than in the form of an account balance. Even when the borrower takes the funds in the form of an account balance, that balance is a liability of the bank that is a claim against its reserve assets. When the borrower then proceeds to make transactions with that balance, the bank then has to draw on its reserves either to redeem the balance as cash of make interbank payments.
For the most part, reserve account balances don’t leave the banking system, but are just transferred bank to bank. But some portion of them are always leaving the system as they are converted into cash and the cash is withdrawn. (Also these balances are being augmented when people deposit cash.
It might be true overall and on average that the required interest overhead is being injected into the non-bank public sector by the banks in the form of bank dollars, but the ability of the banks to do that depends on a continual corresponding injection of Fed dollars into the banking system.
Right, thanks….. that makes it a lot clearer. Reserves are accessible by deposit customers simply withdrawing their funds in cash etc. That makes a lot more sense.
One thing though Dan, as you can see I am fully accepting of all statements you’re making about the Fed but wouldn’t you agree that because MOST (or at least some substantial %) of that reserve money stays in the reserve system because people want to net save, it is incumbent upon the treasury to continue to inject deficit spent interest free (from the POV of the public) money to help offset the interest overhead over time.
I think you are right Auburn, but I’m not sure I follow you.
First, just for the reserve management side: if the public’s desire to hold cash increases, and reserve balances are drained as a result, I believe the needed injections come from the Fed in the end. But one process by which that happens is that the Treasury issues securities in order to deficit spend, and the Fed buys a portion of those securities. When the securities are purchased, some dollar reserves move from private sector accounts to Treasury accounts to make the purchase, and the securities are deposited in private sector securities accounts. The Treasury spends the borrowed amount, so it more or less immediately goes from the Treasury account back to bank reserve accounts. The Fed buys some of the securities, so those securities are replaced in private sector accounts by Fed-issued dollars. If the private sector needs more reserve balances, the Fed will buy more securities.
The Fed can also inject the dollars as interest on reserves. But, I think this is where your point about net saving comes in. When the treasury borrows and spends, that spending doesn’t just move reserve balances from one reserve account to another, it creates household and business deposits that are claims against those reserves, and can be spent on consumer goods or capital goods. If the private sector has an extraordinarily high proclivity to save, creating more of these additional private sector claims injects money that ultimately overflows the savings desires and moves around the economy. The banking sector as a whole now has more deposit liabilities, but has been compensated for them with the additional government assets it received in the form of Treasury securities.
Of course, the whole thing would be easier if we modified the cumbersome system we have now and let the Treasury initiate Congressionally-approved and Fed-backed helicopter drops. The Treasury could issue checks to the public that are not drafts on its account but direct payment orders to the Fed. A member of the public that receives one of these deposits it in their bank account and gets an account balance as a result. The bank then presents the payment order to the Fed, and receives a reserve account balance as a result. This is the kind of thing that makes global financial poobahs freak out, no doubt.
Correct me if I am wrong Dan, but are you saying that the reserves held by the Fed on behalf of the private banks equates to, and is made to balance, the amount of “new money” created by those private banks as interest bearing loans?
Apart from that, the whole convoluted system you have explained seems like the height of irrational stupidity that could only come from a warped and twisted mind. Whoever came up with that system ought be locked up!!!!!!
Dan, its clear that some reserves can leave the system as cash withdrawals, but unless there is a compelling reason (a bank panic for example) for people to hold more cash than they normally would, that cash would work its way back into other financial institutions and eventually end up as vault cash where it would be converted back into reserves, so in the aggregate the reserves are dependent of the Fed and the Treasury. Does that seem right to you?
so in the aggregate the reserves are dependent of the Fed and the Treasury.
Do you mean dependent on or independent of?
Sorry, it’s getting late. I meant dependent on.
Yes, the Fed manages reserves. These days they don’t try to target a specific quantity of reserves, but the Fed Funds rate. If the effective rate is too high, they will inject reserves and if it is too low they will drain reserves.
After reading your comment again an upgraded version might look something like this.
As far as I can tell, there is no inherent contradiction between MMR and MMT. Its absolutely true that private banks create money on demand. The trick is that this credit creation requires a continual infusion of new money into the reserve system. Therefore, the Fed must create the reserve money to satisfy the credit money ratio requirements in maintain stable interest rates. The Treasury also creates deficit money when it net spends. Its precisely this INTEREST FREE deficit money the treasury must spend in order for the non govt sector to continue paying the ever increasing amount of interest the banks make as rentiers for creating the credit money.
As an aside…..I wonder how high that private debt bubble could have grown if the Govt made accommodations and maintained a correspondingly high deficit? This is something we are really going to need to think about because even WHEN (not if) legislators and society finally understand the system, there is going to be another private debt bubble if nothing changes and we need to understand how that works better
Are you supposing that the interest payments leak out of the system (or into few hoarding hands), and hence, make-up injections are necessary? I think, except under pathological circumstances, interest payments should be taken to remain in the system, like any other income does.
Also, there is no such thing as interest-free deficit money. And, that happens to constitute the core of most discussions in this forum.
(Nihat) “Are you supposing that the interest payments leak out of the system (or into few hoarding hands), and hence, make-up injections are necessary? I think, except under pathological circumstances, interest payments should be taken to remain in the system, like any other income does.”
(ME) What I am saying is that loans create deposits and liabilities which cancel each other out on a balance sheet. The requisite reserve value is created inside the reserve bank system with the help of the Fed injected reserve money. All the cancelling out reverses itself as the loans are paid down and what do you have left?…..interest costs.
Interest costs are then made out of the future income of the borrower. But thats the problem, at some point on a blown up macro scale you cannot continue to make interest payments from inside the system without reaching some critical mass of private sector debt. This is why the public needs the treasury to deficit spend.
(Nihat) “Also, there is no such thing as interest-free deficit money. And, that happens to constitute the core of most discussions in this forum.
(ME) While that is not necessarily true, you are right that it is true now. The difference between my interest and the government’s interest is the govt can provide itself with the outside money needed to continue to make interest payments. The Fed can’t run out of money like the private sector can.
“Interest costs are then made out of the future income of the borrower.”
Auburn, I don’t see why we need to know or talk about reserves/reserve accounting to make that observation. I don’t see how that’s a macroeconomic question, either. It strikes me as a perfectly micro reality, and I fail to see any problem with it. You seem to prescribe that the government should take account of interest costs on private loans by sufficient offsetting deficit spending into the economy. As far as I can see, that might be a proper prescription if these interest payments corresponded to demand leakages (as in the case of current account deficits). Otherwise, and barring other pathology, one’s interest expense is someone else’s income; it’s all in the economy.
Imagine a closed system economy where the only money came from private banks creating money through loans. More and more of the money in the system accrues to the lenders as half the population that loses money in a given time frame, all the accounts must balance, must always borrow more new credit money to maintain there living expenses and their interest payments. Over time the credit levels will become unsustainable and come to an end, and when this happens deflation sets in as people cant spend enough money to keep all the workers employed AND pay the banks ever increasing interest income which leads to a greater loss in consumer spending. All of this is the natural result of a debt driven money creation system on its own. Maybe they can find some equilibrium point where its maintained, I just dont see how.
Now when an outside actor like the govt spends money into the system, injecting income to someone that did not originate as debt from the banks, you decrease the ratio of debt created money to govt created money. And increase the sustainability as long as you deficit spend enough.
I may be totally off base here….I am just trying to find a way to reconcile the fact that banks create money and the Fed creates money. And something about the system is clearly unsustainable because of this graph from Prof Steve Keen that shows what causes depressions.
http://blogs.reuters.com/rolfe-winkler/2009/12/14/americas-debt-burden-starts-to-shrink/
Thanks for saying that so well.
When you talk about debt-free government money being spent into the economy, and by that I mean new money creation and issuance by that spending, are you talking about ‘money’ that the Fed puts into the financial system?
I hope not because that’s not money and its not spending.
The only way the government can spend money into existence is just like what happened when Greenbacks were issued.
It’s a specific amount authorized, for a specific identified public purpose – all as agreed in the budget.
It becomes public equity and private capital upon spending. There is no debt associated. It is a permanent addition to the money supply – never extinguished.
Permanent, public, debt-free money issuance by the government .
That’s what the Kucinich Bill calls for.
With a concurrent end to the privately-issued, debt-based system of temporal (loan-term) money.
You can do all the excellent things MMT wants to do.
And more.
For the Money System Common.
Auburn, you imagine both the lenders and the govt as being external to the system. They are not; they are both inside the system. All money is endogenous. And that’s fine; the system works as such (if not for starve-the-beast deficit hawks, pain sharing, budget balancing legacy hunters, … you name them).
I believe MMT formula leads to deficit spending as a rule, not as an exception. Problems stemming from private sector indebtedness (e.g., debt deflation we are said to be experiencing) would cause deficits to rise automatically in an MMT regime anyway. Kinda what you say is needed, isn’t it? Just without singling out interest costs as an object of special accounting?
Maybe, Nihat, but there is certainly such a thing as interest free “money” that can be used through a publicly owned bank.
@Dan
“It is part of a very hierarchical structure of credit, debt and payment assets with the Fed at the top of the pyramid.”
Aha, now I know why there is an image of an Egyptian pyramid on all Federal Reserve notes. The person who designed them had great insight and a wicked sense of humor, when he shows us that the Federal Reserve system is a Ponzi scheme.
As seen from the top of the pyramid.
A ponzi scheme is an investment scheme in which the investors’ promised returns can only be delivered by using the funds from ever-larger new investments to pay off the earlier investors. The Fed is nothing like that. It issues the nation’s money, and so it needs no investors. Maybe you are worried about inflation? Otherwise, I’m not sure I see the analogy.
I should have called the Federal Reserve system a pyramid scheme. Since all money under this system is created as interest bearing debt, the debt increases exponentially. But since incomes are not rising, there will soon be a point in time, when the debtors cannot pay the principal and interest and the system will collapse.
http://en.wikipedia.org/wiki/Pyramid_scheme
No,I don’t think that has to happen Frank. So long as the interest rate is low relative to growth rate of the economy, the banks can keep lending money into the economy in amounts that are not inflationary and are sufficient to pay all of the interest on existing debt. The lending finances production and productivity increases which adds to the volume of goods and services produced each year, so the newly injected money only monetizes the new output at stable prices rather than inflating the prices of the goods and services produced at the previous level of overall output. But since there is more money circulating, the earlier debts to the banking sector can get repaid with the contracted interest.
If it were only banks lending to others in its own (private) sector, no amount of growth would keep the banks from eventually owning all of the money. Whatever they lent, they would always get back more, until they have it all (or the debtors default on them).
The extra money to buy the extra goods and services must come from outside the sector, either from exports or from government deficits. Even the foreign sector would eventually run out of dollars, so the government deficit is the only sustainable source.
I don’t think that’s right golfer. Here’s an Excel exercise: Assume we have a banking system where all loans are made at the beginning of the year, and always are to be repaid after two years with 5% interest. Suppose we start in Year One with the the banks lending $1 trillion to the private sector at 5% interest. And suppose again in Year Two the banks lend $1 trillion at 5% interest. Then in Year Three, the banks lend $1.05 trillion to the private sector, with which the private sector is able to repay the entirety of the amount loaned in Year One, with the interest. Now assume this process continues indefinitely, with the banks in each year lending exactly the amount need to repay the loans made two years previously. Here’s what I come up with:
1. The amount of money held by the public rises continuously
2. The amount of money owed by the public to the banks rises continuously
3. The ratio in any given year of money owed to the banks to money held by the public is exactly 1.05.
So the banks never end up re-absorbing all the money. They keep loaning more money into the public sector to more than offset what they drain out. It rolls forward ad infinitum. Also, the growth rate in the amount of money held by the public oscillates stably between 2.4% and 2.5%. So if the growth in real output is about the same, prices will be stable.
Also, the picture is the same if you replace the banks by the Fed and the private sector by the banks, and assume all Fed injections of dollars take place by discount window lending. So if bank dollars are liabilities for Fed dollars, as they are in our system, the Fed can accommodate the process described above with its own continuously increasing rate of lending to the banks.
@Dan,
You are making three assumptions:
1. That banks are willing to lend more money.
2. That the incomes of the people who owe the money rise to meet the increased cost of living and the interest.
3. Interest rates will not increase.
None of which are guaranteed. An example of which were the mortgage teaser rates of 2.5% which increased every year by 2%.
Another issue you seem to ignore is that no matter what rate of interest is set, the debt increases exponentially. In my experience, incomes do not increase exponentially.
Margrit Kennedy also points out the problem of compound interest growing exponentially, which impacts every part of a country’s economy.
http://www.margritkennedy.de/presentations.html
Interest payments and Interest:
Gains show large disparities:
80% of the population pays twice as much as they gain.
10% gain more than twice as much as they pay.
Her analysis his spot on, but her suggested solutions are too complicated in my view. She seems to exclude the idea of a government creating its own debt and interest free money.
Frank,
Spreadsheet programs produce the results from their formulae.
Besides Marg Kennedy’s placement of the cost of compounding interest into the price of goods and services, there is the much more comprehensive work done by German monetary economist Bernd Senf here.
http://blip.tv/file/4111596
There should never be a question but that debt money MUST lead to compounding interest outcomes. And the result of compounding interest outcomes are an accumulation of monetary wealth higher and higher up the financial food chain – to the owners / issuers of monetary assets – and a reduction in monetary wealth among the more and more of the Restofus, who pay the compounding interest to the fewer and fewer, who are getting richer and richer, at the top.
It’s trickle up economics, it is inescapable and it is the cause of many of our societal problems, as Dr. Senf explains.
Call it what you want.
But the results are simple and undeniable mathematics.
Thanks.
Se comment just above.
“As far as I can see, MMT seems to completely ignore the “money” creation function of the private banking system.”
Perhaps you should read some more MMT, because it categorically does not ignore “money creation” by banks. “Money creation” or credit creation by banks is actually central to MMT.
“As far as I can see, MMT seems to completely ignore the “money” creation function of the private banking system.”
I have to agree.
“the ongoing creation of perpetual debt to the private banking system.”
Which they’ll then gladly hand over to the government if/when the bundled debt becomes essentially worthless. And, the government will gladly pay face value for it.
This is the issue that the MR people have with MMT. They say that banks create all of our money and the government just uses the money. They say MMT misrepresents the reserve accounting to make it look like the government creates all of the money when the banks are the actual creators of all money.
I am beginning to think they’re right.
That would be a valid criticism if treasury bonds offsetting fiscal deficit didn’t find a buyer. It appears that the system is set up to guarantee that that wouldn’t happen ever. See Randall Wray’s talk (his last video post here on this site, I think), where he explains how the treasury, if need be, can in effect sell bonds to the Fed even though the law disallows such a sale.
Fiat money means fiat money. Everything is happening by congressional fiat. Whatever power banks may appear to have, it is power delegated to them; if push comes to shove, they have zero power to exert back on the congress. (On the government of/for/by the people, I should say maybe, since concerns of political corruption/degeneration exist.)
I don’t see how that matters. Delegated power is delegated power. It means that the banks have been put in control of the entire money system. MMT pretends as though this delegation never took place and seems to naively state that the government is still in control of the money system when they’re clearly at the mercy of America’s largest financial institutions. Anyone who truly buys into the idea that the government is in control here has been sleep walking through reality for the last 20 years. Yet that’s precisely what MMT does.
Nonsense. Banks are empowered to price private risk; that’s where it starts and ends. The government doesn’t need the banks’ (or any other private agents’) largesse to provision itself. If you like, the govt prints the bonds, and the everyday money for the rest of us gets printed as a consequence. Beyond that, be my guest if you want to continue decrying the government for staying out of the minute business of pricing private risk.
I am not saying the government “needs” the banks. I am saying exactly the opposite. But the reality of our monetary system is that it is the banks who dominate money creation and power. Our government has basically outsourced the power of money to private bankers.
This shouldn’t even be a controversial point, but MMT glosses over it as though the government is still in control of the money system.
Yeah, I too am sometimes feeling that MMT should probably scale back appeals to sexy chartalist/state theorist notions, and instead advance full force within the credit paradigm. I find the former interpretations to be philosophically applicable and very illustrative. Operationally, though they may be upheld in close examination, they create more doubts and confusion than necessary.
This is what Cullen Roche has developed through MR. I find their description of banks as having all the power to be very accurate. But they strike me as pro-bank people which is a shame. Cullen refuses to get involved in policy which is also a shame since he has a broad blogger influence.
I wish MMT would take the same approach as the MR people, but focus on the problems involved in letting a bunch of corrupt bankers rule our monetary system for their own selfish interests. We can have the government issue all of the money. There is no need for banks. But I never see MMT come out and just say that.
I am not sure if I agree with the notion of banks’ having “all the” power. MMT as an apolitical macroeconomic theory is concerned first and foremost with the govt’s ability to provision itself for public purpose. Do the banks have the power –or the standing– to deny the govt that ability? I don’t suppose they do.
As far as I can tell, there is no inherent contradiction between MMR and MMT. Its absolutely true that private banks create money on demand. The trick is that this credit creation requires a continual infusion of new money into the reserve system. Therefore, the Fed must create the reserve money to satisfy the credit money ratio requirements in maintain stable interest rates. The Treasury also creates deficit money when it net spends. Its precisely this INTEREST FREE deficit money the treasury must spend in order for the non govt sector to continue paying the ever increasing amount of interest the banks make as rentiers for creating the credit money.
JVR, also, did you check out Warren Mosler’s “Proposals for the Banking System, Treasury, Fed and FDIC?” (Link is under Drafts in the left pane at http://moslereconomics.com). Who knows, it may change your mind as to what MMT does or doesn’t say on the matter.
I seem to remember Warren Mosler making an offhand comment in a Q&A–don’t quote me–that having the government issue all the money invites congressional shenanigans, that you need some method of a check and balance so that the system isn’t abused. Congress can appropriate anything and it has the weight of law. What if 10 senators from 5 states got together and appropriated huge infrastructure programs that benefited commercial projects the 10 secretly planned on creating once they left office? What if the ELECTED senator and ELECTED rep in your state doesn’t like you or your company? Who do you appeal to? How do you get a loan? At least with a banking system, you have a lot more options, and, supposedly, a three directors from the regional fed bank that represent the citizens of the district to whom you could appeal.
Whether anyone can pin that down to Warren or not, it is an ignorant comment when it comes to the potential for public money. Just another red herring.
When the renowned authors of the 1939 Program for Monetary Reform (Fisher, Graham, Douglas, et al) explained the purpose of its development, they were very clear that what was needed was a monetary Rule of Law that could not be placed at the whim of politics.
“It is intended to eliminate one recognized cause of great depressions, the lawless variability in our supply of circulating medium.” Political suasion over money would advance that lawlessness.
So, while the ultimate method of money creation and issuance involves a form of debt-free, public money administration, this cannot be made workable without putting the monetary Rule of Law beyond the reach of the politicians. That’s why the Kucinich Bill does the same.
Mechanisms are proposed within the 1939 Program for a economic metric of new money creation that fulfills the role of money in enabling the creation and distribution of national wealth. As we have dismantled our economicstability.org website, I’m not sure right now where a copy of the 1939 Program can be had online, but one will be available soon at monetary.org . And I would be glad to forward a copy to anyone’s email from mine at [email protected] .
For the Money System Common.
I agree with Nihat. MMT as an apolitical macroeconomic theory is concerned first and foremost with the govt’s ability to provision itself for public purpose. That’s the ballgame.
Mosler said that he first started speaking out in the 90s because he could see the average citizen was getting the shaft by not understanding how the fiat currency worked, and COULD work for the benefit of everyone. Finance capitalism was taking advantage because of citizen ignorance.
As Sir James Goldsmith said in an incredibly prescient interview with Charlie Rose on November 15, 1994, the economy is here to serve the people not a financial index. That it should provide for the security, comfort and prosperity of the people.
I think you are just talking about the fact that the banks do not have to acquire excess reserves before expanding their lending, but can make the loans first and then acquire needed additional reserves subsequently. But if the expansion of the lending leaves them short of reserves, they do have to acquire those reserves at some point.
And I’m not just talking about their reserve requirement. Whether the central bank imposes a legally mandatory minimum reserve requirement is secondary. The more important point is that reserves balances are the assets banks use to settle their debts among themselves, and the routine transactions of their depositors in the economy are constantly generating interbank debt. The more the deposit account liabilities banks have, the bigger their reserve holdings must be so that they can pay their debts. If they come up short of the balance needed to pay their interbank debts, they will be given an automatic overdraft by the Fed. But the overdraft carries a penalty rate that is more expensive that acquiring the reserves in the other routine ways.
We do not live in a “free banking” system where the monetary system has delegated and contracted out to the commercial banks. We live in a very hierarchical system in which the asset/liabilities emitted at one level generate debts that must be paid in asset/liabilities issued by higher levels.
The money created by banks consists of debts of those banks. The debts are redeemed by the banks when a depositor either withdraws the deposit balance in the form of government-issued cash, which the bank obviously cannot issue but must obtain from the government, or when the depositor issues a payment order against the deposit balance to a depositor who banks elsewhere, which requires the bank to make a payment in turn from its own deposit account at the Fed, again drawing on a settlement asset that the bank cannot issue but must obtain from the government. If the depositor is also a debtor to the bank, then the bank’s debt might be redeemed by netting against the depositor’s debt, and the party with the largest debt is left with a positive position against the other party.
When a person or firm pays taxes by issuing a payment order against their deposit balance at a bank, the typical end result is that some quantity of the banks’ reserve account balance is transferred from the bank’s account at the Fed to the US treasury’s account at the Fed. So the Treasury receives a government-issued asset that was held by the bank, not a bank issued asset. To reduce volatility in reserve accounts at tax time, the government has decided to manage some tax payments via TTL accounts: government accounts held as deposits at Federal Reserve member banks. As a result, the government has some account balances at those banks that can uses to make payments, rather than drawing on its balances at the Fed. The result is the same though. When the government draws on those accounts to issue checks to carry out its spending, the checks are settled and cleared by the Fed. The reserve account of the bank is debited by that amount and the reserve account of the payee’s bank is credited by that amount. The payee also now has a new balance in their account at whatever bank they bank at.
I have to say that the amount of attention people give to these operational details is out of all proportion to their importance. The detailed architecture of the payments system and the credit system is not nearly as important as issues such as the structure of ownership of the nation’s capital stock. The present architecture is what our government itself has decided to make it. The government can change that architecture at any time. The idea that the government is in some sense dependent on commercial bank emissions of deposit liabilities is thus utterly misleading. For some reason, the word “bank” seems to set off some populist alarm bells that keep people from thinking clearly. One of the problems comes from the vague use of terms like “credit money”, “money as credit” etc. There is a consistent failure to understand that when a bank creates a deposit balance in the process of making a loan, there are now two new credit relations going in both directions. There is an exchange of credit for credit. The bank issues a deposit account balance, which is a liability of the bank and an asset of the customer; the customer issues a promissory note which is a liability of the customer and an asset of the bank. You can say the bank has “created” something “out of thin air” if those slogans are comforting. But that is true in exactly the same sense that the customer has created something out of thin air. The customer has issued a promise to the bank, and the bank has accepted it, which means the customer now has a debt which they didn’t have before. It came out of thin air. Similarly, the bank has issued a deposit balance which the customer has accepted, and so the bank has a debt that it didn’t have before.
We could change this system and create a single state-run bank. But even if the private banks did not intermediate between the government and the public, and even if all of the bank deposit balances Americans held were direct liabilities of government, rather than direct liabilities of banks for the direct liabilities of the government, that would not eliminate the institutions of debt and credit. People would still go to banks, government operated ones, to ask for loans. Some applications would be approved and some would be accepted. Those who get the loans would still have debts as a result, and would have to be repaid. The loans would still probably carry positive interest more often than not. It is possible that we could subsidize some of those loans for particular purposes, maybe offering very low interest, zero interest, or negative interest loans for the subsidized activities. But the government’s net emissions of money would still be offset to a large degree by either mandatory tax obligations or promissory notes for repayment, because if the net contribution or deficit is too large the result would be inflation. Most people would receive most of their monetary income as payment for their labor, just like now.
The government should, in my opinion, rely more on net currency creation driven by the fiscal authorities as part of their routine spending operations – emission of non-maturing, non-interest bearing debt – to fund its spending. Under current operational arrangements, the currency issued by the government is all emitted by the central bank. It emits that currency either to buy treasury securities or other assets from the public, the pay interest on already-existing reserve balances, or in advancing loans to banks which will later be repaid with other Fed-issued money. But there is no reason that the government needs to follow its current chosen policy of offsetting each dollar spent by a equivalent combination of new tax obligations and swaps of newly-issued maturing, interest-bearing securities for existing government-issued currency.
This is what the MR guys always criticize MMT for:
“So the Treasury receives a government-issued asset that was held by the bank, not a bank issued asset.”
That’s not right. The government has been designed in a way that it can only credits its TGA account AFTER it has obtained TTL credits from the private sector. This is not “creation” and “destruction” of money as Cullen Roche says. It is a redistribution of money.
The government has put the banks in charge and has willingly decided to be a user of private bank money. Of course, the government could change this arrangement and kick out the bankers as middlemen, but that would mean a very different monetary system than the one we have.
I think MMT obscures and overlooks these facts.
I talked about this already. It makes no difference. The Treasury holds deposits accounts at commercial banks, but when it issues checks drawn on those accounts to buy goods and services or make transfer payments, the result is that the reserve account of that bank is then debited and the reserves of the payee’s bank is credited.
So instead of getting a series of reserve transactions that go:
Bank A reserves —> TGA —-> Bank B reserves
you get a more efficient operation:
Bank A reserves —> Bank B reserves
What constantly seems to be missed in all this is the legal status of a bank deposit balance. Those electronic balances are not some self-sufficient form of fundamental “fiat” money. They are debts of the bank: debts that the bank constantly has to make good on by carrying out transactions with the assets in its reserve account.
If you have $1M in your bank account, and the bank goes under, you no longer have that asset. It’s gone, except for FDIC insurance for 1/4 of it. If you have $1M in Federal Reserve Notes, you have $1M no matter what, as long as the government of the United States survives.
It seem to me that is a critical difference.
Yes, but I think we all know that if the government has an account at some bank that happens to go under, the government will not lose a single penny. So this idea that the government is a “user” of private bank money, and thus vulnerable to the vicissitudes of commercial finance, seems wildly misleading. The Fed will unravel the bank in such a way that the account is either moved to another bank, or converted to a direct Fed account.
What is Cullen Roche’s thing with MMT? Seems like in August 2011 he was for it, now against it? Wassup? What caused the break?
I follow his comments to Stephanie Kelton on Twitter. I find him an sneering vicious little shit, out to score ahagotcha points. He doesn’t impress me.
Hee’s an example from 10 hours ago:
Cullen Roche @cullenroche
Please be careful learning sectoral balances from MMT people. They totally misrepreent Godley’s work by implying the pvt sector is worse
10 hrs Stephanie Kelton @deficitowl
@cullenroche Suppose its safer to learn from someone who never met him than someone who wrote a Ph.D. dissertation under him. [Which Kelton did, with honors]
10 hrs Cullen Roche @cullenroche
@deficitowl Yes, beacuse meeting Godley means you are Godley. Don’t be ridiculous.
MRW, do you have any sense of what is meant by “the pvt sector is worse?”
I’m sure you’ll tell me? 😉
?? Have no idea. I don’t get what you mean, either. Don’t know the man.
Cullen’s much more conservative than most MMTers and was opposed to the JG and its place as part of the core of MMT. When he offered this position; he was criticized by Bill Mitchell and other MMTers. This led to the break and establishing MMR as a separate approach. See this series of mine at Correntewire: http://bit.ly/J3zfCJ
You’re not being very fair there, Joe. That’s not what Cullen said at all when he started saying MMT was wrong. He was actually in favor of a “small” JG:
” I don’t see what’s so unreasonable about starting a JG on a small scale? It seems like the logical way to go. Ease people into it. If it works then we can enlarge it over time.”
http://pragcap.com/the-politics-of-mmt/comment-page-1#comment-90710
He mentioned this the other day when someone on his site said the same thing. As far as I can tell Cullen is not very conservative at all. He favors government spending and has said he favors almost all liberal social causes. I don’t think you’re being very fair here at all.
In monetary matters, more than anywhere else in science for sure, the terms progressive and conservative completely lose their relevance.
For instance, conservative Milton Friedman proposed the exact same remedy to money-destruction under the private, debt-based system of money as did the most progressive social scientist of the last century, Dr. Frederick Soddy, and also many of the FDR progressives from the Chicago School, including Simons, Knight and Yale’s Fisher as well. Thay ALL agree. How is that?
MR recently posted this piece by Brett Fiebiger in consideration of Soddy’s work.
http://monetaryrealism.com/frederick-soddy-on-endogenous-money-debt-deflation/
A read of the comments shows that the site is rife with both progressive and conservative viewpoint.
I definitely consider most MMT enthusiasts to be very progressive thinkers, with one exception. Their continual defense – for whatever reason I cannot understand – of the private, debt-based system of money-creation and issuance (endogenous money) stands well to the right of the conservative money mechanics proposal of Friedman.
MMT will someday understand the concept of ‘fish, or cut bait’.
Either we will have a system of debt-free public money administration, and the government WILL create the nation’s money systemically when it spends, OR we will continue to have a system of private, debt-based money creation and issuance, and people will realize the ‘PPK and beyond’ movement of MMT never really addressed the failures of the money system.
For the Money System Common.
From what I’ve seen, Bernie Sanders and Barney Frank are more conservative than most MMTers 🙂
Actually now that I think about it the more I read your work the more I agree with you.
JVR, what would be the result if the Treasury just stopped issuing bonds totally, completely, immediately? The banks would/could still issue credit (make loans) and collect interest, but when all the available funds were collected as interest, commerce would stop. Only the deficit spending by the Treasury supplies the additional funds to keep the private debt system operating.
This is exactly what I’ve been thinking. When the govt deficit spends money into existence into the private economy…..this is the only money that is created interest free from the private sector’s POV. Sure the US govt has to pay interest but thats never an issue and its just more income for the public to boot.
Well, the Fed could choose to increase the rate of interest on reserves to offset any loss off interest from government bonds. Functionally, it’s about the same thing. Now that reserve balances earn interest, when private sector financial institutions buy government bonds they are just swapping one interest bearing government-issued asset for another.
The Fed could also get rid of IOR and change its policies on discount window borrowing to make it cheaper. The Fed can lend into the banking sector at small rates of interest, and continually roll over that bank debt to the government with additional lending.
Dan, I am not referring just to the interest the Treasury injects into the banking system by paying interest on bonds, I am talking about the deficit spending the Treasury does by issuing US Treasury Bonds. I suppose the Fed could make up for the lost deficit spending and interest by paying enough interest on reserves, but that interest would go directly to the banks and would not find its way into the hands of those who have borrowed from the banks and have outstanding loans. Once these borrowers are tapped out, the system must either collapse or undergo some cataclysmic readjustment.
Wow sunflower….we are on the exact same page here. Even though all money eventually ends up in the reserve system……when the Treasury buys goods and services or pays federal employee salaries or makes direct payments to SS or welfare recipients => This is NEW money in this system that was not financed by private sector debt. Yes, it is accounted for as govt debt, but that doesn’t matter since the govt can just create the interest money as well. Users of the currency CANNOT continue to borrow to make ever increasing interest payments + living expenses. This is precisely the reason private credit money creation is an unsustainable ponzi scheme and the only thing that supports it are govt deficits. I think we finally have. I think the circle has finally been closed.
A hah moments are fun, but they do require a lot of ground work and help from our friends.
I thought you were talking about reserve deficiencies caused by a lack of Treasury debt. If the question is just about making sure Treasury still does an adequate amount of deficit spending in a world without without Treasury borrowing, then Congress is going to have to change the rules to let Treasury control the direct issuance of of US government monetary liabilities.
But if the question is juts about making sure the private sector can continuously roll over its aggregate debt to the banking system, that can be handled entirely by the Fed and the banks.
Dan
somehow and somewhere…….Sunflower, me, and you are miscommunicating.
Sunflower
I have more I want to say about this without the inefficiencies of a comment board discussion.
I have an idea with regard to this I’d like to run by you.
My email is [email protected]
message me so I have you email (or post it here if you don’t care if its public) and I will write you in an hour or so.
Dan, although the Fed could continuously roll over the aggregate debt, at some point the banks would find it difficult or impossible to find credit worth customers without charging prohibitive interest rates. I think we are actually close to that situation now, with the collapse of the housing bubble, the restrictions on Treasury deficit spending and the Fed trying to keep the banks solvent with quantitative easing. Isn’t this just the kind of pickle that lack of Treasury deficit spending would predict?
I guess I don’t understand what you’re talking about here. Lending rates are pretty low right now, no?
Low interest rates are a result of Fed policy, but they haven’t lead to a boom in housing refinance or new construction. Underwater homeowners are still being evicted because they cannot qualify to refinance even with historic low rates and limited government assistance. Banks might refinance many of these homes if interest rates were high enough to justify the risk, but now they are just sitting on their reserves and turning down applicants as unqualified. Same with business startups.
It seems to me that to the extent that bank lending is suppressed, it is because there are not enough profitable opportunities for lending. And there are not enough profitable opportunities for lending because there is not enough demand in the economy to drive economic expansion. And there is not enough demand because the wealthiest parts of our societies have starved the less-wealthy parts of income. They have appropriated so much for themselves that the middle class that was once the broad foundation for growth in the US is now crumbling and cannot sustain the dynamism they once did. The well-off part of America has consolidated itself and created its own self-sustaining economy within an economy, by jettisoning a large portion of the workforce from the economy and crushing much of the rest into a caste of working poor who are powerless and dependent on the affluent for what they are still permitted to earn. The economy as a whole is not doing well, but the upper half is, and that’s why there is no politically powerful movement for change.
That’s basically what I was trying to say, that the economy is being starved of oxygen (new money) because of the wealth accumulation by a few, including the banking sector. Without government infusion of new spending, the patient will continue to deteriorate.
“I am beginning to think they’re right.”
Read more MMT stuff. You will find that most “MR” criticisms are quite superficial, or in the case of Cullen Roche, simply straw man attacks.
Sunflower
Another thing to remember is that those reserve dollars CANT be used for anything else. The Fed (or congress?) mandates that the reserves are held as an offset to the value of privately created credit money in circulation.
Scratch the above comment it was made in haste and is INACCURATELY worded
Guggzie,
Why are you starting in the middle of the system? The legality of what you’re describing started with the government.
You call it “the government’s acquiescence and endorsement of this huge ‘ponzi’ scheme,” as if the government had no say in creating it. It wasn’t acquiescence. It was designed that way. Now, you may object to it, or find it inefficient, or subject to abuse. But if read the historical documents, you will discover that these arguments you present were hammered over and over again.
The US congress decided in 1908 to come up with a central bank. The House overwhelmingly voted for its existence in 1913. Over the years, changes have been made to its operation, but it IS A FEDERAL GOVERNMENT OPERATION, with private elements, like the 12 regional banks made up of regional bank shareholders each having one vote in the system as a bank not an individual, and paying local taxes, but not local or state taxes.
Sorry. Should read:
You call it “the government’s acquiescence and endorsement of this huge ‘ponzi’ scheme,” as if the government had no say in creating it. It wasn’t acquiescence. It was designed that way. Now, you may object to it, or find it inefficient, or subject to abuse. But if read the historical documents, you will discover that these arguments you present were hammered over and over again.
The US congress decided in 1908 to come up with a central bank. The House overwhelmingly voted for its existence in 1913. Over the years, changes have been made to its operation, but it IS A FEDERAL GOVERNMENT OPERATION, with private elements, like the 12 regional banks made up of regional bank shareholders each having one vote in the system as a bank not an individual, and paying local taxes, but not local or state taxes.
Just a comment on your post MRW – I have done some research on the formation of the Federal Reserve and discovered the following comments – although I cannot verify the complete accuracy of this information , it does seem reasonable – in 1907, when the gold conversion guarantee applied to the US banknote, people became suspicious and made a demand for their gold. This created a particularly bad run on the banks and left the bankers with no choice but to close their doors. As the 1907 panic was just one of a series of boom and bust cycles over the previous years, the American Congress were pressured into the idea that a privately owned central banking system would stop future panics. Although there was strong opposition to allow such a private entity to issue the nation’s money, the Federal Reserve Act was passed in 1913. This Act created a “bankers’ bank” that was controlled by Wall Street financiers. A co-author of the Act, Robert Owens, later testified before Congress that the banking industry had conspired to create a series of financial panics aimed at getting the people to demand “reforms” which, ultimately, served the interests of the financiers.
In essence, what this did was to allow the United States Treasury to write IOUs in the form of interest bearing U.S. treasury bonds, which it then sold to the privately owned Federal Reserve Bank. In exchange, the Federal Reserve would write a cheque and credit this to the US Government’s account while the Government assumed the responsibility to pay the interest. In reality, this is simply an accounting transaction creating interest bearing ‘money’ out of nothing. Today, this transaction is done electronically via a computer.
In spite of all the assurances, the greatest bank run in history occurred only twenty years later, in 1933.
So; according to my research, while the Federal Reserve does come about through an Act of Congress, its creation seems more like a beast of Wall Street’s making rather than a desire of the “people”.
Guggzie,
I read the entirety of Robert L Owen’s 1939 paper on “an exposition of the principles of modern monetary science in their relation to the national economy and the banking system of the United States” (76th Congress, 1st Session, Senate Document 23), published by Congress just before WWII, and I didn’t read that. Do you have a link for his testimony before Congress, if possible? Or, if too much trouble, point me in some direction. thx.
Here’s the Robert Latham Owen document I am referring to:
http://www.archive.org/details/NationalEconomyAndTheBankingSystemOfTheUnitedStates
BTW, Owen was very much against the gold standard.
MRW, thanks for that link – I will have a read. Unfortunately, I cannot give you a link to Owen’s comment. I did the research a few years back and it is a note in my papers which I had compiled into an article..
The gold standard was recognised as an anachronism by C. H Douglas back in the 1920’s (probably by others long before that) when he pointed out how ridiculous it was to say a nation could only create an money supply if they had a quantity of gold to back it up.
Guggzie,
The following statement by Ellen Brown was included in a posting on her Blog site about 5 years ago.
http://www.webofdebt.com/articles/banking-bailout.php
“”Robert Owens, a co-author of the Federal Reserve Act, later testified before Congress that the banking industry had conspired to create a series of financial panics in order to rouse the people to demand “reforms” that served the interests of the financiers. A century later, JPMorgan Chase & Co. (now one of the two largest banks in the United States) may have pulled this ruse off again, again changing the course of history. “Remember Friday March 14, 2008,” wrote Martin Wolf in The Financial Times; “it was the day the dream of global free-market capitalism died.” ”
Ellen is generally a respected researcher, so maybe a note to her would be of service here.
Thanks.
MRW,
“and paying local taxes, but not local or state taxes.” Did you mean “paying local taxes, but not federal or state taxes.”?
Guggzie, did you see my reply to Scott Baker’s comment? I think your comment is essentially the same as Scott’s, and I would be interested in how you see my point. Thanks for the input.
Apparently it’s just me, then, that finds MMT comparatively simple to understand. The hiccups aren’t in the “theory” itself, it would seem to me, but how it can possibly be put into proper “practice”.
Taxes, for example. Taxes, in MMT, are a device to create demand for the currency and tax policy can serve to constrain or expand money supply as needed. Did I get that right? If so, it makes sense on paper, to me at least. But Congress sets tax policy. Congress. Not only is it collectively stupid when it comes to macroeconomics, it’s outrageously SLOW to get even the simplest things done, and it consists of representatives who, as a matter of course, place a higher premium on their individual districts and their pay-to-play donor base than they do the broader economy. For the MMT recommended method of tax setting to work, wouldn’t it require a degree of coordination with Fed’s use of monetary controls? And am I correct in recalling that the historical track record of federal government’s regulation of the economy demonstrated its inability to do so effectively to those decision makers who deliberately structured the federal reserve bank to operate relatively independently?
Exactly. If we are to switch from trying to manage (“fine tune”) the economy via “monetary policy” – Federal Reserve actions – to managing via “fiscal policy” – spending and taxing- then we should also institute an agent with responsiveness similar to the Federal Reserve.
Congress would have to delegate a portion of its taxing authority to this agent, as it has delegated a portion of its money-creation authority to the Fed, so that timely policy changes could be made as conditions change. The authority delegated should be to make small changes to the tax rate of a very broad-based tax, one with immediate effect on aggregate demand, efficient in its implementation and simple in its calculation.
We have no such tax today, but a tax on all sales by all businesses at a very low rate, perhaps 3%, could replace the corporate income tax, and be adjustable by this agent in increments of 0.1% at intervals of 3 months, as quarterly economic data is compiled.
GJ, the sales tax is, of course, very regressive; taking a far larger portion of the income of the poor and working class than of the wealthy. I think the mechanism you propose is good, but I would like it applied to a more progressive tax. Perhaps something like adding or subtracting 5 % or 10 % to withholding tables quarterly to adjust to changing economic conditions.
Adventurous notion, but not crazy. So, mulling it over, what could be the downsides?
Off the top of my head, I’d say, of course, this is is a regressive tax – which isn’t the ideal fit in regulating this economy given that it’s consumer driven, reliant on imports, and burdens most those already earning sub-par and continuing-to-decline wages. It burdens the same folks whose unsustainable borrowing to maintain their standard of living ultimately tanked the asset values underpinning it (housing prices) AND their creditworthiness such that they’re no longer *able* to consume goods and services at that “reasonable standard of living” level today. Seems the economy would remain fundamentally “broken”, even after we’ve acquired a new tool for regulating the money supply.
And is it just me, again? But I don’t get why corporate tax levels are viewed as “detrimental” to this economy. Corporations, in the aggregate, seem to me to be making the most money and are all too happy to bank it – meaning they’re happier realizing their taxable incomes rather than tax “dodging” them via deductible spending splurges. If anything, again-this may be just me who thinks this way-but to me, we need a tax policy that goads corporations to either spend themselves or coaxes them to give back to government to spend. There’s *way* too much money pooling up in corporate coffers. Obviously their needs don’t align with the economy’s needs, or they’d be spending/investing their profits there already. So this corporate sideline money is already pooling up, like a hemorrhage. Seems logical to me that further incentivizing corps to realize every dollar earned just fuels the beast.
I like the idea of a tax with similar mandates and responsiveness to, say, fed interest rates. In theory. But I don’t like much, I guess, these suggestions how to implement one
Sunflowerbio and Demythify,
Remember, first, that this very-low-rate sales tax replaces other taxes, so it is not a scheme to raise taxes overall. The need right now is to lower taxes, not raise them. This is not a plan to fix today’s broken economy, but to change from ineffective management of it to a more effective way, under any conditions.
Second, remember the circumstances under which this tax would be adjusted upward: full employment, when everyone who wants a job has one. (And, if I had my way, MMT’s job guarantee would mean that job would provide a better standard of living than the current minimum wage with no benefits. But, even if we continue using a buffer of the unemployed to restrain inflation, this is a more effective way to manage the economy.)
Third, remember this tax adjusts downward as well as upward, and when it adjusts downward it helps those who spend most of their income far more than those who save most of it. Regressivity cuts both ways. And it is a small part of a large tax system, which can still be progressive overall, even with a regressive component.
As for adjusting income tax withholding rates, that is easily circumvented by adjusting one’s own withholding instructions (W-4), or 401(k) contribution, or other savings. Only 53% pay income tax, and they are the higher earners, and the more financially savvy, and the bigger savers. They can easily maintain their spending levels and lifestyles. The point of raising the rate is to reduce spending, because aggregate demand is getting too high. Doing it to a tax that is paid only by savers does not accomplish that purpose.
The fact that our economy is 70% consumer-driven means that any effort to regulate it must focus on consumers. Nothing else could have the same effect. And it is consumption (C + I + G + (X-M)) that is the only logical and friendly target of any overt effort to speed up or cool down the economy. It makes no sense for government to do things it doesn’t really need to do, or to stop doing things it really does need to do, just to manage the economy. Trying to manage trade is hostile to our trading partners. And investment is a response to the economy, not a control.
Also remember, corporations don’t pay taxes, they collect them. The reason corporations are hoarding cash now is that they see no prospect of increasing sales anytime soon. (Though many corporations now are deploying part of that cash to stock buybacks and dividend increases, which returns some of it – probably not much, but some – to spending in the economy.) The reason they keep their overseas profits overseas is that if they brought that money to the US, Uncle Sam would take 35% of it off the top. They need a good reason to have that money here (which would be to invest it in new capacity here) before they would take that hit. Eliminating the corporate income tax would not only bring that money back here, but would make our products more competitive, and reduce the trade deficit (leakage). Replacing it with a no-deduction no-loophole gross receipts tax would disemploy lots of accountants and tax lawyers, and force them to do useful work for the economy.
GJ, you make some good points in favor of your proposal. I would just point out that you can only legally claim fewer (not more) exemptions than you are entitled to, so your employer can withhold more than your estimated tax liability but not less.
An alternative to a sales tax might be a European style value added tax, although I am not sure exactly how that differs. Perhaps someone familiar with VAT’s could comment.
VAT has complexities in that it attempts not to tax anything twice. It’s paid at all levels of the supply chain, but each stage gets a credit for the tax paid by the previous stage. Because of the deductions and credits, the rate must be very high. 27% comes to mind, for Europe. Then tourists can get a credit for things they take home, and exports by all companies are exempt. It’s as bad as income tax, for complexity, even though it sounds simple. Mine does tax things each each time as they go through the chain, but at a very low rate. It would encourage vertical consolidation, which might improve efficiency.
But, that said, a VAT would have the rest of the necessary characteristics.
And you can claim additional exemptions based on itemized deductions or other items that reduce tax liability, not just personal exemptions. All you have to do is pay by withholding or estimated taxes 100% of the previous year’s tax liability, or 90% of this year’s. Since most people get refunds, it’s not difficult. But if you can’t do it that way, you can just reduce your savings.
My error. I meant to say say you can only legally claim fewer dependents than you are entitled to on your W-4, not more. Exemptions are a different matter as you say.
Thanks also for the info. on VAT.
VAT sucks, it is a complete waste of every company’s time, filling out forms
to pay it and claim it back. It is the end consumer who pays it anyway, just like sales tax and therefore I really don’t know why it is used in the EU.
It is administered by HM Customs and Excise, who have far more power than the Inland Revenue. They come to your office without appointment and look through your books. Woe betide anyone, who has made a mistake.
The why is easy. It taxes only domestic consumption, not income, so it is thought to encourage investment and savings, which are thought to be good (two different misconceptions); and because it exempts exports it helps further a mercantilist strategy.
Sales taxes have exactly the same effects.
Frank, sales and VAT are not exactly the same because sales tax is applied to some services that are not consumption, at least in some jurisdictions.
And some items are not subject to VAT. Sales tax is a lot less cumbersome and time consuming.
US State Sales taxes typically exempt a lot of things, most on the grounds that they are “necessities” and the poor should not be taxed on them. Sales tax with exemptions for food, medicine, rent, clothing, etc. is not as regressive as a linear calculation would suggest.
Hey Guys…GJ especially
While I don’t want to get involved in the debate about the relative merits of the sales tax vs some other mechanism……..I would like to make these 2 observations:
1. I really love the notion of having an independent 3rd party agent that adjusts fiscal policy (re: taxes\govt spending is much more complicated and could as easily be delegated to a third party agent) to balance the unemployment\inflation needs of the economy. The more I think about it, the more it makes sense as THE ONLY POSSIBLE way to use fiscal policy like this. Congressional votes are just too unwieldy and their is too much room for the idiots to cause problems.
2. We already have a broad based regressive tax that directly impacts aggregate demand……THE PAYROLL TAX. FICA collects about $1trillion a year and it comes out of everyone’s bi\weekly paychecks so its implementation and impact are felt pretty much immediately. Again, I am not going to go through the math and logistics of whether or not the payroll tax would be more or less efficient\fair etc than the sales or VAT tax options, I’m only saying that we currently have something similar in place and no one has mentioned it yet in this one particularly thread conversation you boys are having
cheers
Oh boy…..the above sentence….
“I really love the notion of having an independent 3rd party agent that adjusts fiscal policy (re: taxes\govt spending is much more complicated and could as easily be delegated to a third party agent)”
should read
“I really love the notion of having an independent 3rd party agent that adjusts fiscal policy (re:taxes). I don’t think you could ever get away with having a 3rd party agent distribute money on the govt spending side of the fiscal policy equation……….
my bad
Thanks for the input Auburn. I have supported adjusting the FICA tax on other posts and think it’s a good candidate here too, with the caveat that reductions in FICA taxes would need to appear at least to be offset by contributions to the SS Trust Fund to get support from SS beneficiaries, otherwise it’s a third rail issue.
Yes, FICA would work, too, but the connection to Social Security is a political problem. And FICA is only levied on wage income, not other types. (The truly rich escape FICA because they have no jobs.) Taxing spending avoids the complexities of taxing income, and it goes directly at the problem, not indirectly. My income tax would be much simpler, too. That’s not a new idea.
This explanation is a good one, but to tell the truth Mosler’s ‘7 Deadly Innocent Frauds … ‘ did about as good a job as one can do by way of an introduction. I still tell people to read that first, if they want to get a grasp of these concepts.
I may be a bit close-minded on this subject.
You seem to begin by trying to answer the question of why government ‘taxes” its citizens(when ostensibly it doesn’t need to) , and then you seem to answer the question of from where does the sovereign national currency obtain its economic legitimacy ( as if it is related to that taxation issue).
If you can answer that second question, the answer to the first question might also become obvious.
So, here’s a clue.
Despite the vast writings by Dr. Wray and others on this ‘taxes-drive-money’ causation scenario, the answer to how money becomes the national exchange media has zero to do with taxing obligations, but because of a nation’s laws of its money system and legal tender. That’s all there is to it.
We are a sovereign nation.
We have a Constitution.
We have the power to create, issue and regulate the national money system.
We make laws on both private commerce(contracts) and government finance that involve the currency($US), including the capacity to make that currency legal tender for all debts, public and private.
That’s it.
Because these legal tender laws exist, people use the currency – they pay and get paid in $US.
It’s not a problem.
People don’t use the $US currency because they have a SPECIAL obligation of any kind regarding paying their tax bill. That is a complete myth.
If the Repugs are correct, half of Americans do not pay any federal taxes.
But there is no cause for these non-taxpayers to use any other other currency.
The one we have works fine for pretty much everything.
Finally, the government’s agreement to accept the currency in payment of taxes is not an obligation, is not a liability, is not a debt and is not an IOU.
It is merely a continuation of the legal tender laws that say that the government will pay and get paid in $US, the tax obligation being considered a ‘public debt’ of the taxpayer.
Just like the Restofus.
In sum, there is no inherent IOU in a $US unit of currency.
Only because we have established a debt-based system of money creation and issuance(c.e.) by private bankers does every $US in circulation, paper or electronic in nature, have a double-entry accounting attached that makes it an IOU. Thus, all money is a debt.
It has nothing to do with government or taxation.
It has to do with the nation being in the control of the purveyors who sit atop our mountain of debt and collect all the interest.
But, of course, that’s not a problem for MMT.
Pity.
“If the Repugs are correct, half of Americans do not pay any federal taxes.”
No, if the media knew their taxable income from their hairdresser bills, they would say that about half of all Americans do not pay any Federal Income taxes, which is what the Republicans sometimes say, and is true.
Everyone who works, and many who do not, pay Federal taxes.
BTW, it was not always so. Prior to the tax cuts proposed and fought for by two recent Republican Presidents, lots more people paid Federal Income Taxes.
Absolutely correct and well put.
Scott Baker,
Could you please explain debt-free as you understand it – in the simplest language possible?
J.D. Alt.There is no logical sense I can think of in which that can be considered a meaningful debt.
Y:I mean – what kind of a debt is that? “I promise to accept this in payment”. That’s not a debt.
Of course it is a debt, a meaningful debt, the most ordinary kind of debt. It is just that when people nowadays speak of money, economics, banking, finance, the force of omnipresent garbage economic theory is such that they lose the ability to formally understand things that everyone understands innately, understands explicitly as soon as they learn to talk. It is an “I owe ya one”, the most ancient, the most important, the most fundamental, essential kind of debt. As has been understood by good economists and philosophers for centuries. If something is an IOU, it is a debt. The O stands for “Owe”. “Owe” means “debt”. Always. There is no other fundamental meaning of the word “debt”, or its equivalents in other languages. It is a universal human (even primate) concept. Other meanings depend on this meaning.
It really, really helps to look at a dictionary for the primary meaning of the word “debt”, which has nothing to do with interest, and CAN have nothing to do with interest fundamentally. I promise any interest rate you want on my “IOU”s (note the scare-quotes) if they are unconnected to the primary meaning of debt, if they are not promises to accept this IOU in payment for a debt going the other way, if they cannot be used to buy something from me (= incur such a contravariant debt) – of which taxes paid to a government are merely an example of – as most lucidly explained by Mitchell-Innes.
As I have noted several times, probably even here at NEP, Lewis Carroll made this point about interest and debt. (Probably stolen from work on logic by Charles Lutwidge Dodgson. :-)) But childrens’ books are at a rather higher intellectual level than most discussions of economics, being addressed to people whose ideas are not yet rigidly frozen, no matter how self-contradictory and fractured they are.
I don’t think that anyone on this thread disagrees with you that all money is created as debt in our current monetary system. The dollars in my bank account as a book entry or the dollar bills in my wallet represent a debt of equal magnitude by some other person or entity, directly or indirectly. But from my point of view, they are credits that I can spend. I recall reading some of Isaac Asimov’s science fiction novels when I was a boy. His characters living far into the future on other worlds, seemed to use “credits” universally accepted by everyone. He never mentioned taxation. Perhaps he was ahead of his time 😉
With regard to the idea that taxation is necessary to give credence to a particular currency I regard as somewhat of a red herring. I operate a UK based trading company and all our international transactions are carried out in US dollars, whether we are dealing with another company in Russia, China, Chile or Germany. We usually keep our bank cash reserves in US dollars, but pay our operating expenses and any taxes in pounds sterling. Our London and Dutch bank credit lines are also denominated in US dollars.
The reason we do so, is that we do not want the expense nor inconvenience of entering into a foreign exchange contract every time we do a deal. I also regard the US dollar as just another commodity to be traded against other commodities, whether they be other currencies, stocks, bonds and the various commodities that we trade in. In other words, we ladle and teem our assets, endeavoring to be long of vehicles going up in price and short of those going down. The US dollar is the base we return to when we have surplus cash.
Even if the US government did create all US dollars debt and interest free, it would not influence me to suddenly drop the US dollar for trading. However, I do see the need for a progressive income tax, particularly on the very wealthy to restrain inflation of the currency, but more importantly to redistribute income and hence wealth for a more equitable society. How many dollars are held offshore I do not know, but taxing the dollars held in those accounts is not really feasible.
Hey Frank
The whole taxes create currency value thing is more a historical truism….read UKMC undergrad’s post at the top of this page. You are absolutely right that now that the monetary system is so deeply ingrained in the mechanics of the economic machine that even if all US taxes were eliminated the US dollar would still be used as a means of recording value, making transactions and record keeping. The real question is for how long would state fiat currency (US dollar) maintain its current role if there were no more US taxes? The taxes guarantee that the US dollar will maintain its value as a tax credit to the govt permanently…..no need to gamble.
Federal Reserve notes aka US dollars have lost 97% of its purchasing power since 1913. Do you really think that I, or anyone else with half a brain, are just going to park their funds in US Treasury bills, when the return is lower than the rate of inflation ? How do you think I made my money in the first place ? It was not working for $7.25 per hour and saving up for a rainy day 😉 You know- the American Dream.
I have this notion that the rate of inflation of the currency is equal to the average interest rate on all dollar loans. I cannot prove it, but from observation it seems reasonable to make that assumption.
Frank
Now, that is what I call a non-sequitur. You did not address my reply at all…..but to you’re comment:
(FRANK) “Federal Reserve notes aka US dollars have lost 97% of its purchasing power since 1913.”
(ME)While technically true, this statement is a little misleading because you are not taking into account the increase in income. Are average incomes an equivalent amount higher than an individual dollars decrease in purchasing power? I don’t know the exact answer but I do know that the exact answer is the value of REAL lost purchasing power. Everything and I mean everything is RELATIVE….thank you Einstein!
(FRANK) “Do you really think that I, or anyone else with half a brain, are just going to park their funds in US Treasury bills, when the return is lower than the rate of inflation ?”
(ME) Oh man there were at least $4 trillion in people who purchased UST’s while that was the case over the last 4 years…..give or take
Because there is continual inflation of the currency, caused by increases in the money supply, there have to be commensurate wage increases so that people can cope with the increased cost of living, otherwise living standards would drop. This is in fact what is happening now in the US economy – wages have not kept pace with inflation.
Most people are not astute enough to become hedge fund traders and therefore US Treasury Bills are seen as safe havens with some return, albeit modest. Of the $16 trillion US Treasury debt half is intergovernmental. The other half is held roughly equally between foreign and domestic entities. However, these bills can be used as collateral for other investments, if your broker is not using them for the same purpose without your knowledge.
You remind me of the economist who had one foot on a bed of hot coals and the other in a bucket of ice water. Someone asked him how he felt, and he said “On average, I’m quite comfortable”.
Maybe the average wage keeps up with inflation, or even exceeds it. That doesn’t mean that inflation isn’t harming anyone, or harming half or more of the population. Wages in many industries have gone up far in excess of the average wage, and others have gone up less or not at all. Inflation is a transfer of wealth from creditors to debtors. It doesn’t know what happened to your wage.
Not everyone earns wages anymore. Pensions and annuities (except SS) don’t even try to keep up with inflation, they are fixed. Do you propose that we all work to 80 or 90, or until we die, so that we aren’t harmed by your inflation? Or should we be happy when our income that used to buy food for a month only buys food for a week, and you tell us “The average wage still buys food for a month, so you’re still quite comfortable”.
@golfer
Good points you make. I do not pretend to be an economist. My formal qualifications are in metallurgical engineering and I used to do academic research on metal deformation. Since 1972 I have been an international trader in metals and later, other various commodities and currencies.
What I write above are just observations about the way things are, not necessarily the way I would like them to be. Inflation of the currency seems to be a built in feature of fractional reserve banking, whereby all money is created as debt. Money creation and compound interest are what causes the inflation. I learned to take financial advantage of it early on. To some extent expansion of the money supply is necessary, so that economic growth can occur.
I grew up in a working class household, where both my mother and father had manual labor jobs in English factories with pay that was abysmally low.
When the socialist government of Clement Attlee was elected in 1945 it brought in universal healthcare and free university education, which little did I realize back then, that it would change the direction of my life and also my cousins, all of whom have university degrees. As a consequence I have become a progressive socialist, although I have flip flopped a number of times, being annoyed with the antics of both past Labour and Conservative governments.
For the average person today, whether he lives in Europe or the US, his standard of living is dropping, not because industry cannot produce enough goods, but due to the inequitable distribution of income and wealth. The real unemployment rate of 19% of the workforce, according to my calculations, is not going to improve significantly in the private sector in the foreseeable future. Reduced government spending will increase unemployment and further reduce tax revenues.
I don’t know, it seems to me there has been inflation before fractional reserve banking, and deflation after. It is very hard to measure true inflation in a world of constantly changing relative prices, never mind to assign a cause to it, outside some economic theory like monetarism that sort of assumes the cause.
As for standards of living dropping in the US and the UK, I think it’s probably due to technology and globalization. Labor is more and more becoming a commodity that can be procured anywhere in the world, and the higher-priced laborers are not able to compete as well as when they had more of a local monopoly. Standards of living must be rising elsewhere, though, like in China and India.
Maybe our economics and politics have to catch up to business in terms of their global awareness. No country is an island economically, anymore, even if it is geographically.
On a conservative estimate, a third of the world’s wealth is held offshore, with 80% of international banking transactions taking place there. More than half the capital in the world’s stock exchanges is “parked” offshore at some point. The offshore aspect of the global economy is far from marginal; to a large extent it has captured any significant onshore economic activity that remains.
This is the reality that national governments face; it is not hard to see how impossible a task it is for government to function in these circumstances, and it explains why governments have little option but to bend to the demands of corporate and financial power. Unless they do, corporations and banks just move to the next square on the chequer board of their offshore game, and the national fisc suffers.
http://www.guardian.co.uk/commentisfree/2010/dec/28/protests-tax-havens
“childrens’ books are at a rather higher intellectual level than most discussions of economics, being addressed to people whose ideas are not yet rigidly frozen, no matter how self-contradictory and fractured they are.”
___
That is an observation of beauty. No Kool-Aid for you.
You know, I really like the idea of MMT and would gladly try to defend it but if you expect me to walk into a bar and say, look up at that brand new fighter aircraft, there’s an example of your gov’t collecting taxes!! And the dollars that they gave the defense contractor are really just tax IOUs created by the gov’t. No really!! Honest!! Only a self-hating fool would do that.
Why don’t you try something a lot more plausible. Tell them man A cuts down a tree and makes a desk. He then sells the desk for 1000$ to the gov’t as the lowest bidder. The gov’t creates a 1000$ debit on its’ books and then credits A’s bank account with 1000$. The debit and credit cancel each other out. There is no debt because the money is not borrowed which means there is nothing to repay.
You repeat the JD Alt example of MMT and they’ll laugh you out of every place you tell it and you’ll set MMT back at least 10 years if not 20.
Yep.
I kinda feel that we stand to benefit from having more “self-hating fool”s. Otherwise, self-adoring fools abound, and they will give us many a balanced budget that we arguably deserve.
Rich
This is hilarious……..you’re absolutely correct that this idea is more of the intellectual and theoretical variety and not one to be used in everyday communication, whether it is true or not….which of course it is
In order for this private sector economy to grow, the government has to spend MORE I.O.U.s (dollars) than it collects back (cancels) on tax-day. If it does NOT spend more than it collects, the private citizens and businesses will have no “net” dollars for private commerce and, as a consequence, there will be fewer real goods and services for the government to purchase. The more I.O.U.s the government spends, relative to what it collects back in taxes, the MORE net dollars remain in the private sector economy and, assuming the real resources are available to put those dollars to work, the economy will add jobs and produce more goods and services.
This is what doesn’t entirely make sense to me. To my mind, this confuses money with economic activity. A given number of dollars can circulate more rapidly, resulting in higher GDP, or more slowly, resulting in lower GDP.
The super-simplified mental experiment is an economy with two participants and one dollar. Yes, that dollar had to come from somewhere, but once it’s in existence, it can be used over and over again. Participant A has the dollar. Participant B makes a spear and sells it to Participant A for one dollar. Particpant A makes a drum and sells it to Participant B for that same dollar.
They can make stuff for each other every day and hand the same dollar back and forth daily, or they can do that weekly or monthly or just once a year. In any case, there is one dollar, but annual GDP can be 365 dollars or 52 dollars or one dollar.
I’m quite open to the idea that I’m the one missing something here, so have at it.
Savings desire is the issue. I am not sure if anyone used some motor oil analogy for money. Savings are like motor oil leaking out (or into a nook where it may remain for a long time); you wanna add oil, or else… That’s why fiscal deficits have got to be the rule.
Net saving I can see requiring deficit spending, but not economic growth. (I also wouldn’t say deficits have got to be the rule, as a general matter, because the private sector can also net spend, be it via increasing its debt or drawing down prior savings. Not that that’s particularly relevant to the current situation, of course.)
I think desire to net save is the rule rather than an exception. That’s what I meant.
That makes sense, especially considering inflation and population growth. (I guess if we weren’t so dependent on credit, which means debt, population growth could be offset by deflation without much trouble, allowing goods and services produced to increase without new money being required.)
The problem with deflation is that it encourages hoarding of currency, and the reduction of demand causes unemployment. Not a good strategy.
Strategy? Who said anything about that? But you make a good point about hoarding.
Oh. I thought you suggested that there could be growth with deflation, were it not for our dependence on debt. I think, historically, deflation brings about depression, not growth.
I did, but it wasn’t to propose a strategy – just thinking out loud, theoretically. But I’d take it back, anyway, in light of what you wrote about hoarding. It probably wouldn’t work, even in theory.
WHQ
this is true but what if one these guys wanted to save some money for the future when he can no longer work? This drains the amount of money in circulation.
And the other problem with this example is what if that dollar was created as a loan that needs to be paid back plus interest….there would be no way to do so without borrowing more money…..
Sure. I think Nihat and I pretty much covered all of that. But that’s not what was written in the top post. In the end, I’d say it’s more a “show your work” issue than an actual disagreement. Of course, if you want to educate people about the need for deficits, showing such work would avoid confusion.
And I don’t “you,” Auburn Parks, rather the general “you.”
I might take issue with your discussion of interest requiring more money, now that I think about it. My super-simplified example doesn’t account for that, but that’s why I described it as such. It was intended to make a very limited point. In any case, while a given individual might need more money to pay interest, the interest simply gets transferred to another economic actor. It doesn’t disappear. And that interest was able to be paid because the borrow obtained money from some other actor, who very may well have earned interest in order to pay the borrower for some goods and services. (And maybe the borrower sold a spear directly to the lender to earn the interest necessary to pay off the loan.)
It doesn’t make sense because it’s not right. The private sector can save without the govt spending money. But it requires the economy as a whole to run a foreign account surplus or it requires the private sector to run a deficit against itself (more liabilities need to be issued against itself). It’s entirely possible (and has happened in the recent past) for the government to run a budget deficit that is smaller than the foreign deficit and still see an economy that grows.
I think J.D. is being a little sloppy with his language and that the head MMTers would not say something like this.
“It’s entirely possible (and has happened in the recent past) for the government to run a budget deficit that is smaller than the foreign deficit and still see an economy that grows.”
Yes, but it’s not sustainable. Eventually the private sector runs out of accumulated savings or creditworthiness, and can no longer run a deficit. Then you get recession or depression.
Would you agree that a large economy needs more money than a small one? If so, then it follows that an ever-growing economy requires an ever-growing stock of money, which means a government deficit as a norm (when the foreign sector is also in surplus).
You’re talking about the concept of the velocity of money. In real life, velocity changes only very slowly, and is often assumed to be constant. And it slows as well as speeds up. Growth based on constantly and persistently growing velocity seems unlikely.
I would say that the real taxes that government collects are not units of currency but the actual real goods and services the government uses to govern. The consumption of these goods and services “taxes” us in the original sense of the word, since they are no longer available for us to use. You cannot consume that which has already been consumed!
So these real taxes are levied at the time the government consumes these goods and services. For accounting purposes it may make sense to regard the tax as “collected” at the time the government issues the money to “pay” for it. But in actuality the tax is paid at the time the government consumes the goods and services it “buys” from us, since it is only when something is consumed that it becomes unavailable to others.
” it may make sense to regard the tax as “collected” at the time the government issues the money to “pay” for it.”
Did you mean when the government collects the money?
Anyway, tax collections and spending go on continuously, with no association, in general, of any particular tax payment with any particular government purchase. But I like your original point, that the burden of the tax is the removal from the private sector of real goods and services, not the taking of money. Time has nothing to do with it.
Was it Milton Friedman or Ronald Reagan who said the real burden of government on the people is measured by its spending, not its taxing?
When a government taxes people and corporations, that money is spent back into the economy, which provides incomes for workers and profits for corporations. If there were no taxes, what would happen to that money ? Would it be spent into the economy or would it be used to by second hand stock certificates or disappear into offshore tax haven bank accounts. Therefore, the question is – does taxation economy as a whole more than non taxing ? During the Eisenhower presidency, when tax rates were very high, the economy was expanding. Now that tax rates are low, especially for capital gains and dividend payments, it is contracting.
“Therefore, the question is – does taxation economy as a whole more than non taxing ?”
Maybe you can rephrase the question.
“During the Eisenhower presidency, when tax rates were very high, the economy was expanding. Now that tax rates are low, especially for capital gains and dividend payments, it is contracting.”
It contracted at times during the Eisenhower presidency, too, and it has expanded when rates were low (as it is expanding now – at least until 4Q12 – not contracting). The economy is cyclical by nature, with only temporary influence due to changes in tax rates. The time between recessions since tax rates were dramatically lowered in 1983 is longer than before, but I don’t think that is a major causal relationship. I think it has to do more with globalization and technology.
The problem that I have with this approach (as it concerns debt free currency) is that a currency is supposed to stay in circulation and taxing a debt free currency would take it out of circulation. A sovereign issuing debt free currency would not want to take the currency out of circulation except in two situations: (1)to avoid inflation and (2) to avoid accumulation of wealth in the hands of a few. There would be no other reason to tax. So it is really not an IOU if it is intended to remain in circulation.
Why should the argument be different for –for lack of a better term– debt-attached currency?
Because in a debt attached currency, the government needs a source of income to pay its debt and that source of income is usually taxes. In a debt free currency, it needs no source of income; it just prints the money and pays for what it needs.
The currency is only taken out of circulation if there is a government surplus. If taxation is lower than spending, that adds currency rather than removing it. You’re ignoring the spending side of the equation.
Wouldn’t a government surplus produce inflation? I think we are talking about the same thing.
The US Treasury is purportedly in debt to the tune of $16.5 trillion, but half of that is intergovernmental. Yearly deficits have been running at around $1 trillion per year. Even if the Treasury by some miracle ran surpluses of $1 trillion per year it would take 16 years to be in surplus.
No, a surplus, meaning revenue in excess of outlays, would be deflationary, all other things being equal. Fewer dollars makes them worth more.
Yes, shrinking the money supply is always deflationary. There is reduced demand and higher unemployment.
If you add currency the dollars are worth less. He was talking about adding currency, which I presumed meant would be creating a surplus of dollars.
A government surplus means money is being removed from circulation, whereas a deficit (i.e. spending exceeding revenue) adds dollars. But adding currency doesn’t necessarily make dollars worth less, just as taking them out doesn’t necessarily make them worth more, which is why “all other things being equal” is the qualifier. Deficits add inflationary pressure, you might say, but if you are a net importer and/or the private sector is net saving in aggregate, that pressure is offset. And when the private sector is net saving, that usually means your are not at capacity for production, so output can readily increase in response to increased demand without significant price pressures occurring (not to mention that some level of inflation is generally a good thing, especially if wage inflation is on par with price inflation – existing debt gets smaller in real terms).
“some level of inflation is generally a good thing, especially if wage inflation is on par with price inflation – existing debt gets smaller in real terms).”
A good thing for whom? The private sector is a net lender, the government a net debtor. Inflation reduces the real value of the private sector’s financial assets and interest income.
If central bankers are so unsure of themselves that they fear deflation, and thus aim for a small amount of inflation, that may be a good thing. But it is only the choice of a lesser of two evils.
It’s not named the Center for Full Employment and a Little Inflation. It’s the Center for Full Employment and Price Stability because both inflation and deflation are harmful to humans.
Fantastic, literally…
As I mentioned earlier above, I have this notion that the rate of inflation of the currency is equal to the average interest rate on all dollar loans. I cannot prove it, but from observation it seems reasonable to make that assumption.
If you want zero inflation, there has to be an average of zero per cent interest rate on ALL US dollar loans.
I have not read through all the comments and so not sure if anyone else has picked this up but the explanation seems great but incomplete.
The idea that with a change of mindset to the debt and the nature of the dollar and the problem disappears is fine so long as the dollar, debt and citizenry are confined to a particular country. But what if say, China, takes ownership of substantial amounts of that debt. In fact what if that currency becomes the reserve currency of the world. The money is not removed from the system on tax day as there is no tax day for non citizens. The currency value internationally has therefore its strength based on the ability of the US economy to deliver goods and services for export to the international holders of this debt.
The start of a useful concept but it does not let the US or any other country off the hook. I wish that the Europeans had thought about this before starting the Euro!
MMT mostly speaks to a country that not only is monetarily sovereign, but also allows the value of its currency to float on international markets. Not that it can’t analyze other situations, and it does, but the focus is on floating currency because that allows the most “policy space”.
If the foreign sector becomes unenamored of dollars, perhaps because the dollar is usurped as the world reserve currency, then foreigners will do one or both of two things: sell their dollars and buy Yuan, or whatever the reserve currency is, if they want to maintain their level of reserves; or use the dollars to buy US goods and services. To the extent that they sell dollars, the value of the dollar will drop, and US goods and services would become more attractively priced for foreigners. Both actions cause the US trade deficit to drop, or perhaps turn into a surplus.
Ultimately, I think you are right, the international value of the currency is based on the ability of the country to produce goods and services for export. It need not be a net exporter, at least at first, even if its currency is not the world reserve currency. I think, though, that for most countries, especially smaller economies, full employment with trade deficits is unsustainable. The exchange rate probably would drop so as to at least eliminate the trade deficit. Maybe if all countries adopted MMT and budgeted for full employment, trade would tend to balance automatically for everyone. One large mercantilist, though, could provide enough extra goods for all the others to have a trade deficit and full employment. Could they continue to do that forever? I don’t know, maybe one like China could. If they could, would they? I don’t know that either.
Thanks to everyone for this very stimulating commentary! Thanks especially to Dan Kervick and Auburn Parks for articulating some (for me at least) big insights. I hope we’re making progress.
I don’t even know the way I stopped up right here, however I thought this put up was good. I don’t realize who you’re but definitely you’re going to a well-known blogger in case you aren’t already. Cheers!
BRILLIANT. period.
Step F is just fine. It doesn’t matter what we call money, but only what money actually is. It is actually the same thing whether it is a Federal Reserve Note with a paper debt that the Fed cannot actually collect, and interest that goes back to the government anyhow, or a Greenback dollar that makes no pretense of being loaned into circulation.
The important thing is to not allow private entities to lend money into circulation. We owe no public services to banks, and so paying interest for a receipt from a bank is nonsense.
The Federal Reserve allegedly returns the interest it makes on US Treasury Bills. It currently owns about $1.7 trillion worth. The US banks, who are participants in the Federal Reserve system, receive 6% per annum interest on their reserves held by the Fed.
How much the Federal Reserve really makes is unknown, since it has never been fully audited and does not file a tax return.
The Federal Reserve is the creator/issuer of the currency and the US Treasury is the borrower/user of the currency. The private banks (including the Federal Reserve) create money as debt as a multiple of 14 times their reserves on which interest is charged. This interest has become a burden on the real economy, since both the private and public debt expand exponentially. For example, at an interest rate of 5% it takes 15 years for the debt to double and in 30 years for the debt to quadruple. There is thus an interest component in everything you buy, which is sucking money out of the real economy at an ever expanding rate.
http://blip.tv/quorum/bernd-senf-deeper-roots-of-world-financial-crisis-part-1-of-3-4130447
Prof Senf is long winded, but if you have the patience, he makes some excellent observations.
Margrit Kennedy is more concise.
http://www.margritkennedy.de/presentations.html
I wouldn’t conflate the money that the banks create, which is a usurpation and a burden on the economy, with the money that the Fed creates. All money that the Fed creates draws interest that goes to government, after expenses are taken out.
The Chicago Plan, which makes the banks pay interest to government on the $13 trillion they have created out of thin air, solves the banking problem. However banks should have to get additional money to lend by getting long-term deposits from the people. Government money should be spent directly into circulation.
I would also either fully nationalize or abolish the Fed. We can do Greenbacks without the Fed.
I agree with all that you say with this exception, “All money that the Fed creates draws interest that goes to government, after expenses are taken out.”
I think that it returns something like $50 billion to the US Treasury, which is basically chicken feed. The private banks receive 6% on their reserves held at the Fed. And lets not forget that the US dollar, aka Federal Reserve notes, are used for 90% of international trading. There is therefore a huge float of US dollars held in overseas bank accounts. It has been suggested that Gaddafi met his end for threatening to sell Libya’s oil in Euros. Same possibly goes for Saddam Hussein. And JFK had also threatened to undermine the Fed.
>>The US banks, who are participants in the Federal Reserve system, receive 6% per annum interest on their reserves held by the Fed.
Not quite. US banks receive 0.25% on excess reserves.
http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm
They receive a 6% dividend on their ownership stake in their regional Federal Reserve Bank, which is 6% of their “paid-up capital stock and surplus.”
http://www.federalreserve.gov/aboutthefed/section5.htm
http://www.federalreserve.gov/aboutthefed/section7.htm
Thanks for the clarification EconCCX. The distinction is important.
Thanks for the catch 😉
Frank,
All of that is well and true enough WITHOUT bringing in the ‘multiplier’, as MMT considers the ‘multiplier’ a red flag heresy for a known myth among the classicals.
You can scribe a hundred truisms, but if you mention the ‘multiplier’ (of anything), then MMTers might think that you are claiming that deposits are multiplied to make loans – when, in fact, those loans are timed to create deposits that are simply demanded by consumers.
That economic truism is based upon the fact that there is no expanding ‘money’ in the real economy – no expanding wages for labor – and thus the maintenance of a worker’s standard of living MUST create demand for what they call credit – but which is merely debt.
The deepest truism is that those FR banks create/issue the nation’s debt-money out of privilege, thereby directing the allocation of future resources in the economy, and profit from doing so by collecting a tax on its issuance that we call interest.
Thanks.
“In order for this private sector economy to grow, the government has to spend MORE I.O.U.s (dollars) than it collects back (cancels) on tax-day. If it does NOT spend more than it collects, the private citizens and businesses will have no “net” dollars for private commerce”
This is not true. You are not thinking dynamically. Private banks can issue loans at a higher rate than they are being paid off; that is another robust source of money creation in the economy.
“Private banks can issue loans at a higher rate than they are being paid off; that is another robust source of money creation in the economy.”
…and a pathway to debt slavery.
While I agree that it tends to lead to bankster tyranny, my premise is still true. Private banks can create money by issuing loans in excess of repayment.
To all you MMT’ers out there. You need to watch the lectures from the MMT Seminar at the Fields Institute last year. They present a unified, coherent model of money creation which incorporates Treasury, the CB, and private banks as well, all via a sophisticated and incredibly educational economy-modelling program called Minsky.