Lavoie’s Critical Look at Modern Money Theory: A Reply

In October 2011 Marc Lavoie, a post-keynesian economist, very friendly to Modern Money Theory (MMT) wrote a paper presenting a friendly critical look at MMT. In his conclusion, Lavoie states that “. . . the neo-chartalist analysis is essentially correct . . . “ affirming his substantial agreement with MMT’s analysis of banking operations and fiscal realities in nations with non-convertible fiat currencies, with floating exchange rates and no debts in currencies they do not issue, as well as MMT’s analysis of Eurozone viability. But he goes on to say (p. 25):

“There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; That government expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures.”

So, Lavoie questions the wisdom of MMT economists and writers making certain counter-intuitive statements he perceives as certainly questionable, perhaps untrue, and also confusing to people, economists and decision makers trying to understand MMT writings. He considers these statements an important barrier to understanding, and he wants this ‘baggage’ to be discarded because he thinks it hurts MMT and post-keynesian efforts to get important new approaches to economics accepted.

Recently, Lavoie’s work was used in a very vigorous and important discussion at Rodger Malcolm Mitchell’s Monetary Sovereignty web site by a commenter named “Tom,” questioning some of Rodger’s formulations and the statements of other commenters who defended the MMT and MS positions. I participated in the discussion, but also concluded that it would be more useful to write a more formal reply to answer Lavoie’s question of what is gained by taking some of the positions MMT and MS writers often take. This is my reply.

The Consolidated Government Assumption

Well, let’s set the parameters of this discussion. When MMT writers refer to the Government, they don’t mean just the Executive Branch or the Treasury. They include in “the Government,” the whole central government including the Congress, the Supreme Court, and the so-called “independent agencies” including the Federal Reserve — the Central Bank of the United States. Now, there is wide disagreement about whether the Fed, comprised of its Board of Governors, the Federal Open Market Committee (FOMC), and the Regional Fed Banks are a Government agency. I won’t try to resolve those disagreements in this post. I’ll just assume for purposes of this discussion that the system comprised of these institutions and their interaction as created by the Congress, is part of the Federal Government under the full authority of the Congress to regulate.

Whether this is right or not is disputable, and I’m sure some of my friends among the commenters will dispute it. But, what is not open to dispute is that when MMT writers make the claims attributed to them by Lavoie, this is what they are assuming. So, if one wants to refute these claims he or she must argue against the basic assumption, or failing that one must critique the MMT claims by first stipulating to that key MMT assumption, for the sake of argument.

Lavoie disagrees with the MMT assumption that it is useful to see the Government, especially the Treasury and the central bank, from a consolidated point of view for purposes viewing the reality of fiscal operations. He does not dispute this by claiming that the central bank isn’t part of the Government, and in my view he presents no compelling argument why the MMT conceptual consolidation of the Government and the central bank is incorrect; but, in spite of this he opts to view the Government and the central bank as separate entities because he finds that view more illuminating for his own analytical purposes.

He’s entitled to do this, of course. But, in evaluating his view that MMT gains little or nothing from various statements it makes, I think one needs to keep in mind that what is gained may look different if one accepts the consolidated Government point of view than if one doesn’t. Now, let’s get to each of the MMT claims Lavoie questions and try to answer his question about what is gained by asserting them.


“Government can spend by simply crediting a bank account;. . . ”

 

I think MMT economists and writers point this out because it is true, provided that all parts of the Governmental spending system are aligned. That is, if spending is appropriated by the Congress and the Federal Reserve banking agent of the Treasury places the reserves in the Treasury General Account, then the Government can, and most often currently does, spend by crediting private sector bank accounts. So, the question now becomes what is gained by simplifying the above explanation into the short claim above?

And the answer is that MMT wants people to know that their Government, as a whole, can spend freely if it wants to, because if MMT can convey that message to people, then they will be in a position to deny the claims of the austerity-mongers that the Government just doesn’t have the money and cannot get it, because it must either tax or borrow, and then face inescapable “funding” constraints on both options. If we could get to the point of public recognition that such a claim is false, then that would be a great, enabling, political gain in the fight for MMT-based policies.

Looked at in other words, MMT writers see the power of the austerity position on fical policy in its claim that “There Is No Alternative” (TINA). The idea that the Consolidated Government spends by simply marking up accounts creating its fiat money in the private sector is a powerful one in beginning to make the case that “There Are Good Alternatives” (TAGA) to austerian fiscal policy.


“. . . government expenditures must precede tax collection; . . . “

 

MMT doesn’t exactly say that. What it says, as Lavoie recognizes in his detailed analysis in the paper, is that from a logical point of view there has to have been government spending of the currency unit of choice allowing people to accumulate that currency, before it can be used to pay government tax obligations. That doesn’t mean that MMT is saying that government spending must precede tax collections on any given month, or given day, or given year. As Stephanie Kelton puts it in her account of the way in which deficit spending creates net financial assets:

“As we in the MMT tradition consistently insist, spending must, as a matter of logic, precede taxation in the first instance (for it would be impossible to collect dollars from the private sector unless they had first been spent into existence by the public sector). But in the real world, the Treasury receives tax payments on a daily basis, and government checks are clearing bank accounts on a daily basis as well. So there is really no objective beginning point or ending point. You can begin with spending if you prefer. But it will not alter the result.”

So, I think Lavoie has overstated this MMT claim. If he doubts the validity of the claim made as a point of logic then I think it’s up to him to explain how people can have the currency needed to pay taxes without the Government, in the MMT meaning of that term, spending in the first place to originate the process of establishing the legitimacy and value of the currency.

“. . . the creation of high powered money requires government deficits in the long run; . . . “

High-powered money includes cash money and reserves emanating from the Government, including the Federal Reserve. If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating. And so, it is not doing any net high powered money creation. MMT writers simplify a bit when they they say “the creation of high powered money” rather than “the net creation of high powered money” but I think it’s easy to excuse the simplification since the word “net” tends to make people’s eyes glaze over, and much MMT writing is an attempt to communicate with the broader public, rather than just other economists.

Lavoie seems to think that net high powered money creation isn’t necessary for an economy, even if it is good to have. He says:

“While I would certainly agree that government deficits in a growing environment are appropriate, as it provides the private sector with safe assets, which can grow in line with private, presumably less safe, assets, it is an entirely different matter that government deficits are needed because there is a need for cash. Even if the government keeps running balanced budgets, central bank money can be provided whenever the central bank makes advances to the private sector.”

Of course, it’s true that the central bank can provide money to the private sector through lending and asset swaps; but this kind of money creation is not net money asset creation unmatched by a corresponding liability. So, all it can do in the long run is to produce unsustainable credit bubbles that will periodically crash the economy, rather than net money asset creation, which can support the continuous creation of real wealth.

The gain in using formulations like the one Lavoie critiques is that these and related expressions provide a counter to the conditioning of people to the idea that deficits are somehow a negative state that ought to be avoided as much as possible. Lavoie is certainly no opponent of deficit spending, but I think perhaps, he’s not giving deserved recognition to the difficulties MMT economists have been having in fighting the world view of austerity that looks at deficits as overwhelmingly negative states that ought to be minimized and eventually avoided. A negative view of deficits as immoral is fundamental to the austerity posture in fiscal politics. If we can get people to agree that deficits are necessary for nominal wealth accumulation in the longer run, then we will greatly weaken the negative view of deficits that is so important to austerians.


“. . . . central bank advances can be assimilated to a government expenditure; . . .

 

I’m not sure what Lavoie has in mind here. It’s not clear to me what he means from the analysis in his paper, and I’ve never seen an MMT writer say anything like the above statement.


“. . . taxes and issues of securities do not finance government expenditures. . . . ”

 

Lavoie wonders what is gained by a statement like this after he has shown through an analysis using T-accounts that the Treasury borrows from the private sector when it needs to deficit spend. Then he says (p. 18):

“The purpose of this whole exercise is to show that there is no point in making the counter-intuitive claim that securities and taxes do not finance the expenditures of central governments with a sovereign currency. Even in the case of the US federal government, securities need to be issued when the government deficit-spends, and these securities initially need to be purchased by the private financial sector. It seems to me that the consolidation argument – the consolidation of the central bank with the government – cannot counter the fact that the US government needs to borrow from the private sector under existing rules.”

However, it’s just not true that the Consolidated Government needs to borrow from the private sector to deficit spend under existing rules. Here are four reasons why this is not so.

First, “existing rules” include the Constitution of the United States which states the most fundamental rules of all for the Consolidated Government. Article One of the Constitution provides Congress with the authority to create money without limit and to appropriate spending with or without borrowing. That authority is a fact. And it is important for people to recognize that any constraints on the authority to create money without issuing debt instruments that may exist in current practices are, as MMT says, self-imposed constraints.

Second, apart from existing constitutional authority to delegate authority to the Treasury to spend without borrowing, there is also the fact that in addition to those rules that appear to constrain the Treasury component of the consolidated Government to only taxing and borrowing to deficit spend, there is also legislation that allows the Treasury to coin money, deposit it at the Fed, force the Fed to provide reserves in return for that deposit, and proceed to have the seigniorage revenue resulting from this process “swept” into the Treasury General Account (TGA), the spending vehicle of the Federal Government.

Seigniorage has always been a relatively minor source of reserves for Treasury. However, an act passed in 1996 provides the authority to mint platinum coins of arbitrary face value to use in the process of gaining seigniorage. Face values on these coins can be in the many trillions of dollars and can fill the public purse to arbitrarily high levels. These reserves can only be spent on Congressional appropriations and repaying Federal debts and interest due, so this capability doesn’t take away the purse strings from the Congress. But it does make Lavoie’s claim that the consolidated Government needs to borrow from the private sector to deficit spend under existing rules untrue; even overlooking the constitutional authority of Congress to amend current constraints on the Treasury’s ability to generate reserves “out of thin air.”

Third, there is the issue of whether the Treasury is really borrowing money, when it issues debt instruments in return for the Consolidated Government’s own fiat. MMT economists often point out that when the Government “borrows” money it is not like you or I borrowing money. Yes, the Government must repay in both cases, and in both cases the term ‘debt’ is used. But, a) the Government’s debt is more like the liability of a bank to its depositors, than it is like the liability you or I might have to the bank.

The Government, in selling its debt, is functionally providing the equivalent of a time deposit opportunity to depositors, rather than borrowing money from people who are incurring a risk that they won’t be repaid. In fact, the Government’s “time deposit” carries the same risk with it that a “time deposit” placed in a bank does, since it is the Government that insures such deposits.

And b) what sort of ‘debt’ is it that provides no burden at all on the borrower and pays a return to the lender without exposing that lender to risk? It certainly isn’t like a ‘debt’ that you and I or any user of a currency incurs. The reason is that the power and authority of the consolidated Government to create reserves is unlimited, so no matter how circuitous the process of generating those reserves may be, the issue is never in doubt. The Government can always create the reserves it needs to repay its debts. And under the 14th Amendment, to the US Constitution, section four, the US cannot default on its ‘debts.’

Fourth, “the counter-intuitive claim that securities and taxes do not finance the expenditures of central governments with a sovereign currency” is true if one considers carefully the term “finance.” When you or I have to “finance” our spending we must do it from money we acquire from others through our economic activity including our lending. But, the Consolidated Federal Government in the end creates money from the Fed’s power to generate reserves, and the Treasury’s (US Mint’s) power to generate currency (ordered by the Fed) and coins.

The Treasury may tax and borrow as an important part of its spending operations, but that doesn’t mean that it is the Consolidated Government that ultimately “finances” these spending operations through these measures. The Treasury may use these measures plus seigniorage to generate the reserves that end up in the TGA; but the Consolidated Government, viewed as whole, ultimately enables and facilitates the Treasury’s spending through exercising its collective authority to create reserves by fiat in the TGA in response to Treasury’s tax, debt instrument sales, and seigniorage-producing activities. It does not “finance” its spending in the manner we normally associate with the term “finance.”

So, what do MMT writers gain by claiming that the Consolidated Government doesn’t ”finance” deficit spending by “taxing” or “borrowing?” I think the answer is that we continue to underline the central point that governments sovereign in their own currency have no solvency concerns, because they have an unlimited capability to generate nominal wealth. This point is very central to both MMT and MS, because it implies that austerity is an untenable position in fiscal policy, and that the whole litany of neoliberal concerns about the sky falling someday because the Government is running out of money is just a fairy tale.

This point is where the action is politically, and much of the effort of MMT and MS writers is devoted to demonstrating it in various ways, and underlining it again and again in order to overthrow the neoliberal paradigm of economic thought. I think that overthrow is our main messaging objective, and that objective is served by the various counter-intuitive statements that Lavoie views as “baggage” MMT ought to get rid of.

For my part, I think these statements are both true and also important in creating our alternative paradigm. Paradigms advance by creating cognitive dissonance in those who accept the old paradigm or who are neutral in relation to that paradigm. That is, I think, exactly what we are doing.

And out of that dissonance we are beginning to see change. Let us hope that we will see that change accelerate over the next few years so that the world and its various nations will be able to end the global move toward plutocracy, and a new feudalism that is gradually impoverishing the middle class and ending the hope brought by freedom and democracy everywhere this new feudalism advances.

(Cross-posted from New Economic Perspectives.)

275 responses to “Lavoie’s Critical Look at Modern Money Theory: A Reply

  1. Bravo.

  2. sunflowerbio

    Nice summary, Joe.

  3. John Hemington

    This is an excellent post, but it, I believe, misses one extremely critical point that is entirely misunderstood by almost everyone in the nation — including those who make the laws. That is that the United States Treasury is now required to borrow its money into existence. This is not for the reason which austerians believe — that it is an act of nature. Instead, it is because Congress as a part of the Banking Act of 1935, mandated that all spending by the U.S. Treasury be done by issuing various types of Treasury securities through certified Wall Street bond brokers. This was confirmed by Marriner Eccles, Fed Chairman, in Congressional Testimony in 1947.

    This simple and hidden requirement means that all money issued by the Treasury must be in the form of interest paying debt. It is nothing more than an absurd subsidy to Wall Street, since the Treasury can always create enough new money to pay the interest without having to collect taxes in order to accomplish this, but it permits those who would push for austerity to claim that the nation must borrow from private sources to fund its deficits and its debts. This, in my opinion, is something which must be exposed before the public can ever come to understand the true nature of money and the ability of a sovereign issuer of currency to create money out of thin air.

    It also proves that taxes are not necessary for the government to spend. It is, after all, the capacity to tax and to require that taxes be paid in the currency issued by the government which give fiat money its value in the first place. It is also important for people to understand that the need for taxation is not to fund government activities, but to limit the impact of inflation should too much money end up in circulation. The stand taken by Republicans that taxation is evil is simply at odds with their beliefs that government deficits will create hyperinflation.

    Without some understanding of how and why all of this works as it does, these myths will never die and we will continue into neo-feudal serfdom following the same old neoliberal policies. Therefore anything which has been done by Congress can also be undone by Congress if it could for an instant escape the vice-like grip of Wall Street.

    • John,

      Between Joe’s post and your comment it makes one wonder how an academic like LaVoi (and others) could misinterpret the dynamic so badly. These aren’t particularly difficult concepts unless one loses himself in infinite loops of circularity. The bottom line is they fail to understand the Arrow of Time. From Wikipedia…

      “Physical processes at the microscopic level are believed to be either entirely or mostly time-symmetric: if the direction of time were to reverse, the theoretical statements that describe them would remain true. Yet at the macroscopic level it often appears that this is not the case: there is an obvious direction (or flow) of time.”

      From the macro perspective, it matters what happens first.

    • Joe Firestone

      John H, This:

      “That is that the United States Treasury is now required to borrow its money into existence.”

      Times have changed since Marriner Eccles’s testimony. Treasury can now use Platinum Coin Seigniorage to cause the Fed to create reserves in its account. Also, the coins are money as soon as they leave the Mint. This was covered in the post and is explained more carefully in many other posts here, and in my e-book (see link above).

    • golfer1john

      “all spending by the U.S. Treasury be done by issuing various types of Treasury securities”

      Really? There have to be securities issued for all spending, not just for deficit spending?

      And what about coins? Not just platinum coins, but regular quarters and dimes. Is there no longer seigniorage created by them?

    • Warren Mosler’s ‘7 Deadly Innocent Frauds … ‘ has answered all of this in a way that is simple, direct, and easy to understand. It is free (or you can buy a hard copy at Amazon) and should be recommended to everyone.

    • Hasn’t QE killed that myth to a large extent. Or am I misunderstanding something. Although the Fed may be promising to sell that debt back into the private market, the fact that they seem to be able to hold it as long as they feel like it must begin to give people the idea that the government can simply create some money if need be without issuing debt.

      • Joe Firestone

        It’s giving some people that idea; but others still insist that it’s either taxes or debt instruments.

      • golfer1john

        Even before QE, the Fed never promised to sell the Treasuries it held back into the private sector. The Fed’s balance sheet was pretty much monotonically increasing over time, more or less in pace with the economy. QE is just giving it a big jump. QE is now purchasing bonds and MBS faster than Treasury is issuing bonds.

        If the Treasury sells bonds and the Fed buys them, you can logically think of the consolidated government as not “issuing debt”. The Fed’s transaction reverses the Treasury’s. The one remaining transaction, the spending, is what creates money and influences the macro economy.

    • “United States Treasury is now required to borrow its money into existence.”

      Since the 1792 founding of the U.S. Mint, which is part of the Treasury, the Mint has been creating coins. In 2011 for example is created roughly $10B in coins, which it sold at face value to the Federal Reserve in exchange for credit (reserves) in an account at the Fed, which ultimately got swept into the Treasury’s General Account and was used to cover the government’s bills.

      Per the NY Fed:

      The distribution of coins differs from that of currency in some respects. First, when the Fed receives currency from the Treasury, it pays only for the cost of printing the notes. However, coins are a direct obligation of the Treasury, so the Reserve Banks pay the Treasury the face value of the coins.

      • Joe Firestone

        Yes, the Mint’s account is called the Public Enterprise Fund (PEF). The Treasury periodically, at it its option, sweeps the seigniorage, the face value of the coins deposited in it, minus the cost of producing those and other operational costs of the Mint in producing the coins, into the Treasury General Account (TGA).

    • Gary Goodman

      John, thanks. Fantastic clarification. I understood “self-imposed constraints by Congress” as Mosler said, but these specifics are helpful.

  4. I see half the problem here as people failing to understand what treasury operations across all organisations actually achieve – which is to disconnect the spending part of the organisation from the funding part of the organisation and switch control to a budgetary system.

    What this does as organisations get larger is break the need to ‘ring down’ to see if there is any money left before you can proceed. As long as you’re within budget you can proceed.

    The key point here is that *spending is not after funding*. They are entirely asynchronous via a buffer stock that absorbs the time differential between the two operations.

    Organisations that are large enough and sophisticated enough to use the buffer stock/budget approach to spending (and most are) are dynamically different to the those spending against a hard limit sequentially.

    I suspect again that the problem here is economists struggling with the dynamic nature of operational organisations and it is banging up against the static methods they use to analyse them.

    There is no way that any government treasury in the world with a sovereign currency can be told it can’t spend any more. A way is always found to make the buffering work. Bernanke himself said as much when he admitted that the central bank is the agent of the Treasury and it does what the Treasury tells it to do.

    The UK description of the consolidated sector is here along with a picture of the hierarchy. The UK is much clearer in that the central bank is definitely owned by the treasury, and there is definitely full intra-day interest-free overdrafts available to all those with central bank accounts.

    • Joe Firestone

      Very good reply Neil. Lots of good formulations. Very interesting about the clarity of the hierarchy in the UK.

      On this:

      “We were mostly looking at our internal systems and our ability to address whatever directions – we are the agent, of course, of the Treasury and it’s our job to do whatever they tell us to do.”

      That’s why I doubt the statement made by the Obama Administration that the Fed wouldn’t go along with crediting the US MInt’s PEF account for deposits of High Value Platinum Coins. If the Treasury ordered the Fed to credit such coins, then it would have to do so, under the rule that in case of disputes between the Fed Chair and the Secretary, the view of the Secretary shall prevail.

      So, the Administration was just using the Fed’s joint statement with Treasury about it not being feasible to use the coin as a cover for its own decision, not to end debt ceiling crises, More duplicity.

    • Excellent post Neil, thank you.

      I suspect that your observation is closer to the truth than many would like to admit.

      I suspect again that the problem here is economists struggling with the dynamic nature of operational organisations and it is banging up against the static methods they use to analyse them.

  5. Excellent article, Joe.

    There is a fundamental issue, which is – as with John Hemington’s excellent point – widely, if not entirely, misunderstood, and which has been the subject of my ‘action-based’ research at UCL and that is the completely disparate natures of the twin legal obligations (lumped together as ‘liabilities’) underpinning modern finance capital.

    Historically, the ‘single entry’ system of tally stick accounting recorded two completely different relationships between counter-parties.

    One – the ‘Memorandum Tally’ – was a record of a PAST exchange of value for instance, a record of a payment by a subject to the king for a farm. Essentially this was a document of title, and the Exchequer held the ‘counter-stock’ to the ‘stock’.

    It was the second – the ‘loan tally’ relating to a FUTURE exchange of value – which enabled sovereigns (and the merchants whose good credit eventually led to them becoming merchant banks) to raise the money or money’s worth of value they needed.

    These loan tally ‘stock’ was a pre-payment for the king’s (or merchant’s) goods and services. In the case of the king, keeping out barbarians; maintaining rule of law and so on.

    Such stock, was necessarily issued at a discount which gave a profit to the tax-payer or merchant’s creditor in return for the use of the value they had provided.

    The periodic ‘return’ of the stock to the king’s exchequer for accounting and cancellation against the counter-stock gave rise to the phrase ‘tax return’, while the origin of the phrase ‘rate of return’ derives from the fact that the more tax was paid, the faster the tax-payer would be able to return the stock to the Treasury, and the more quickly he would be able to realise his profit/discount. Interestingly, it will be seen that no compound interest is involved.

    The point I am getting to is that this form of loan tally stock is a credit obligation created by an individual over his own resources, whereas a debt obligation is created by an individual over someone else’s resources.

    National Debt is in fact, and always has been, a National Equity, and the DATED (albeit UK ‘consols’ are undated) stock obligations created by Treasuries are better seen as interest-bearing Redeemable Preference Shares in Government Incorporated.

    In my view we are at the end of a 300 year aberration where the ‘stock’ form of undated credit instrument was hybridised into the two conflicting bastard forms of finance capital:

    (a) Common Stock (so-called Equity) – the (divine right of capital) instrument of absolute ownership consisting of shares in the ‘Joint Stock Limited Liability Company’, with everything that goes with it;

    (b) Loan Stock – dated instruments bearing compound interest – with everything that goes with the exponential function.

    I observe the Prepay instrument re-emerging in use (eg Russia’s oil dealings with Glencore and Vitol) because ‘it works’ as a financing instrument even when bank debt and equity do not.

    I believe that a new generation of prepay instruments will enable:

    (a) People-based (peer to peer) credit – short term financing needed for the circulation of goods and services and the creation of new productive assets;

    NB (i) P2P credit has nothing to do with P2P debt in respect of EXISTING money, and (ii) there is no need for a currency in a credit creation and clearing system although there is a need for a unit of account; and

    (b) Asset-based (peer to asset) credit – for long term funding of completed/existing productive assets – eg prepaid rentals, and prepaid energy.

    I believe that provided wealth is equitably distributed the latter will emerge as generally acceptable currencies.

    For anyone who has had the patience to read this far, and is nevertheless interested, these recent presentations in Bristol covered the consensual protocols/agreements necessary for the creation of such credit.

    The Community is the Currency

    A Green Deal

    • Joe Firestone

      Very interesting, Chris. Thanks for introducing it!

    • into the two conflicting bastard forms of finance capital:

      (a) Common Stock (so-called Equity) – the (divine right of capital) instrument of absolute ownership consisting of shares in the ‘Joint Stock Limited Liability Company’, with everything that goes with it;

      Bastard? Common stock is a democratic, non-usury based private money form. How dare you call it “bastard?”

  6. “Even if the government keeps running balanced budgets, central bank money can be provided whenever the central bank makes advances to the private sector.”

    Where does the private sector get the money to pay the interest on the ‘advances’ (loans)?

    More loans?

    • Interest is in $/unit of time. Loans are in $.

      The money to pay the interest on loans comes from flowing the loans made around the economic system at sufficient speed.

      Always remember that bankers consume as well.

      • The money to pay the interest on loans comes from flowing the loans made around the economic system at sufficient speed. Neil Wilson

        You mean the debt is lent into existence for even more interest. That’s not a solution; it literally compounds the problem.

        Always remember that bankers consume as well. Neil Wilson

        So bankers should get something for nothing?

        Hey Neil,
        Your opinion?

        Can money private money be issued as Equity or not? Or is a money form that “shares” wealth and power too alien for you?

    • golfer1john

      Yes, or net exports.

      • “The money to pay the interest on loans comes from flowing the loans made around the economic system at sufficient speed. Always remember that bankers consume as well”.

        Neil, I wasn’t referring to private loans, I was referring to loans made by the central bank to the private sector.

        If the only way the private sector can originally get the money to pay taxes (assuming a balanced budget) is by borrowing from the central bank, then how can the private sector pay the interest on those loans? It seems to me that the only way it can do this is by borrowing yet more money from the central bank (given that only the central bank creates the money with which the loans+interest can be paid). Am I missing something?

        • “If the only way the private sector can originally get the money to pay taxes (assuming a balanced budget) is by borrowing from the central bank, then how can the private sector pay the interest on those loans?”

          An excellent question. But, note that not all reserves come into existence as a result of loans by the central bank. Central banks also create reserves by buying up loans made by commercial banks, e.g., the Fed buys Treasuries and real-estate-backed securities from commercial banks. And, often, the commercial banks make a profit on those transactions, thereby acquiring reserves in excess of their debts to the Fed.

          But, I’m not convinced that that’s the whole answer to your question. Obviously, the reserves from which the interest gets paid have to come from somewhere, and the commercial banks would be in ever increasing debt to the Fed if they had to borrow from the Fed to cover their interest.

          • Joe Firestone

            Hi wigwam, welcome to NEP.

            “Central banks also create reserves by buying up loans made by commercial banks, e.g., the Fed buys Treasuries and real-estate-backed securities from commercial banks. And, often, the commercial banks make a profit on those transactions, thereby acquiring reserves in excess of their debts to the Fed.”

            Who do they take the profit from? Others in the private sector?

            • golfer1john

              From the Fed? They make a loan at 4%, and sell it to the Fed for 101 cents on the dollar (3%).

              • Right. For example, the Fed pays slightly more for say a T-bond that does the primary dealer from whom it buys that bond. So, that primary dealer winds up with reserves that are not a liability.

        • golfer1john

          They can get it by selling goods and services to the government, in amounts in excess of their tax liability (aka “government deficit”), or by selling more stuff to the foreign sector than they buy from the foreign sector (aka “trade surplus”). Since those three sectors comprise the entire universe, those are the only other possibilities.

        • Gary Goodman

          Y,
          The way I’ve explained it in shorthand (not so accurate) is that what we are with CB creation of money is really a SWAP of debts.

          Keep in mind, archeologists and historians know that original money was a balance sheet of IOUs among farmers and producers, OR between the govt and farmers that issued a tax advance to buy what the private sector produced. And that, during the long history of scarce goods and scarce production, not super abundance and over-production.

          When banks issue loans to consumers or companies, this is a debt swap and asset swap. The paper is signed, the signature creates a debt obligation — asset to the bank — the bank simultaneously creates a deposit — a liability to the bank. To the borrower, the asset/liability relationship is reversed. The signature is the liability, the deposit is the asset belonging to him or his assignee (home seller, car dealer, etc.).

          At the federal level, I think roughly the same thing happens. Treasury gives T-Bills/Bonds/Notes to the Fed. These are assets to the Fed and liabilities of the Treasury. The Fed adds FR Notes to Treasury’s account, which are an asset to the Treasury and a liability (debt) of the Fed. The Fed (banks) says what it owes for $1.00 is not $1.00 worth of gold, it’s just $1.00, but to be logically consistent in accounting it’s a “liability”.

          So they just swapped debts. But Treasury can spend these as Congress tells them t0 (including automatic payments like SS) because the Govt will accept FRNs as “money” for taxation and it has additionally said FRNs are “legal tender”.

          So the Fed does gain profit-making assets (those T-Bonds), but 100% of the Fed’s net profits are paid back to Treasury … which really doesn’t need that income.

          So it’s not really a “loan” in the usual sense when the lender pays all the profits to the borrower, is it? This means the Fed is essentially the Treasury’s institutional partner so the govt can borrow “from itself”.

          Yes, that number that’s kept on the Fed’s spreadsheet on their computer — outstanding T-Bonds it’s holding — will grow bigger over time. So what? Or the Fed will sell those T-Bonds to private banks to “sop up” their surplus Reserves created by banking operations, loan-making.

          For Treasury to pay out interest to the private sector, it’s just like any other govt spending. It just “borrows” more money from the Fed, i.e. govt just creates more money by the process just described.

          The ONLY way this is “not sustainable” is the equivalent of filling up your gas tank after it’s already full. You can put 1000 gallons in your car, just not all at once. The proper amount to add per day depends on your usage. Spill0ver would be analogous to Demand-Pull inflation, govt trying to buy more (for itself or for recipients of so-called ‘entitlements’) than what is available for sale or available in surplus capacity.

          Subject to corrections by anyone here with more professional economic literacy. I’m a noob.

          • “100% of the Fed’s net profits are paid back to Treasury … which really doesn’t need that income.”
            I agree with the rest of your comment, but not this.
            If Treasury pays interest to the Fed, that money is effectively destroyed. This would be a persistent drain of base money (via tax) from the economy. Replacing it by sale of more securities (ultimately) to the Fed incurs yet more interest, so is unsustainable. I think Treasury *does* need that “income”.

          • Wouldn’t it much simpler and just as accurate to look at fiat money this way:

            Treasury issues a Time Instrument of debt to the Federal Reserve, a contract that contains words to the effect that “I have your notes and promise to pay them back in the future with interest”. The Federal Reserve, in exchange, gives Treasury many notes saying in effect “I have your Time Instrument promising to return this note in the future.”. The wording on the note contains the words “Federal Reserve Note” and is on green paper for aesthetics. To me, this Federal Reserve Note is simply “Evidence of Debt”.

            The Federal Reserve Note has a value which is strictly dependent upon what the bearer can trade it for, with no restrictions.

            Yes, it makes a lot of sense for government to accept the notes for taxes, as that does give the notes some potential value. It also makes sense to attach an interest rate to the Time Instrument because that does give the notes some potential for future value. It also makes sense to limit the number of notes in circulation because that has the potential to influence value. Otherwise, the value of the note is only what the bearer can trade it for.

            Oh, yes, it also helps value if government passes a law forbidding the printing of green paper with the words “Federal Reserve Note” imprinted.

            I think we are making fiat money much too hard to understand, injecting background that either is meaningless or represents only one component of many components that creates value and advantage to using a currency. MMT would be much easier to understand and accept if some of the preconditions were better blended, such as “money is an I.O.U. or “government taxation is THE source of value for the currency”.

            Finally, it matters not whether the Federal Reserve Bank is private or government owned. The Fed and Treasury are simply trading notes written on paper, not agreements to exchange labor or materials.

    • Joe Firestone

      Yes, that’s one of reasons why balanced budgets in fiat money systems create bubbles and are unsustainable.

      • To repeat: the funds to pay taxes, from inception, come from government spending (or lending). Where else can they come from?”

        (Warren Mosler, 7DIF, p.20)

        “It also has to be true that the State must spend or lend its HPM into existence before banks, firms, or households can get hold of coins, paper notes, or bank reserves… not only must government spend or lend its HPM into existence before it can receive HPM in taxes, but logically government also must spend or lend HPM before government can borrow HPM”

        (Fullwiler/Kelton/Wray, MMT: A Response to Critics, p.3-4)

        Note that in both cases it is clear that the government has to either spend *or* lend before it can tax or borrow its own currency.

        However, say the government never ‘deficit spent’, always ran a balanced budget, and provided currency to the private sector by lending it. What would happen? The private sector would become increasingly indebted to the government, borrowing from the government (or central bank, if you prefer) to repay the interest on previous loans from the government, ad infinitum.

        • golfer1john

          Well, first there doesn’t have to be a reserve requirement. Canada doesn’t have one. So banks would not need to borrow from the government before they could lend, or to meet some post-lending requirement. Capital requirements as well are government-defined. They might allow capital to be held in the form of real assets like real estate or bars of metal.

          So, banks could create deposits with which people could pay their taxes even if nobody borrowed from government, and government did not run a deficit. Government might even “borrow” from its employees and vendors by paying them in arrears, after taxes had been collected.

          Even if the government provided money to the economy by lending only, and the private sector (banks) borrowed from the government and lent to the public, their debt to the government need not become onerous for them. They would still profit from the spread, but the private non-bank sector would become more and more indebted to the private banking sector. As long as the private non-bank sector had some source of money to pay the interest on their bank loans, which might be net exports, the economy could grow indefinitely. It might even be the foreign sector, and not the domestic non-bank sector, that became increasingly indebted to the banks. Either way, it would seem that eventually some borrowers would repay their interest and principal from profits, and the unprofitable ones would default, and the banking sector would end up with zero net profits (which might mean some profitable banks and some failed ones.)

          But all of this is hypothetical and convoluted. The MMT explanation is simple,logical, and coherent, and in tune with real world experience. It is today’s laws about government operations that are illogical. They only work because of the buffer of existing money in the economy.

          • “So, banks could create deposits with which people could pay their taxes”

            Well that’s some alternative hypothetical world. I’m talking about the real world

            1. Mr A has to pay $100 taxes
            2. Mr A has to borrow $100 from the CB to pay the tax, as the CB is the only source of state money with which taxes can be paid.
            3. Mr A now owes $100 + interest to the CB.
            4. Treasury spends the amount taxed ($100). Now Mr A can repay $100 to the CB.

            5. How does Mr A repay the interest?

            • golfer1john

              ” Mr A has to borrow $100 from the CB to pay the tax, as the CB is the only source of state money with which taxes can be paid.”

              In the real world, I think Mr A would borrow from his local bank, not the CB. I’ve always paid my taxes with bank deposits. I’ve never used state money.

              The local bank would have an account with the CB, but absent a reserve requirement, that account balance could be zero, right?

              When the CB clears Mr A’s check, the Treasury would have a $100 balance in their account, and the local bank would have a balance of -100 in their CB reserve account, and would have to borrow reserves from the CB (assuming that the absence of a reserve requirement, like in Canada, does not mean that the reserve account can remain negative). If the local bank goes belly-up without paying back the CB loan, Mr A’s tax is still considered paid, and Treasury’s bank still has a $100 balance in its reserve account. Apparently the reserves (state money) were created during the clearing process, by the CB?

              Meanwhile, Mr A keeps building widgets in his garage and selling them to customers in China, who send him bank deposits. He uses his profits from widget-making to pay the principal and interest on his loan. The bank uses the principal to repay the CB, and the interest to pay the CB interest, and the teller salaries and the rent and the executive bonuses, with some left over for shareholder dividends and retained earnings. The Chinese company is now indebted to an American bank from which they borrowed the dollars to buy the widgets.

              • “I’ve always paid my taxes with bank deposits”

                My example is a simplification. I thought that would be obvious.

                The fact is you don’t actually pay your taxes with bank deposits. You simply instruct your bank to pay on your behalf. If your bank became bankrupt, for example, and couldn’t make the payment on your behalf, you would still owe the taxes.

                “the local bank would have a balance of -100 in their CB reserve account”

                That’s an overdraft from the CB. An overdraft is a loan.

                “Mr A keeps building widgets in his garage and selling them to customers in China, who send him bank deposits”

                Bank deposits are simply debts from banks to their depositors. If you have a £100 bank deposit, that simply means the bank owes you $100. As such it’s not possible for customers in China to “send you bank deposits”. You’re thinking about bank deposits as if they are things – like coins for example, when they are simply bank debts.

                “the bank uses the principal to repay the CB, and the interest to pay the CB interest”

                The bank has to repay the CB with money created by the CB.

                You don’t appear to get the very simple logic of the monetary system. Your complicated examples are irrelevant.

                • Alright that was a bit harsh. What I meant is I can’t see the point of your examples when the basic logic of the system is simple.

                  • golfer1john

                    Yes, logically, MMT is quite sound. It is a bit of a stretch, though, for MMT to apply strict time requirements to the actual functioning. It is possible, via lending, for the time sequence to be the reverse of the logical sequence. It’s easy when there is a buffer of existing money in the system. Taxes due on the 1st, government payroll on the 30th. Every April is a great example, the government runs a surplus in April, often a surplus year-to-date April, even when there is a large deficit for the year. But with a bank as intermediary, you can even do that the very first time. Still, the MMT logic is the only valid logical explanation of it.

                  • I’m not sure how money can be paid into the Treasury General Account (at the Fed) before that money has been created.

                  • You seem to be suggesting that might be possible.

                    How exactly?

          • Joe Firestone

            Good!

        • golfer1john

          “not only must government spend or lend its HPM into existence before it can receive HPM in taxes, but logically government also must spend or lend HPM before government can borrow HPM”

          Government might receive tax payments in the form of bank deposits, created by private bank lending to the public. Would not these deposits, when held at the CB, become HPM? Likewise, government might receive deposits in exchange for paper currency or coins (also HPM?). It wouldn’t need to “spend” the currency or coins or reserves into existence, if it exchanged them for bank deposits.

          But, again, a convoluted way of thinking about it and not related to reality. The MMT explanation is more logically correct.

          • golferjohn

            how can private bank deposits be held at the CB?

            • golfer1john

              Through the clearing process (see above). I draw a check against my deposit in bank A, and the recipient
              (Treasury) deposits my check in bank B. Bank B credits Treasury’s deposit account, and sends the check to the CB, and its reserve account there is credited, creating HPM where none existed before, especially if Bank A had nothing in its reserve account.

              • golferjohn

                reserve balances held at the CB are not ‘private bank deposits’. They are central bank deposits.

                In your example, if bank A has nothing in its reserve account then it has to borrow the reserves from the CB with which it can pay bank B.

          • Joe Firestone

            John, I think the demand deposits aren’t HPM. But when the accountholder who holds them pays taxes by check, then his bank must settle the check in HPM held at the Fed. Of course, its supply of HPM reserves may run out or run low. But then it must get more HPM reserves from the supply of other banks or from the Fed.

            • golfer1john

              Right, and if the bank borrows the reserves from the Fed, then the HPM is created after (or, at best, concurrently with) the settlement of the tax liability.

              • It can’t be created after. ‘Settlement’ means payment. Payment can’t occur until the HPM has been created.

        • If the government ran a balanced budget (before taking account of interest payments) and loaned currency out at an interest rate in excess of the growth rate, retaining the income (so that it was in fact running a net surplus), then its net worth would grow faster than the economy, which would eventually be a problem.

          This is actually not a position of no net money asset creation; this a position of net money asset destruction. The more interesting situation to think about, which is the one I think of when I read what Marc Lavoie wrote, is where the government (and central bank) are in a balanced budget position after taking account of interest payments, so the net money asset creation is zero.

          • Joe Firestone

            Nick it is destruction. See here.

            • Thanks for the link, but are you sure that was the right one?

              I was trying to understand what I thought was the suggestion that a balanced (consolidated) government budget leads to net money asset destruction, and more particularly to credit bubbles. The post you linked just talked about alternative names for surpluses and deficits.

              As a starting point, I would expect that if the government is in a balanced budget position, that the net financial asset position would remain unchanged. Now, you might argue, that in a growing economy, the ratio of net financial assets to GDP is in fact falling. However, all it is doing is converging on zero, whereas I think to get bubbles you need ratios that are tending towards infinity.

              I’m assuming that when you say net money asset, you are talking about net financial assets generally, not specifically monetary assets, but I don’t think that changes very much. If the net financial asset position is unchanged, the only way the net monetary asset position can be falling is through changes in the composition of the debt, e.g. through bill issuance. Of course, the government might decide to do that, but there’s no requirement to do so. Surely, one of the things MMT emphasises is that the revenue and spending decisions are separate from debt management decisions?

              Am I missing something? MMT wasn’t around when I studied economics, and I’m still trying to work out what new insights it might offer. On most points, I think it’s consistent with the way I see things. I keep coming across these surprising statements, but when I drill them down, it turns out that they’re not saying anything different after all. I’m wondering whether that’s the case here.

              • Detroit Dan

                Responding to Nick Edmonds who said, “I would expect that if the government is in a balanced budget position, that the net financial asset position would remain unchanged. Now, you might argue, that in a growing economy, the ratio of net financial assets to GDP is in fact falling. However, all it is doing is converging on zero, whereas I think to get bubbles you need ratios that are tending towards infinity.”

                The situation you describe is net financial assets of the private sector falling in relation to real economic activity. That means that more economic activity is being conducted on the basis of private loans which are subject to cascading defaults. As more and more financial assets are in the form of loans that must be repaid, a failure to repay a loan anywhere in the system will be more likely to trigger additional defaults and bankruptcies. At some point the government will have to step in and clean up…

              • Joe Firestone

                Nick, That may be the case here. I was writing a bit vaguely about balanced budgets, generally meaning by that term the class of budgets either perfectly balanced, or most frequently in surplus. Sometimes, however, I do mean precisely balanced budgets. I hope the difference is clear from the context. But you’re right that there is a difference.

        • Gerry Spaulding

          y,
          On Mosler.
          “To repeat: the funds to pay taxes, from inception, come from government spending (or lending). Where else can they come from?”
          From inception – presumably, as a nation.
          I have made the point here that the national government was $6 million in debt BEFORE we coined our first nickel, this being several years after becoming a nation.
          Government did not ‘lend’ to pay taxes; government borrowed.
          And the funds to pay the taxes, to pay the interest on that borrowing did not come from government spending. All which served as money for government transactions was private banknotes.
          How can Warren’s anecdote withstand that fact?

          We paid interest on that national debt with private banknote issued money collected by the government, same as we do with bank credit today.
          It’s a fallacy.
          Again from the Philly Fed’s publication on Franklin – FROM THE PHILLY FED – that MRW linked to below:
          “”At the 1787 Constitutional Convention, the Founding Fathers took the power to directly issue paper money away from both state and national legislatures. This set the stage for the second epoch of paper money in America, namely, the ascendance of a government-chartered and -regulated, but privately run, bank-based system of issuing paper money, an epoch we are still in today. “”
          I know that because the Philly Fed says that’s true doesn’t make it true.
          Same goes for Warren’s anecdote.
          MMT needs to square its theoretical corners with monetary history.

          y – “”Note that in both cases it is clear that the government has to either spend *or* lend before it can tax or borrow its own currency.””

          Yes, please note that the same is true for the Fullwiler, Wray, Kelton statement.
          The statements are clear as theory.
          And they are obviously wrong, as fact.

          Did, or did not, the government borrow private bank money to pay its obligations, without FIRST putting any money into existence?
          And did, or did not, the government collect private bank-issued tax money to make the interest payments on that debt, without FIRST putting that tax money into existence?
          From inception.
          Thanks.

          • Gerry,

            notice “before it can tax or borrow ITS OWN CURRENCY”

            If the government taxes or borrows foreign currency, as the US did before the created its own national currency, then the statement above doesn’t apply.

            The US Federal Reserve issues the paper currency today. Some people claim that the Fed is a private bank, but that’s wrong.

            • Gerry Spaulding

              y, thanks.

              While it is certainly true that our new government inherited bunches of foreign-denominated and state-issued debt, this does not detract from the fact that, from day one the new US government DID issue all kinds of new $US denominated debt instruments.
              The principal and interest was repayable from taxes and fees collected by that government, despite the fact that our sovereign government was not issuing the currency and, as noted in the Philly Fed piece, it was the private banks that were issuing the currency.
              Those very real historic facts should be enough to disprove to any dispassionate listener that the history-by-anecdotal-logic statements that the government must first issue the money before it can be taxed is, again, a historic fallacy.
              Again, either it is or it isn’t.
              Thanks.

              • Actually the Treasury issued the base currency in the form of coins, and banks issued paper notes, which were redeemable in coin.

          • Gary Goodman

            Gerry,
            There’s some interesting history around the First National Bank. It was created by Hamilton and few friends, wasn’t it?

            Essentially they were said to be private creditors that loaned money to the new United States govt, i.e. their “ex-Tory” savings.

            A.J. Nock mentioned that most of the people who wrote the Constitution were “government creditors” as well as lawyers and merchants and monopoly capitalists. Remember, they met in sealed chambers, secret discussions, and arranged so their internal notes and debates would be sealed away from the public for at least 50 years. Kinda like Dick Cheney’s secret Energy Commission meetings with Exxon to Enron.

            YET, even Murray Rothbard pointed out that the First National Bank’s initial capital only partially came from private investors. Most of that capital came from the Govt itself. HOW? I don’t recall the details, and I can’t say if Rothbard’s facts are accurate on this, let alone is “apriori” conclusions. So if so, the govt creditors were in a position to profit for free if the govt created the capital that it had to “borrow”.

            Wasn’t Colonial Scrip a pure ‘fiat’ currency created out of nothing and spent? Rothbard’s criticism was that it was highly inflationary, but it was created to fund a war and was being heavily counterfeited by British military efforts to kill it. The colonists couldn’t very well borrow the gold from Britain.

            Whatever the details, I don’t think this detracts from Warren’s basic simplified 7DIF explanations about operational realities, even if that’s a bit too simplistic for your tastes and doesn’t tear into all the historical nuance and intrigues. A govt doesn’t NEED to borrow before spending, and the fiat currency must exist before it can tax.

            Also, 7DIF refers to the CURRENT system. Back in the 1700s, the system was tied up in Gold Standard thinking and practice, especially since Gold was needed for foreign trade, since there was no FOREX or Internet, so what Hamilton and the USG did was affected by that factor.

            • Gerry Spaulding

              @ Gary G., thanks.

              First, I’ve read Rothbard’s history of the first BankUS and it comports with most other deeper histories of the bank – noting maybe the private bankers’ failure to meet their agreed capitalization requirements, even back then – lending their own banknotes issued primarily against government backing of the stock of the bank. I believe this is better covered in Ch 5 of Bray Hammond’s ‘Banks and Politics in America – From the Revolution to the Civil War’.

              As far as Colonial scrip and currencies go, these were indeed state-issued currencies, but they are not relevant to the founding and “inception’ of THIS government-US, gold or no-gold.

              Please explain how the historic reality that the government issued debt, taxed and spent WITHOUT issuing the currency does not “detract(s) from Warren’s basic simplified 7DIF explanations about operational realities”.

              Distract is too soft a currency explanation. So, let me again try to be clear.
              A sovereign government can tax and spend without FIRST, or ever, issuing the currency.
              Our sovereign government did indeed issue new debts, tax and spend without FIRST, or ever, issuing the currency.
              And it continues to do so today.
              IMO, the DIF here is that of the author.

          • Joe Firestone

            Good statement; but we may have to go back further to find out the facts. Didn’t the Government print “continentals” during the Revolutionary War and through the Articles of Confederation period? And what is the history of money in America prior to Independence? How were currencies originally established here in America?

      • (I include reserve balances under the term ‘currency’ btw)

      • I don’t think I understand this point. Are you talking about a situation where the government is running a balanced budget, but the central bank is running a surplus from the spread on reserves? I can’t get from that to a credit bubble. Could you elaborate. Thanks

        • simplified example (leaving out banks as intermediaries):

          1. Mr A has to pay $100 taxes
          2. Mr A has to borrow $100 from the CB to pay the tax, as the CB is the only source of state money with which taxes can be paid.
          3. Mr A now owes $100 + interest to the CB.
          4. Treasury spends the amount taxed ($100). Now Mr A can repay $100 to the CB.

          5. How does Mr A repay the interest?

          Answer: he has to borrow it from the CB, given that the Treasury is running a balanced budget.

          • Having since seen a few more posts on this now, I think I’ve figured out that you are talking about a position where the central bank is earning and retaining a new profit, so that even if the government budget is balanced on an unconsolidated basis, the consolidated government sector would be in surplus. It may be a reasonable question to ask what would happen in such a scenario, and I would agree that this could lead to an ever growing ratio of public sector net worth to income.

            However, I don’t think that’s what Marc Lavoie is talking about (just looking at modelling he has done on this). I think he is referring to a situation where any net income of the central bank is remitted to the government, so that the consolidated government sector is in balance.

            • reve_etrange

              If the consolidated public sector is truly in balance, then the economy will be faced with severe deflation in the face of private sector savings desires, productivity growth, population growth and potentially an external deficit of some kind (trade imbalance). The “base state” of a modern economy is real growth, and nominal growth is required to maintain the relevance of the money system.

              That modern economies are inherently deflationary imposes the requirement that the public sector always run a deficit. That is ignoring any other consideration behind the public deficit, such as manipulation of floating exchange rates or supplying international reserves traders (i.e. the hegemonic role of US dollar as international reserve currency is predicated on US public deficits).

              If money becomes too scarce, folks bite the bullet and revert to informal debt systems – as in Europe during the early Middle Ages, in between the collapse of the Western Empire and the age of silver coinage.

              • That may or may not be the case, but I don’t think that’s under discussion here. In the relevant quoted section, Lavoie says “…I would certainly agree that government deficits in a growing environment are appropriate…”

                • After 4. in my example above, Mr A has to borrow from the CB again before he can pay the interest on the previous loan, correct?

                  You’re right that if the CB then passes this money on to the Treasury to spend, Mr A’s debt to the CB doesn’t expand ad infinitum. However, he still has to borrow yet more money from the CB to pay the interest on the loan he just took to pay the interest on the previous loan, and on and on, etc.

                • reve_etrange

                  I was just responding to this:

                  I was trying to understand what I thought was the suggestion that a balanced (consolidated) government budget leads to net money asset destruction.

                  My understanding is the various demand leakages etc. comprise asset destruction in this balanced case.

          • @ Y 29 June, 2013 at 8:04
            Since the beginning line was overlooked, your example should start:

            1. Mr A earned $1,000 of taxable income at a 10% rate. (now add 1 to your numerations)

            Now how does that help your understanding? Does it not put a different complexion on the answer you were after? as well as the question itself? It does not look particularly brilliant looking at something through a soda-straw and thinking you have the whole view. Do you think you can figure out where the interest might come from? Your stated answer leaves much to be desired – basically everything rational.

            • T-Bear.

              The money to repay the central bank loan and interest has to be created by the central bank, or the treasury.

              You can’t repay a central bank loan with private bank deposits.

              It’s actually very simple.

  7. Auburn Parks

    Excellent post Joe….I wonder if Tom will be convinced.
    Mr. Hemington,
    Very good point you make John, although I would add that the issuing of securities isn’t all bad as they are a necessary component of savings for retirement funds, pension funds, and individuals. Of course they are an absurd subsidy for wall street and they make the MMT argument much harder for the public to accept since it truly looks like the Federal Govt is borrowing money so we are definitely caught between the proverbial rock and a hard place. In a perfect world the Treasury would still be able to issue securities on demand, and yet it would not be required to issue them commensurate with the level of deficit spending.
    After all, as RMM says…..in the real world…..
    “There can be deficits without securities and there can be securities without deficits”
    unfortunately, the powers that be must continue to perpetuate the myth that the above quote is false, when even a cursory knowledge of monetary operations shows just how silly the myth of neo-liberal “the federal Govt’s budget operates the same way as a household or business budget”

  8. Gerry Spaulding

    Joe, nice job.
    I comment both here and at RMM’s site as Gerry Spaulding as some of MY comments get moderated into the intertubes and don’t make the comment page, despite making many statements of appreciation to NEP for tolerating my opinions. I hope Marc Lavoie has some observations on this further consideration of the debates, because this IS important stuff.

    The question I always ask here, and have in the past until being blocked from commenting at Naked Capitalism, is WHY?
    Lavoie is much more elegant,as you quoted: “There is nothing or very little to be gained in arguing that government can spend by simply crediting a bank account; That government expenditures must precede tax collection; that the creation of high powered money requires government deficits in the long run; that central bank advances can be assimilated to a government expenditure; or that taxes and issues of securities do not finance government expenditures.”
    He says there is nothing or little to be gained by making those claims.
    My question is why all the good intents and purposes of MMT require such a questionable, in terms of logic as well as law, monetary construct.

    You here, MMT in general, and RMM in boldface fail to distinguish between two of the three basic monetary powers – those being sovereignty and autonomy.

    EVERY sovereign nation has monetary sovereignty. It cannot be given away nor taken away without losing national sovereignty. (Yes, RMM, the states gave up their monetary sovereignty to the federal government – who in turn have trashed the state’s ability to function by mis-managing the currency).

    What neither we in the US, nor the EMU nations have is monetary “autonomy”. The EMU nations have overtly transferred autonomy over their national money systems to a regional monetary authority with its own private central bank – the European Central Bank. But because they maintain monetary sovereignty, they can reverse the abdication of autonomy whenever they so choose. That’s the difference.

    Our abdication of autonomy is much more abstract and obtuse – we created the Federal Reserve System (without FIRST creating a public central bank). So today we have a private central bank – ONE of the 12 private Regional Fed Banks, and we have set up a system where our nation’s autonomy over money has been completely transferred to that private banking SYSTEM. It is the private MEMBER banks who actually issue the money as debt in our system today.
    We do not have a ‘government monopoly issuer of the currency’ (as Wray and others are wont to declare) – and that is our major flaw, correctable through law, but embraced as the endogenous money status quo by MMT.

    That ‘original sin’ of money creation part of MMT seems to be a fallacy, based on my understanding that we the people and our government were NEVER the monopoly issuers of the currency. I left the comment at RMM and repeat. We the people and our government were $6 million in debt – had BORROWED the money from someone – before we coined a plug nickel. This, when coins and private Banknotes circulated as currency.
    Who was creating the money? The private bankers.
    How did we pay the debt? By using the private bankers’ money.
    Same as today.
    No mystery, really.

    Today the private commercial bank members of the Federal Reserve System create all of the money in circulation, c.e. . Today, all of that money MUST end up first in private bank accounts before it can be taxed or borrowed FROM those private accounts TO the Treasury’s account before Treasury can use that money to make ANY payment for ANYthing. MMT’s theoretical logic notwithstanding.
    Unless we manage the Platinum coinage option.

    Hope you get this Joe.

    • golfer1john

      The chairman of the Fed doesn’t know he’s running a private bank. He said just the other day

      “we are the agent, of course, of the Treasury and it’s our job to do whatever they tell us to do.”

      • Gerry Spaulding

        Thanks, golfer
        I think the Bernank correct.
        We have a private bank acting as agent for Treasury (government).
        The Fed was designed by bankers.
        It’s in the Fed statute that it must act as fiscal agent(payments manager) for Treasury, otherwise Treasury would have its own central bank and its own payment system.
        Reserve free.
        Imagine.

        • Joe Firestone

          Gerry, No way Bernanke thinks it’s a private bank. How do I know? See: http://www.federalreserve.gov/pf/pdf/pf_complete.pdf And please note that the url of the Fed is federalreserve.gov.

          • “The Treasury Bonds held by the Federal Reserve are not owned by the Board of Governors or the Federal Open Market Committee. They are owned by the regional Fed banks. Those banks are privately owned and the bonds are among their assets. Privately owned companies will not sacrifice their assets forgiving the Government’s debts. Nor should they! The Government is obligated to pay those debts by the Constitution!”

            Joe Firestone (LetsGetitDone) | December 5, 2012
            http://www.aei-ideas.org/2012/12/how-could-washington-avoid-a-debt-ceiling-default-mint-a-few-trillion-dollar-platinum-coins-seriously/comment-page-1/

          • Gerry Spaulding

            Joe,
            First, I never said that the Bernank said he knows he’s running a private central bank with FRBNY, or not.
            I said it IS a private bank.
            Is it not?

            I merely acknowledged the role of the Fed Regionals to ACT as fiscal agent for Treasury. That’s all.
            Second – did you REALLY give me the 146 page “Purposes and Functions” to peruse to see what Bernanke thinks about the private-ness of the Fed? Thanks.
            I’ve been reading them for almost fifty years and I promise that if you get a version from the Seventies backward the Fed says it is a private institution.
            Check it out. They used to pride themselves on their private-ness .

            I thought you had agreed that all of the Federal Reserve Banks WERE private stock bankcorporations as defined by the FDIC and SEC.
            The url of ALL the Fed Regional banks are .org – including the biggie.
            http://www.newyorkfed.org/‎
            Besides, the Fed can command any gdam url it wants.

            We can do functional finance using a ‘governmental’ sector, even when the entities reporting the accounts are obviously private entities.
            What we can’t do is make the private Fed banks part of the government – by decree of logic.

            • Gary Goodman

              I think “quasi-private” applies.

              The “private” designation was bragged about from the get-go to demonstrate their “independence” from democratic govt, so Congress couldn’t meddle too much. But Congress created it and Congress could abolish it and Congress has inserted different rules and laws over time to change the system.

              • Gerry Spaulding

                Agreed.

                Quasi-private and pseudo-public.
                We the people pay when “the system” fails, They the corporate persons, gain, regardless.
                I think I agree with Joe F.s description that calls for Fed to be incorporated into Treasury, as also proposed by Kucinich here.
                http://www.govtrack.us/congress/bills/112/hr2990/text

                Otherwise, the prevailing Fed-Treas Accord puts the Fed in charge of all things money.

                • “The Federal Reserve System fulfills its public mission as an independent entity within government. It is not “owned” by anyone and is not a private, profit-making institution.

                  As the nation’s central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

                  However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve’s activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as “independent within the government” rather than “independent of government.”

                  The 12 regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation’s central banking system, are organized similarly to private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year”.

                  http://www.federalreserve.gov/faqs/about_14986.htm

                • Joe Firestone

                  The Fed/Treasury accord is informal in nature and can be revoked by the Executive at any time, if it wishes to do so. Also, the Accord doesn’t put the Fed in charge of coinage and seigniorage. That is still the Treasury’s province. Also, Federal law specifies that in case of disagreement between the Treasury Secretary and the Fed Chairman over money matters, the views of the Treasury Secretary shall prevail. The President is in a position to enforce that provision by replacing the Fed Chair and appointing someone else.

            • Joe Firestone

              Gerry, I don’t think the individual banks are part of the Government. I think the system of private regional banks governed by the Board of Governors is part of the Government. I know it seems strange to say that the system is Government, but its 12 regional banks are not. But nevertheless, the system is defined by the interactions among them and the two Government components, which regulate the regional banks and set policy. And I think the law says that that system is part of the Government, and that is why the Fed says it’s part of the Government.

      • Charles Fasola

        Keep believing that John; you’re Tiger Woods too.

    • Joe Firestone

      Thanks, Gerry. I think I do get it; but I also think that the private nature of the Federal Reserve System is in dispute. I pointed up the issue in my post, but did not engage the argument there. In your reply you are challenging the Consolidated Government assumption by claiming that the Fed is private and not a part of Government. I don’t want to go to a full bore counter-argument because I want to keep this reply short. But, I think it’s clear that the Board of Governors and the FOMC are certainly part of the Government. Moreover, even though the regional Feds are privately owned, they have been ruled by the Courts to be Federal instrumentalities, agents of the Federal Government in their banking functions. In addition, the Fed banks clearly get their authority to create reserves “out of think air” from the Board of Governors and from the Congress. As for currency itself, the Fed banks do not directly “create” it. They order it from the US Mint, part of the Treasury, which does the physical creation. Finally, the Treasury still has the sole authority to coin money, and now it has the authority to do so using arbitrarily high face values. If the Treasury were to exercise that authority it could force the Fed Banks to generate as much in reserves for use by the Treasury as it desires. All this suggests that while the Fed Banks may be formally private; the Fed system is certainly public in nature and a part of the Government. There is no other reasonable conclusion to draw.

      Having said that, I do wish that the ill-advised and anti-democratic fiction of the “independence” of the Fed were ended and that the Fed be placed within the Treasury Department, and the regional Fed Banks (and perhaps all banks larger than a certain size be nationalized). There is no reason why private investors should be making any money from central banking functions whose purpose is to create full employment and price stability, and there is much evidence that over the years the private ownership of the Fed Banks has influenced the Board Of Governors to care much more about price stability than about full employment and to be laughably gentle in regulating banks that have been committing large scale control frauds. Fed regional banks and a Board of Governors that were unambiguously part of the Government would be more accountable to us all and at least have the potential, depending on the President’s attitudes and appointments, to act much consistently than they do now to achieve public rather private purposes.

      So, bottom line, I think the Consolidated Government assumption holds; but I also think the consolidation should be made much more explicit to increase accountability and make clear that the system must be devoted to public purpose and must serve us all and not just Wall Street.

      • the system must be devoted to public purpose and must serve us all and not just Wall Street

        Which requires that Joe Six-Pack understands the basics of how all this works. The arguments about how the Fed is a private bank, and how we should have a smaller federal government, and how the states should be producing what the Fed is required to do for the people, all work against public purpose.

        If Joe Six-Pack understood that by promoting these ideas he is promoting his own economic demise, he might change his tune, and demand that Congress do its damn job.

        • Joe Firestone

          I absolutely agree. But the name of the Government has been blackened over the past 40 years or so by heads of agencies who were anti-government and by legislators who would not pass laws that achieved public purpose. This last group has passed laws that aren’t representative and have then complained that the Government doesn’t work when they were the ones who broke it. Joe and Jane Six-pack don’t pay close attention to know that this is going on and that the remedy is to get rid of representatives who do not represent their interests.

          • “the name of the Government has been blackened over the past 40 years or so by heads of agencies who were anti-government”

            No, the blackening was by elected officials who did the bidding of the likes of Charles Keating, or who are convicted perjurers, or who had sex with children in the cloak rooms, or sicked the IRS on their political opponents, or gave millions of public funds to campaign contributors like Solyndra and Goldman Sachs, or just plain lied to us and showed no remorse when caught at it.

            • Joe Firestone

              That too. But Republican appointees in Federal Agencies in political positions have been undermining the regulatory performance of agencies at least since the 1970s. To have good government you must have appointees working for it who believe in the possibility of the Government functioning well. When administrations systematically appoint people who do not believe this can happen, the result is that the fish rots from the head(s).

      • Gerry Spaulding

        Thanks, Joe.
        My main point was not really challenging the Consolidated Government construct. Anyone can create these economic-sector constructs for the purpose of macro-economic analysis. Whatever works there.
        I did agree that BoGUVs and FOMC were quasi-gov, merely pointing out their being funded by the private banks.
        Whatever problem I might have with the Consolidated Government construct would be well met with your suggestion which I believe “publics” the Fed into Treasury – as proposed by the original Chicago Plan, Irving Fisher(100 Percent Money) and Friedman (Fiscal and Monetary Framework) as well as Congressman Kucinich’s proposals.
        With Fed under Treasury, no question about the deposit of the Platinum Coin, and with CB – GUV cooperation.
        As for the Courts ruling on the Regional Fed Banks being ‘governmental’ in nature, there are far more NAY’s to that question than AYE’s.
        The exception here being to note that the Fed serves as the fiscal agent of Treasury – ‘sounds’ governmental.
        All Fed Presidents were made Federal Agents under the law, mainly to ensure the handling of federally-created currency.

        No matter what, when you try to shoehorn that Consolidated Government functional finance identity into today’s political economy by stating that the private federal reserve system IS part of the government, I do have another conclusion drawn, me thinks reasonably, but not worth any deeper discussion.
        Thanks.

        • Joe Firestone

          Gerry, it’s not a question of quantity; it’s a question of which areas of their behavior are involved. In the areas of their banking activities they are government “instrumentalities” and are treated that way in the law. In the area of ownership and ownership related issues; they are treated a privately owned but regulated entities. Now, I think I’ve just made a true statement, and a key one for supporting the proposition that the Fed AS A SYSTEM is part of the Government. As its web site says. The Fed is in “independent within the Government.”

          • Gerry Spaulding

            Joe, again, I made little of the private-ness of the Fed originally.
            So, to the degree that the Fed System – BoG, FOMC, Regionals and THOUSANDS of Member banks – act as private entities, they are a private system.
            To the degree that any of them act as public entities, they are part of the government.
            Certainly that must include their statutory appointment as agents to the BoGs.
            Aside from that I see their collective actions as supporting private property, private enterprise and private gain – and in maintaining the status quo, while enjoying the aristocratic position of being independent within government – whatever that means..
            Not my opinion of public anything.

            • Joe Firestone

              Gerry, I agree with you that the Fed has been penetrated by private interests and for the most part serves Wall Street interests. But the legal structure is there for any president to change that behavior, if he/she really wants to do so.

              On PCS, if the Fed were placed under the Treasury, then PCS would not be needed, since the Treasury could order the Fed to credit accounts to always prevent them from falling below zero. There would also be no further need to use debt instruments, since interest rates can be targeted by paying interest-on-reserves (IOR).

    • Mr. Spaulding,

      We do not have a ‘government monopoly issuer of the currency’ (as Wray and others are wont to declare) – and that is our major flaw

      The hell we don’t. Do you understand what High Powered Money (HPM) is? It is the currency of the state: notes, bills, and the liabilities of the central bank, bank reserves.

      You’re not understanding the difference between credit money and real money. The banks issue credit money. But that amount cannot increase beyond the ability of the state to create, or produce, real money.

      As for this;

      We the people and our government were $6 million in debt – had BORROWED the money from someone – before we coined a plug nickel.

      You need to read this: “Benjamin Franklin And the Birth of a Paper Money Economy”
      http://www.philadelphiafed.org/publications/economic-education/ben-franklin-and-paper-money-economy.pdf

      You need to ditch the Mullins, Kah, Scharf view of the banking system and do better research.

      • Gerry Spaulding

        @MRW.
        Thanks.
        First of all, there is no such thing as “high-powered money”.
        Look up the introduction of the term – it is from when we all believed in the money-multiplier fairy-tale, does not and cannot apply to the creation of reserves by the CB in today’s economy. You can “call” it high-powered money, but you cannot give it any more money power today than excess labor has in determining wages.
        High-powered money today would be that advocated by Lord Adair Turner as “Overt Permanent Money Finance” in his speech on Macroeconmic Policy and Economic Stability recently at INET. See:
        http://www.youtube.com/watch?v=ZhrY_coLK_k

        So, if the so-called “liabilities of the central bank, bank reserves” are your proof that we have a monopoly issuer of the currency, you need to go back to the meaning of currency, which is “money” that circulates in the economy. Neither of which applies to CB non-cash reserves. They just sit there. They do not circulate. In theory, they are created to settle real money payments within the central payments system. That’s all. And we hardly even need them for that.

        Your tale about the limitations of bank money being related to the Fed’s creation of CB reserves is a banking function issue and not a money system issue. The banks issue the money. The Fed issues the reserves as settlement media. That’s it. Not much there as far as being the monopoly issuer of the currency.

        My monetary understandings include Franklin and others of that era, but in modern times those of Soddy, Simons and Fisher, also some Friedman,all of whom informed Turner in his OPMF proposal. I admit to having a large library of Austrian economics writers because I believe in understanding the breadth of monetary thought. I do read.

        Having said that I fail to understand your link to the Philly Fed paper by Farley Grubb on Franklin’s paper-money philosophy. You seem to imply an error in my statement about being $6 Million in debt before we “coined” any US money. Is that the point?
        I do have a copy of Franklin’s paper-money piece but I find nothing therein about whether we have had private bank money creation since we were born as a nation, and never a government monopoly money-issuer.

        Not to make little of the point but the Constitution’s money-creation powers became law in 1789 and Franklin died in 1790, so what difference could his paper-money writings have on this outcome.
        In fact, unfortunately, Franklin was one of the early ‘public’ paper money advocates to embrace the change to private banknote money in his later years. From the Grubb paper, a quote:
        “”At the 1787 Constitutional Convention, the Founding Fathers took the power to directly issue paper money away from both state and national legislatures. This set the stage for the second epoch of paper money in America, namely, the ascendance of a government-chartered and -regulated, but privately run, bank-based system of issuing paper money, an epoch we are still in today. “”

        Still today, we have a bank-run system of issuing (digital) paper money.
        It is MMT yhat needs to square its theoretical corners with monetary history.
        Thanks.

        • Gerry,

          Why would you say there is no such thing as high-powered money? Randy Wray writes about it in his book as this article by Dan Kervick quotes here at NEP.

          Modern Monetary Theory (MMT) emphasizes the central role of governments in sovereign monetary systems. MMT co-developer Warren Mosler has described the US dollar system, for example, as a “simple public monopoly.” L. Randall Wray has written that, “In the United States, the dollar is our state money of account and high-powered money (HPM or coins, green paper money, and bank reserves) is our state monopolized currency.” Sometimes this crucial MMT claim is expressed more broadly by saying the US government is the monopoly supplier of “net financial assets” to the non-governmental sectors of the dollar economy.

          It’s been used by the the National Bureau of Economic Research in a book written before we went off the gold standard internationally to describe our domestic fiat money:
          http://www.nber.org/chapters/c1642.pdf

          Husband and wife team David and Christine Romer wrote in The NBER Monetary Economics Program, 2007

          When the central bank wants to stimulate the economy, its usual tool is an open-market purchase of government debt. By increasing the stock of high-powered money, the open-market purchase drives down nominal and real interest rates, and so increases consumption and investment.

          Nominal interest rates, however, cannot be negative: since high-powered money has a nominal return of zero (that is, since the nominal value of a dollar next year will be a dollar), investors will never hold bonds with negative yields. Thus when the nominal interest rate on government debt reaches zero, one critical channel through which monetary policy can stimulate the economy is no longer present. Moreover, when the nominal interest rate is zero, government debt and high-powered money are perfect substitutes: both are non-interest-bearing assets issued by the government. In this situation, an open-market purchase is just an exchange of two assets that are perfect substitutes. Thus, there is reason to fear it will have no effects.

          http://www.nber.org/programs/me/

          • Gerry Spaulding

            @MRW
            Thanks.
            I didn’t say there’s no such ‘term’ as high-powered money so please stop looking for citations using the maxim. Many economists use the term to imply economic swagger, and Wray loves it because it matches Hy Minsky’s initials.
            I said despite the term, there’s no such thing in existence.
            And I qualified by saying “non-cash reserves”.

            So the point is pretty simple really – non-cash reserves have zero power above any bank-credit money in terms of the real economic power.
            If they had any power+ characteristics, there would not be copious quantities (in the $Trillion of dollars US) of this ‘high-powered money’ sitting on the sidelines producing no power for the economy. As the Bernank said – “They do not circulate. They just sit there.” What can be high-powered about things that just sit there?

            High-powered money is a term that came to use in the 40s when it explained how increasing reserves provided the base for the money multiplier. Increasing the HPM base by adding $100 of reserves MEANT that this base could increase economic activity by $1000. THAT is high-power indeed. If true.

            Today, it’s obvious that none of that is true.
            Banks create the $1000 in bank credit and the Fed creates the reserve balance needed for the system to operate.
            While the term base-money is also misleading, the use of the term ‘high-powered money’ carries the weight that what the Fed is doing POWERS what the economy is doing.
            Again, obviously, it does not.
            Non-cash reserves are more readily termed impotent money than high-powered money.
            Thanks.

            • The “the money multiplier” wasn’t applicable in the 40s. We were off the gold standard by then, domestically.

              • Gerry Spaulding

                So,…… you believe the term ‘high-powered money’ has SOMEthing to do with the gold-standard being in effect?
                And so when do you think the term high-powered money came into use?
                Please explain.
                But, no matter.
                There is no such thing as base-money, as M-zero, having any power beyond any other money.
                If so, what is it?
                If there’s no ‘multiplier’ of anything, what is its “higher-power” ?
                Thanks.

            • Joe Firestone

              Gerry, I think you may be missing the point of high-powered money (HPM). First, HPM includes coins, currency, and Fed-generated reserves. They’re all Government money, the only money good for final settlement of debts and for tax payments. Second, other classes of money include IOUs issued by others. What others? Banks, businesses and households. Third, there is a hierarchy of money in the sense that these other types of money may be ordered in terms of their perceived risk of default. Generally, household IOUs are at the bottom. Business IOUs carry less risk of default than households. And bank IOUs or liabilities are at the second level of the hierarchy. Currency Sovereign Government IOUs (liabilities, money) are at the first level because they are the ultimate means of settlement, the only means of paying taxes, and carry with them the least risk of default. MMT says that the banking, business, and household sectors all “leverage” the government IOUs. In what sense? In the sense that the debts of households, businesses, and banks can only be ultimately settled with Government money.

              Getting to the banks, the money they create is only good because it can ultimately be exchanged for Fed generated reserves or vault cash if that is demanded. If this were not the case, then the bank money would have less or no value depending on circumstances.

              I think you know all this, and that the source of your remarks about HPM is your belief that Fed money is under the control of the banks so that Government money is really at the same level of the hierarchy as private money. So, at bottom you don’t really believe in the Consolidated Government Model even though you say you do. Instead, you believe in a Consolidated Private Sector Model in which bank money is supreme and the Treasury is nothing but a user of that money.

              • Gerry Spaulding

                Thanks, Joe.
                I do know all that.
                But it does not convey any higher power.
                Too often MMT is LOST in the weeds of reserve accounting.
                By that I mean its like the holy grail there.
                It is meaningless to the real economy.
                That’s one point.
                I’ve read a bunch of stuff about theoretical hierarchies of money-ness.
                They pretty much reflect ‘liquidity’ in monetary assets that have little to nothing to do with money.
                The reason there is no high-powered money is not because the banks control the Fed (notwithstanding that truth).
                Some people like to carry $5s and $10s ; others $50s and $100s .
                That’s a liquidity preference that is determined by the markets in which they operate.
                Same with money-ness.
                But the economic(purchasing) power of every one of those dollars is the same.
                Reserves have no purchasing power in the real economy.
                A dollar in coins and currency have exactly the same purchasing power as a dollar in my checking account.

                I am thinking about your observation of what it is I believe in.
                What has happened with MMT is a taking of an FSB accounting/analysis-created identity of a ‘consolidated’ public sector and transformed that sector into our political economy without regard to the boundaries of the functionaries within what we call a federal reserve banking system.
                Yes, to me, the governmental sector of that system stops with the BoGs, and FOMC.
                The quasi-governmental part of that system is in the Regional banks.
                And the private part of that system is ALL of the Member banks that have money-creation powers.
                But none of that has anything to do with whether there is any “higher-power” attributable especially to non-cash base money.
                Thanks.

    • Alex Seferian

      The US Government is both “sovereign” and “autonomous” when it comes to its ability to issue currency. One just has to look at history to realize this. Why has the Primary Dealer (PD) network never failed to purchase US Treasury securities issued in relation to deficit spending? Why has the Fed never acted in a manner that can be said to have been against a Congressional directive? The answer in both cases is because the parties involved cannot do otherwise. Sure, one could argue that, in theory, the PDs could just one day stand up and “say no”. However, that would be like saying that a President of a company can in theory “say no” to its Board of Directors; he can… but he or she will probably getting fired! If the PDs don’t play along, they would lose their status and be replaced. If all the possible PDs colluded and just “said no”, then the Fed could step in and make any issuance attractive by agreeing to scoop up all the securities from them. The point is that despite the perhaps convoluted process, the US government can deficit spend, as and when it pleases if Congress approves a budget… and that is even before beginning to consider coin (platinum and standard) related options. Put differently, the US is the issuer of a currency and has de facto full “sovereignty ” and “autonomy”. It can “force” the PD network to issue the currency, and/or it can issue its own. It is a different matter if the public isn’t being served as well as it could in the day-to-day. The financial community represents a big lobby, political campaigns are funded, favors are exchanged, officials get elected… and round and round you go. Back to the prior analogy, some company presidents manage to get Board Members elected that are supportive and friendly. Abuses can therefore materialize, but the company’s bylaws wouldn’t need to be changed to fix the problem, as much as just changing the specific actors involved. Yes the system is maybe a bit “abstract and obtuse”, but MMT’s assertions regarding currency issuance are 100% correct.

      Also, it is a bit misleading to say that “all that money MUST end up first in private bank accounts before it can be taxed or borrowed FROM those private accounts TO the Treasury’s account before Treasury can use that money to make ANY payment for ANYthing.” Take the simple example of an individual who borrows from a bank and pays someone who has an account at that same bank. When that second individual wishes to pay taxes with the “money” received, the bank will have to have or obtain a corresponding and equivalent amount of “reserves” for the tax payment to materialize. At inception, the bank would have no such reserves, and it would therefore have to borrow them… at inception from the Fed. Bottom line, if one nets out the operations, one realizes that Mosler’s summary is most accurate: “the funds to pay taxes, from inception, come from government spending (or lending).”

      • Joe Firestone

        Yes, the reserves are necessary for settlement and that’s part of why they are HPM. HPM is necessary for tax payments and to satisfy legal obligations (Court judgments), also.

        Apart from that, Gerry is making the test of public vs. private whether or not an entity acts in the interests or Wall Street or other national private interests; But if that’s really the test, then I’m afraid the Federal Reserve is not the only “private” Government system. In fact, it looks to me like all three branches of government are private by this test.

      • Gerry Spaulding

        Alex, sorry I did not realize this was in reply to my comment – til now.
        Thanks for the explanation.

        Second things first.
        You made me think about whether Warren’s use of the term “from inception” related to the ‘inception’ of the government, or the ‘inception’, as I believe you imply, of the funds.
        Going back and looking at your example, and maintaining the meaning of the term ‘currency’, either way it is not true.

        Already dealt with the ‘inception’ of the nation and government.
        This is not about reserve accounting. This is about money, about currency.
        In your example, the “inception” of the money that the second individual used to pay his or her taxes began ITS life with its creation through the ex-nihilo loan of that money to the first individual.

        At inception, by your use, the bank did not have the money to lend – it did not exist.
        The bank’s balance sheet and that of the borrower, and the national money supply, all increased that day by the amount of that loan.
        The money supply did not change when the borrower made a payment to the second individual. The money supply did not change when the second individual makes his or her tax payments, assuming there is a corresponding payment made by the government for goods and services that end up with another bank account – which eventually it must.
        All of which is merely a circulation of the supply of money.

        The money supply will change when the borrower repays the loan and upon repayment the money supply, as related to these funds, will be back where it was on the day the loan was made.

        It should be pretty obvious therefrom that the government had zero control, by either spending or lending, over the creation, issuance or inception of those funds that were used to pay the second individual’s taxes, and that the government’s entire role in spending that money was as a user, and not an originator, inceptor or issuer of that portion of the money supply.

        On:
        “The US Government is both “sovereign” and “autonomous” when it comes to its ability to issue currency.”(Alex).

        It is oft-claimed, even by many MMters, that in joining the EMU, each nation gave up their sovereignty.
        They did not. They USED their sovereignty to give up their monetary autonomy and the independence of their central bank. They can use their sovereignty to take them back.
        And, so can we.

        Your anecdotal history is accurate, but more reflects the autonomy of the state over its budgetary and fiscal operations, and not the state’s control of the money system itself.

        Monetary autonomy is the state’s power to issue the national currency without any outside interference or control. That interference can come from the state joining an entity that can influence the sovereign state’s money issuance, and thus the supply of money available in the national economy – as in the case of either the EU or Bretton Woods and IMF. It can also come about by creating a system that delegates the state’s autonomy over monetary operations to a separate entity to issue the money and control the supply of money in the economy.

        In this country, the body with that power, as delegated by the state, is the private banking system, and the system is that of endogenous money. An endogenous money system is one where the growth of the money supply takes place based on the interactions between the private bankers and the borrower community; i.e., the needs of commerce and not the state. The autonomy over state monetary operations is subject to satisfying the confidence of the bankers to meet their profit motive by making loans. No confidence. No loans. No money.

        There is no state autonomy over monetary operations there. Today, most EVERY MMTer would agree that what we need is more “money” in the system. Had we the autonomy postulated by Joe Firestone in his reading of the Platinum Coin legislation, then we would have a partial restoration of autonomy.

        Were we to adopt the Overt Permanent Money Finance(OPMF) advocated by Lord Adair Turner here
        http://www.youtube.com/watch?v=ZhrY_coLK_k
        then we would partially restore the state’s autonomy over monetary operations.

        The sign of a truly autonomous state operation of the money system would be by the state determining the quantity of money needed to achieve the national GDP potential, and the state ensuring the issuance of that amount of money into the national economy. The result, again, would be in achieving all of MMT’s objectives.

        But today’s temporal, private, debt-based, endogenous money system would be history, being totally replaced with its opposite, that of a permanent, public, debt-free, exogenous money system.

        The government would BE the monopoly issuer of the currency.
        Thanks.

        • Alex Seferian

          Gerry,
          1. Only government created money can be used to pay taxes.
          2. Yes banks can increase the money supply, but so can the government. It all depends on what you define as money. In any event, it does not follow from your argument that the US gov is a user of currency.
          Those are my views at least.
          Thanks for your response.

    • Charles Fasola

      Thank you for being the first to mention the fact that private banks create the majority of our money through debt issuance. The private banking system rules the roost; in reality. The MMT and MS groups will not accept they are offering a prescription for a better system, not a description of reality. MR explains reality much more thoroughly.

      • Detroit Dan

        In reply to Charles Fasola who said, “Thank you for being the first to mention the fact that private banks create the majority of our money through debt issuance.”

        This is a widely believed fallacy, even by many in the MMT community. Since taxes affect all money equally, whether privately or publicly created, you should be comparing gross government expenditure to net private lending to determine the origin of money in the system. From Paul Meli:

        Since 1970, credit has accounted for between 36% and 47.5% of the total number of dollars spent into the economy (and bad things happened at that peak), currently standing at just under 40% of the “money supply”.

        and

        Year…Public spending…private debt…ratio
        1970…201.60…94.14…31.8%
        1971…220.60…109.81…33.3%
        1972…245.20…149.20…37.8%


        2010…3703.40…-1883.32…N/A (can’t calculate the ratio between a positive and negative number)
        2011…3757.00…-69.13…N/A
        2012…3757.70…203.05…5.1%

        • Gerry Spaulding

          Dan,
          With all due respect, none of that is relevant to who creates the nation’s money. And how.
          There actually IS a relationship between public debt and the private money supply, but nothing that informs us of the root source of the money in existence.
          Thanks.

          • Detroit Dan

            Perhaps we’re using a different definition of money. But if you look at net financial assets, it’s clear that most comes from government, right?

            • Detroit Dan

              Actually, all net financial assets come from government, so I screwed that up.

              If you look at money in circulation plus Treasuries (a form of money for most practical purposes), then most comes from government…

      • “MR explains reality much more thoroughly”.

        ‘MR’ is basically just MMT, plus: (1) some disagreements over policy ideas, (2) semantic disagreements, (3) some meaningless nonsense written by Cullen Roche, expressing the incoherent, confused and contradictory opinions of Cullen Roche, (4) misrepresentations of MMT.

        “Thank you for being the first to mention the fact that private banks create the majority of our money through debt issuance”

        Randall Wray:

        “Of course, most transactions that do not involve the government take place on the basis of credits and debits, that is, in terms of privately issued credit money. This can be thought of as leveraging activity – a leveraging of the money things accepted by government, or, what we have called high-powered money. However, this should not be taken the wrong way – we are not hypothesizing some fixed leverage ratio (as in the orthodox deposit multiplier story)”.

        “The Credit and State Theories of Money (published 2004)”

        http://arno.daastol.com/books/wray/Wray,%20Credit%20and%20State%20Theory%20of%20Money%20(2004)w.doc

        I bet you’ve hardly read any MMT.

        • Gerry Spaulding

          y

          We’re ultimately all well served by trying to inform, to clarify, to discuss the political-economic-monetary science differences that are ‘out here’, and I like one of the discussion frameworks advanced by Randy Wray – we (anybody) could be wrong.

          The best of what is, what is known and what can be communicated thereupon remains to be written.
          Better that readers take in alternative perspectives, open-mindedly.
          These disparate views on money are both from MR’s site.
          http://monetaryrealism.com/jkh-on-the-recent-mmrmmt-debates-2/

          http://monetaryrealism.com/frederick-soddy-on-endogenous-money-debt-deflation/

          Your quote from Randy Wray raises an interesting question, if we may.
          “”.. most transactions that do not involve the government take place on the basis of credits and debits, that is, in terms of privately issued credit money. This can be thought of as leveraging activity – a leveraging of the money things accepted by government, or, what we have called high-powered money.””

          The banks create all the money (c.e.) by issuing debt that becomes M1 money and moves through the aggregates.
          This can be thought of as the private, debt-based money-issuance system and regardless of what else it can be thought of as, the private banks, in creating that money, are not leveraging anything; they are just creating the money, ex nihilo. (Sorry ’bout the Latin(?))

          We the people and the economy in which we all live and work participate ONLY in those private bank debt-based, money-creation transactions. What other kind are there?
          Thanks.

          • JKH has written some interesting things but that article just seems to be going over the use of the words ‘saving’ and ‘net saving’ in MMT. It was a long semantic debate which seems to have yielded no results of any real value beyond maybe clarifying a few things for some people.

            “The banks create all the money”. No they don’t.

            “not leveraging anything”. Yeah they are. A bank’s basic business model is based on leverage.

            This paper by Scott Fullwiler is worth a read:
            http://www.rokeonline.com/roke/post%20crisis%20monetary%20policy%20debate.pdf

            At the very simplest level, bank deposits are bank liabilities. They are liabilities because they are promises to pay state money (cash or central bank reserves) on demand, either to the depositor or on their behalf. In other words they are bank debts denominated in state money and redeemable in state money.

            • Gerry,

              all payments to the government are ultimately made with state money, i.e. central bank deposits (reserves) or cash. If you “pay your taxes with a bank deposit” what happens next is that your bank pays the Treasury on your behalf with central bank deposits.

              Perhaps you think that central banks aren’t part of the state or the government, but in actual fact they are.

              • Payments between commercial banks are also made with state money, i.e. with central bank deposits.

                If you have a $100 deposit at bank A and you make a $100 payment to someone with an account at bank B, what happens is this:

                1. your bank deletes your $100 deposit (i.e. debits $100 from your account),
                2. it transfers $100 in reserves (central bank deposits) to bank B. (all else being equal)
                3. bank B then credits $100 to their customer’s account.

                Before QE the quantity of bank reserves was relatively small, but this conceals the fact that the amount of transactions taking place in bank reserves was vast:

                “According to the Fed’s data, average daily dollar volume of payments settled via Fedwire – the Fed’s real-time gross settlement system – was 17 percent of GDP in 2011 (Federal Reserve 2012)”.

                http://www.rokeonline.com/roke/post%20crisis%20monetary%20policy%20debate.pdf

                (Fedwire is the system by which banks transfer reserve balances at the Fed to each other)

                And of course we also have physical currency (paper notes and coins). I don’t know about you but I use that every day.

                So there’s the answer to your question: “We the people and the economy in which we all live and work participate ONLY in those private bank debt-based, money-creation transactions. What other kind are there?”

  9. golfer1john

    Off-topic, but the disagreement about who creates money, government or private banks, has got me thinking about the MMT assertion that government must spend first, in the very beginning, before it can tax, else there would be no money with which the people could pay their taxes.

    MMT agrees that banks do create money when they make loans, so would it not be possible for the new government to announce the unit of account, charter private banks, and announce a tax payable tomorrow in that unit of account, and the people could obtain the money they need to pay the tax – the first instance of money existing in the economy – by taking a loan from the banks? Then, after the tax receipts come in, the government could spend the money it received in taxes.

    Of course, without government deficits or a trade surplus, it is unsustainable, but as far as the timing of taxing and spending, it would seem that the MMT assertion of spending first is truly only a clearer way of thinking about it, not a real temporal requirement.

    Maybe Lavoie is right, at least in this instance, that toning it down a notch would be helpful.

    • How does a bank advance a loan and then pay the government – which has an account at the central bank?

      You don’t pay taxes with bank money. You pay them with government money. There is a currency peg between bank money and government money that allows you to make a seamless exchange and the Federal Reserve System clears that. But it is still an exchange, not a conversion.

      So unless the central bank gives money to the private banks – either by loaning to them or giving them government money, then the new private banks can’t pay any taxes. They don’t have the right sort of money.

      It is a simple point of logic that the way a fiat system works is that it imposes a debt upon you that it can enforce denominated in some token. Then it issues that token in return for some real good or service – allowing the government to provision its own operations with real things. There is no point issuing tokens otherwise.

      Breaking the link between taxation and spending is vital if we are to maintain countercyclical systems in the economy. Taxation is there to stop rich people spending too much and overheating the economy – because they receive too much relative to their input due to imperfections in the distributional structure of a capitalist economy.

      Taxation is like a pair of spectacles you have to put on a capitalist economy to correct its extreme myopia.

      • Neil

        Are you saying that golfer1john’s scenario would work if the central bank were to lend the commercial banks the reserves?

      • golfer1john

        So the government money gets into the system when the government exchanges it for “bank money”?

        Is that “spending”? Such as when the government issued paper money to buy gold for its vaults?

      • Gerry Spaulding

        Neil,

        “You don’t pay taxes with bank money. You pay them with government money.”
        I always pay my taxes with bank money. Yes, I do. I could only pay with government money if I paid in cash ( and could wait around at my local IRS office to watch their shredders in operation) as that is the only ‘government’ money that taxpayers have access to. I earn bank money and I pay my taxes with that same bank money.

        End of story as far as the real taxpayer-voter, potential MMT supporter, is concerned. An end needs to drawn from foisting central bank reserve accounting on taxpayers trying to understand MMT.
        IOW, your seamless clearing of the currency peg in the exchange between bank money and government money is an unnecessary fiction for real people trying to understand modern money.

        What we’re ultimately concerned about is how to get the money system working for the public purpose. Arriving at that understanding in a way that will gain political power for the eventual changes to the laws and rules affecting real money creation and issuance – that which affects aggregate demand, employment and the public purpose – is best had by ignoring those nuances, if they exist.

        “”It is a simple point of logic that the way a fiat system works is that it imposes a debt upon you that it can enforce denominated in some token.””
        That is NOT the simple point of logic about a fiat money system. The more simple point of logic is that any nation’s fiat money and banking system can function in many ways. The present one, with “fractional-reserve based” banking creating debt-based money, is a throwback to the gold-standard era, and only serves to reinforce the fiction of a ‘reserve’ for our national currency.

        That which backs the national currency is the national economy. How the central bank chooses to operate the payments system is irrelevant to maintaining the stability of the currency.
        Thanks.

    • sunflowerbio

      It would be possible, at least theoretically, for the government to “tax” by accepting goods and services as payment without issuing any type of currency. I understand that the Inca empire taxed in units of quinoa grain, the cultivation of which the Conquistadors immediately outlawed in order to establish the Peso as the unit of account. One could say that the quinoa was a currency, but it was not issued by a central authority. It enshrinement as currency was enforced by central authority, however. Making, issuing , spending, and declaring are not identical, but there is a relationship as far as sovereign currency is concerned. Perhaps this example can help clarify these relationships.

    • Joe Firestone

      John, not off-topic at all, but I still think it doesn’t quite make it. The reason is that the money generated by the private banks through loans would not be in sufficient supply to allow people both to pay taxes and to buy the goods and services they need. So, I think that would be untenable from the very beginning.

      In addition, however, I don’t think that’s the way things worked. The way they worked is that rulers took goods and services from the ruled using various bases of authority based on needs of the rulers. Later on the idea of providing some “currency” in return for the goods and services and then imposing taxes in that currency arose. Only then did credit institutions that would lend money in “the unit of account” arise.

      I know that even if this story about how things worked in the past is true, it doesn’t mean that it is how they have to work. But consider: say we’re starting a new Government and we establish private banks to create money in the unit of account. We also announce taxes and say that they will only be payable in the new unit of account, and that our citizens will just have to get money from the banks to pay the taxes.

      Now, as the Government, what will I do for goods and services while I’m waiting for the banks to issue sufficient money to people to allow them to pay my tax bill? Wouldn’t I just issue and spend money so I can provision my army, police and other people I need to pay to get them to do things? And even I didn’t issue any money myself wouldn’t I be the first to borrow from the banks I authorized to create money so that I could provision my government by spending that money?

      In short, while it may be logically conceivable that the Government doesn’t have to spend first for people to get money. There are no possible worlds where this can occur.

      On toning down the point that the Government spent first, I don’t think that would be helpful. The myth that money arises spontaneously from barter in what is essentially a state of nature is a pernicious one in that it ignores the role of human authority and hierarchy in establishing the value of the currency. Few points are as effective in debunking this myth as the MMT view that the Government must spend first before people can have the monetary wherewithal to pay taxes. Since, as I’ve just argued above, I think that this MMT point is how things must work when Governments first originated money systems, I also think we should not tone down this point of attack on one of the most pervasive neoliberal myths.

      • golfer1john

        “Now, as the Government, what will I do for goods and services while I’m waiting for the banks to issue sufficient money to people to allow them to pay my tax bill?”

        Defer payments to employees and suppliers (a form of borrowing)? Continue collecting taxes in kind until the banks get up and running? What did you do for goods and services before you established a fiat currency?

        Anyway, I like the concept of the buffer. However it worked in the beginning (history seems sparse, and logic is on the side of MMT), it works now without any definite time relationship because there is a buffer of money already in the system. It is possible for government to operate today as if it were a household, requiring itself to tax or borrow first, because it has issued so much currency into the economy in the past, whether by simply spending greenbacks, or by buying gold or silver bullion, or buying foreign currencies like Pounds Sterling or Spanish doubloons, or by issuing treasuries.

        • […] because there is a buffer of money already in the system. It is possible for government to operate today as if it were a household, requiring itself to tax or borrow first, because it has issued so much currency into the economy in the past, whether by simply spending greenbacks, or by buying gold or silver bullion, or buying foreign currencies like Pounds Sterling or Spanish doubloons, or by issuing treasuries.

          No, it’s not. That $17 trillion issued (national debt) is currently in bank, retirement, and pension accounts, or represented by the non-government sector’s other assets. The government doesn’t have it. It’s in the non-government sector’s hands.

          • golfer1john

            “The government doesn’t have it. It’s in the non-government sector’s hands.”

            Exactly. So the government can collect taxes today, and spend tomorrow. The buffer enables them to tax first, which would be logically impossible to do from the get-go, when the private sector had no money (although it seems that if banks can create money, the private sector can lend/borrow it into existence and pay the taxes before government spends. But so what?).

        • Joe Firestone

          John,

          “Defer payments to employees and suppliers (a form of borrowing)? Continue collecting taxes in kind until the banks get up and running? What did you do for goods and services before you established a fiat currency?”

          Before fiat currency was established goods and services were confiscated by people collecting taxes in kind, who received part of the take. But, you can’t defer payments to employees and suppliers who have to live unless you use force. So, when you want to switch to tally sticks or whatever, you have to confiscate the goods and services and supply tally sticks in return as payment, saying that the tally sticks will be good in the future to pay taxes. But if you do that then the tally sticks become the fiat money and “the trick is done” as Lerner said, because you then have paid people for their goods and services. So, the Government has to spend first, or the fiat money doesn’t get its value established.

          • golfer1john

            “you can’t defer payments to employees and suppliers who have to live unless you use force”

            Of course you can. California did it just recently. Employees and suppliers aren’t necessarily living hand to mouth, they may have some food in the pantry that will get them to the end of the month.

            • Joe Firestone

              California could do it because its political/taxation system was established and, as you say, there was a buffer so people could live. But at the inception of a political system when its authority and its currency are getting established; there is no faith or trust, and you must provide with the wherewithal they need to live, or they will not keep working for no pay. If people hadn’t believed that California would soon be able to get back to paying in US money, people would have stopped working for the state.

              • golfer1john

                “at the inception of a political system when its authority and its currency are getting established; there is no faith or trust”

                And yet the Continental Army worked for coupons that were promised to be redeemed for money to be issued if the rebels won the war, even before that government existed.

                An the people who were there before the government already had a buffer. They didn’t harvest crops in Winter and Spring, for instance, they saved them from the previous Fall.

                • Joe Firestone

                  The Continental Army was raised under the authority of the Continental Congress, and the associated central government of the United States was specified under the Articles of Confederation. Congress issued “continentals” under that system. People were paid in Continentals. Continentals were used to buy food and provision the Army. There was certainly substantial inflation. But, people were willing to accept continentals sufficiently often to provision the Government and the Army and facilitate fighting the Revolutionary War. Of course, many volunteers worked for nothing, and soldiers went unpaid for long periods of time, but they were paid in kind sufficiently to keep them alive and fighting. If they were paid neither in kind nor in continentals, the War could not have been prosecuted.

                  • golfer1john

                    Hmmm. Wikipedia seems to agree with you, but that’s not how the government (NPS) told the story when we visited Valley Forge.

      • Gerry Spaulding

        “” But consider: say we’re starting a new Government and we establish private banks to create money in the unit of account. “”

        How ’bout this?
        Let’s pretend that we learned absolutely NOTHING from our failure to maintain the public’s money-creation and issuance powers, forgot about the real Depressions and recessions and suffering of the real people throughout a couple of centuries brought about by private debt-based creation of money, leaving us in this untenable and unsolvable crisis of debt-peonage for the people and debt saturation for the national economy, and that we never had the internet to come to a greater understanding of what a national system of money actually IS, such that the government could readily and normally deficit spend real money into existence as needed, with or without Platinum Coins, and THUS, we established this same friggin “private banks create debt-money nightmare all over again…….
        Yeah, then we would be embracing that imperfect definition of being a nation insane.
        We could do better.

    • [W]ould it not be possible for the new government to announce the unit of account, charter private banks, and announce a tax payable tomorrow in that unit of account, and the people could obtain the money they need to pay the tax – the first instance of money existing in the economy – by taking a loan from the banks? Then, after the tax receipts come in, the government could spend the money it received in taxes.

      Yes, but those checks on commercial banks written to the IRS have to clear, i.e., get turned into credit at the Treasury’s bank, namely the Fed. That’s not a problem, however, since the Fed will happily loan the commercial bank such funds (i.e., reserves). But the Fed charges interest and that commercial bank has to find a way to cover that interest, and that’s where the need for government spending eventually enters the picture. For example, the commercial bank might buy some treasuries and sell them to the Fed at a markup.

      And, I can’t figure out whether that Fed purchase of Treasuries should be considered “government spending,” or simply one part of the government loaning money to another. 😉

      • Joe Firestone

        Of course it’s spending, since the Fed is buying a private sector asset in return for its reserves.

        • golfer1john

          That’s a bit of a stretch. If you say that, you have to say that the Treasury selling bonds is taxing, or else invent a new concept of anti-spending. I think it’s clearer that government (whether Treasury or CB) buying and selling Treasury securities is an asset swap. “Spending” should be reserved for the buying of goods and services.

          And for another reason, the Fed buying securities is a negative for private sector income, because it takes away their interest, whereas the Treasury buying stuff is 100% net positive for private sector incomes. The macroeconomic effect is 180 degrees different. To lump them together only muddles things.

          • Joe Firestone

            Don’t know if I have to say all that, but it’s true that this is not ‘spending’ from a Federal accounting point of view. It’s just an asset swap.

      • golfer1john

        “But the Fed charges interest and that commercial bank has to find a way to cover that interest”

        Which they would do by charging a higher rate of interest to their borrowers. That’s the normal way that banks make profits, when they’re not speculating on derivatives and shorting silver futures.

        And eventually, yes, the private sector needs an outside source of funds, either from government or from the foreign sector. But they can get by on the very first round of transactions before government starts spending.

    • Gerry Spaulding

      Golfer, thanks for bridging this question.
      Without the need for any particular ‘schedule’ of delegating monetary powers and taxing, and ignoring whether that is all sustainable – and how so – what you have questioned as a “why not?” here IS exactly what HAS happened.

      That being so, and NOT being shown to be incorrect here, it isn’t really a question of whether Lavoie can be correct on this one point or not, so “toning it down” a notch WOULD obviously improve the message.

      But then the question might become – if it is truly possible that the banks DO create the money used for taxation, in the very real sense as people DO pay their taxes with bank money, then WHY does MMT need any other explanation of how that happens? Why does endogenous money not simply fill the bill for explaining how things work in today’s real economy?
      Thanks.

      • golfer1john

        Because the private sector does have positive financial net worth, savings. That cannot be created by bank lending, as that takes place entirely within the private sector, and the net is zero. It can come only from net exports or government deficits.

  10. “The Treasury may tax and borrow as an important part of its spending operations, but that doesn’t mean that it is the Consolidated Government that ultimately “finances” these spending operations through these measures. ”

    – Government requires real resources from the private sector to do its business. It “finances” purchases of these real resources (including labor), by drawing down its coercion power (taxes) against the private sector (by giving the private sector IOUs that say “you can use this to pay your tax — present this, and you will be spared from our force.”
    – Worded this way (coercion), it sounds quite scary, until you step back and realize that government is something we have created for the common good of our society. So really, we are all coercing ourselves (a giant pinky promise backed up by force) to all donate some portion our real resources to the public good.

    My point is that, the government does truly finance its expenditures. It’s just that the consideration it offers in return for the real resources it purchases, is a promise that it won’t knock on your door demanding more real resources. Everything else seems to flow from this. Someone correct me if I’m wrong.

    • Joe Firestone

      Your not wrong about what happens, only about using the term “finance” as a label. When I “finance” something in business, either I borrow money from someone else or I sell equity in my business. When the government sells a security, that destroys the reserves in private accounts, and then creates reserves in government accounts at the Fed. That’s analogous to what banks do when they take deposits. Do people believe that banks are “financing” their activities by providing savings accounts to people? If not, then why apply the term “financing” to what government is doing? In answering these questions please keep in mind that :government” means the Consolidated Government!

      • “Do people believe that banks are “financing” their activities by providing savings accounts to people?”

        Yeah, I think most people do believe that. I think credit unions actually do operate that way (?) I think that is what the “loanable funds” theory is all about (?) Maybe I’m wrong, but if so that only tends to prove my point.

        • Joe Firestone

          Do you believe that? I think it may be pretty plain to people at this point that their banks don’t finance much of anything with deposits. So, I guess we’ll have to agree to disagree. But even if people did believe that then all the more reason to tell them the real truth about how banks make their money.

          • golfer1john

            I don’t know who that would be plain to, other than economists. And if “loanable funds” means what I think it seems to mean, maybe some economists, too. Austrians say that when government borrows, it competes with private borrowers for limited funds, don’t they? How could they say that, if they also knew that banks create the money they loan?

            • Joe Firestone

              Well, take a look at the debate between Warren Mosler and Robert Murphy. I don’t think Murphy’s ignorant of the notion that loans create deposits. I suspect the Austrian fear of “crowding out” is probably grounded in inflation fears, rather than a belief that banks can’t create money. In fact, the Austrian would probably like that power severely limited by a return to the gold standard.

              • golfer1john

                I thought Austrians wanted, by return to the gold standard and other reforms, to limit creation of money by government. They believe, I think, that deficits and Fed “money printing” cause inflation. Their emphasis, generally, from what Murphy said, is to limit government interference with free markets, and that is the crux of the “crowding out” argument. He didn’t talk much about Treasury borrowing or spending specifically, but talked a lot about misguided efforts to manipulate prices, specifically interest rates, away from market levels.

  11. There seems to be a fundamentally incorrect perception of how Money Supply is created. MMT maintains that government can create money at will — a claim that seems obvious to me. At issue is the method of creation and what happens to the money once created.

    I suggest we should begin by considering that bonds issued by government may be a simple agreement for the holders of cash to not spend their money NOW. Instead, government will spend the money for them NOW and will repay the money in the future. A rather radical shift in viewpoint but productive in concept as we shall see.

    A second realization is also important. The Federal Reserve has no money to buy Federal Treasury bonds except by printing money (creation of new money). That is true whether the bonds are presently held by the Public or are
    new bonds issued by Treasury. The green Federal Reserve Notes received by either the Treasury or Public in exchange for bonds becomes spendable cash to both counter-parties. When Treasury bonds are purchased by the Federal Reserve, the bonds become reserves to the Federal Reserve.

    If indeed Treasury bonds are “a simple agreement for the holders of cash to not spend their money NOW “, then the ability of the Federal Reserve to buy and sell Treasury bonds is an extremely important path to controlling the
    value of a currency. Any need for this capability (or even recognition of its presence) seems to be completely lacking in MMT discussions.

    If indeed Treasury bonds are “a simple agreement for the holders of cash to not spend their money NOW “, then
    government is providing a fail safe way for people to save money for the future, thereby encouraging them to not spend and invest wisely at present. The existence of this path of disincentive seems to be overlooked in MMT discussions.

    This brief outline seems to me a coherent, logical and accurate description of the present application of MMT by the Government. No doubt others will have a different perspective.

    • I like this and will steal it for future debates on slate.com with those who believe every dollar added is instant hyperinflation. “If a dollar falls in the forrest and no one is around to spend it, does it cause inflation?”
      I would also like to see a simpler sectoral balances description from MMT. To me understanding that makes MMT simple but trying to explain it seem hard. For me anyway. Something along the lines of “governments can’t save money” but catchier more slogan like.

    • Why would anyone spend their life savings just because its form was changed from bonds to cash? Holding on to your fortunes is kinda the point of saving. And bonds can be sold for money, I don’t think possession of bonds hinders anyones ability to spend if they want to.

    • bonds issued by government may be a simple agreement for the holders of cash to not spend their money NOW

      I’ll let Kelton explain:

      “In all modern systems, the central bank targets an overnight interest rate. And then it supplies reserves, on demand, horizontally, at the interest rate, that it sets. It also drains any excess reserves using what we call open market operations, buying and selling government bonds to hit its overnight interest rate target. So, bonds are thought of, more appropriately, not as a financing tool, but as an instrument of monetary policy. Bonds help the government coordinate the reserve add, that is caused by its government spending, with the reserve drain, that’s caused by the collection of taxes.

      • Kelton and I seem to be making the same assumption about bonds. Bonds are simply an agreement to not spend. On the other hand, cash (Federal Reserve Notes) is an invitation to spend. Kelton is saying that the Fed controls interest rates by shifting the balance between cash and bonds.

        • Joe Firestone

          Well, that’s sort of right. Warren Mosler has long pointed out that Governments securities are like time deposits. You give up use of your money for a pre-determined period in return for the interest. The repayment is guaranteed by the Government and the 14th amendment’s guarantee of government debt.

          However, cash is not so much an invitation to spend compared to securities as you assume, because securities can be sold at anytime, and they also can be used as collateral for loans. MMT researchers contend that securities are more inflationary than reserves because they can serve as collateral and also add more interest to economy than reserves.

          Anyway, the various functions of bonds and the comparison of securities to reserves in terms of relative impact is NOT a subject that has been neglected by MMT research. You just need to read a little more of it. Google Scott Fullwiler, please.

          • “However, cash is not so much an invitation to spend compared to securities as you assume, because securities can be sold at anytime, and they also can be used as collateral for loans. MMT researchers contend that securities are more inflationary than reserves because they can serve as collateral and also add more interest to economy than reserves.”

            To my thinking, Time Instruments issued by government are so close to being money supply, that it is only logical to equate Time Instruments with cash, making both Time Instruments and cash accountable as Money Supply. This near equivalence of cash and Government Time Instruments not seem to be a generally held MMT principal.

            Of course Time Instruments are not cash but are agreements to not spend for a period of time, the inducement/incentive being a return of cash in the future enhanced with interest.

            Thanks for the suggestion to read the works of Scott Fullwiler. One paper of his that I just completed reading contributed to my thinking as I write this reply. As I read his use of the word “reserves”, the blurring of Time Instruments and cash into bank reserves came to mind.

            Thanks for posting the reply to Lavoie. It contains many openings for constructive discussion.

            • Replying to Roger Sparks who said, “Time Instruments issued by government are so close to being money supply, that it is only logical to equate Time Instruments with cash, making both Time Instruments and cash accountable as Money Supply. This near equivalence of cash and Government Time Instruments not seem to be a generally held MMT principal.”

              On the contrary, this near equivalence is fundamental to MMT. MMT uses the term net financial assets to include Treasury bonds, central bank reserves, and cash. Private bank loans are the other main component of the money supply. MMT co-founder Randall Wray describes the various types of money and related financial instruments using the notion of a “pyramid of liabilities”…

  12. Lavoie’s one of the good guys as far as I can tell.
    Still don’t get why (or if) MMT, whatever version we’re talking about. doesn’t consider itself post-keynesian

    • Scott Fullwiler

      Hi Andy,

      Actually, we do consider ourselves PK. This is from the piece I did with Randy and Stephanie:

      “As a group, we (Fullwiler, Kelton and Wray) have contributed to the PK and Institutionalist literature,
      served on their Editorial Boards and as members of their Boards of Directors, organized their annual
      conferences and summer schools, presented countless papers, organized panels, and so on. We are, in
      other words, part of this community of scholars. ”

      Indeed, the 2012 Int’l Post Keynesian conference was held at UMKC (http://info.umkc.edu/umatters/2012/09/11/intl-post-keynesian-conference-reclaiming-keynesian-revolution/)

      Again from the paper:

      “We have never tried to separate our “MMT” approach from the heterodox tradition we share with Post
      Keynesians, Institutionalists and others. We have tried to extend that tradition to study the “nature” of
      “modern” money—that is, state money as defined by Knapp and Keynes.”

      In fact, it is the other way around, in our view, with some in PKE deciding not to claim us:

      “Lately, however, we have been accused of departing too sharply from the PK tradition and of attempting
      to compete with our heterodox friends by rebranding ourselves with the MMT label. We have been
      asked, “Where did this name come from?” “Why do you need to distinguish yourselves from the rest of
      us?” “Why are you getting so much attention?” One of the more vocal opponents of MMT, in an
      apparent moment of weakness, even confessed that there is a “lot of jealousy” in the heterodox
      community over the success the MMTers have achieved. We cannot know what motivates those who prefer to focus on our subtle differences in style rather than our significant similarities in substance.”

      You might further take note that it is PK people like Lavoie, Fiebiger, Palley and others (like Epstein at UMass, quoted in a major newspaper when the R/R-Excel thing broke, who took a total potshot at us that was completely wrong–“UMKC people think deficits don’t matter”) that critique us, not the other way around. If we write anything on such matters, it is almost always in defense of ourselves related to what another PK has written, not to critique PK or otherwise distance ourselves from PK. (For the record, I would not at all put Lavoie in the category of those that think MMT doesn’t belong in PK–he calls his piece a friendly critique, and he surely did intend it that way.)

      Hope that clarifies at least our own perspective on the relationship b/n us and PK for you.

    • golfer1john

      As an outside observer, ISTM MMT considers itself a subset of post-Keynesian, with significant differences from other subsets.

  13. There is a feature of MMT not explicit in this post (or Lavoie’s paper) worth highlighting: Its power (correct or not) as a thinking tool.
    I don’t find MMT concepts “confusing”; rather the contrary (although I don’t agree with all). The MMT consolidation of government allows such simplification of money flows that a non-economist can grasp them with some confidence. They are three (after Neil Wilson): Income (mostly tax), Spending (including interest), and purchase/sale of securities. If one now “opens the box” to show Treasury and Central Bank, any detail that doesn’t map directly to these external flows must be purely internal, again simplifying analysis. Also, logical starts and ends become obvious. Income and Spending map to Tsy, and transactions to both, so I split the last (making four).
    This clarifies that there’s a single source of permanent or base money: CB transactions.
    Tsy transactions concern Income and Spending only, so are part of existing base money flows. John Hemington’s comment is thus (with respect) ambiguous; Tsy doesn’t “borrow..” base “..money into existence”; CB indirectly buys it into existence. This also highlights his “absurd subsidy to Wall Street”, as the fundamental transaction is Tsy sale to CB (internal).
    Reality check: It follows that base money and Tsy debt held by CB should track closely. This was true for the US until 2008, when something different happened*.

    I think this is quite a lot “to be gained” by a non-economist just from vertical money and consolidated government concepts. It also hints at good (and bad) economic strategies.

    *FRED datasets FDHBFRBN and BOGAMBNS (I have the chart in .pdf at need).

    • Joe Firestone

      Well done, Peter. But I’m not sure this is right:

      “This clarifies that there’s a single source of permanent or base money: CB transactions.”

      How about Treasury coining money?

      • Point taken. My aim was only to show how easy MMT makes it to reach hypotheses testable by anyone. It did, however, prompt your response.:)

        FRED indicates that US currency quantity is and was comparable with base money, so you’re right; I have a half-solution.
        Consider currency: It obviously has production and maintenance costs, so a finite effective lifetime. In contrast, MMT teaches that base money issue is costless, and my simple model indicates that it circulates until withdrawn by a Central Bank (CB) transaction, so has an indefinite lifetime. That government explicitly destroys base money is MMT-compliant; whether its agent is CB or Treasury (Tsy) is for my purposes a quibble. This simply explains why records of currency and base money are separate; these are qualitatively different, and can only be aggregated with care.
        I now have a specific sense of “high-powered money”. I suggest that if I started from note-by-note printing and the transactions of a single security, I’m unlikely to have reached these insights (even if they’re not quite correct).
        Snag: The $1T coin appears not to fit, as it can’t be spent (?); however that’s fortunately rather off-topic.

        Reality check: Is there any other outlet for base money, compromising my simple (MMT-compliant) model? Has base money also a finite lifetime?
        Tsy securities incur interest. I argued previously that (MMT-wise) interest to the economy was implicit in Tsy aggregate spending, so maintaining it as circulating base money. Interest on Tsy securities held by CB would be a persistent drain on base money, giving it a finite lifetime (nb = CB destroying base money?). From MMT guru Warren Mosler’s blog, this interest is *not* in fact paid, and my conclusions stand (so far). Base money appears not necessarily “permanent” as many assert, but under CB control.
        So, by easy stages from a few MMT concepts, I’ve arrived at relevant facts that seem little discussed anywhere (even as misconceptions).

        The above indicates simple possible government actions: Tsy-CB transactions could create new base money for spending (as in enabling purchase of goods & services) at Tsy’s will (managing quantity), where CB retires the new money as it sees fit (managing lifetime) by sale of the same securities.
        Hence a specific candidate solution for discussion; more mileage from MMT.

        Elsewhere here is discussion by JF and Golfer1john on the nature of CB transactions. The view I’ve developed indicates that CB open purchase of Tsy securities is half of a Tsy-CB transaction, so a kind of “remote spending”.;)

  14. MMT does consider itself to be Post-Keynesian, I believe…

  15. I watch c span and the news and I hear politicians saying that the federal government is going broke and we can not keep borrowing money. Well since I discover this information from this web site that teaches us that we have a sovereign currency and that we are no longer on the Betton Wood system but have a fiat currency which means that we are no longer on the gold standard but now on the get it done standard. It makes me upset that the politicians are either lying or they are misinformed about our currency. how come there seem to be no politicians informing us about the beauty of our fiat currency which means it shall be done and the blessing we have of our sovereign currency which the fed creates out of thin air for goods and services which means jobs. I understand that the federal government cannot owe itself and that the 16 trillion dollar debt is investment in the private sector which is a good thing. It seems to me that some politicians are spreading lies, fear, and ignorance and we need to fight back with the good fight which is truth, peace and wisdom. I would love to see a politician fight the good fight with the truth. You also always hear politicians saying God bless the USA well he does with our sovereignty and our sovereign fiat currency which is issued for goods and services that are the correct way to love our neighbors.

    • Joe Firestone

      We’ve been trying to find a Congressperson or Senator who will communicate MMT for some time now. A big barrier is that they don’t want to be labeled as “nuts” or “cranks.” There may be some who are close to an understanding; perhaps Senators Sanders and Warren. And in the House, maybe Grayson, Nadler, Conyers, and Rush Holt. But I’m just guessing.

      • Do they think Warren Mosler comes across as a nut or a crank? I mean, compared to some of their colleagues?

      • Joe,

        Do you know who Mosler and Kelton have already talked to in Congress?

  16. If indeed Treasury bonds are “a simple agreement for the holders of cash to not spend their money NOW “

    That is is a bank time deposit that is not negotiable. Tsys are negotiable and do not impede the ability to spend at all. Banks and corporations used tsys, especially T-bills as a way of holding funds that produces interest. When large amounts of funds are regularly involved, even the overnight interest is significant over time.

    This erroneous idea is based on tsys being classified as savings, implying that therefore they are “sterilized” from use in the economy. This is not the case in developed economies, where govt securities are always in demand as “safe assets,” the market is highly liquid, the securities are risk-free, and large borrowers use govt securities as a primary source of banking and funding, some parking excess funds temporarily and others either selling them or using them as collateral when they need liquidity.

    Look at the market in US Treasuries. The daily volume is way high and is a result of shifting preference within the pool of market participants. How likely is it that a bill or bond is held to maturity by the original purchaser?

    MMT economists have discussed this is some depth.

    • In a more complete discussion, for the reasons you have given, I would continue to extend the logic to conclude that Treasury bonds are an active part of the money supply. The true money supply, then, is at least the sum of the outstanding Treasury Bonds and the sum of the Federal Reserve Treasury Bond holdings.

      Did we just count the Treasury Bonds twice? Yes, that is a curious result of fiat money when created internally by government with a Treasury selling bonds to itself via the Central Bank mechanism.

      If we agree to say that the savings represented by bonds is really money, not savings, we must also reconcile that some individual first earned new green Federal Reserve Notes later used to buy Treasury Bonds. Ownership of the bonds represents savings so apparently the original purchaser of the Treasury Bonds never spent his newly printed Federal Reserve Notes. Yes, he may pass on the savings to some other individual who elects not to spend his own savings.

      This is not confusing if we conclude that our national money supply is just the accumulated savings of all the individuals who have worked for newly printed money issued by the government. Exactly in agreement with MMT but derived from another logical sequence.

  17. Joe,

    I am not an expert on MMT/MS by any means and would not consider myself an MMTer (but I have been learning about it and out of all the economic schools I have read up on I have learned the most about how our government actual operates through MMT/MS) so when I saw Mr. Lavoie’s paper although I agree with a lot of it, I was interested to know what actual MMT/MS’ers reply would be.

    So Joe, I thank you very much for taking the time to dive into this!! You presented one of the most clear explanations on this issue that I can recall reading!!

    Which by the way is one of my other problems with MMT/MS. In their desire to get message/point across when talking with non MMT/MS people they often do not take the time to explain what their terms mean or even that they mean something different than the common usage and more often than not they end up talking past the other person.

    In any case I am still not totally convinced on all the points made but I do have a clearer understanding of some of them.

    Take for instance the statement that taxes and borrowing don’t fund government expenditures.

    Since there is a lot that can be said here I will (try) to limit it to the point made about the treasury’s ability to issue Seigniorage either regular coins or a platinum coin. (I apologize in advance if I am not being as clear as I could/should be or if I ramble on…)

    There is no point in my trying to argue against this type of financing authority on the part of the treasury (not that I would try since I agree the treasury can do this) since it is right there in writing which you can point to, to show me I am wrong. Some may argue that the feds can reject the coin as I believe was already mentioned by others here but even if the federal reserves tried to reject the treasury, congress can just rewrite the laws so again there is no point in making this argument.

    However this is a bit misleading….as I have debated with GolpherJon on Mr Mitchells site (RMM’S Blog) there is what the government could do, even what it could do by law (or what we would like it to do) and what the government is actually doing, again whether it is by law or custom (with the understanding that congress can change the laws at any time) even if it is self imposed or by necessity.

    So although the treasury could issue a platinum coin which would be debt free to “finance” its spending… when was the last time it actually issued one?

    The government could also issue regular coins in the same manner but again when was the last time it did this?? Right now when it issues coins it is to accommodate depositors request for physical currency (if new money is created or the bank runs low) or to replace existing coins that have been damaged.

    So although the government could issue debt free coins it does not actually do that.

    When it collects taxes however regardless of its effects on the money supply those taxes offset spending. Whatever the difference is between tax revenue and spending, the treasury through the fed issues debt and the treasury receive the revenue from that debt offering . Also I maybe wrong but I believe right now by law (again even though the government could circumvent this by using Seigniorage coins or by changing the law) any deficit is offset by an issuance of treasuries. Remember deficits (no I am not talking about total debt) = treasuries outstanding for any given period.

    The issue of the timing of the spending and the recognition of revenues or if it is enabled by the creation of reserves is really besides the point at least in terms of whether taxes or debt finance spending as is the idea of “financing” meaning something different than it would in relation to us as individuals.

    That is….Semantics or shift in paradigms aside…. using conventional terms my understanding is that when the treasury issues debt the person or entity the debt is sold to receives the IOU or certificate, the fed creates the corresponding money (affecting the reserves/money supply) and that money is then sent back into the treasuries account. Using conventional terms is this not correct..maybe it is an oversimplification but is this correct??

    We can debate what debt actually is…(here is something to think about…you mention the risk of holding government debt is not the same as you or I holding private debt because of the risk of not being paid which under the government is minimum at best…but that is not the only risk, a major risk of holding government debt is one of opportunity costs, another is the effects of inflation so again there is more to it) but the issue is that the government does issue debt and does receive revenues from the debt issued as it does with taxes collected and those revenues offset spending.

    Again as Mr. Lavoie and you point out part of this depends on how you view the government (consolidated or not) but the fact still remains even though the government could issue a coin, it does not and in its place it does receive revenue through taxes or borrowing which at some point offsets spending. It it is a complete circle which for some reason MMT/MS ers do not want to acknowledge again probably because of how they view the government.

    In any case maybe I am completely wrong, or just hard headed… but so far I have not seen anyone address in plain language some of these specific issues……in this case specifically when the government taxes does that revenue end up in the treasuries account and does it offset future spending, or when the government borrows does the money raised by that debt offering end up in the governments account?? So until this is answered directly then on some of these issues, there is more there I could question, I remain not totally convinced.

    Joe..again I appreciate you taking this on…and I look forwarding to following you and this site in the future!!

    Best,

    Tom

    When you say it is not necessary for the government to collect taxes in order for it to spend you are correct

    • Sunflowerbio

      Tom, just a couple of points to clarify seigniorage. You can go to the Treasury websight today and buy a 1 oz,$100 platinum coin (or as many as you can afford). Granted these are not producing enough seigniorage to fund much more then minting costs, but the precedent has been set. Likewise, the mint has struck billions of dollars of commemorative silver dollars, both state and individual dollars (Susan B. Anthony and Sacagawea) which have been ordered by Congress, not banks, and which have never been put into circulation. They have been accepted for deposit by the Federal Reserve Bank and the seigniorage has been credited to the Treasury and swept into the Treasury General Account, just as Joe has proposed for High Value Platinum Coins. The point is, this is a common and ongoing practice.

      • Sunflowerbio

        Than, not then. Didn’t proof enough.

        • @Sunflowerbio…ok point taken…maybe your just clarifying but I think I said…

          “The government could also issue regular coins in the same manner but again when was the last time it did this?? Right now when it issues coins it is to accommodate depositors request for physical currency (if new money is created or the bank runs low) or to replace existing coins that have been damaged. ”

          I think this is basically what you said.

          My point here is that yes the government issues coins but it does not issue coins for the purpose of swaping the coin for reserves ie..to “finance” government spending.

          So When was the last time the treasury issued a $100 billion dollar coin to get around the debt ceiling for example??

          • sunflowerbio

            You are right that the Treasury has not issued a $100 billion coin to avoid the debt ceiling…yet. It had that opportunity last year and passed thanks to BHO’s timidity, but Treasury does issue coinage for purposes other than replacing damaged ones or accommodating depositors’ requests. Congress has requested it to mint commemorative state coins in specific amounts, for example, and Congress has authorized the Sec. of the Treasury to strike platinum coins in any amounts and denominations that he sees fit, so the table is set.

    • Joe Firestone

      Thank you Tom, for incentivizing me to do this post. Clearly, there’s a lot of interest in the issues raised and the discussion thus far has been very good quality. There’s also considerable discussion at other sites on these issues as well. I think your statement above about what is actually done in current practice is correct. Our quarrel however, is with those who contend that there is a fiscal constraint on Government spending because they interpret current practice as mandated by current law and eternal legislative commitment, and who state There Is No Alternative (TINA) based on that contention.

      That view is just plain false. The Consolidated Government is not like a household, even now, in current law it can issue all the money it wishes to issue without ever running out of money. If it issues too much in the way of net financial assets it will exceed the capacity of the economy to absorb those assets without demand pull inflation. But that is the limit of Government spending not the constraint that Government can only tax or borrow to get money.

      • Joe…Agreed….”But that is the limit of Government spending not the constraint that Government can only tax or borrow to get money.” I like that last paragraph and this sentence, I think this is what I was trying to say and would have like to have said if I was more articulate.

        Other than a few minor points which a lot smarter people here are debating (maybe the NSA has all the answers) I would mostly agree with MMT, at least up until this point after which I kinda lean more toward the Austrian’s (I know that may not seem to to make sense)..that is even though the government can issue all the money it wishes, where is the limit and just because it can spend should it…. with the good comes the bad, with the healthcare bill that RMM mentioned on his blog there also comes the NSA spying and the endless wars and even with the healthcare bill (or with healthcare for all) there are still market distortions that need to be taken into account..but anyway I appreciate having to think about this more deeply!

  18. Sorry, that very last sentence should not have been included…I was starting to write something else and then put it aside and forgot about it until after I hit the “post comment” button….

    • Gerry Spaulding

      Tom,
      “”It it is a complete circle which for some reason MMT/MS ers do not want to acknowledge again probably because of how they view the government.””

      Sovereignty, fiat , bla-blah….bottom line……….pay attention The government is the monopoly issuer of the currency. How can any reasonable person deny this truism?

      But, ………how can this be true when the private banks endogenously issue all of the money in circulation, c.e. ?
      Is it just the ‘charter’ thing? The license?

      Amazingly simple. All we need to do is to identify all of those private banks that create all the money as being the government because they are, after all, part of the federal reserve banking system, which system itself includes a policy setting Board(being self-identified as “independent within government”) whose election must be ratified by government representatives, and then, with private rent-seeking banks BEING the government, we identify all of the central bank-created ‘reserves’ in the clearing system so as to be money – almost as in currency.

      Not only money. High Powered Money.
      Better show some respect here.
      We’re talking high-powered government stuff here.
      Not any of that regular, ‘broad’ money stuff.

      Sorry, but that which we desperately need is to have a government that is the monopoly issuer of the national currency. That reality alone could solve many, if not all, of the problems the modern monetary-ists want to tackle somehow.
      In order for the ‘real’ government – Treasury – to actually issue the ‘real’ money – currency, that would involve a public monetary authority.

      We do not have a public monetary authority, and we do not have a government that is the monopoly issuer of the currency. That is the problem.
      The Status is Not Quo.
      Thanks.

      • Well, yes and no, Gerry.

        Yes, I agree totally that private banks are an integral part of the system.

        The general mistake which is made is to think that private bank IOUs are modern money. Private banks – like the Central Bank – create Treasury IOUs and thereby essentially act as fiscal sub-agents of the Treasury. Having created them, they THEN credit the accounts of recipients (ie spend) and enter into dated sale/repurchase agreements (loans) in respect of the use of this manufactured credit over time.

        But no, the answer is not centralised Treasury creation of credit – God preserve us from such a top-down technocrat’s paradise, which would inevitably end up being run by psychopaths.

        The answer IMHO is to enable, bottom up:

        (a) People-based credit – created individually and collectively within a mutual framework of trust, managed by a service provider, and under the supervision of the relevant community as ‘monetary authority’;

        (b) Asset-based credit – consisting of prepayment, at a discount, of the use value or production of assets held in common (which does NOT mean by a Westphalian State).

        The recent presentations I made in Bristol and linked to in my earlier post above covered the consensual protocols/social contracts necessary as a framework for such Peer to Peer and Peer to Asset credit creation. (Note that P2P debt in respect of existing money is not the same thing at all as P2P credit)

        In summary, we need banking, but we don’t need banks: we need governance but we don’t need government.

        • “Private banks – like the Central Bank – create Treasury IOUs”

          I thought they create bank IOUs.

          Do you mean that private banks “create Treasury IOUs” because of government deposit insurance (and other implicit government guarantees)?

          “we don’t need government”.

          I got the impression you saw government-issued money as ‘equity’ for the population. Do you not think we need this ‘equity’?

        • Gerry Spaulding

          Chris Cook, thanks.

          “The general mistake which is made is to think that private bank IOUs are modern money.”
          How about ordinary, everyday – universally accepted, media of exchange type money?

          “”Private banks – like the Central Bank – create Treasury IOUs and thereby essentially act as fiscal sub-agents of the Treasury.”
          ‘…thereby essentially act as…………….. sub-agents ‘.
          So, to be clear, they are not agents or sub-agents of the Treasury. And they only, somehow, thereby essentially act like them.
          The creation of the certificates of indebtedness of the Treasury – if that is what you mean by ‘Treasury IOUs’, is based on rather meaningless rule and protocol, having nothing to do with creating the money.
          Because private banks create all of the money, they create all of the certificates of indebtedness to all of us. The banks create the private indebtedness when they issue the bank-credit money (being modern money or not) and the public certificate of indebtedness when that debt-created money in existence is borrowed by the Treasury.
          I don’t really see any sub-agency there. So I guess, thereby, that essentially it can be thought of as that way or not, being much in the eye of the beholder.
          On the rest, thanks for the engagement. Let’s just discuss the merits of public money administration versus non-psychopathic peerage.
          Thanks.

  19. FYI

    Stephanie Kelton wrote the following tweet on June 6, 2013. If I remember correctly, she was at a conference at Harvard at which Marc Lavoie was also appearing.

    “Reading Warren Mosler’s Soft Currency Economics, I first thought he was crazy. Then I realized he was right.” ~Marc Lavoie

    https://twitter.com/deficitowl/status/342352501200277505

  20. Tom,

    This doesn’t sound right:

    When it collects taxes however regardless of its effects on the money supply those taxes offset spending. Whatever the difference is between tax revenue and spending, the treasury through the fed issues debt and the treasury receive the revenue from that debt offering .

    I thought Scott Fullwiler said that the purpose of the Treasury issuing debt (treasury securities) was to cover a negative in the Treasury’s General Account at the Fed–an event possible when the Federal Government spends new money into the economy–which it (the negative balance) is not allowed to have according to laws passed by Congress during the gold standard period.

    Your statement makes it appear as if the Treasury is keeping its eye on the difference between taxes and spending and fills the void. Mosler says this doesn’t happen, so I am confused.

    Can someone correct my understanding?

    • golfer1john

      MRW,

      This post of yours and your next one are inconsistent.

      If Treasury issues debt only when its account is about to go negative, and if tax revenues are destroyed (i.e., don’t end up in that account that is not allowed to go negative) then Treasury would have to issue debt to cover all its spending, not just the deficit spending.

      I think two concepts are getting mixed up here. The physical currency may be physically destroyed, and when electronic money is removed from the private sector it may be logically “destroyed”, as far a macroeconomic effect is concerned, but without accounting for both these things in the same way a business must account for its transactions, the government’s finances would be hopelessly confused and inaccurate. How would anyone know how much debt to issue (to comply with the law), if the amount of tax receipts had not been at least recorded somewhere, and if that “somewhere” did not have the same effect on Treasury’s ability to spend without an overdraft as if it had been deposited into a TGA account? Never mind that if those pieces of paper to be destroyed were not scrupulously accounted for, the possibility of theft would be not a possibility but a near certainty.

      I think that when Treasury destroys currency, it doesn’t just dump handfuls of it into the shredder, it must count and record each bill, and the destruction of each one somehow gives it the ability to spend that amount without borrowing or additional taxing. If the “somehow” has been explained by MMT, I’ve missed it.

      • sunflowerbio

        Golfer, most taxes are paid electronically, so the destruction and crediting are done by changing bits on computer spreadsheets. When the taxpayer’s liability is zeroed electronically, there must be a corresponding posting of credit to some treasury account or, as you say, hopeless confusion would ensue. If that Treasury account is labeled “revenue”, then this electronic amount could be transferred to the Treasury General Account (or the payment could simply credited to a revenue subcategory of the TGA) and would be available for spending into the economy. This is the traditional Tax and Spend (T & S) model that you, I, and Roger Sparks were discussing in an earlier post. If, on the other hand, the taxpayer’s liability is zeroed and the payment is simply noted somewhere on some computer spreadsheet and then the “revenue” bits are set so as to “destroy” the payment as many MMTers contend, then the Treasury would have to provide the equivalent amount of new currency into the TGA either by key stroking it into existence or by increased deficit borrowing. Key stroking would be what I called the Destroy and Reissue (D & R) model. I think when you compare the T & S and the D & R models, no functional difference can be found. It’s an example of a distinction without a difference.
        Cash payments of taxes might appear different, but if the local IRS office deposited the cash into an account labeled “revenue” at a bank, it could be electronically transferred as above and treated either as a T & S or D & R transaction.

    • @MRW..

      Ditto what GolpherJon said!!

      I think we are saying the same thing but in a different way…how does the treasury get a “negative in its General Account at the Fed”??

      If taxes and or its issuance of debt does not offset its spending then it would have a permanent negative in its general account at the fed wouldn’t it??…

      Treasuries would then equal total spending for a given period instead of just the deficit and we would not be talking concerned about differentiating between deficits vs total debt??

      In any case this is one issue I have been trying to get confirmed myself and is one of the points that started this whole debate!!

      • Tom,

        I think we are saying the same thing but in a different way…how does the treasury get a “negative in its General Account at the Fed”??

        I’m starting to confuse myself . 🙂 I remember reading Scott Fullwiler somewhere in a comment saying that by law congress must issue securities if government spending (let’s say for something large like a dam or massive public project…this is my eg not Fullwiler’s) creates a negative balance in the government’s general account. So yes, securities are issued whether the govt is in deficit or not. All government spending; the practice wouldn’t make sense otherwise.

        I think what is not being addressed here sufficiently is the difference between the vertical and horizontal components of the economy. The vertical, as a I understand it, is interest-free real money injected into the economy, in concert with the Federal Reserve, increasing the monetary base. The horizontal is the leveraging of government money by credit creation through the Federal Reserve and the banks.

        • I am starting to get confused also!! I have to think about this a bit more (not that my thinking about it would do much more than create a lot of smoke :)…what I was really trying to focus on is what happens with the Treasuries account….

  21. Tom,

    Stephanie Kelton at Rimini in Feb, 2012 did address this

    In any case maybe I am completely wrong, or just hard headed… but so far I have not seen anyone address in plain language some of these specific issues……in this case specifically when the government taxes does that revenue end up in the treasuries account and does it offset future spending

    http://www.mediaroots.org/dr-stephanie-kelton-modern-money-theory-explained/

    She says it’s destroyed.
    You can download the audio here:
    http://www.webfilehost.com/?mode=viewupload&id=5782512
    The transcript is here:
    http://www.mediaroots.org/dr-stephanie-kelton-modern-money-theory-explained/

    I think the slides are on slideshare.

    • @MRW…

      From what I gather she is talking about how it affects the money supply (which I agree with) and not whether taxes and borrowing offset spending..see my reply to you above and golpherjohn reply (if I am understanding him correctly).

      Again maybe I am being hardheaded but I have not heard or seen anything to the contrary.

      So for example if the federal government taxes and borrow say 100 dollars but then spends 110..the treasuries account gets credited 100 and then when it spends it gets debited by 110. The extra 10 is then covered by issuing treasuries which the federal reserves does and that money then goes into the treasuries account. This is one part of it.

      What also happens is that when the government’s account gets credited (someone else’s account gets debited) by 100 the reserves at the federal reserves goes down by 100 (100 dollars are destroyed). However when the government then spends that money (credits to some one else’s account) creates 110 in new money.

      Obviously it is way more complex than this and this just a very simple example. Also because of the volume of transactions and amount of money being moved around, it is not a one to one relationship, it is not kept track of moment to moment and the government doesn’t first need the tax/debt money before it can spend (it basically has a line of credit).

      However once the accounts are reconciled taxes and debt offset spending or are used to “finance” spending. In this sense money is not destroyed (and I really cannot believe that physical money is literally destroyed by the government outside of being damaged…that I do not believe!) and taxes and debt do offset spending the issue of signorage coinage aside.

      However when you look at what happens to the reserves or money supply then yes taxes destroy money and spending can create money.

      One of the problems is that MMT using a consolidated government approach to the treasury and fed misses or dismisses the first step I outlined…they see it as all one step broken out into the two parts of money creation and money destruction. They seem to only look at how it affects the money supply and never close the loop.

      Again no one from MMT has really touched upon the first part I presented…they tend to skip over it or introduce other aspects like signorage coinage which although coins are issued they are not used for these purposes or have been issued specifically for these purposes.

      • But how do you know that taxes aren’t destroyed in practice at the vertical level, thereby having nothing to do with what’s in the accounts? By this I mean, taxes don’t destroy money at the horizontal level.

  22. So although the government could issue debt free coins it does not actually do that.

    So far as I can tell, the Treasury is constantly issuing coins. As I noted above, per the NY Fed:

    The distribution of coins differs from that of currency in some respects. First, when the Fed receives currency from the Treasury, it pays only for the cost of printing the notes. However, coins are a direct obligation of the Treasury, so the Reserve Banks pay the Treasury the face value of the coins.

    Per the Wikipedia, in 2012, the U.S. mint coin production amounted to $9,336,230,000.

    • Joe Firestone

      This is right. So coin issuance is common, but seigniorage still accounts for a very small percentage of the amounts eventually credited to the TGA every year. Of course, that can change as a number of us, including wigwam, have often written about. I provide a link to my kindle e-book above. It provides the most extensive current treatment of the possibilities arising from platinum coin seigniorage. Check it out!

  23. Tom you are asking for the books to be always balanced. How can they be when:-

    1.) The value of everything we own will start to deflate because the same units of currency will also have to be allocated to new production of goods and services.

    2.) Or we stop producing new goods and services to keep value aligned with an existing quantity of money.

    • What do you mean by balanced?? Do you mean the books have to be reconciled? At some point they do have to be reconciled and if there is a deficit between taxes and spending then bonds are issued. I am not sure how often the books are actual reconciled but I think I read that the treasury and fed coordinate the selling of bonds on a daily basis.

      As a side issue even if the books always did have to be balanced and it caused deflation I don’t see this type of deflation as necessarily a bad thing except maybe to those deeply in debt ultimately I would prefer the value of money to be stable but again it is a side issue….

  24. Joe Firestone,

    Wrote a post for you here:

    http://www.concertedaction.com/2013/06/28/firestone-backfiring-an-unfriendly-critique/

    Your error is that you confuse HPM creation for NAFA.

    For example, even if the budget is in surplus, net HPM creation is not negative. When the Treasury receives more from taxes than spending, it can retire previously existing debt and debt redemption also leads to HPM creation (like debt issuance leading to destruction).

    In committing the errors, you accuse Lavoie for saying things he did not say. Seriously have you read Godley/Lavoie?

    • Joe Firestone

      Ramanan V. Iyer was kind enough to notice my post on Marc Lavoie and to write a post of his own he links to just above. This is my reply to him in statement and reply dialogue format.

      Ramanan:

      Joe Firestone has a blog post critiquing Marc Lavoie’s critique of Neochartalism.
      Among other things, he seems to have issues with Marc Lavoie’s critique of the Neochartalist claim [which he quotes] that

      . . . the creation of high powered money requires government deficits in the long run; . . .

      Firestone states:

      High-powered money includes cash money and reserves emanating from the Government, including the Federal Reserve. If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating.

      Firestone is mixing various things. HPM or “high powered money” is different from the net financial assets created by deficit spending of the government.

      The trouble with Neochartalism is that Neochartalists and “MMT” fans go to over-overkill levels to show the importance of fiscal policy. In general it is a mix of doublespeak and outright incorrect statements and it is highly unacademic and unscholarly.

      Joe: First, Ram, the passage you quoted is not all I said in that paragraph, and where is your “. . . “ showing that it is not all I said? Isn’t the absence of those little dots a bit “unacademic and unscholarly” of you?

      Here’s the full paragraph:

      High-powered money includes cash money and reserves emanating from the Government, including the Federal Reserve. If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating. And so, it is not doing any net high powered money creation. MMT writers simplify a bit when they they say “the creation of high powered money” rather than “the net creation of high powered money” but I think it’s easy to excuse the simplification since the word “net” tends to make people’s eyes glaze over, and much MMT writing is an attempt to communicate with the broader public, rather than just other economists.

      Second, look at the quote again; I never said high-powered money and net financial assets are the same thing. Why do you claim I said that? Can you quote it? Or is that just your mistaken logical inference from the quote you gave.

      Third, as for MMT’s great emphasis on fiscal policy I think it’s perfectly in order given the decades of primary reliance on monetary policy which have managed western economies right into the pit of unsustainable inequality, the return of fascist movements in key nations, and rise of plutocracy threatening the very existence of democracy. Also, you still have to show that the emphasis on fiscal policy is 1) overkill; 2) involves “double-speak;” and 3) is incorrect.

      As for being unscholarly and unacademic; MMT formal papers are as academic and scholarly as any papers of other academic economists. MMT blog posts, of course, are sometimes “unscholarly and unacademic.” After all, they’re supposed to be primarily statements of opinion. And while we’re on the subject, I don’t see that your blog post critiquing mine is particularly academic in approach and style. What makes you think it is? Or does the standard you’re trying to apply to me not apply to you?

      Anyone can make outrageous claims about MMT academic scholars being unacademic and unscholarly. It is another thing to prove them.

      When Bill Mitchell took Paul Krugman to task for being unacademic and unscholarly (in a blog post), Bill cited chapter and verse. You would do well to use Bill as a model in your evaluation of MMT and its researchers and writers.

      Ram continues:

      To see this point, first imagine an open economy in which there is a current account balance of payments surplus of say around 4% of GDP for over 10 years or so (some proxy for “long run”) and the (domestic) private sector “NAFA” – net accumulation of financial assets is around 2% of GDP. The government budget will be in surplus – as a matter of accounting. This needn’t cause any trouble for the private sector.

      Joe: Of course, it depends on what one means by the long run. I’m well aware that Governments in surplus may not get into any trouble if they don’t run deficits, since their central banks will swap foreign currency net trade credits for newly created domestic currency credits, thus adding new HPM net financial assets to their domestic economies. But no Government will be able to allow its nation to run trade surpluses forever, because the people of such a nation will one day get tired of producing more for others than they do for themselves, and also because their central banks and governments may tire of accumulating foreign reserves at the Fed or other central banks.

      Eventually, their trade balance will change, and when it does the ability to accumulate net financial assets without deficit spending by their Government will disappear. There’s no reason to assume that 10 years is the long run time window in which this may happen. For some nations the idea of continuous trade surpluses may seem so attractive that their “long run” must be measured in terms of generations. If so, that’s too bad for their citizens who are foregoing their own consumption for the sake of others.

      Ram continues:

      Of course this doesn’t take away the role of fiscal policy and in no sense is the above statement meant to propose a policy for the government to be in surplus. In fact since the government’s budget balance is endogenous, it could well be the case in the above situation that the government’s fiscal policy is expansionary.

      Joe: Ram, in the situation you’ve described, the Government is running a surplus of 2%, so it’s destroying net financial assets that would otherwise be flowing to the private sector if it had a smaller surplus, a balanced budget or a deficit. The budget surplus isn’t high enough, given the size of the trade surplus, for the Government to be causing a negative accumulation of NFAs in the private sector; but that doesn’t mean that the Government’s fiscal policy can be called “expansionary.” In fact, it’s contractionary relative to even a balanced budget, much less a deficit.

      Ram:

      HPM is a different matter. The central bank can easily provide banks with reserves via open market operations or direct lending. Deficit spending is not really needed.

      Joe: Yes, the Central Bank can provide reserves to other banks via direct lending, and since the Central Bank is providing the reserves, then by definition it’s providing HPM. But in the long run this isn’t NET new HPM creation (see the qualification, in my original post, to the MMT claim under scrutiny again), because the banks eventually will have to repay those loans to the Central Bank and that will extinguish the HPM created by direct lending. So, this is not a successful argument against the MMT claim.

      Also, as Ram says the Central Bank can conduct open market operations and buy non – HPM financial assets using newly created HPM (CB reserves). We have a Government sub-system, the Central Bank, creating HPM out of thin air, unaccompanied by any taxation, and simultaneously with its creation, buying private sector non – HPM financial assets.

      This different from Treasury deficit spending. The difference, again, is that it’s not expansionary, because it’s an asset swap rather than Government deficit spending that leaves a net financial asset in the private economy. So, it doesn’t make a net contribution to the private economy. However, the creation of HPM in this way, doesn’t negate the proposition that:

      . . . the creation of high powered money requires government deficits in the long run; . . .

      I’ll explain shortly, why this is so when I reply to Ram’s next statement.

      Ram:

      It may also be the case that while taxes flowing into the account of the government at the central bank is “destroying” more HPM than what expenditures is creating, net redemptions of government bonds (as the government is retiring debt) is creating HPM.

      Joe: Yes, net redemptions of Government bonds creates HPM. But, short term, it’s another case of asset swaps, it doesn’t create NFAs in the private economy, so it’s not expansionary, and doesn’t help the economy grow, so long as we restrict our focus to the short term.

      On the other hand, if we do so, then the fact that redemptions create HPM doesn’t negate the MMT claim that deficit spending by the Treasury creating NFAs is necessary for the creation of net HPM in the long run, but instead, supports it; since over the longer term, the NFA debt instruments created by Treasury deficit spending accompanied by debt issuance are redeemed in the asset swaps of redemption. And it’s that final asset swap/Fed deficit spending step that completes the longer run process of net HPM creation resulting from Treasury deficit spending.

      Ram continues:

      Now consider another case but a closed economy. Assume that the private sector NAFA is negative for many quarters/years and the government’s budget is in surplus. This by itself is not a problem for HPM but may become unsustainable because the nonfinancial sector can start to have liquidity pressures – i.e., financial assets/income of the private nonfinancial sector may start to deteriorate even though net wealth/gdp is not falling (wealth includes nonfinancial assets such as firms’ fixed capital and households’ houses) and this may lead to more financial fragility.

      Again, fiscal policy can be expansionary even with a surplus budget because the government budget balance is endogenous. Cannot be found from the above given data.
      But Firestone blurs such matters giving the reader an impression that the private sector is losing assets and sees a reduction in output and income. And to the basic point, this has really little to do with HPM.

      Joe: I agree with the first paragraph in this passage and have already replied to the remainder, but I do want to emphasize that the private sector in the two sector economy running a surplus is losing NET FINANCIAL assets, as Ramanan grants, and that I never said anything about whether its non-financial assets were increasing or decreasing while the Government is running a surplus.

      Ram:

      Firestone is highly confused and muddled when he says

      Lavoie seems to think that net high powered money creation isn’t necessary for an economy, even if it is good to have.

      Joe: Well, my reasons for thinking that Lavoie is wrong about this may or may not be muddled. But, I’m afraid my very clear statement just above isn’t nearly as muddled as Ram’s claim about it. What I mean is clearly stated; and it is an accurate reflection of what Lavoie says in his paper.

      Ram:

      Net HPM creation is not equal to private sector NAFA.

      Again, I didn’t say or imply that it is. if you think I have, then please quote me.

      Finally Ram:

      In fact typically the government’s cash flows do not affect the HPM when looked over larger time intervals. Expenditures add to HPM as the government moves its balances from its account at the central bank and taxes do the opposite. Bond issuances reduce HPM and redemptions increase it. Over short intervals, the flows are offset by central bank operations. Also for the wonkish, this needn’t always be the case: when there is a flow out of the government’s account at the central bank, it can simply lead to reduction of banks’ daylight overdrafts instead of increasing HPM. Firestone confuses cash flows with deficits.

      Joe: Well, I think I’ve said enough to indicate that I don’t confuse cash flows with deficits. As for the rest of this, I think it is neither here nor there in relation to the MMT proposition Ramanan is trying to debunk. The fact is that:

      . . . the creation of high powered money requires government deficits in the long run; . . .

      And, as I think I’ve shown here, none of the arguments Ramanan has advanced in his post shows this proposition is false at all.

      • I sort of guessed you will play this long reply game.

        Here is a direct question for you.

        The US budget deficit is $100bn. Does that net add $100bn of HPM?

        • Scott Fullwiler

          It does unless bonds are sold. For instance, if the govt receives overdraft at CB, then deficit creates HPM.

          I’m assuming Joe’s using HPM the same way as Randy did in his book. Randy’s point was to separate the act of deficit spending from the act of the bond sale. Indeed, one could say that the deficit created HPM while bond sales drained the same amount. Many have misinterpreted RAndy in his book on this, assuming he didn’t know the difference b/n HPM and NFA, but he was not confused at all, only trying to provide a different conceptual view to better understand the nature of govt deficits vs. the nature of govt bond sales, whereas most blend them and assume deficits without bond sales are “jet fuel” b/c they think the HPM is more inflationary.

          • “It does unless bonds are sold. For instance, if the govt receives overdraft at CB, then deficit creates HPM.”

            Scott,

            Long time.

            But you are mixing hypotheticals with real world scenarios.

            Even a surplus can create net HPM. Let us say the budget in surplus and the government retires more debt than the amount of surplus by making an overdraft at the central bank. Plus assume a floor system. So surplus has created net HPM.

            Another example I gave in my blog was the private expenditure rises to bring private sector into balance. More bank borrowing leads to greater demand for HPM (assuming 10% reserve requirement). Budget in balance but net HPM creation. This possibility is denied by Joe Firestone.

            Point being Firestone’s confusions are not others’ problems.

            • Ramanan

              “the government retires more debt than the amount of surplus by making an overdraft at the central bank”

              Wouldn’t that overdraft be counted as a deficit?

              “Budget in balance but net HPM creation”

              If the HPM is created by central bank loans, then those loans need to be paid back with interest – which is HPM destruction, right? So if you include the repayment of the loans there is no net HPM creation in that scenario.

              • y,

                “Wouldn’t that overdraft be counted as a deficit?”

                Overdrafting is a way of financing. The deficit is G-T whether financed by issuing debt or overdraft.

                In general, as JKH as highlighted many times, people mix NIPA flows with Flow of Funds flows.

                “If the HPM is created by central bank loans, then those loans need to be paid back with interest – which is HPM destruction, right? So if you include the repayment of the loans there is no net HPM creation in that scenario.”

                Well something in the future. Don’t mix future accounting flows with accounting at present.

                • “Overdrafting is a way of financing”

                  Right. What I meant was, say G is 90 and T is 100, we have a surplus of 10. If the Treasury then borrows 20 from the central bank via an overdraft and spends it, then G is 110 and T is 100, so we have a deficit.

                  “Well something in the future”.

                  That’s true, but still, is it right to call a loan “NET money creation”?

                  I mean, here’s wiki on inside money:

                  “The net amount of inside money in an economy is zero. At the same time, most money circulating in a modern economy is inside money.”

                  http://en.wikipedia.org/wiki/Inside_money

                  And Ricardo Lagos:

                  “inside money is in zero net supply within the private sector”.

                  http://www.minneapolisfed.org/research/sr/sr374.pdf

                  – the NET amount is of inside money is zero…

            • Joe Firestone

              You’re replying to Scott, but also replying to what I said in the same way that you replied in your post.

              Other readers note, I have already replied to Ram’s post just above, but in this answer to Scott, he doesn’t deign to address the reply I’ve already made, but just repeats the criticism he gave in his Firestone Backfires post without addressing my answer. Let’s see if he gets to that reply below, or keeps pursuing the same empty “argy-bargy” in his usual disingenuous way.

          • Btw Scott,

            Left you a comment on your post debt sustainability part 5 in this blog.

            Will debate later on that in length sometime – not now preferably.

          • Well increasing the quantity of base money and bank deposits (by buying back bonds) does appear to lead to asset price inflation. See QE, for example.

            • golfer1john

              QE raises the price of the assets the Fed buys, I think everyone will agree. That’s kinda the point.

              The former owners of those assets have a choice of what to do with the money. The theory on Wall Street is that they buy other assets, specifically assets with higher yields and more risk than what they sold. People think this is driving the stock market advances that have coincided with the various stages of QE. Mosler disagrees, but I don’t know his logic.

          • Joe Firestone

            Thanks, Scott, I always appreciate help from my friends. But, Ram, clearly isn’t interested in having a serous exchange, he’s just interrogating me without replying to my earlier replies.

          • It does unless bonds are sold. For instance, if the govt receives overdraft at CB, then deficit creates HPM.

            Presumably the same goes for the case where the CB QEs those bonds, leaving commercial banks with the corresponding HPM, on which to collect a quarter of a percent per year. Right?

          • Joe Firestone

            Scott, I believe I am using HPM in the way other MMT writers, including Randy, use it. And thanks for your reply. But I didn’t want to encourage in his disposition to ignore my reply to him and distract everyone’s attention to other issues. He wrote the blog post, critiquing my post. So, I think it’s time for him to defend his post.

        • Joe Firestone

          Ramanan, I kind of figured you would continue to play the interrogation game.

          Now, I did you the courtesy of responding chapter and verse to your “unfriendly critique,” what you call “the long reply game.” I play this game because it is the way to get closest to the truth and to avoid distorting what other people say. That is the academic and scholarly way.

          I expect you to do me the same courtesy if you want to continue this debate further. Otherwise, I’m just going to assume that you can’t answer my replies satisfactorily and prefer instead to just launch new lines of attack with questions that are not asked in good faith.

          That’s the interrogation game and it’s just not a game I will play with you when you refuse to reply to my previous answers to the issues you raised in your post. You reply first, then I’ll reply to you, and maybe we’ll get something done. If you don’t want to do that, then just get out of here, since you’ll just be wasting everyone’s time, anyway. Kapish?

          • No Joe you are trying to hide behind long replies.

            You make several errors and throw random statements about HPM. Which only mislead.

            For example as a simple matter of your writing, for example this:

            “High-powered money includes cash money and reserves emanating from the Government, including the Federal Reserve. If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating”

            This is an erroneous and misleading statement. Even if the government’s budget is in balance for some reason, it isn’t necessary that HPM is not increasing. HPM may have increased – for example in a closed economy situation in which private expenditure rises so that the private sector is in balance and higher borrowing activity leading to a situation in which the central bank creates HPM by open market operations (because banks require more reserves to satisfy reserve requirements).

            • “For example as a simple matter of your writing, for example this:”

              should simply be: “for example this:”

            • This thread reads as if terms are not crisply defined:

              Reserves: cash, Federal Reserve Notes, Time Instruments, all three?

              HPM: High Power Money— cash and reserves or only cash?

              “reserves emanating from the Government”: An inclusive term including Federal Reserve Notes and Time instruments?

              My definition of “cash”: Federal Reserve Notes.

              My definition of “Time Instruments”: cash delayed/accelerated from/to active spending by time agreement.

              Comment: A Time Instrument delays spending by the owner and accelerates spending by the borrower. The money supply (cash) borrowed never disappears (unless recaptured by government taxes or fees) but the labor and materials purchased with accelerated spending may be lacking future value.

            • Joe Firestone

              Again, this reply is disingenuous and repeats a quote I’ve already pointed out is partial and disingenuous. Other readers, take a look at my long reply to Ram’s blog post. This comment of his is just a repetition of the point he makes there which is already answered in my reply. But again, Ram, doesn’t reply to me but just repeats an assertion he’s already made while accusing me of hiding behind a long reply.

              Why are long replies “hiding” anyway. What if a long reply is necessary to answer multiple criticisms made in a blog post.Is supplying answers to criticisms really “hiding” or is it that Ram offers criticisms and then when they don’t work wants to hide behind misdirections, distractions, and disingenuousness?

      • “In fact, it’s contractionary relative to even a balanced budget, much less a deficit.”

        You will fail Billy Blog’s test if posed with such a question. Ridiculous to conclude the budget was contractionary by looking at the surplus.

        • Joe Firestone

          Ha! Ha! What a funny jibe! ROFLMAO!

          Well, I’ve explained this in detail in my reply to you. So, Mr. “unacademic and unscholarly,” why don’t you reply to the argument I gave there, instead of grabbing something out of context and replying with silly little kindergarten jabs, like “you will fail Billy’s test.”

          • Ignorance.

            You perhaps don’t know what the measure of fiscal stance is and you are taking the deficit as a proxy for the fiscal stance.

            Here is Billy Blog:

            http://bilbo.economicoutlook.net/blog/?p=23673

            “What does a deficit of 2 per cent of GDP mean? Only that the deficit is 2 per cent of current price GDP. Is a deficit that is 2 per cent of GDP better or worse than one that is 4 per cent of GDP? The answer it that it all depends.

            The higher deficit figure might be the exemplar of fiscally responsible policy choices whereas the lower outcome might indicate fiscally irresponsible decisions. Or, the opposite might be the case, depending on the circumstances.”

            But you CONCLUDE that 2% surplus is less expansionary than a balanced budget or a deficit without giving any qualification whatsoever.

            Here is your statement: “In fact, it’s contractionary relative to even a balanced budget, much less a deficit.”

            I do not even know where to begin and DO NOT wish to get involved in long exchanges.

            Your errors are simple confusions around HPM and am trying to get you to focus on it rather than wandering here and there.

            • “you CONCLUDE that 2% surplus is less expansionary than a balanced budget or a deficit”

              Let’s say we’re in a situation where the government is running a surplus and the economy is expanding – what you might call an ‘expansionary surplus’. Do you agree that if the government were to switch to running a balanced budget or a deficit this would then be more expansionary?

              • Well you are assuming that the government’s budget is under its control. The expansion or contraction is measured not by the deficit but government expenditure and the inverse of tax rate

            • Joe Firestone

              Actually, Ram, I did specify the context of the conclusion you quote just above, and you know very well that I did, because that context was your own very example. So, again we have distortion disingenuousness, labeling and name-calling substituting for a rigorous reply to my critique of your blog post. Who do you think you’re fooling. Not me? And not the clever readers at this web site. They can all see from reading my wrong reply that the qualification was the context contained in your example and that your claim “But you CONCLUDE that 2% surplus is less expansionary than a balanced budget or a deficit without giving any qualification whatsoever” is just false.

      • Now you’ve got me confused again.

        You stress:

        “.. the creation of high powered money requires government deficits in the long run..”

        but then you qualify that by saying that what you actually mean is net HPM creation, where net HPM is presumably HPM less obligations of commercial banks to the central bank.

        And, it’s still not clear to me why you think net HPM creation is necessary, as opposed to good to have. I’m genuinely interested to understand if there is some reason. Some people have offered some interesting ideas on why it might matter, but they all fall into the “good to have” category and that’s never been at issue. Or they implicitly assume that the consolidated government sector is in fact running an ever increasing surplus.

        • Good points about “good to have” etc.

          QE also creates HPM which obviously Firestone won’t think is “good to have” if he agrees with his colleagues. But then this post claims HPM creation good to have. Contradictions!

        • Joe Firestone

          Hi Nick, not sure why I got you “confused again”, I made this point in the original post. Did you miss it?

          I’ve already explained why net HPM is necessary in my reply to Ram, please read it and critique what I said there. I think I also clarified what I mean by net HPM in that lengthy reply. So, if you think my account was unclear then please quote and critique it. Thanks.

          • Your reply was a nice game to shift topics.

            • Joe Firestone

              No, that’s not true. It was a reply to Nick indicating that I’d already replied to the point he made.

          • Joe,

            Thank you. I’m not trying to critique you – I’m just trying to work out if there is some assumption you are making that I’m not seeing.

            I’ve had a read through again and I think part of my confusion is that sometimes you say net creation of HPM and sometimes you say creation of net HPM. I’m not sure whether you mean these to be different, but they are not the same.

            I read you reply carefully to see if I could find what items would be netted off from HPM to get net HPM, (and I’ve tried googling net HPM as well) but I couldn’t see anything, so I’m wondering whether in fact you always mean net creation of HPM.

            Anyway, at one point you clearly seem to be referring to net creation of HPM. You say (in your reply to Ramanan):

            “Yes, the Central Bank can provide reserves to other banks via direct lending, and since the Central Bank is providing the reserves, then by definition it’s providing HPM. But in the long run this isn’t NET new HPM creation (see the qualification, in my original post, to the MMT claim under scrutiny again), because the banks eventually will have to repay those loans to the Central Bank and that will extinguish the HPM created by direct lending.”

            Now I think I understand this argument, but it doesn’t sound correct to me. Sure loans have to be repaid, but new ones can then be made and as long as they are not continually growing faster than the economy, that should not be a problem. I’m not sure whether you agree or disagree with the following, which is the sort of thing I understand, when I read what Marc Lavoie wrote:

            Assume we start with a position where the only outstanding item on the (non-consolidated) balance sheet of the government is a stock of 100 in outstanding treasuries. There is also 100 of HPM outstanding, which is exactly matched by interesting bearing advances of 100 from the central bank to commercial banks.

            The central bank makes a profit of 1, say, from the interest on the advances. It remits this to the government. The government runs a balanced budget, which means that expenditure is equal to taxes plus profits remitted from the central bank. So if it has tax revenue of 100, it must be spending 101. The income that the central bank is extracting is being recycled back by the government.

            As treasuries mature, new treasuries are issued to the same value. As central bank advances fall due, new ones are made to the same amount. All three balance sheet items remain constant, which is fine if the economy is not growing.

            Now, if the economy is growing, there may be a need for more HPM. This can be achieved by the central bank increasing its loans to the commercial banks. So HPM goes up and loans go up and Treasuries stays constant. HPM and loans can go up at any rate we like, as long as they match, but we only need them to grow at the same rate as the economy. And there’s no reason to suppose that they could not do so for ever.

            Now, of course, if HPM and loans go up, so does central bank profit, which means that government spending also has to rise (slightly) to maintain the balanced budget. If not, then the government will start running surpluses that will be ever growing as a percentage of GDP. That of course would be a problem.

            Is there any part of that that you disagree with? Because, this to me is net creation of HPM with a balanced budget. It’s not creation of net HPM (taking net HPM to be HPM less central bank advances), but I can’t see why that’s a problem.

  25. So consider this scenario for cases where the central bank has a system of zero reserve requirement.

    Reserves at the start of the year ~ 0
    Reserves at the end of the year ~0

    From this information alone, you cannot conclude whether the budget is in surplus or deficit or balanced.

    • Joe Firestone

      So?

      • So?

        HPM creation and deficit spending are different things.

        Do this. Define net high powered money creation.

        • Joe Firestone

          I’ve pretty much defined net HPM creation in my earlier long reply to you. Just read between the line of my long reply. Go there, quote, criticize, and we can have an exchange.

          Now, don’t quote me out of context now, or mischaracterize what I say, because if you do, I’ll catch it, and then just keep pointing out your lack of honesty in debate.

          As for deficit spending and HPM creation being different things. I’ve never said they were the same thing. The implication that I have is just another mark of your dishonesty in debate. Please prove what you say with a quote or stop saying it, or you’ll soon be a laughing stock around here, if you’ve not already attained that exalted status.

          • “your lack of honesty in debate.”

            Look who’s talking!

            Here is you:

            “If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating. And so, it is not doing any net high powered money creation.”

            Erroneous statement.

            • And that statement precisely shows your muddles around these issues.

              And you resort to redefinitions to make it look correct. Talk of honesty.

            • Joe Firestone

              Well, Ram, I’ve seen you repeat that assertion a number of times by now; but I still haven’t seen you reply to the counter-argument in my long reply.

  26. Imagine the following dialog.

    MMTer:

    Government expenditures must precede tax collection.

    MMT-skeptic:

    Nonsense. I can borrow money from my local bank, and the IRS will accept checks drawn on those funds.

    MMTer:

    Yes, but your check how to clear, which requires that your bank have reserves (credit) in its account at the Fed.

    MMT-skeptic:

    Nonsense. My bank can borrow all the reserves it needs from the Fed.

    MMTer:

    Yes, but a loan is an expenditure. When someone makes a loan, he/she is purchasing an IOU from the borrower.

    So far as I’m concerned, the MMTer has won the argument. But, I doubt that everyone agrees to the notion that “loaning is spending.”

  27. Joe,

    You should check my latest in which I show net HPM creation in a situation of balanced budget!

    • Am I correct in understanding that HPM is created when and only when, either:
      * the Fed makes a loan, or
      * the Fed purchases a security, or
      * the Fed purchase coins or currency from the Treasury?

      If so, then HPM gets created in any of those instances, even if the budget is balanced. Am I missing something here?

      • Joe Firestone

        No, wigwam. You’re right. But the issue I’ve been addressing is when “net HPM” is created. I’ve been viewing net HPM as both newly created HPM, which is also a Net Financial Asset. So only creating coins, and currency, or Fed purchase of an already existing Net Financial Asset such as a security, would newly create net HPM. Of course, creating new Net HPM through swapping it for a security means that the security would already be owned by a private sector entity, the result of debt issuance associated with previous deficit spending.

        • I don’t follow all of that. You seem to be excluding the reserve that is created when a commercial bank borrows fresh reserve from the Fed. For example, the seven trillion or so that the Fed loaned to big banks around the world right after the meltdown. That would certainly seem to be HPM given the definitions I’ve read. Obviously, there is a corresponding liability on the part of that commercial bank; is that considered to be negative HPM?

          When the Fed buys a treasury from a commercial bank, that is an asset-for-asset swap (freshly HPM for that treasury), but one of those assets is freshly issued HPM that didn’t exist before. Certainly, that treasury is the result of prior debt issuance, but there is not law I know of that requires that debt issuance only be for covering a deficit. Also, the Fed purchases many securities that are not treasuries, e.g., bundled mortgages etc.

    • Joe Firestone

      is your argument any different there than it was in the post I’ve already replied to? If not, I won’t bother.

      • Hi Joe,

        This is in response to your claim that:

        High-powered money includes cash money and reserves emanating from the Government, including the Federal Reserve. If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating. And so, it is not doing any net high powered money creation.

        It appears to me that if the Treasury mints say a $60T coin and deposits it into the Treasury General Account (perhaps indirectly via the Mint’s account etc.), then $60T of new reserves, which are HPM, has been created and is sitting in the TGA. And, the Treasury can mint arbitrarily large platinum coins whenever it pleases, completely independent of whatever deficits it may or may not run.

        Also, if the government runs surpluses for a sufficiently long time, it would eventually pay off the national debt and start to accumulate a ever-expanding balance in the TGA. Each year’s surplus would be new HPA sitting in the TGA.

        What am I missing?

        • Joe Firestone

          Wigwam, if the platinum coins generate reserves in the TGA and these are then used to pay off debt instruments without issuing new debt then deficits in the past were run in generating those NFAs, so the proposition that deficits must be run to create net new HPM is supported, even though all the new HPM reserves are doing with the private sector is an asset swap of NFAs.

          On the other hand, if the seigniorage is used to close the gap between spending and tax revenues (the deficit), then that use of the reserves creates net new HPM.

          And on the third hand, if the Treasury runs surpluses for a sufficiently long time after minting the $60 T coin, then the public purse, after the debt instruments are paid off, will swell with reserves that are not being injected into the private sector.

          • I agree that it is common policy to issue treasuries to cover deficits and only to cover deficits, but I don’t think that that policy is law. In any case, after paying off the national debt with the proceeds on that $60T coin, there’d be about $45T left over and sitting in the TGA. That $45T of HPM that didn’t exist before and that would take a few decades to spend down. And it doesn’t exist as are result of any past deficit.

            • golfer1john

              Treasury must issue securities to fill its spending account before it spends, if the budget is to be in deficit. Or even to cover a “float”, if the budget is to be balanced, and the spending is scheduled before the anticipated taxes come in. According to law. Yes, there is a law, else the debt ceiling law would have no practical effect. So, you could say those Treasuries issued before the deficit spending or during the balanced budget year are not issued “only” to cover deficits. They are issued to cover anticipated future (short-term future) spending needs, so that they can hold auctions only every few weeks, not every day.

              And Joe already said that HPM is created by coin seigniorage as well as by deficit spending. That would include a roll of quarters, or a $60T platinum coin.

              But, SO WHAT??!! QE has proven that creating HPM doesn’t make a whole lot of difference to the economy.

  28. Joe Firestone,

    Here is from your post creation/destruction which you link to in the comments section:

    “So, here’s another proposal for renaming/reframing key terms in monetarily sovereign government accounting.

    – When a monetarily sovereign government spends more than it taxes during a specific time period, that is Government creation of net financial assets in the non-government sector. Let’s call it “the addition.”

    – The accumulation of net financial assets created over time is national net financial savings, let’s call it “the national credit.” The current total of debt instruments subject to the limit is equal to “the national credit.”

    Strange definitional scheme.

    You are confusing government accounting and “national” accounting. Or mixing “public” and “national”.

    The accumulated national net financial saving (plus/minus revaluations) is associated with the net international investment position not the public debt.

    • Joe Firestone

      Ramanan, are you going to reply to my reply to your post; or are you content to allow my post, your reply, and my long reply to stand as they are?

      On your specific comment. It’s just a set of proposed definitions introducing new labels, for things that have misleading labels now. So, how can it be “confused”?

      As Mandy Patinkin said to the guy in The Princess Bride: “I don’t think that word means, what you think it means!” See:

  29. You might be interested in the 2013 updated and revised version of Lavoie’s same paper:

    http://www.karl-betz.de/Veranstaltungen/postkey/Unterlagen/Tag_4/JEI_2013_MMT_friendly_critique.pdf

    • First paragraph.

      “that the Govt does need to borrow to deficit spend”

      Is that a typo ?

    • I am at a loss to understand why Lavoie focuses so strongly on the problem with consolidating Govt and Central bank. In the UK for example we have the Bank of England, the shares of which are owned by the Govt, the Governor of which is appointed by the prime minister and who’s remit is determined by the treasury.

      If subject to accounting rules applicable to any other entity, consolidation would be a legal requirement, never-mind how much more transparent the accounting relationship of monetary assets between the Govt and Private sectors would be.

      Why does he insist that artificial rules dictate how economic models should be built ? Don’t get it.

      • Joe Firestone

        It’s probably about fear of inflation.

      • “If subject to accounting rules applicable to any other entity, consolidation would be a legal requirement, never-mind how much more transparent the accounting relationship of monetary assets between the Govt and Private sectors would be.”

        Excellent point. It certainly doesn’t help anybody to understand monetary relationships that running a set of books should allow for a “a no man’s (person’s) land” fudge in the middle! We need to understand history better why such a fudge came into being in the first place and starting with the “human nature reason” why the Bank of England came into being in the first place is a good start

    • Joe Firestone

      Thanks.

  30. “First paragraph.

    “that the Govt does need to borrow to deficit spend”

    Is that a typo ?”

    That put me off reading it. Pretty fundamental typo after two hundred years:-

    “A prince, who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind, might thereby give a certain value to this paper money; even though the term of its final discharge and redemption should depend altogether upon the will of the prince.”

    ( Adam Smith. “Wealth of Nations” Book II, Chapter II. 1776 )

    This was a Keynesian statement. Over two centuries later the American economist Randall Wray added the following to Smith’s statement:-

    “As has long been recognized by some economists (from Adam Smith through J.M. Keynes), “fiat money” will be accepted by the public in payment for goods and services it provides to the government so long as the government accepts this same fiat money in payment of tax liabilities. That is, it is the tax liability that creates a “demand” for fiat money; there is no need for a “precious metal” backing because modern money is “backed” by the taxes the government imposes. If a government can create at will the money that the public willingly offers goods and services (especially labor services, for our purposes here) to obtain, then the government’s spending is never constrained by narrow “financing” decisions.”

    ( Randall Wray. Levy Institute Working Paper No. 213. 1997 )

  31. Joe Firestone,

    Again I won’t reply to your long painful reply it just is a convenient way for you to escape from your basic mistakes. Long run is always a convenient way for people pontificating on economics to avoid the short run and your errors are simple short run .

    A big part of your post rests on the idea of net HPM – both as a stock and as a flow.

    Again your error is simple. Your “net HPM” is a fake definition. I suppose you wanted to think of something such as nonborrowed reserves of the banking system but it cannot be because HPM is created not just by central bank lending but also outright purchase of government bonds by the central bank.

    I will catch you the next time you mention net HPM. The post moderation somehow delays directly talking to you.

    But do one thing:

    http://www.federalreserve.gov/releases/z1/Current/z1.pdf

    which number or combination of numbers is net HPM? (both in the stock and flow sense)

    You cannot come up with a definition which is consistent with everything else you say.

  32. Firestone,

    “Ram:

    Net HPM creation is not equal to private sector NAFA.

    [Firestone] Again, I didn’t say or imply that it is. if you think I have, then please quote me.”

    “If there’s no deficit spending the Government is destroying as much money through taxation as it is spending/creating. And so, it is not doing any net high powered money creation.”

    Then you start accusing me for dishonesty for your own confusions.

    If the budget is balanced you are claiming that HPM creation is zero. But then you claim that “you didn’t say it”

    Now further you don’t have HPM creation but self defined net HPM creation. If net HPM is nonborrowed reserves, the claim “not doing any HPM creation” is again wrong in the balanced budget case because the central bank can instead of lending, create HPM by outright purchases of government bonds from the markets.

    So neither can net HPM be equal to nonborrowed reserves and neither can they be equal in the flow sense.

    What is it then – it doesn’t exist. It is just some imaginary ill-defined thing you think you have properly defined. Show what it is from the Fed’s flow of funds report.

  33. Iowa Housewife

    My deepest thanks to all of you, Gentlemen. This thread has indeed provided me with clarity about MMT and MMT-ers.

    Here are a few things you have made crystal clear:

    Not a single one of you knows what money is. (Not that it’s just yiz guys – there IS no economist who knows what money is. Housewives know – even though it’s true they aren’t consciously aware that they know. Economists never have known and apparently never will figure it out. Which is hilarious – no – make that tragicomedic.)

    Your definitions, explanations, and philosophies exist floating in air and nothing but nothing in them is tied down to Earth.

    You are role models for, and champions at, straining gnats whilst swallowing camels.

    You suffer from the fatal delusion that we humans have the time and the right to go on seeking consensus agreement on answers to all the wrong questions. (see Bucky Fuller)

    It has to be some kind of Christmas miracle that MMT has not already disappeared right up the ass of its own stupendous myopia.

    You will spend your all-too-brief lives trying and failing to deal with but a few of the millions of extremely negative consequences of the root cause of all those consequences you are oblivious to.

    You don’t understand that even if the banks and banking system were nationalized the public money would still end up concentrated in the treasure chests of the fraction few private hands because the many legal thefts you are unaware you are unaware of – and therefore never speak a word to – would still stay on the job 24 hours a day automatically and ceaselessly shifting wealth from its rightful earner-owner to the freebie-getters.

    You have no respect for us common working people, in fact you have inadvertently unveiled your true contempt for us upthread.

    You’ve learned nothing from history.

    The first and most vital fundamentals of economics are absolutely invisible to you, you wouldn’t know a significant fundamental of economics if it bit you in the butt, and economics today including MMT is – practically – nothing but a long list of attempted excuses for the vile, genosadistic disgrace known as inequality injustice.

    You epically fail to grok that the pool of wealth is demonstrably finite so you’ve no concept of what that means for humanity.

    You don’t even know that economics 101 is humans are cursed with having stomachs to feed.

    The PHD after an economist’s name stands for Piling it Higher and Deeper.

    You BEGIN in denial of the most overarching true fact of facts that will ever pertain to the existence of beings living in human bodies: that TIME is the only currency any human being ever really has to spend.

    You fail to understand that democracy is by definition rendered impossible by extremes of wealth so you continue to speak of democracy as if it exists.

    You are steeped in the information and knowledge that should have caused you to understand it long before now yet you still have no clue what can of worms we opened when we embarked upon the community project known as division of labor.

    You are engaged in a project that serves to very effectively obscure the fact that the truth about money, work, and wealth has so few moving parts it’s harder for people to see it. The truth is disappeared by the zillion and one ‘Rube Goldberg’ moving parts you unrealists construct ad nauseum and ad infinitum.

    You are too busy inventing myriad supposed distinctions about money to see the one real, actual distinction that does exist but that no economist has ever made.

    You are good for blowing heaps more smoke that actually make it immensely more difficult for people to think their way back to good sense about money, work, and wealth, then pat each other on the back for “creating clarity”. (see terms like circlejerk, naval gazing, propaganda by omission of relevant facts, and ‘perfection of means/confusion of goals’.)

    You will build not mere towers of econo-babble but whole cities of towers of econo-babble without ever going near the simple economic solution to humanity’s most enormous dangers and threats.

    You are so far from reality it may actually be impossible for you to find your way back from where you have taken your species.

    The human species will go extinct in 100 years along with the topsoil, which is being lost at the rate of 1% per year because everything we humans need to do to save our bacon is perfectly physically possible but it’s artificially made financially impossible because economists wouldn’t tell the truth that matters if it would save their lives.

    Yes, Gentlemen, all of that is clear to me now after having followed this thread closely.

    Somebody needs to write a book that explains economics to those by far most ignorant about economics: the economists and their followers.

    I guess that ‘somebody’ is gonna have to be me. Because economists have everyone else so obscenely and unnecessarily buffaloed with their oceans of pseudo-think they can’t even see that professional economics circa 2013 is perfectly irrelevant to anything but itself, is perfectly incapable of seeing the picture whole, is perfectly impervious to the higher intelligence the rest of this universe is shot right through with, is perfectly incapable of intelligent introspection – and has nothing to say that is of actual benefit to anybody, least of all to the world’s working families, the world’s working poor.

    I would say that it’s all too funny by half except for the little facts that 50 million working people – keyword working people – die every year from lack of enough pay for their work to purchase the means to stay alive while still no economist gets it … and, another child under the age of 5 has died a lingering death we know full well how to prevent, every 5 seconds that yiz haz been typing typing typing away. One is left to wonder how many Mozarts and Einsteins humanity has cheated itself out of by this species’ refusal to acknowledge that justice is a virtue crucial, vital, essential to happiness.

    For years I have been telling my peers that this planet would be a far happier and safer place to live if we’d round up all the economists EXCEPT the ones from UMO, KC and eject them into space on rocketships. I now and hereby apologize to Mr. and Mrs. Backbroke Working Family for my having been wrong about the exception part.

    I am PAY JUSTICE, JUSTICE IN PAY, and I am all the sanity missing from economics, writ large.

    • golfer1john

      If you know and they don’t, can you maybe tell us?

      • Iowa Housewife

        Thank you very much for asking, golferjohn.

        Money is a license to take workproducts from the pool of workproducts produced by human work.

        Only work produces workproducts. Workproducts: the goods produced and services provided when human beings sacrifice some portion of their irreplaceable time and renewable energies to working. Money represents work-products, money only represents wealth creation by work. Work products are substantial wealth, money is symbolic wealth. Money is (a symbol of) license to take workproducts.

        No sacrifice of time and energies to working means no work done means no work-products created, means money is worthless – worthless even as a concept. All the money in the world equals all the work in the world equals all the work-products. (Double the amount of money while the amount of work-products stays the same and every dollar is worth half as much, each dollar buys half as much.)

        We humans invented job specialization, which necessitated trade. The purpose of trade is to give out the specialized products we ourselves produce, and get the products we want that are produced by other specialists. What is supposed to happen is that a working person’s wealth after a transaction is the same as it was before, just in different work-products. Trade shouldn’t leave us better off or worse off in work-value. The amount of work in the products we buy should be equal to the amount of work we do. Anything else is theft, that is, unilateral or one-sided shift of wealth from an earner to a freebie-getter.

        People should share the substantial wealth ( produced only by work) in the same proportions they would without trade, when each person consumes what she produces, which is natural automatic justice.

        The very simple, very dangerous fact which seems to have been overlooked by virtually all economists and thinkers, and which has never entered the common mind of humanity, is that in any transaction the two things exchanged cannot be equal in workvalue. There must be more work gone into one thing than the other thing. There is no way to determine with absolute precision the exact workvalue of the two things. They must be unequal. The chance of them being of exactly equal value is infinitesimal, and equality of workvalue will occur in almost no transactions. This necessarily means that wealth will pass automatically from one person to another in every transaction. Every transaction will be a fair-exchange-no-robbery, plus a robbery. The two things will be of values x, and x + y. The x’s will be the fair-exchange-no-robbery, and the y will be the robbery. One will get out more than he put in, the other will get out less. On top of the fair exchange, in which both work and both reap, one will work and the other will reap. Inevitably. Unavoidably.

        Both may think they profited, but if both profited, the mere exchange would have caused an increase in net value of both products, and mere exchange cannot increase value. This obvious truth has not stopped economists from teaching that both do profit. They argue that the exchange is voluntary, and therefore what can be wrong with it? They ignore the involuntary elements in transaction. The one who loses does not know he loses. You can’t be said to have volunteered to do something without knowing what that something is. There is a measure of coercion in all transactions. My book will kill the voluntary argument, that chestnut of economics that no one has yet cracked.

        Because all the money equals, represents and is backed by, all the products of work, pay without work has to mean work without pay. Means theft has occurred. Means anger – every theft comes with an angry person attached. Means ever-escalating war of all grab for all, grab off and grab back. Means ever-decreasing peace, safety, happiness, freedom.

        My book will define work. Work is one of 2 things only. It is either the original work done by mother nature from which all of our human work proceeds (her giving us land, bees to pollinate our food, ocean views, putting the minerals in the ground), work for which no person deserves pay, or else work is the sacrifice of a human being’s irreplaceable time and renewable energies. Not yet convinced only the sacrifice of a human’s time creates wealth? Take a dollar bill out of your wallet and command it to fix you a sandwich.

        My book will show people that since it’s their sacrifice to working that alone backs money and the nation’s credit, the capability of their government to fund all that needs done is only restricted by the amount of work they do. And my book will show them they are producing plenty of wealth by their work – much more than they have been led to believe – I will show that everything that must get done is affordable once we rid ourselves and each other of the idea to allow wealthpower giants. Fairpay justice is win-win-win. Overpayunderpay is lose-lose.

        My book will tie its economic thinking right down to earth – so people will see that the right to work to feed your stomach is a right we have in nature and there is no reason for society to exist if it is going to subtract natural rights instead of increasing our comfort and safety. Society makes governments – we constitute governments as a necessary evil for the benefits we wouldn’t have without them. Society has no right to withhold a job from anyone – having stomachs to feed means work is the first condition of life, of staying alive. To deprive anyone of the right to work to feed their stomach is to murder them. The fundamental justification for a jobs guarantee has always been you have a stomach to feed.

        We have to know our reality. It’s the doggie doodoo you don’t see that you step. See it and don’t step in it. This is our human insane reality: two people do a fortnight’s work, and we give one of them $1 and the other $50,000,000 [average, all his life] $1,000,000,000 [peak rates of pay]. We give 99% of people less than the world average, we give 90% of people less than a 10th of average, so we can give 1% of people more than average, so we can give 1% of people up to a million times average. We calmly sit by while a few rake most of the money out of the social pool of work/ wealth/ products of work. We look in the pool and we say: Isn’t it sad that there is so little in the pool for most people, and we make no connection between this and the people pumping out most of the water in the pool with a fleet of siphon trucks.

        Money is power and super overpay is super overpower. The human species is blind to the reality of the actual situation we find ourselves in. A rich man’s hour is the same thing as a poor man’s hour, but 99% of humanity is giving away their rightful earnings to wealthpower giants in exchange for nothing – we shovel our fairshare of democratic power to wealthpower giants in return for tyranny.

        Pay justice is equal pay for equal WORK. There are many wideopen legal ways by which money moves easily from earners to nonearners. My book will expose a list of legal thefts. We must be clear that right now people are being paid (trillions) for non-work things – their higher pay is being justified falsely by non-work things. Only work produces substantial wealth (goods and services).

        My book will expose – and using reason will destroy the rationalizations behind non-work things people are currently paid for: higher position in hierarchies (not more work), business risk (risk is everywhere; worker risk, which is greater, is not paid or used as justification for higher pay), having studied (study is work, having studied is not), natural gifts (work by nature, not by the individual), owning land (not work), experience (gained with no effort in paid work), skill (natural gift or experience) – and so on. I will show that overpay is other-earned wealth, wealth that creeped into the wrong hands.

        Pay for no work (overpay, overpower) causes work for no pay (underpay, underpower) – overpay-underpay in theft, causes violence (war and crime), which gets to everyone from richest to poorest. See history. History is – surprise – unanimous that overpay is as bad for the overpaid as it is for the underpaid. Another enormous point my book will cover. People will give up clawing their way to riches only when they see clawing your way to riches is clawing your way to misery. Defining pay justice will strengthen a lot of MMT arguments, will provide the clarity so people can see for themselves they have been fed a diet of what is untrue and taught to call it truth.

        I better stop here for now. Did I answer your question, golferjohn? Can you see that it’s clear that money is a license to take workproducts from the pool of workproducts? Can others see it? Can a soundly-reasoned argument be brought against that definition of money? Is it the most accurate possible definition? Does it come from the biggest-picture perspective? Is it right in line with observable reality? Does it comport perfectly with the actual situation we humans find ourselves in?

        • golfer1john

          That is clearer, I think I understand.

          I think many people will agree that many of those who make very high incomes are overcompensated, but how would you analyze a more common situation?

          Let’s consider an illustrative example. Most people are able to farm tomatoes, and can produce a tomato for about an hour’s work effort. Widget-making takes some talent, and some skills-development time, but a skilled widget-maker can produce a widget in about an hour. Because your economic theory has been adopted, widgets exchange in a free market for tomatoes, one for one.

          Now along comes Mary, who by her exceptional green thumb, can produce 20 tomatoes in only 19 hours. She is able to exchange her tomatoes for 20 widgets, where others would get only 19 widgets for the same amount of work, under your economic system.

          What would you propose to do, so that Mary would receive only 19 widgets for her work effort, like everyone else? Is she to be forced to give away one tomato of every 20? To whom would it go? Is it up to the government to provide everyone else with one additional widget for each 19 hours work?

    • Stay off the sauce.

      • Iowa Housewife

        It’s easy for me to continue to stay off the sauce as I can’t afford sauce on my underpay.

  34. My reply from 2 days ago still seems to be awaiting moderation.

  35. Iowa Housewife

    Mr. Moderator, believe it or not I am not disgruntled or upset that you are not going to post my hardcore-critical comment and I do not consider your refusal to do so to be censorship. You can just delete it from the queue, you needn’t let it just hang there in limbo. I know full well that legitimate reasons do exist for you to not post those remarks.

    Just please don’t let this follow-up note cause you to think I take any of it back. I am still of the opinion y’all have yor heads up yor keesters and I’m still so angry about the Jane Six-pack slur I could spit nails. That won’t change, but again, I shall not be calling it or considering it censorship when you just send the comment to the trashbin.

  36. @ Iowa Housewife

    You might have something interesting to say but it doesn’t come through the ranting. Perhaps you could try again and be specific about what you see are the issues.

    Many of us sympathize with the view that most economics other than Marxian doesn’t address the actual issues, which are essentially political in that they are based on power and its use and abuse in a plutonomy.

    I would say that the MMT approach is one of the those that attempt to make the best of a bad situation in which change is limited by politics. MMT shows the way to take best advantage of the existing system in order to achieve growth, full employment and price stability. This is considered unachievable through conventional approaches.

    The complete MMT policy proposal includes reforming many societal institutions, including banking and finance, health care, education, and other aspects of economics that affect public purpose.

    If you have a constructive proposal along the lines of Bucky Fuller (as you suggest), Kenneth Boulding, Adolf Lowe, Robert Theobald, Abraham Maslow, etc. let’s hear it.

    So far, however, you have offered nothing of substance that gives any indication that you know what you are talking about.

    • Iowa Housewife

      Please let me know if this, which will be in my book, helps you think I might know what i’m talking about:

      The law of supply and demand

      There are those who argue that the market is the best mechanism for justice. And they are right that the invisible hand of the free market is a very useful, automatic tool for the adjustment of supply and demand. If the ratio of supply to demand goes up, prices fall, and supply drops. If the ratio of supply to demand falls, by increase of demand or decrease of supply, prices rise, ideally drawing in more suppliers seeking the greater profits, and the ratio returns to moderation. This is the invisible hand, the automatic adjustment of supply and demand. And it is superior, more efficient and cheaper, than state control of supply and demand.

      But economics has been reluctant to admit and describe its failures. It has been supported by those wishing a free hand to make unlimited profits. The overpaid and overpowerful have invoked the freedom of the market, the value of the invisible hand, to inhibit the intervention of government in the failures of the invisible hand to provide justice. The governments have been in the hands of the overpaid, and the governments have therefore generally failed fully and adequately to prevent the gross injustices of the free market, although the purpose of government is justice, since the very existence, and the life quality, of everyone in the state depend entirely on it. The powerful have had a free hand to subvert the working of the invisible hand, and to profit from those cases where the invisible hand fails to work for justice, and from those cases where the invisible hand can be manipulated to work for injustice.

      Thus, in the beginning of the industrial revolution, when cheap labor was desired, the rural life of the people was strangled by the grabbing-up of rural land by the land-rich and power-rich, forcing people into the cities and factories in such oversupply that labor was dirt-cheap, and children were working 10 hour days in evil conditions, and profits were enormous. The invisible hand would have operated to reduce the labor supply and raise wages, but the rural alternative was closed to the people. The people were enslaved, herded into the cities. Protesters were massacred. Inequality of money breeds inequality of money. Inequality always grows. Money is power, power is money. Britons, singing ‘Britons never will be slaves’, were enslaved even more. This forced the people in self-defense to organize, form trade unions, and struggle for many decades for an enlargement of their far-too-small share. Then the unions became powerful enough to get into bed with the ruling classes, including the Mafias, and start robbing the workers.

      In the 19th and 20th centuries, the lower classes gained back some of their rights by organizing. The same pattern is seen and will be seen in the relation of the first world and the third world. The third world countries will increasingly organize amongst themselves and thus gain ground against the ruling countries. We can already see this in the oil-producing countries, and to a smaller extent, in the coffee producers and banana producers. The Latin American left is organizing, unifying. Continuing rough seas for all.

      Again, in the beginning of the 19th century, the ruling classes created scarcity by preventing grain imports in times of low supply of grain, in order to profit from high prices. Today, the ruling classes promote large farms, which are far less productive than small farms, and promote government subsidies not to grow food, in order to profit from the manipulation of the market to inhibit the free working of the invisible hand in adjusting supply and demand for foods. Higher profits and more starvation. Small-farm Sudan and China are 30 times as productive per acre as the big-farm USA. (See World Book of Rankings.) In the Philippines, for one example, small farmers are being coerced off the land to make big farms, which will increase scarcity of food, and thus increase profits and starvation. Again, these farmers have nowhere to go but the cities, and make labor starvingly cheap. The poor are ever being forced to pay unnaturally high prices for food, keeping them poor and enslaved. The ruling class has ensured that the invisible hand works for them. Scarcity has been created because the law of supply and demand means that a small ratio of supply to demand means high prices, big profits, big legal theft, big violence, anarchy. Anarchy is best taken to mean extreme range of political power. We thus have anarchy, the decline and fall stage of the human empire.
      When the social system of extreme overpay and underpay has crumbled society, we have order, egalitarianism, the absence of tyranny and slavery, but historians call it anarchy, dark ages. The fall of extreme rich-poor society is the rise of egalitarian order, as we can see from the fact that the so-called dark ages were the mother of the social order of the later times. In the so-called Dark Ages, the Irish had their egalitarian golden age, when the boast was that a princess could walk the length of Ireland wearing all her jewels and not be robbed or molested. Social organization was able to rise again out of the dark ages, when the fall of the rich-poor society had led to egalitarianism, the soil of re-growth. Every empire has been strong and grown, though small, in its egalitarian beginnings, and has been weak, and fallen, though large, in its tyranny-slavery end. The state built on injustice cannot stand. To have a sustainable human empire, to avoid the endless cycle of growth and bust of all empires so far, with vast unnecessary suffering and violence, we have to bow to the good sense of equality, justice, control of legal theft. We can smooth out the murderous rollercoaster of history by recognizing the simple sense of maximum fortune, which puts a totally effective limit to all forms of theft, legal and illegal, which puts a limit to the growth of tyranny and slavery, of violence and endless escalation of violence.

      Economics has recognized and admitted the invisible hand, without recognizing and admitting and studying its failures and manipulations by ruling classes. In the occasional absence of monopoly, the invisible hand tends to reduce prices where there are big profits by drawing in other profitseekers, willing to get a share of the market by lowering prices. But economics has never focused on the limitations of the efficiency of the invisible hand. It has never for instance explored the implications of the time interval for the invisible hand to operate. In the time period between the emergence of a new high-profit product, and the slow reduction of prices by competition, there is a time period of decades in which high profits are being made, in which legal theft is operating.

      And economics has never recognized or admitted that the invisible hand brings prices towards justice without ever arriving. The closer the prices get to justice, the more slowly prices move towards justice. As the difference between price and total costs becomes smaller, there is less incentive for competing sellers to lower prices to get a larger market share. Several competitors may coast along forever getting prices still above total costs.

      The fact of legal theft should not be in dispute. It is obvious from the fact that some are increasing ‘their’ fortunes by up to US$100 million per day. The description here of the mechanisms of legal theft is only to reinforce the point which should have been obvious to all and should have been opposed by all.

      New technology always offers golden opportunities for legal theft and acceleration of violence. New technology is necessarily a situation of small supply and high demand. Everyone wants the new product, whether machine-made clothing, electricity, cars, or computers. And the supply is limited as long as the industry is setting up, gearing up and growing towards meeting demand.

      And, especially with new technology, people have no idea of the costs of providing the product.

      And people are excited by the novelty, and are therefore careless of cost.

      And the patents associated with new technology are monopolistic. Japan has a two-year limit on patents, whereas the rest of the world has had 70-year limits on patents. A patent that may have cost the person 10 years of work to create is a license to legally steal from the social pool of wealth for decades. The developers of the Tetrapak carton are richer than the British queen. Entrepreneurs and inventors who would have returned to work on new ideas are lost to production for 70 years of overpay. The sacrifice in producing ideas is only the time spent by the individual. The sacrifice, and therefore the just reward, is not properly measured by the size of the impact on society. The sacrifice is justly measured by the worktime. Market forces greatly overpay and underpay for invention, which net impairs invention, greatly. Besides, size of impact on society cannot be measured. Therefore size of impact cannot be used to justify egregious overpayment, with its consequent accelerating violence.

      Monopoly of course means freedom to get high prices. Depressions are caused by monopoly extracting overprices till the people are poor, causing boom and bust. The stockmarket booms with the monopolistic high prices, and then busts when the nation has exhausted its money, and monopolistic profits can no longer be taken.

      The depression is a mini-parallel with the rise and fall of empires. Concentration of wealth. Extreme wealth and poverty. The free play of legal theft. Legal theft makes many poor, driving them to borrow, which means they give aid to the lenders in the form of the excess of the sum of the repayments over the loan. In the unlimited-fortunes society, poverty makes poverty as surely as money makes money. In the 1930s depression, there were many rich, spending up large, because they happened to get out of the stockmarket before the bust, and could then buy things at the deflated prices. (and See Michael Hudson’s latest article.)

      Even governments have been wise and impartial enough to see the legal theft in monopoly, and to take partially effective steps against it. But even governments who have been clear that monopoly is wrong, have been unable to root out every element of monopoly from society. They are lucky if they are powerful enough to inhibit the grossest appearances of monopoly, despite the political muscle of the biggest monopolists. But what of the subtler and smaller degrees of monopoly? There is a limit to which a government can economically search out all the price cartels and monopolies. And what of implicit price cartels, where the competitors, without formal agreement among themselves, decide to prefer to share the market rather than grab a bigger market share by lowering prices closer to fair return? The costs of government investigating all businesses for too great a gap between company income and outgo are prohibitive, and are politically uphill in unlimited-fortunes systems. But setting the just maximum fortune prevents with one swipe all forms of legal theft, all the products of thieving ingenuity, past, present and future, from getting out of hand.

      Again, in new technology, the advantage of the headstart of the first in the field means that they have financial power to buy out competitors, to undersell them into bankruptcy or cheap sale, and so on.

      The market, with unlimited fortunes, can never claim to serve justice, and thus to serve the survival of states and the welfare of humans. Largely because of payment for scarcity, which is clearly not payment for contribution to society by work. Scarcity is not work. It takes only an annual average profit rate of 36% a year to turn 5 million into 50 billion in 30 years. It is the scarcity of PCs that has enabled the Bill Gates super-overfortune, not his work or talents, real or assumed.

      It takes only a 7.2% interest rate, and 100 years, to multiply money 1000-fold. Without self-work. With others’ work.
      One need only create or obtain a unique and desirable item, in order to get a license to take from the social pool of wealth without putting in by work. A highly desirable work of art, a rare stamp, and the person has a license to eat without working. Forcing many others to work without eating. Forcing everyone to be embroiled in violence, war and crime. Forcing everyone to finance the ever-greater cost of invention of ever-greater weaponry, and to finance the repair of all the destruction.

      People are not prone to giving money to strangers in return for nothing. Therefore it takes only people seeing that they are giving billions to strangers in return for nothing, for them to stop.

      Giving money to the underpaid is not giving money in return for nothing, it is giving money for sacrifice made, it is increasing justice and decreasing violence, increasing quality of life.

      It is only confused ideas that stand between people and peace and happiness. Why is it that it has occurred to so few that they are working fulltime, and billionaires are working fulltime, so there has to be gross legal theft? One of the many ways that people have been bamboozled and confused into accepting wealth and poverty are the various excuses for higher-than-average hourly pay: responsibility, business risk, experience, skill, merit, talent, brains, brawn, beauty, ‘hard work’, etc.

      We need only a broad social grasp and acceptance of the reality of legal theft to reap an almost infinite harvest of human happiness. Our happiness must increase by as much as the happiness would increase if a government stopped stealing most earnings off most people and giving it all to 1%. Because the global unlimited-fortunes system is stealing most earnings off most people and giving it all to 1%.

      It is an example of our psychological bias to seeing little things and overlooking big things, seeing branches not the tree, that we can see the Great Train Robbery and not see the annual theft of US$70 trillion. If we can learn to see the annual theft of US$70 trillion, every family can get on average US$70,000 a year more of their earnings, and 100-fold happiness.

      The increase of happiness we can have is proportional to the injustice we have. We have super-giga-astronomical injustice.

      • 1. There is no law of supply and demand or invisible hand. Those are neoclassical assumptions that have never been presented in way that squares with the facts, and empirical analysis suggests strongly that they are non-representational of reality. These are essentials of conventional economics based on equilibrium. Several heterodox schools of thought deny these assumptions as idealized and not representation of how modern economies work. There is a considerable literature on this, and it is hot topic in the blogosphere now.

        2. Much of the rest of the analysis is quite similar to Marxian thought in its assumption that value derives from work. This is not new thinking unless you differentiate your position from Marxian analysis. There is a significant literature, pro and con, around the labor theory of value an price theory, including in Post Keynesianism, stemming from Kalecki and Sraffa, who have Marxian roots.

        3. A great deal of what you talking about involves extraction of rent through rent-seeking behavior and institutional arrangements based on power. You might wish to look at the work of Michael Hudson, who is a visiting professor at UMKC. A great deal of the problem is parasitical.

        4. Non-Marxian “futurists” have also contributed to a similar analysis, as I mentioned above, e.g., Fuller, Boulding, Lowe, Theobald and Maslow are notable.

        I would agree that the ultimate goal is getting from dystopia to utopia, which is in the power of humans to achieve with presently available knowledge and resources, as Fuller attempted to show decades ago. Technological innovation has amplified the ability to do more with less through design science since then. I would also agree that the choice now is stark. Humanity is on an extinction course if it continues to pursue its present path. This will, of course, require standing the social order on its head, which is huge but necessary political undertaking.

        The goal of MMT is more immediate. That is, it is now possible to greatly improve the quality of life of most people by using the existing system to greater advantage without reversing the status quo. In other words, it is feasible politically now.

        Some would argue that this is merely cooptation that postpones the need for deep change, and so they oppose it. Others hold that any improvement in the general quality of life that can be won, should be as soon as possible. These are strategic choices, and there are differences wrt to strategy. I don’t think that many in the MMT camp are unaware of this, and most have made a strategic choice to go for what can be accomplished without overhauling the system and standing society on its head, which would require a revolution of one sort of another. Instead they prefer the path of incremental change, winning one battle at a time instead of laying siege to a virtually impregnable fort, although that also is involved in confronting the economic establishment from the hinterlands. Inaddition, allies with the same goals complicate the task by sniping at each other over details, method, or strategy and tactics.

        But let a hundred flowers bloom. Go for it your way, if that is your choice.

  37. Thank you for including my comment that my post was still awaiting moderation, but you appear not to have actually done anything regarding the original post, which still appears to be awaiting moderation. In case, it has somehow gone missing, I’ve reproduced it below:

    Joe,

    Thank you. I’m not trying to critique you – I’m just trying to work out if there is some assumption you are making that I’m not seeing.

    I’ve had a read through again and I think part of my confusion is that sometimes you say net creation of HPM and sometimes you say creation of net HPM. I’m not sure whether you mean these to be different, but they are not the same.

    I read your reply carefully to see if I could find what items would be netted off from HPM to get net HPM, (and I’ve tried googling net HPM as well) but I couldn’t see anything, so I’m wondering whether in fact you always mean net creation of HPM.

    Anyway, at one point you clearly seem to be referring to net creation of HPM. You say (in your reply to Ramanan):

    “Yes, the Central Bank can provide reserves to other banks via direct lending, and since the Central Bank is providing the reserves, then by definition it’s providing HPM. But in the long run this isn’t NET new HPM creation (see the qualification, in my original post, to the MMT claim under scrutiny again), because the banks eventually will have to repay those loans to the Central Bank and that will extinguish the HPM created by direct lending.”

    Now I think I understand this argument, but it doesn’t sound correct to me. Sure loans have to be repaid, but new ones can then be made and as long as they are not continually growing faster than the economy, that should not be a problem. I’m not sure whether you agree or disagree with the following, which is the sort of thing I understand, when I read what Marc Lavoie wrote:

    Assume we start with a position where the only outstanding item on the (non-consolidated) balance sheet of the government is a stock of 100 in outstanding treasuries. There is also 100 of HPM outstanding, which is exactly matched by interesting bearing advances of 100 from the central bank to commercial banks.

    The central bank makes a profit of 1, say, from the interest on the advances. It remits this to the government. The government runs a balanced budget, which means that expenditure is equal to taxes plus profits remitted from the central bank. So if it has tax revenue of 100, it must be spending 101. The income that the central bank is extracting is being recycled back by the government.

    As treasuries mature, new treasuries are issued to the same value. As central bank advances fall due, new ones are made to the same amount. All three balance sheet items remain constant, which is fine if the economy is not growing.

    Now, if the economy is growing, there may be a need for more HPM. This can be achieved by the central bank increasing its loans to the commercial banks. So HPM goes up and loans go up and Treasuries stays constant. HPM and loans can go up at any rate we like, as long as they match, but we only need them to grow at the same rate as the economy. And there’s no reason to suppose that they could not do so for ever.

    Now, of course, if HPM and loans go up, so does central bank profit, which means that government spending also has to rise (slightly) to maintain the balanced budget. If not, then the government will start running surpluses that will be ever growing as a percentage of GDP. That of course would be a problem.

    Is there any part of that that you disagree with? Because, this to me is net creation of HPM with a balanced budget. It’s not creation of net HPM (taking net HPM to be HPM less central bank advances), but I can’t see why that’s a problem.