Former Dept. Secretary of the U.S. Treasury Says Critics of MMT are “Reaching”

By Stephanie Kelton

A few weeks ago, I had a lengthy e-mail exchange with Frank N. Newman, former Deputy Secretary of the U.S. Treasury. Frank’s books (here and here) are so closely aligned with MMT thinking about deficits, debt, monetary operations, etc. that I wanted to get his thoughts on one of the most common criticisms of MMT. MMT recognizes that the currency itself is a simple public monopoly and that the issuer of the currency must spend (or lend) it into existence, before it can be used to pay taxes or buy bonds. The implication? Governments that issue sovereign money are not revenue constrained. Critics have argued that MMT has this all wrong because the system requires the government to have numbers on its balance sheet before it can spend — i.e. the government is not allowed to run an overdraft and is, therefore, constrained by cash on hand. Here’s what Frank Newman thinks of that critique:

I recall from my time at the Treasury Department that the assumption was always that there was money in the fed account to start with. Nobody seemed to know where it came from originally or when; perhaps it was established in biblical times. But as a matter of practice, if the treasury wanted to disburse $20bn a given day, it started with at least that much in its fed account. Then later would issue new treasuries and rebuild its account at the fed.  (I do not recall ever using an overdraft.)

In my view, this is still consistent with the MMT perspective that you mentioned, and in my own book the explanation starts the cycle with government spending, thus adding to the money supply, and then issuing treasuries for roughly equivalent amount, thus restoring the money supply and the Treasury’s Fed account to the levels they were prior to that round of spending. Every cycle is: spend first, then issue treasuries to replenish the fed account. The fact that Treasury started the period with some legacy funds in its Fed account is not really relevant to understanding the current flow of funds in any year.

[In practice, Treasury varies its issuance not only to match outlays, but also to deal with seasonal factors, and to avoid wide swings in new-issue sizes; so at one point of a year, treasury might actually issue some extra securities because the next month was expected to have low tax revenues, or might not fully replenish recent spending because the next month was expected to have high tax revenues. That seasonal process doesn’t really affect the overall flow of funds over a year.  The substance of the cycle is still: spend then replenish. Debating that would seem highly philosophical, and would miss the practical aspects of the flows.]

In any case, the treasury can always raise money by issuing securities. The bond vigilantes really have it backwards. There is always more demand for treasuries than can be allocated from a limited supply of new issues in each auction; the winners in the auctions get to place their funds in the safest most liquid form of instrument there is for US dollars; the losers are stuck keeping some of their funds in banks, with bank risk.

(I even try to avoid using the expression “borrow” when the treasury issues securities; the treasury is providing an opportunity for investors to move funds from risky banks to safe and liquid treasuries.)

If critics have focused on the technical matter about the spending and issuance cycle, then we are really in great shape: they are reaching to find any issue to debate!

Addendum: Many thanks to Frank for granting me permission to publicize these remarks.

Follow me on Twitter: @StephanieKelton


75 Responses to Former Dept. Secretary of the U.S. Treasury Says Critics of MMT are “Reaching”

  1. It was obvious from the beginning they were reaching. Claiming that a self imposed technicality changes the main idea, nonsense. And the funny thing: the technicality in question can only be imposed AFTER the government had spent the first batch of money, otherwise the Treasury would never sell a penny worth of bonds. This shows how stupid it is to frame it as some kind of fundamental constraint that makes MMT description incomplete. Desperation to differentiate themselves while lacking any original, non-MMT insights to offer.

    • Roberto, can you clarify whether the “beginning” you are referring to is the beginning of the US government under the Constitution in 1791 or the beginning of the Federal Reserve system in 1913? When the Federal Reserve was established the government had already issued money, so the imposition of the debt ceiling restraint could have, at least theoretically, made sense to a Congress that felt it could not trust itself to live within its own budget. It might seem comparable to a family telling the bank not to honor any checks or credit card debts exceeding its monthly income, although in the Government case the ” income” is unlimited except by the constraints of the real economy. Tax revenue, of course, is limited, but that is not the equivalent of government “income” in the analogy.

      • “Congress that felt it could not trust itself to live within its own budget”

        The debt ceiling is unrelated to Congress living within its own budget. Congress’ budget almost always involves issuing new financial IOUs which are regarded “debt”, so the Congress then breaches the debt ceiling by trying to execute its own budget. Abandon the debt ceiling and Congress still needs to stick to the budgeted spending/taxing schedule. The debt ceiling prevents Congress from executing its own budget.

        • I don’t see how the debt ceiling is unrelated to Congress living within its own budget since Congress limits the amount of debt it will allow the Treasury to issue. Whenever Congresses’ expenditures exceed its tax revenue it moves the “national debt” closer to the ceiling. The real understanding is that tax revenue doesn’t limit government spending. Taxes have their purposes for the national government, but funding government purchases is not one of them. Families, cities, counties, and states are limited to their revenues for expenses, but the federal government is not.

      • Maybe”government resources” is a more apt term than” income”.

  2. Every cycle is: spend first, then issue treasuries to replenish the fed account.

    But if Congress refuses to permit the issuance of treasuries beyond a certain fixed point, that cycle breaks down, right?

    • Only if they also prohibit overdrafts.

      • Or, like they should, issue only US Notes (Greenbacks) and, of course, inexpensive coins WITHOUT borrowing.

        But, of course, that’s too straightforward and does not provide welfare for the rich and the banks.

      • Which they do currently.

        • “Which they do currently”

          Do they?

          The Treasury may not be allowed to have overnight (or longer than overnight) overdrafts, but does this mean that they don’t (or can’t) get intra-day overdrafts from the Fed?

          Wray et al believe that the Treasury does in fact get intraday overdrafts from the Fed (perhaps only now and again), but they aren’t able to confirm this because of the shroud of secrecy (and, as Newman says, ignorance) which surrounds these matters.

    • No. See, there are at least 7 options plus combinations of these for getting around the debt ceiling.

    • Just to be clear, I’m only emphasizing the point that “government” in the MMT framework has to be understood as the entire government, and not a synonym for “Treasury Department”. If Newman, as a Treasury Department employee, always just took it for granted that there would be a positive balance in the Treasury’s Fed account, that’s because he always took it for granted that Congress would never prohibit Treasury from selling additional debt to, as he says, “replenish” the account. But if Congress does exercise that option, then the automatic replenishment cycle would break down. Then the Treasury would either have to suspend spending or resort to one of the extraordinary measures that Joe cites, if Congress permits those measures to remain in play.

      In the end, that just means that in the US system, Congress (subject also to some presidential veto power) is the central locus of spending commands. The US government can never be revenue constrained unless Congress decides to constrain itself. The Fed also plays a role in setting interest rates and performing other reserve adds and drains independently. But the degree of Fed autonomy (or lack of autonomy) is determined by Congress.

    • Unless a new currency is being issued every cycle, the cycle doesn’t have to break down. There is already money in circulation using which people can pay taxes. Say the government accumulates a surplus in one cycle. They can start paying out of the surplus of that cycle in the next cycle while their account is replenished with the taxes received in that cycle. Depending on the frequency of tax payments, it can always be managed so that the government has no necessity to borrow or create new money. That is how governments managed their expenses for millennia.

  3. Fox News: “We’re seventeen trillion dollars in debt!”
    MMTer: “You do realize the federal government can create dollars whenever it needs to, right?”
    Fox News: “Um, hello, ever heard of inflation?!”
    MMTer: “Aha! So you admit the United States can always pay its bills! Glad we agree on that.”

    • It has always seemed ironic to me that MMT presents the unlimited ability to create dollars as some profound, unrecognized insight, when in fact not only are the deficit hawks aware of it, they are terrified of it.

      • Stephanie Kelton

        A great many “ordinary” Americans don’t know it. It does not follow that because it is received (by some) as a “profound insight” that MMTers PRESENT the ideas that way. We aren’t claiming to have invented the wheel. But I think we can agree that distinguishing the ISSUER of the currency from currency USERS has been a useful rhetorical weapon (h/t Warren Mosler!) that helps to expose what should have been (but wasn’t always) obvious.

        • I agree it is fundamental, that many Americans haven’t thought it through, and the framing of “we’re broke” needs to be debunked. Still, it is the fear of that very capability that inspires the side of the debate that is currently winning. And the post above is typical of many MMTers’ presentations of it, in this case with a tinge of sarcasm:

          MMTer: “You do realize the federal government can create dollars whenever it needs to, right?”

          And don’t sell yourself short. If not a wheel, at least a better mousetrap 🙂

        • I think the reason that so many average Americans don’t know it is because they have never thought about it.

          I find it is quite easy to get them thinking about it by just asking a few simple questions: “If you could print money would you ever need to borrow money to buy a car? If you could print money could you pay off all your debt tomorrow? Then I tell them the federal government can do that but you can’t. The fact that the federal government has debt should tell you that the government is borrowing to build an aircraft carrier and not printing the money to pay for it when it is built.

          Then you get one of those “aha moments.”

      • John Rosenfield

        A recent experience that I had while I was talking with one of my friends may help to further illuminate the issues. My friend stated that since he always paid his debt, shouldn’t the federal government act in the same way that he does. As I was replying to him with a very short and simplified explanation about how the federal government debt functions differently than his debt, he interrupted to tell me not to explain “all that smart stuff” even though his nonverbal communication relayed that he well understood what I was saying.

        There is a common phrase that explains what goes on in the minds of too many people as to their thinking and relating processing.

        “Don’t Confuse Me With The Facts.”

        • Yes, it takes some doing to get someone off a long-held belief. Maybe something even shorter and simpler, like currency user and currency issuer. Once it is established that government is the currency issuer and your friend is a currency user, then it is easier for him to see that maybe the rules that apply to the one might not necessarily also apply to the other.

          • John Rosenfield

            I’m afraid that you missed my point. My friend well understood what I was explaining to him, but he didn’t want his beliefs altered no matter what the facts demonstrated — thus the phrase “Don’t confuse me with the facts” — ie. I’m not going to alter my beliefs even if your facts make perfect sense.

            But don’t be too discouraged. People who have beliefs that we often say are “on the edge of determination” have less unproductive defenses to sustain silly beliefs that are often presented by let’s say Fox News. These types of individuals are the people to whom you can make your arguments in favor of principles presented in MMT. The key is your ability to identify these individuals and reaching them before ideological organizations such as Fox New reaches them first.

            • So, your point is that it is an issue of good faith? If he persists in that, he is indeed a hopeless case. But if Fox News can persuade him to take one position, why can’t you persuade him otherwise? He is obviously easily persuaded.

              Fox News often presents facts that the mainstream media ignore, but on this they are quite in step with the others, not understanding the difference between a currency user and a currency issuer. And with the schools, except UMKC, and his parents and most of his friends. I doubt Fox News is the one and only cause of his beliefs. Lots of people held these beliefs for years before the founding of Fox News.

              • John Rosenfield

                You present an excellent question. I think you’re asking if my friend was being intellectually dishonest with himself and if so why.

                At this point it is best for me to shift the discussion to generalities rather than specificities concerning my friend’s thinking — for which I have limitations to know (as it should be among friends). Second, I’ll avoid using Fox News as an example of anything.

                The best answer to your question that I can offer is that the challenge that people acting in good faith (such as the educators of MMT) have in teaching their ideas to the masses of individuals who could benefit from a change in their understanding of economics is getting past the psychological defenses of these masses that keeps their thinking status quo. Identifying those people who have flexible thinking albeit incorrect about how currency works is a good place to start. Then move on to people who have somewhat inflexible thinking and so forth.

                As to where my friend fits in this situation, I do not know — but if my goal to be his friend then trying to change his mind is not what I would seek in this case. To be honest I regret that I used an experience with one of my friends as an example for discussion.

                PS: My friend and I are truly separate individuals (who except each other for their differences as well as their similarities).

                • John Rosenfield

                  The first sentence of the second to last paragraph of my last comment should read:

                  As to where my friend fits in this situation, I do not know — but if my goal is to be his friend then trying to change his mind is not what I would seek in this case.

                  Sorry about the error.

        • “… he always paid his debt, shouldn’t the federal government act in the same way…?”,Comment by JR.
          Just a simple question deserves a simple answer. The Constitution states, we “shall honor all debt”, so the answer should be : YES, but the time could be prolonged while keeping an eye on “maintaining the value of the sovereign currency”.
          Just a straight answer.

        • No it is not that at all. It is the fact that economists consistently use the wrong kind of language.

          Keep it simple. Use words like “if you could print money,” or “if it was not illegal for you to counterfeit” and then follow with a simple question. Would you borrow to buy a ____________ or would you just print the money? Believe me they get the idea in a heartbeat, even the most poorly educated.

          That is how they quickly understand that the government is not like a household.

    • “Um, hello, ever heard of inflation?!” Tyler Healey

      1) The government-backed banks create much of our inflation since they create most (97%?) of the money supply.
      2) The allowance of genuine private currencies, good only for private debts, would limit that price inflation to government and its payees since everyone else could escape the “stealth inflation tax” by using those private currencies.

      But hey, instead of ethical, optimal money creation let’s instead fight over who gets to mismanage a government-enforced monopoly money supply for all debts – fascists or socialists. /sarc

  4. Yes but that is a politically imposed restraint / choice and not a structural limit imposed by the primordial facts of money creation.

  5. MMT often refers to the sectoral balances, and I have seen the chart of the net deficit/surplus for each sector as a function of years. What I am not clear about is how the deficit/surplus for the domestic private sector is measured. Can anyone explain this? Thanks.

    • the domestic private sector surplus is equal to its total income minus its total expenditure (on both consumption and investment).

  6. “I recall from my time at the Treasury Department that the assumption was always that there was money in the fed account to start with. Nobody seemed to know where it came from originally or when; perhaps it was established in biblical times.”

    Maybe if this were explained, it would help everyone to understand. Didn’t it come from the government purchasing gold, or purchasing British Pounds, and then taxing back part of the purchases? Did it all come from purchasing goods or services to be consumed by government? Obviously government could not first tax or borrow dollars that did not exist, but equally obviously there could not have been a tax liability before the first dollars existed. What did they actually do? None of the major modern (post-Bretton Woods) fiat currencies were established from scratch. They all evolved from commodity-based currencies. Is it really possible to establish a fiat currency from scratch in a large economy? Does the evolution from the gold standard make any difference to how it works today, or does it only matter to understanding how it works today?

    • Actually, the specific history of the US dollar is very instructive and interesting. During the period before the US dollar was created (during the revolutionary war, chiefly) the primary unit of money in use in the states was the Spanish silver dollar. The assumption among the Founders was that the Spanish dollar held its value because it was made of silver, but they had to confront a strange (to them) fact which was that like most precious metal coins throughout history the coin did not actually contain a fixed amount or purity of silver.

      Instead of thinking through the implications of this puzzling contradiction, they simply fixed the definition of “a dollar” at a certain weight of silver, and established the 15:1 ratio with gold as a means of standardizing, in their minds, the value of an American dollar. So actually, contrary to popular belief, the dollar did not begin on a gold or a silver peg but on a FX peg, and was changed to a silver peg on August 8, 1785.

    • At the beginning the Mint operated ‘free coinage’ for a while. Which meant that people could bring metal to the mint and have it turned into coins for a fee. This is maybe similar to a ‘helicopter drop’ of money (where the CB prints money and just hands it out, without taking anything in exchange).

      • Actually at the very beginning the Mint didn’t even charge a fee for coining, that only came later.

        • I think this differed from helicopter money in that the people who brought metal to the mint to have it struck as coinage already owned the metal; having acquired it in a legal (or at least fair) or illegal manner in trade for some object, service, commodity, or foreign money.

          • Of course production, money and trade existed before the US government created its own currency. I say free coinage is like a ‘helicopter drop’ because the quantity of government currency in circulation increases without the government actually spending or lending it. It just hands the currency out to whoever happens to have the specified physical medium. You could imagine a scenario where the CB allows anyone with a particular type of paper or cloth to bring it to the CB, where it will be printed on and thus turned into money (either for free or for a small fee).

            • No, it is not a helicopter drop. It is a fiscal operation, an operation of government spending, as Mitchell-Innes explains. Crane & Co. might have been paid in banknotes printed on the paper they had sold to the US government – so that scenario doesn’t need much imagination. As you suggest, there is no essential difference between this and paying people with gold coins coined from the gold they brought. But basically what is happening is that the state is spending its “fiat” money for the public’s gold (or paper). Nobody would think otherwise in the Crane Paper example, but many hold very different, crazy beliefs concerning the identical gold transaction.

              • that’s an interesting view. The state buys people’s metal and pays for it with coins made from the metal.

    • Golfer, what would the governments have used to purchase the gold or Pounds Sterling? Individuals might have been paid in gold or Pounds for commodities like tobacco, cotton, rum, timber, etc., but the government wouldn’t have had anything to purchase them with except Continentals or script. I suppose the government could tax part of the individual’s earnings, but then it would only be able to purchase gold or Pounds with gold or Pounds. Not much gain there.

      • It would have used its newly created currency to purchase gold or pounds, and demand that taxes be paid in that new currency. It’s a way of “spending” the new currency into the hands of the public, and at the same time accumulating “reserves” to back the new currency.

        Similar to the way Euros got into circulation, except for the part about accumulating reserves. The ECB used freshly printed (and electronic) Euros to buy up all the Marks and Francs and Drachma from the public.

        • So essentially the government issued script (fiat dollars) and “purchased” hard currencies from its citizens and then accepted its script (dollars) for tax payments. Pretty much the MMT description of how fiat money is created, except MMT sees the hard currency reserves as superfluous.

          • I suppose the language allows for that interpretation, but the impression I get from the MMT description is that the government spends first on things it needs in order to carry out the operations of government; things like salaries, aircraft carriers, etc. Not things it intends to store in a vault so that the country can trade with other countries. Once the currency is established, (my impression of) MMT’s statement is totally true; however it doesn’t seem to be an accurate description of the origins, especially the origins of a fiat currency that evolved from a gold-standard currency.

            • One way to look at it is that the newly launched government felt it needed hard currencies (or gold) to ” carry out the operations of government” in the era of the gold standard at least as much as it needed warships, coastal defenses and a military academy, so it “spent” its fiat currency to “purchase” hard money from its citizens. From the MMT perspective, however, the fiat money got its value from the government’s power to levy and enforce taxes, not from the specie “purchased” with the newly issued dollars.

              • Yes, but again there is semantic ambiguity. It has value at all because of taxes, but under a gold standard the measure of its value is the amount of gold that the government promises to exchange for it. Which itself is not really a “standard”, as the value of gold measured by other standards such as average prices or cost of labor is volatile. For fiat (as we know it today), there is no fixed relationship to any commodity, it has value at all because of taxes, but the measure of its value in terms of anything else fluctuates over time.

                • If no one brought gold or hard currency into the Treasury at the government’s fixed price, wouldn’t the government have had to “adjust” the price it offered for gold? That would result in every other commodity or service changing price in dollars as well. Then taxes would be adjusted to allow for the purchase of the adjusted gold. So in a sense the government could have fixed the value of the dollar to, say, a barrel of flour and the Treasury would have looked like a grain elevator.

                  • Under the gold standard, the government offered to sell gold as well as buy it at the pegged price. Yes, the peg would have to be adjusted when they started to run out of gold to sell. That’s called devaluation, and it happens when the demand for gold relative to its supply persistently exceeds the demand for dollars relative to their supply at the pegged price. FDR did it at the same time he prohibited Americans from hoarding gold. Gold had been pegged at about $20 an ounce, and was changed to $35.

                    The prices of domestic goods and services in terms of dollars would not change because of devaluation, though. Only the price of gold changes, or the price of goods as measured in gold. The forces necessitating a devaluation would have already changed the prices of goods in dollars, and would also have changed the price of gold if it had been allowed to float. Prices of imports in terms of the producing country’s currency would also not change, but the prices of imports measured in dollars would jump in exact proportion to the amount of devaluation, since accounts between central banks were settled in gold. Devaluation tends to reduce a trade deficit, making imports more expensive to domestic buyers and exports less expensive to foreign buyers.

            • “especially the origins of a fiat currency that evolved from a gold-standard currency”

              My understanding at present is that ‘gold/silver standards’ and other commodity peg systems are essentially fixed exchange rate regimes.

      • “but the government wouldn’t have had anything to purchase them with except Continentals or script”

        Who owned all the land after the army kicked out the natives?

        • Good point. The government did sell some land and received revenue for it, but some was given to states, some was already owned before independence, and some was given out for homesteading. What was sold was sold largely for dollars, not gold or Pounds sterling.

  7. “I even try to avoid using the expression “borrow” when the treasury issues securities; the treasury is providing an opportunity for investors to move funds from risky banks to safe and liquid treasuries.” – Yes, yes, yessssss

  8. It’s been said in the past I think that there’s a difference between issuing a monopoly currency by spending and the running of a budget. And the politics of running a budget is confused with the basic spending operations that are involved in issuing government money of account. That it’s budget politics that create debt ceilings, budgetary targets, department spending plans etc., and similarly it was politics that decided that Treasury would issue treasuries – and it’s economics that works out the consequences of these actions. Similarly, we’ve imposed both structure and rules on bank operations that have been decided politically and that are about how we let banks use money of account and restrain how they profit from their monopoly.

  9. What is striking to me in this is Mr. Newman’s serene, even apathetic, attitude about what he is saying. Surely he must realize that because “the bond vigilantes have it backwards”millions of American lives are unnecessarily damaged and embittered. Single moms are struggling to figure out how to get enough food for their children—while Congress debates whether Treasury can generate enough tax revenues to pay for the SNAP program. We desperately need for people with the likes of Mr. Newman’s resume and credentials—and who admit to understanding the underlying reality of MMT—to step up to bat and start hitting some line-drives at Congressional skulls. Why isn’t he willing to do that?

    • I completely agree with you, J. D. except I think they should be using their bats to hit Congressional skulls rather than line drives at said.

    • Writing two books is not enough “stepping up”? What would you have him do?

      • Right golfer.

        Theres not much more he can do without some help. I’d love to see John Stewart get him on the Daily Show or Bill Maher get him on his show. How that stuff happens I have no idea. We certainly have heard enough of all the opposing ideas on those shows. Stewart had a guy from Pete Petersons clan a couple years ago. A former Treasury official would go along way, in the minds of many in those audiences, towards making them pause a little before accepting all the bullshit presented out there.

        Problem seems to be that even Democrats dont want this message out there. Democrats seem to prefer to try to get people to extract a little more form the wealthy with higher taxes while republicans just want all middle class workers to think if they can just get rid of all govt support for shiftless do nothings, all their concerns about not being able to afford as much now AND save for the future would be over. They both are playing a zero sum game and looking for different sources of surplus for the disgruntled middle and lower middle class.

      • The short answer from my perspective, Golfer John, is no. Writing two books isn’t enough. If I had the credentials and networking contacts that Mr. Newman surely must have, I’d be demanding the attention of Congress and the news media. I wouldn’t be able to sleep at night knowing they’d gotten it all so wrong—and so much real suffering and wasted human life was the result.

  10. Alex Seferian

    I am in Argentina today and sat in on a presentation by the chief economist of one the country’s largest banks. Reading this post made me reflect on how different “ordinary” Argentines are to the “ordinary” Americans that Mrs. Kelton refers to. Here, everybody, from soccer players to fans, from farmers to owners of 100,000 acre ranches… I mean EVERYBODY, is aware of the fact that the government is the monopoly issuer of the currency. They all know that only the government prints the Argentine Peso. Here the Central Bank and the Treasury are de facto under the same roof. There are no debates related to the meaning of “consolidated government”. There are also no debates related to “debt ceilings”. The benefits of having a “fiat currency” and being “sovereign” are well understood.

    Notwithstanding these insights, few Argentines would jump to the conclusion that the Government is “not revenue constrained”… and here the key metric to be on the lookout is not so much inflation… which is 2% per month! No, here the key metric is US dollar (“hard currency”) reserves. The reason: not everything is for sale in Argentine pesos, including much needed oil. The currency is too “soft” (alluding to W. Mosler’s first book).

    Regarding inflation, and despite the roughly 25% annualized figure, consumption is relatively healthy with wages keeping up. For the better off, vibrant “black” markets (they call them “blue”) provide US dollars for under-the-pillow type savings. GDP has been recently growing at respectable low single digit levels, and even at low double digit levels a few years ago; poverty levels have come down in a decade; the country runs a trade surplus; its budget deficit is 2.5%; unemployment is roughly 1/3rd of Spain’s; and its net debt to GDP ratio (at aprox. 40%, or half that amount if you exclude internal peso debt) is relatively low by international standards.

    Inflation one can almost conclude is something Argentines have learnt to cope, or deal with. Where Argentines are having a tougher time is in managing the country’s enormous wealth. Here is a country that produces 2.5 x the amount of food that it consumes (one of the highest ratios in the world), and yet is riddled with people starving. A country with poor infrastructure and related problems that lead to not infrequent deaths and accidents, a country with serious security problems where one has to often look over one’s shoulder when walking down the city streets.

    Here the debate is not about whether the Government should or not issue more money and spend. Here the debate centers around questions such as this one: Why despite being sovereign, despite using the printing press, and despite having a fiat currency, is such a rich country in fact so poor? I am a fan of MMT, but think that for some international audiences, it would gain more adherents if it focused more on the “quality”, and not just the “quantity” side, of the equation when it comes to Government spending and money.

    • Alex Seferian. Great post. Thank you. MMT is situated in the heart of OECD-land. We are struggling with fiscal ignorance – this is THE big OECD struggle because the politics of quality are restrained by the politics of quantity. We are at the mercy of vainglorious deficit hawks and struggling to preserve what we’ve got let alone improve the quality of what we should be planning for in the future. Asset sales, pensions, health, benefits and jobs – we’re being screwed. Because… banking wants to be the issuer of credit rather than government the centre of spending for the public good. Quantity/quality is a double sided coin, yes, but historically, at the present conjuncture, we are forced to deal with quantity first.

    • Andrew Hartman

      Dear Mr. Sefarian,

      Thank you for your comment that asks for a policy discussion pertaining to a non-dollar environment. If a country that doesn’t produce enough oil to meet it’s own needs can only buy oil, energy, for dollars, then they are not a currency issuer of a free-floating currency with no foreign denominated debts. To need to buy oil is to have a foreign denominated debt


      • Alex Seferian

        Not necessarily. They export soy bean and other commodities and can close the loop in that manner from time to time.

      • But, with a trade surplus, wouldn’t they be accumulating more than enough dollars to pay for the oil they import? Unless their surplus is entirely with other countries whose currency is also “too soft”, and they have trade deficits with the oil producers and others whose currency can be converted to dollars?

        • I’d agree that a current account surplus indicates an accumulation of dollars and that the cost of the imported oil is subsumed into that surplus number. But those dollars might just get shipped right back out of the country in order to buy foreign assets or might be held as reserves, simply because the holders of those assets feel the need to hold a supply to smooth out fluctuations in their consumption (or income) due to fluctuations in their income (or consumption). For example, export income might be concentrated at harvest time but import expense is spread through the entire year. Seferian’s description seems to indicate a preference for accumulating foreign assets over building up domestic assets among the class of Argentines with export earnings.

      • Andy, the debt is for barrels of oil used, not dollars, unless the national currency is pegged to the dollar at a fixed exchange rate. If the nation’s currency strengthens relative to the dollar, the oil debt is less of a burden, and if it weakens relative to the dollar, the debt is greater. The sure way to lessen the oil debt is to import less oil.

    • Constant awareness that the wealth really is in the real resources is key. Without them fiat or just about any other type of money for that matter really is just play money.
      If you can’t obtain enough oil with ones own currency, then perhaps it’s time to step up the search for the locally available alternatives to oil and develop those?

    • Alex,

      Thanks for the informative post. I have family in Argentina so I am always fascinated by how things work down there. I do frequently wonder exactly what the Argentine government is spending on. The northern provinces where I visit are much poorer than Bs. As. and have third world quality infrastructure and standards of living.

      Its also rather strange that a country with a trade surplus would have such high inflation levels for so long. And while the soy boom has been a good thing for Argentina so far, relying on agricultural exports really is not a path to prosperity- its basically colony status, especially since the US and EU have pretty strict limits/tarrifs on agricultural imports. My family grows lemons in Tucuman and we are blocked out of exporting to major western markets. So Argentina needs to find some comparative advantage in value-added to stay wealthy in the long term. Not sure what this might be.

      Such high sustained inflation is probably not a good thing, and you see all sorts of odd financial products being created in response, such as individual stores extending credit to consumers instead of banks, etc. But as long as real wealth continues to increase, its certainly better than the bubble days of Menem!

  11. The origins of US Dollars are in the monetization of the Revolutionary War debt and the creation of the Bank of North America in 1781 to supervise the future issuance of paper currency. Treasury got its initial dose of money by creating a market for US securities by assuming all war debts and promising to pay them, and establishing a sound currency based on a fixed exchange of dollars to silver (and also silver to gold) which were freely issued by the US Mint to anyone who brought in silver (or gold). The war debt itself had been created by simply issuing paper currency and securities to those willing to take a risk on the American side of the war. Americans were essentially asked to accept for their labors a bet that the Continental Army would eventually push the British into the sea. If this bet went south, they would lose everything. If it paid off, the paper money would be redeemed in specie AND Americans would have gained the power of self-governance. In the interim while these arrangements were being conceived, the original paper money, Continentals, became worthless thanks to counterfeiting and a lack of redemption and were eventually pegged at 100 Continental Dollars = $1 by the time redemption became possible.

    One of the primary problems of Colonial America was a lack of specie money for circulation. The use of paper currency of various sorts might suffice for domestic purchases, but the import of other goods (which was mandated by British Mercantile policies prohibiting outside trade and prohibiting certain domestic manufacturing) was constrained by being able to obtain specie. This meant Americans (and their slaves) had to labor to create a production surplus of desired goods like lumber, metals, tobacco, cotton, etc. that could be sold abroad in order to be able to afford any imports.

    Congress attempted to solve this problem in three ways – (1) trade and manufacturing free of British Mercantile restraints, (2) assumption of war debts with a committment to pay, (3) free issue of specie brought to the Mint.

    With the definition of a dollar as 371.25 grains of silver, the level of physical specie currency was now determined by the willingness of people to expend their energies on mining and refining silver and gold. In the mass of humanity, the willingness of enough people to perform this task is rationally related to the expected reward of obtaining money from it – people would only mine and refine precious metal when they could expect to make enough profit from it to at least support themselves. Absent a major find (like Sutter’s Mill), this left the growth in specie, and thus in currency, relatively stable and related to the growth in population and labor productivity.

    With the assumption of war debts and the ability to redeem them in specie obtained via taxation, Congress immediately created the ability to instead of paying off the debt, grow it via spending whatever it wished, which is what has mostly happened over the subsequent 226 years other than the unfortunate episode of 1835 under President Jackson.

    Lastly, by freeing the economy and American world trade, the creative energies of Americans were unleashed to create economic growth by seeking an increase in personal profits rather than serving as a means of enriching the British upper class.

  12. J.D. ALT:

    Single moms are struggling to figure out how to get enough food for their children—while Congress debates whether Treasury can generate enough tax revenues to pay for the SNAP program.

    But here is where you go off the rails. The economics and implications of MMT are straightforward and simple. However, the effect of government spending on human actions is a moral question, not an economic one. We can’t just issue currency to pay for whatever we want because SOMEBODY has to work to produce consumption goods and services being bought.

    The SNAP mom you complain about is obtaining for nothing and consuming food that someone had to labor to grow, process, package, ship to market, and sell. It is a universal truism that everyone loves a free lunch, but not everyone can have one. If everyone attempted to go on SNAP to feed their families, there would of course be nothing to eat as no one would be working to produce food.

    The purpose of SNAP (and all the rest of the panopoly of the welfare state) was a compassionate way to temporarily tide over individuals in an unfortunate economic situation until they could get back on their feet and support themselves via their own labor. It was not meant to be what it has become, a permanent way of life subsidzing idlesness and the production of a horde of fatherless children at the expense of those who work.

    This is the point that so many on here seem to fail to grasp when they advocate for nearly limitless wellfare spending as a consequence of alleged MMT insights. When one person is given free meals, free housing, or free medical care, it must come at the expense of those who work because the effect of subsidzing this consumption by those with no income is to take away goods from those who do have an income by effectively driving up the price of goods available for consumption. In the long run, there is some elasticity in supply driven by demand as farmers can plant more food and grow more animals, and factory and mine owners can increase resource production and transformation into consumer goods, but in the short run, goods available for sale are what is on the shelf of stores and in warehouses. If 100 families produce $1 in goods each and consume $1 in goods each, the system is balanced. If 80 families produce $1 in goods each and 20 families are given $1 in fiat money, you have $100 chasing $80 in goods, and average consumption by all is driven down to 80 cents, making everyone feel pinnched. Those on welfare feel rightly they aren’t getting “enough” to get by, while those who work feel rightly that they are being involuntarily deprived of part of the reward of their labor.

    Conservative objections to SNAP and the like for able bodied people are not based on finances or disbelief in MMT, but on the moral judgements that as many people who can should work to support themselves, and that people should not have children they cannot financially support. The reasons for these negative moral judgements are a belief that people are first responsible for those under their own care, and that to unnecessarily burden those who work with the support of those who do not work is akin to theft, and that of course theft is wrong.

    For MMT to succeed in the political economy, it must focus on resolving the problem of supply and labor, so that sufficient goods are available to reward those who work (supply side economics), and sufficent people work to produce those goods (full employment). This is why it is insufficent to use MMT power to simply hand out cash or employ people digging and refilling holes. The monetary power of government needs to be focused on productive spending that either facilitates private economic transactions (defense, justice, property rights, information gathering), or the increases the productivity of private undertakings (infrastructure, research, education, public health). Direct handouts not initially paid for by taxes need to be limited.

    • You’re attacking the wrong opponent. While it may be part of Progressive politics to give handouts to lots of people, and while most MMT supporters are also Progressives, the two should not be confused.

      “Conservative objections to SNAP and the like for able bodied people are not based on finances or disbelief in MMT, but on the moral judgements that as many people who can should work to support themselves”

      MMT includes a Job Guarantee, so that all able-bodied people will be able to work to support themselves. Disbelief in MMT is the only thing that creates the conflict over SNAP and the like. Such programs would not be necessary, or would be much smaller, if all the able-bodied people had access to jobs.

    • Andrew:When one person is given free meals, free housing, or free medical care, it must come at the expense of those who work because the effect of subsidzing this consumption by those with no income is to take away goods from those who do have an income by effectively driving up the price of goods available for consumption. Uhh, NOPE! That ain’t how it works. That’s not the effect. We are not always at white-hot chock-full wartime full employment – which is when it would work like that. In fact we are hardly ever at or near that, even at times of a normal economy, of “full” employment. In fact, we are not even in “normal times” but in a long Great Recession worldwide – an intensification of the Great Stagnation of the last few decades.

      It was not meant to be what it has become, a permanent way of life subsidzing idlesness and the production of a horde of fatherless children at the expense of those who work.This is not what SNAP has become. The recipients are not idle. We are in a world where airline pilots qualify for and receive food stamps! This is blaming the victims of an insane economy that has forgotten economics, forgotten morality that has been well understood forever. Even the MMT academics don’t emphasize it enough – Keynesian economics, MMT economics is the economics of common sense. The way to identify the most hyperintuitive, commonsensical parts is when someone, even our UMKC rock stars, calls something “counterintuitive”.

      This is why it is insufficent to use MMT power to simply hand out cash or employ people digging and refilling holes. Nobody is seriously proposing that. But this misses the point of Keynes’s hole-digging etc . The point is that modern economies are run in a spectacularly wasteful way. The incorrect beliefs I criticized above amount to not seeing this colossal waste. Keynes’s point was that we are so spectacularly wasteful that paying people to dig holes and refill them would create a gigantic free lunch – would create real wealth, pretty near instantly by the multiplier effect, by setting people to work providing the free lunch, the work provided by the recipients of the hole-diggers cash etc. Of course the Keynes / MMT /New Deal idea was to put people to work doing stuff for the public good. Which would be an even bigger free lunch. Digging holes is only if the psychotic beliefs of statesmen – and even worse, the general public – stood in the way of something better.

      • Thank you golfer1john and Calgacus for helping to set the record straight. I have been the recipient of food stamps twice in my life, once as an unemployed ABD graduate student and once while struggling to start my own business with no capital. I do not consider myself an idler, and I have only two adult children and one grandchild, hardly a hoard of “fatherless” (an oxymoron) children. I detect a hateful rant in Andrew’s comment which is unbecoming this website.

  13. Giving people $ to buy food, or using $ to buy food first and then giving to them is not taking food away from anyone else, unless there’s a short-term quantity-supplied constraint, in which cases food prices can be expected to rise (a quite efficient rationing mechanism). The implicit point against doing so is that, apparently, the allocation of food to people is seen (by the proponents of such a view) as a reward for them pursuing culturally legitimated individual goals in normatively prescribed or accepted ways. Food insecurity and/or deficits are supposed to be the ‘negative sanctions’ which will both nudge ‘deviants’ back into conformity AND re-moralize the culturally legitimate goals and the institutional prescribed “ways and means” of pursuing them.