By J.D. ALT
It is literally painful to watch our political leaders’ efforts to rethink and restructure how we are going levy taxes on ourselves as a collective society. It is like watching a family member struggling with mental illness: the demons being wrestled with are imaginary—yet they have the palpable force somehow of a granite wall. And as the struggle with this palpable monolith unfolds, even we—the clear observers of reality—forget that it is imaginary; when we do remember, the pain becomes excruciating for the simple reason that we know it is completely unnecessary.
Why does our political system choose to believe and struggle with the imaginary constraint that taxes must pay for sovereign spending? How can we explain to ourselves, in the face of this rock-solid demon, that the simple logic of fiat money demonstrates that sovereign spending must occur first, with taxes collected after? How can we reassure our terrified and confused representatives in congress that if our sovereign government collects back fewer dollars than it issues and spends, the difference is not our collective “debt”—it is, in fact, our collective savings? But the demon will not allow us these explanations.
As is the case with every mental illness, the cruelest aspect to observe is how vulnerable our delusion is to being manipulated and taken advantage of by those who are self-serving and greedy. We actually believe the rich fat-cat when he tells us that if we choose to make him richer we, the poor strugglers, will be better off! How, we are told, can the rich fat-cat give us a new job if he is not made richer and fatter? We cannot, after all, give ourselves jobs—can we? Our sovereign government—which we cannot seem to understand represents our collective selves—can (and must) issue and spend fiat-currency. True! But that currency (our demons are whispering) cannot be spent by our collective selves to pay our individual selves wages to accomplish useful things for our families and local communities. The currency, instead (whisper, whisper) must be spent to fatten the fat-cat so that he can pay us wages to accomplish useful things for him. The pain of this logic makes you numb.
Our case is made all the more desperate by the fact that our “therapists”—the economic pundits and budget analyzers—are actively in collusion with the rich fat-cat. We lie down on the couch and are told that we have a deficit. The deficit we have arises from the fact that our sovereign government—which (whisper, whisper) is not really us but, instead, is a conspiring other who wishes nothing more than to confiscate our tax dollars—insists on spending more of those dollars than it can confiscate. So we therefore have a deficit which, even though it is not our fault, we will be forced to somehow make up and repay. Our simple hope that perhaps our tax dollars might provide us with beneficial public goods and services are dashed and trampled by mathematical calculations demonstrating there can never be enough tax dollars to pay for all the public goods we clearly need. Our only hope (whisper, whisper) is to further fatten the fat-cat so he can accomplish everything for us. If we fatten the fat-cat, he will educate us; he will grow our food; he will build our houses; he will cure our aches and pains; he will put gasoline in our fuel tank. All we have to do is give him everything we have: our farmland, our national parks and forests, our wildlife preserves, our streams and estuaries, our mountain tops. All we have to do is give him our air and our water to do with as he needs. All we have to do is make sure he is rich, because only if he is rich can we hope that he’ll give us a job and pay us to do something. We cannot expect him to hire us if he is not rich, can we? No. And we cannot expect him to hire even more of us if we do not make him fatter and richer still. This is all very logical, we are told, as we lie on the couch.
Finally, our prognosis is greatly diminished by the fact that there are influential people—leaders—who know very well that we are delusional, that taxes do not pay for federal spending, that our fiat-money deficit is not a “debt” that we owe to anyone, that fattening the profits of global corporations neither creates meaningful jobs or causes anything useful to be accomplished for our local communities. They know all these things, yet they are required (by what?) to remain silent or, at the very least, dissembling in their objections. They cannot come straight out and say, “Look here, this tax and deficit calculation is sheer nonsense. It is delusional gobbledygook! The sovereign government has to issue and spend its fiat money before it can collect it back in taxes. And that issuing and spending of fiat money is precisely how the sovereign government can pay us to accomplish everything we agree needs to be collectively accomplished.” The fat-cat needs to be put in his place. He just gets one vote, like all the rest of us. He doesn’t get to run the whole show. Unless we let him. Which we surely will as long as we suffer our monetary mental illness.
When the colonial people arrived the native people realized immediately that they behaved like demons. They saw us as wetiko, cannibals with a desire to consume everything. Some have postulated that the European colonialists/capitalists were/are infected with a mental disease of the collective unconscious called malignant egophrenia (wetiko). http://realitysandwich.com/75652/greatest_epidemic/
Question. Who is paying for our theripist, since we are not being billed? Perhaps the fat cats are paying for it out of concern for our welfare.
Monetary Mental Illness – Precisely!
Great post, J. D. I always enjoy your writing.
Wow! The dawn breaks for those who are awake. I see the light.
…wait, the mass fog machine blusters on behalf of merchant’s of fright. Innocence needs to suffer. Darkness… ears close, eyes follow, folding inward crawling back under the desk…more of the same, as our unceasing natures are used against our collective humanity.
All good JD. I have to say that I’ve been disappointed by the scholars here at NEP from whom I’ve learned a lot about MMT and who have clarified so much for me. I used to listen to Max Keiser years ago when I first started thinking about the essence of money. Michael Hudson used to be a recurrent guest then. (I don’t know if he still is, because I can’t stomach Keiser anymore, since I started to piece MMT together.) Hudson never corrected Keiser fundamentally about the nature of money when Keiser would do his “performance” about the evils of fiat money. Bitcoins and gold to the rescue! I started to wonder why Hudson wouldn’t address this key issue. The same thing happened when I watched Bill Black debate Leo Panitch, an orthodox Marxist tied to the labour theory of value and money as commodity. Tax the rich to pay for services. Black wound up arguing on Panitch’s terms. I was really disappointed. I’m not looking for a hero or a champion. But, why do these people cave in when it comes time to educate? Is it because they know that they are talking to the wind? Do they want to retain their status as serious academics?
If instead of applying the tax cut to the 1%, Congress had set the Federal Income Tax rate to zero, the income of Americans working for a living would have been boosted by $30 billion dollars A WEEK. I would bet that the fat cats and the companies and corporations in America, China, Europe, Japan would have struggled to meet that tsunami of aggregate demand.
RE: “…sovereign spending must occur first, with taxes collected after?…. The sovereign government has to issue and spend its fiat money before it can collect it back in taxes. …”
– Repeating this statement over and over is exactly the wrong approach in convincing civilians. What the hell does it even mean? Is it referring from the beginning of the sovereign’s time? Or next month’s tax receipts? It’s nothing people can wrap their brains around and builds distrust and keeps us in the fringes.
– People understand checking accounts and lines of credit. They can understand the actual mechanics on Fed Treasury operations (see Eric Tymoigne: http://neweconomicperspectives.org/2016/02/money-banking-part-6.html#more-10042 )
– Try this: “Fund expenditures through securities purchased by the Fed – either a loan or just have Fed “gift” it to the Treasury. ” THAT is not only the truth but very simple to understand.
– Here’s the whole thing in bullet point format (the dog nails it!) : http://mmt-inbulletpoints.blogspot.com/2017/09/im-just-responding-to-various-economic.html
Francisco, probably better to just start asking them questions about what money is and how it is created. It will quickly be apparent that they don’t know what they think they know. Ask them, for example, how the national debt, which has existed since 1836, has harmed children and grandchildren along the way. How did the enormous debts run up in WWII, which have never been paid back, harm following generations. Ask them why the Federal Government, which everyone agrees can create money “out of thin air” would need to or even bother to “borrow” money. When they come back with the inevitable “inflation” ask where is this inflation, why is it always coming but never here. There are numerous ways to point out the contradictions in the “common sense” view of money.
I have tried that approach with very little good result. The problem is that even after convincing them that their own account of money is flawed, they still resist accepting the MMT account and desperately cast about for other explanations that do less violence to their intuitions. It’s like, ” OK, you’ve proved me wrong, but I KNOW you’re wrong too.” So when you ask them to point out how you’re wrong, they can’t… but they shake their head and say, “I just KNOW it!”
Francisco: I agree that MMT is hard to get your brain around, but it is insulting to the intelligence of the public to state that repeating a key point twice in an article makes the point hard to understand.
Sorry that it’s hard for you to understand, but logic will tell you that money has to come into existence before the public gets their hands on any to be able to pay their taxes with. Only Congress, according to the U.S. Constitution, can make that money come into existence. The public can’t, without counterfeiting.
Susan: This point is repeated repeatedly in MMT articles, and while technically true in a sense (China doesn’t print dollars), it’s vague and not entirely true depending on the interpretation. Of course Congress coins the currency (or whatever the Constitution says), but for example, banks create money out of thin air, so technically, folks don’t need the sovereign to bring money into existence in order to pay their taxes. So much for logic and counterfeiting. So the statement is vague, imprecise, and not always true. That’s why I suggested wording that is true, clear, and relatable to people who have checking accounts and lines of credit.
I can explain nothing to you.
I am not hearing pushback about the bottom 90% creating over 50% of the new jobs.. We are shooting ourselves in the foot by not pushing that meme over and over and over… There are some statistics showing a slowing in the creation of these new jobs because of the Great Stagnation…. Really the Federal Reserve can soak up A TRILLION DOLLARS a year in bad debts for the banks, but we cannot budge the TAX SYSTEM to provide CREDITS for UNDERWATER HOME OWNERSHIP…. We do not hear about the Real Estate/Debt FRAUD banks scheme, the trifecta that deluded the middle class into believing their real estate values had increased significantly, the banks did not apply the CENTURY OLD underwriting standards and then they DEFRAUDED investors with FRAUDULENT ratings on their investments……ALL THE TIME getting ready to foreclose on 10 MILLION homes according to Tim Geithner…..
Well said, Madame! Thank you.
CENTURIES OLD underwriting standards…
The HSC would have settled the issue. Mint a few 10T$ coins and then everyone will understand.
It’s very popular within one’s echo chamber to describe those who disagree as mentally ill. Fortunately, such opinions do not sent us to the gulag just yet.
Still it should be enough to point out that someone is wrong and then have a respectful conversation. I happen to agree that the people fretting about deficits are wrong, but I also think MMT advocates are wrong to the extent that they focus too much on government created currency and not enough on monetized credit created by commercial banks. Yes, the net creation of credit is offset by a net creation of debt, but the credit goes into circulation immediately, and only comes out of circulation over a number of decades. It makes a world of difference whether I have no money and no debt, or a million dollars to play with and a million dollars of debt.
At the other end of the business cycle much of that money is coming out circulation, and the banks are curtailing their lending. The bottom line is that government cannot create money while the banks are creating it, so we end up with little government creation of money during boom periods, and then we come to the rescue during the downturns when banks are overextended.
Feeble notions about regulating *how* the banks create money ignore that the real problem is how *much* money those banks create, regardless how its done and who gets the money. It also ignores the fact that, even when new money is loaned into make new production facilities possible, the inflationary effects of that new money is still immediate, while the produced goods are several years away. That is, if inflation is “too much money chasing too few goods,” that additional money will have additional goods to chase until said goods are produced, which could be several years. Beyond that, it ignores the fact that regulations are about details that the public doesn’t notice, and banks end up regulating the regulators.
The problem with MMT is that it has only half the answer. In order to significantly increase the currency (digital or paper) that government can issue, we have to significantly decrease the monetized credit banks create, for bank credit is purchasing power as surely as money is.
Nor is Modern Monetary Theory all that modern. It is a step down from The Chicago Plan, created in the 1930s by prominent economists at University of Chicago; Princeton, Yale, Duke, and New York University. By 1939 it was endorsed without reservation by 235 economists from 157 universities and colleges, and is now endorsed by thousands.
It proposed 80 years ago the same government creation of money that MMT advocates propose today, but it balanced that proposal with the abolition of bank-created money. As a transitional measure, it proposed a long term loan to all the banks to offset the money they had created out of thin air. Thus, banks could continue to lend from government loans and from term deposits, but new money would be spent into circulation to benefit the public rather than to be used as a source of revenue for banks.
I hope you can appreciate that I was able to make my case without calling anyone in the MMT camp mentally ill.
I’m not aware of any MMT people (mosler, kelton, wray, etc.) that doesnt include bank credit as part of their economic model? What you are saying is all well understood and discussed throghout MMT literature.
Banks could be a perfectly viable mode for adding money to the economy in an efficient manner a la north dakota as ellen brown talks about. Public infrastructure banks for example.
I have had discussions directly with Mosler, who trivializes the inflationary effects of bank-created money, when in fact 95% of our purchasing power consists of bank notes. As I said, he and other MMT advocates want to regulate *how* banks lend the money they created (not currency, but money none the less), but do not want to curtail how *much* they create. MMT enthusiasts have swallowed the lie you have just stated here, that “banks could be a perfectly viable mode for adding money to the economy in an efficient manner.” Economists and others have known for well over a century that this is not true.
“The curse of credit as a flux of exchanges is that it expands when there is a tendency to speculation, and sharply contracts just when most needed to assure confidence.” Henry George, The Standard, 2/11/1888
In 1869, Congressman Benjamin Butler proposed what MMT is proposing, but importantly added,
“My next proposition is to take from the national banks all power to issue notes to circulate as money, leaving them as they are now, banks of deposit, loans, and discounts, but not of issue; of course to be relieved from all taxes on circulation.” Banks were, in fact, required shortly afterward to hold 100% reserves against the notes they issued. However, check writing was so scarce at the time that it had not occurred to government that it should also require 100% reserves against checking accounts.”
In the same speech he stated that the self interest of banks is incompatible with the public interest:
“A deplorable example of this as a practical fact has taken place within a few weeks under our eyes, by which the managers of an insolvent railroad, in connection which certain banks, who should have been regulators instead of regraters [hoarding speculators] of the currency, contrived to sequester some thirty millions, and thus to bring about a stringency in the money market, and a consequent depression in the public securities of some five per cent, in a single day, out of which the conspirators might realize large profits. This process of robbing the community may now be repeated at pleasure. A system of currency which permits its guardians, the banks which issue it, to thus sport which the public credit and oppress the merchant, depress the public funds, and unsettle the business of the country, is clearly defective, and it is the duty of Congress at once to provide the remedy for that defect.”
So did America’s top monetary economists echo this sentiment in “The Chicago Plan”:
“As we have seen, the banks have often expanded the volume of the means of payment when it should have been contracted, and contracted it when it should have been expanded. For this, bankers are not to be blamed; the fault lies with the system which ties the creation of our means of payment to the creation of the debts to, and by, the banks. Moreover, this system has been advantageous to the banks only by fits and starts, chiefly during boom periods when the volume of loans was high. When crash and depression have arrived, the system has resulted in serious trouble for the banks. Thousands of banks failed primarily because of “frozen” assets due in large part to the fact that their demand deposits were based on slow assets like land and industrial equipment which could not yield cash when suddenly needed. This fact greatly aggravated the banks’ embarrassment from the fractional reserve system.
“Moreover, the independent and uncoordinated operations of some 15,000 separate banks result in haphazard changes in the volume of money and make for instability, with periodic depressions and losses to the banks themselves as well as to others.”
It seems that “Modern” Monetary Theory has forgotten much that has been understood for over 150 years, that, without creating inflation, government can increase the supply of its own money only to the extent that there is economic growth and the supply of bank money is curtailed. It is not that MMT is wrong about issuing government money, but that they are wrong about allowing banks to issue money rather than lend from term deposits.
My last major quote is by William Jennings Bryant, from one of the most famous speeches in American history:
“We say in our platform that we believe that the right to coin money and issue money is a function of government. We believe it. We believe it is a part of sovereignty and can no more with safety be delegated to private individuals than can the power to make penal statutes or levy laws for taxation.
“Mr. Jefferson, who was once regarded as good Democratic authority, seems to have a different opinion from the gentleman who has addressed us on the part of the minority. Those who are opposed to this proposition tell us that the issue of paper money is a function of the bank and that the government ought to go out of the banking business. I stand with Jefferson rather than with them, and tell them, as he did, that the issue of money is a function of the government and that the banks should go out of the governing business.”
Again, MMT has half the solution down perfectly, but they resist the other half, which is absolutely necessary if inflation is to be avoided. Our great periods of inflation came not from expansions of currency, but from expansions of credit, while our depressions came from contractions of credit. MMT’s trying to tiptoe around this reminds me of Henry George’s remark about the man who was “trying to get on the good side of God without angering the Devil.”
Is it actually possible that this few people know about MMT? I assumed many Fed and Wall Street people understood it. Or do the wealthy actually understand it but just prefer making the world suffer unnecessarily and eat each other under some mass delusion? Why??