A Modern Money Explanation


Since the Democrat’s presidential debates, the attacks on progressive candidates for their “unrealistic” proposals to address the biggest challenges we face as a collective society have intensified dramatically. The primary criticism is the enormous price-tag associated with each of the big-ticket issues they propose to undertake: universal healthcare, mitigating climate-change, eliminating college debt, free pre-school daycare, re-envisioning and rebuilding America’s infrastructure, a job guarantee and a universal basic income for every citizen. The attacks come from both conservative Republicans and centrist Democrats, each of whom are avowed believers in fiscal “responsibility” and balanced federal budgets.

Unfortunately, while there is growing sympathy with the progressive goals themselves, the advocates of those goals still don’t have a convincing explanation or formula for how the federal government will pay for it all. The best they can come up with is that we’ll increase taxes on the super-wealthy and the big corporations—or that it’s simply unacceptable, conceptually, that the world’s richest democracy cannot manage to achieve these goals for a healthy society. So long as these are the progressive narratives—even if they manage to win the upcoming elections—the goals will never be achieved. To create genuine, wide-spread support for undertaking the big-ticket issues we face, it will be necessary to explain to America how its monetary system actually works.

So, how do we get there? So far, the Modern Money narrative is bumping hard against an even harder ceiling of disbelief. Even the progressive political advocates themselves cannot—or will not—make a direct attempt to explain it. This, of course, is pragmatically understandable: the first candidate who makes the attempt will likely not survive the pushback of public ignorance and misinformation. Nevertheless, until this challenge is tackled, we can write off the “progress” in “progressivism.” A strategy needs to be established and implemented to create a Modern Money Explanation and frame it to be easily understood and politically palatable.

A few thoughts toward that end

I recently watched the blood drain from Erin Burnette’s cheeks as she announced on CNN, with one of her most consternated expressions ever, that Bernie Sanders had “admitted” his Medicare-for-All program would “cost” $40 trillion. Her blanched expression said it all: How could he even be dreaming that the federal government was going to pony up $40 trillion to pay for America’s healthcare? I’d like to up the ante: it won’t “cost” $40 trillion, but $320 trillion! The narrative we’re trying to create must help Erin (and everyone else) wrap their intelligence around that scale of number—and realize that, in and of itself, it is both immensely meaningful and totally meaningless.

How do I figure? First, Bernie’s $40 trillion price tag is calculated for a 10-year period. But why arbitrarily use a decade’s calculation? Are people going to stop needing healthcare ten years from now? A more meaningful calculation, I would argue, is over a lifetime—so I’m figuring 80 years. Let’s proclaim it then: at today’s prices, Medicare-for-All will require a payment of $320 trillion for each generation of Americans!

Next, we must consider in what sense this number has meaning. Erin’s facial capillaries are clearly responding to the egooptic (a word I just made up) perception that when I “spend money” what happens is that, first, I have to get it from somewhere, second I spend it in exchange for something else and, third, I consequently don’t have it any more. From an egooptic point of view, this is clearly what happens. Erin’s mistake, however, is imagining that the currency issuing U.S. federal government is an egooptic entity—like a person, or a family, or a business. This factually is not the case.

To see why, first consider what the $320 trillion represents. Does it represent a finite amount of some thing the federal government needs to get its hands on—or does it represent the measurement of something, as in “three hundred feet of ribbon”? If America were still on the gold-standard, and the government had to be able to redeem every U.S. dollar for 32oz of precious metal, then $320 trillion would factually represent a finite amount of gold (which would vaporize Medicare-for-All in an instant, because there is not anywhere close to $320 trillion worth of gold on the planet).

If, instead, $320 trillion is a measurement of something, two questions arise: (a) What is being measured? And (b) is it possible for that thing to get so large that we run out of units of measurement? Can a ribbon get so long that we run out of “feet”?

The answer to the first question is: our calculated $320 trillion represents and measures the amount of healthcare services a generation of American citizens will need to obtain over their lifetime. Whether you think it’s an absurdly big number is irrelevant. It is what it is, and there are only two ways it could be made smaller: (1) reduce the amount of healthcare services the generation will need, or (2) change the unit of measurement—i.e. define the “foot” to be longer so the ribbon is, say, only 200 feet long when you measure it instead of 300.

The answer to the second question is established by the U.S. Federal Reserve Act (established, in other words, by “fiat”). This democratically imposed component of the American social contract gave the Federal Reserve (American’s central bank) the authority to create units of measurement—U.S. currency—as needed to measure whatever length of ribbon the American people choose to produce and consume. It was not always the case this could be made to happen. Prior to the U.S. Federal Reserve Act, when the U.S. (at the demand of east-coast financiers) was returning to the gold-standard after the civil war, southern and western farmers in America produced, at every harvest, ribbons and ribbons of corn and cotton which they could not sell for the simple reason there was not enough currency to measure it—creating, year after year, extraordinary hardships and economic crisis. The Federal Reserve Act changed that.

Which means that if a generation of American citizens decides they want or need to consume $320 trillion worth of healthcare services, the Federal Reserve is authorized to create the U.S. currency necessary to enable it to happen. The only impediment would be if there aren’t enough doctors, nurses, radiologists, examination rooms, surgical suites, bandages, drugs, etc. available to provide for the demand—in which case the citizens will, obviously, only consume what’s available (and the Federal Reserve will create the commensurate amount of currency).

In other words, just because we have a theoretically infinite number of “feet” to measure ribbon with doesn’t in itself produce an infinite amount of ribbon. Or, to put it another way: the issue isn’t whether there’s enough “feet” to measure (i.e. pay for the production and consumption of) our ribbon, but rather how much ribbon is actually available to be measured. Erin’s real concern, therefore, should be whether America’s boundaries contain enough real resources that can be marshalled to provide $320 trillion worth of healthcare over the course of a generation.

This brings us to the second aspect of why Erin should let her cheeks return to their rosy blush: From a non-egooptic perspective (shall we call it, “sociooptic”?) the $320 trillion price tag for a generation of healthcare doesn’t represent a cost, it represents an earnings. Specifically, it represents what a very large sector of American businesses and citizens are going to EARN by the act of providing healthcare services to America. In other words, unlike the egooptic perspective (after the spending occurs the money is “gone”!) the sociooptic view sees that in order for money to be EARNED it must first be spent. This may sound like a chicken-and-egg paradox—which happens first, does the money get spent, or does it get earned so that it subsequently can be spent? From the Federal Reserve’s perspective, however, there is no paradox at all: if new money needs to be spent in America, the Fed simply creates it.

How can the Federal Reserve do that?

There are certain rules and procedures that must be followed, of course. It doesn’t happen arbitrarily because someone thinks it should happen. It happens in response to something. So, how does the Fed know when new money needs to be created? One way it knows is when, at the end of an American business day, there are more checks and interbank transactions to be cleared at the central bank than there are Reserves held in the various bank’s Reserve accounts. This means the bank’s collectively have created more “bank-dollars” (which are claims on their Reserves) through loan operations than there are Reserves to back up the claims. When this occurs, the Fed automatically creates new dollars to cover the shortfall. (A shortfall is not ever allowed to occur because the entire U.S. financial system depends on the certainty that, at the end of every business day, all the legitimate claims on bank Reserves clear.)

But the Fed does not just give the new dollars to the bank’s Reserve accounts for free. What happens is the Fed keystrokes the new dollars into the needful bank’s Reserve account in exchange for some collateral ponied up by the bank. The Fed now holds the bank’s collateral, and the bank holds the new dollars in its Reserve account—which enables the claims on those Reserves, generated by its expanded loan activity, to be fulfilled. Voila! New money that American enterprise has demonstrated it needs—by virtue of the willingness of people and businesses to borrow, and the willingness of banks to loan—has been created. Presumably, when the bank’s outstanding loan is repaid with interest, it will redeem its collateral from the Fed using the profits derived from that interest.

Private debt, then, driven by the expectations of PROFIT-MAKING enterprise, is one of the primary instigators of new money creation by the Federal Reserve. There is another driver, however, equally important, that is shrouded in even greater (if that is possible) and more obfuscating confusion: the creation of new money by the Fed’s purchase of U.S. treasury bonds on the open market. What our explanation needs to make clear is that this operation is not only a money-creating action, the dollars it generates are specifically targeted toward the NON-PROFIT enterprises of the public good.

Here is where Modern Money takes flight!

The Treasury is the spending arm of the U.S. government. (If Medicare-for-All is implemented, the $320 trillion will be spent by the Treasury.) The dollars the Treasury spends come from two sources: (1) federal tax collections from America’s businesses and families; and (2) the issuing of U.S. treasury bonds (by the Treasury) in exchange for Reserves from the U.S. banking system.

The first source is intuitively well understood by virtually everyone: the federal government wants to spend dollars for something, so it collects tax-dollars from citizens and businesses for the spending. The second source arises from the situation where the federal government can’t even come close to collecting enough tax-dollars to cover the spending Congress has decided is both necessary and desirable for the public good. So, what to do? Answer: The Treasury issues U.S. treasury bonds and trades them for Reserves from the banking system to cover the spending shortfall. This second source of new spending dollars for the federal government is not only misunderstood, it is willfully misunderstood (and the misunderstanding willfully manipulated) by politicians and ideological pundits seeking to control the American agenda.

The misunderstanding is easy to encourage and nurture because, to a casual observer, it appears obvious that when the Treasury issues a bond, it is undertaking a debt it will have to repay with future revenues. Just like each one of us, personally, must calculate (or hope) that our future income will be adequate to pay off a debt we undertake, so must the federal government make the same calculation. End of argument. If the U.S. federal government takes on a debt, it will have to come up with future revenues (TAXES!!!) to pay it off.

Framed this way, it doesn’t take mathematical sophistication to quickly “demonstrate” that America already has a far greater “debt” than it can ever hope to repay with future tax revenues. But this framing—which creates an unsolvable dilemma for American politics—hides a fundamental untruth in its logical premise. And it is this untruth, and our misapprehensions about it, that prevent us from confidently undertaking the big-ticket issues we face as a collective society—issues which private enterprise will not, or cannot, undertake because they do not fit into a profit-making business model.

Is a treasury bond a “debt” or not?

A thought experiment can reveal the untruth I’m referring to. Ask yourself: could the Treasury pay for things—like, say, Medicare expenses—directly with treasury bonds, instead of first trading those bonds for Reserves, and then using the Reserves to pay the Medicare invoices? Assuming there’s no statute to prevent such payments, the only question is whether the Medicare providers would accept the treasury bonds as payment. If they were, in fact, willing to do that, then the Treasury, when it created a bond, would not be creating a “debt,” but would be creating “money,” as it was needed, to fulfill the spending assignments appropriated by Congress. But why would a Medicare provider—or a climate mitigation contractor, or a community college administrator, a pre-school daycare operator—agree to accept a treasury bond, for payments promised, instead of U.S. dollars?

The answer is because U.S. treasury bonds have a liquidity that is virtually equal to cash: anyone who receives a treasury bond as payment can easily and quickly trade it for U.S. dollars. This interchangeability is unique to U.S. treasury bonds. Corporate bonds or municipal bonds do not have the same liquidity for the simple reason that they each entail some level of real risk that the entity issuing the bond will be unable to redeem it or make its promised interest payment. Why do treasury bonds and corporate-municipal bonds differ in this regard?

To see why, consider that corporations and municipalities—like small businesses and households—must earn the dollars necessary to redeem their bonds. If things don’t go as planned—if corporate profits fall, or local tax revenues decline—the future revenues the bond redemption depends on fail to materialize, and the bondholder loses all or some of his investment. The corporation or the municipality cannot simply issue new dollars as necessary to make the bond good. Which is precisely what the U.S. Federal Reserve can and does do, without fail, in the case of U.S. treasury bonds.

The U.S. federal government, then, does not have to collect tax revenues in order to redeem treasury bonds. It does NOT depend on “future revenues” to repay its “debts.” If you want proof of this, simply consider that over the course of U.S. history, the federal government has issued and redeemed over $20 trillion worth of bonds which have not been repaid with tax revenues. How can the federal government do this while American families, businesses, corporations, and local governments cannot?

Our thought experiment shows us: When the U.S. Treasury issues its bonds, it is actually issuing new “money.” Whether that “money” is spent directly to the suppliers of goods and services—who then trade it for dollars from the banking industry—or is traded first to the banking industry for dollars, which are then spent by the Treasury, is an instance of Einstein’s “equivalence principle”: if you can’t tell the difference between two things, they are the same thing. U.S. treasury bonds, then, are nothing more than “future dollars” that have value today precisely because their future value, and the interest premium they bear, is the most ironclad, risk-free, guarantee that exists in the modern world today. And the U.S. Treasury is authorized to create these “future dollars,” as needed, to pay for any expenditures authorized by Congress.

For all of that, our thought experiment turns out to be unnecessary because a very simple operation— coordinated between the U.S. Treasury and the Federal Reserve banking system—makes it possible for the Treasury to spend today the future dollars it creates with its treasury bonds. I’ll make this short:

  1. The Treasury issues a treasury bond.
  2. The Federal Reserve keystrokes new reserves—equal to the value of the treasury bond—into one of its banks’ Reserve account in exchange for some collateral.
  3. The bank trades the new Reserves to the Treasury in exchange for the treasury bond.
  4. The Federal Reserve returns the bank’s collateral in exchange for the treasury bond.

End result: The Treasury has new spending money equal to the value the treasury bond just issued. The bank is returned to the same position it originally held. The Fed has on its balance sheet the newly issued treasury bond. The Fed now “owns” something it logically doesn’t need at all, ever—future dollars. If you want to run your own thought experiment, I’ll leave it to you to think that one through. (Hint: why does it need something it creates, as needed with keystrokes?) The important work our explanation needs has already been accomplished:

The U.S. Treasury has created the money it needs to buy (from the American people themselves) the non-profitable goods and services that Congress has determined, through its democratic processes, are in the best interests of America’s collective society.

Now we know WHY America is rich!

Is America rich because we have a lot of wealthy people and giant corporations our government can levy taxes on? Is it rich because we have huge capital markets our government can borrow dollars from to pay for our collective needs? Modern Money shows that neither of these are the reason. America is truly rich because, first, it possesses abundant real resources—trained, educated, and creative labor, advanced technologies, water, forests, minerals, fertile soils and temperate growing seasons—and, second, because it possesses and manages a sovereign monetary system that enables us to pay ourselves whatever dollars are necessary to marshal those real resources for our collective benefit. The big-ticket issues we confront, then, are not something to be afraid of. They are something we can afford to pay ourselves to do—and should celebrate the doing of.

25 responses to “A Modern Money Explanation

  1. This is too complicated. I suggest an argument which makes the argument that the role of the Federal Reserve is obsolete since the end of the gold standard. The Fed and Treasury can be combined to create a modern government financial management system. It is no longer necessary to issue govt. bonds, which are a benefit to the most wealthy people and institutions. Instead the govt can spend what is necessary to meet national needs so long as it does not create inflation. Bonds, which are the same as national savings account, can be paid off immediately or as they reach their maturity. Taxes can be used to accomplish other national goals. People can understand this much more easily than a complicated argument about the role of current monetary operations.


  2. Excellent.
    Most elegant solution, of course, is simply to make the tax-credit of the USA a (mostly digital) treasury note rather than a (mostly digital) reserve note.

    Not emphasized by MMT, but probably should be, for the simple reason that otherwise, the public is simply never going to understand the accounting sleight-of-hand involved in the current system. The Koch brothers/Peterson foundation etc will always win as long as we use reserve notes rather than treasury notes as the tax-credit of the nation. It is that simple, politically. The people will always be fooled by the household analogy if we do not make that one elegant (not necessary, but clarifying) change to the current system.

    This will help the transition (politically) to the dominance of fiscal that Bill Mitchell recently discusses. Without this simple change, I fear MMT will never be sufficiently grasped by the public.

  3. I appreciate my fellow Annapolitan and author, J.D. Alt – enjoyed his novel. I’m afraid he suffers from what many persons of high intelligence do, an inability to put themselve in the shoes of the average person. The attempt to dymystify and diminish money as something akin to a length of ribbon, just won’t register. Its actually a deep concept that philosphers have wrestled with since Aristotle.

    Thankfully that abstract concept is not necessary to explain how the Federal government can pay for the things society needs; use its constitutional power to directly create and spend money as needed. A child can grasp that (and they do).

    What Mr. Alt is proposing the Fed do, essentially fund the government, is currently not why the Fed buys and sells bonds. ( I’ll point the reader to Kelton and Wray for that explanation). It is also illegal. There is also a mixing up of money in the reserve system, which never enters the real economy, and bank-credit generated by loans which is what we all use as money. As he points out, only taxes and bond sales to the public fund the government.

    Bond sales are an extemely regessive means of obtaining money since it rewards the rich with interest while the rest of us must fund government from a chunk of our paychecks. His support of bank creation of money is disturbing since it is the sole reason for the grotesque wealth inequality we see today – banks, in general, do not lend for public purpose, non-revenue producing endeavors.

    Since the premise of this article is Mr. Alt’s lamenting the inability to reach the public with the answer to the “pay for” question, his long and abstract explanation begs the question, is this really the way to reach the public when there is a simple and highly intuitive alternative? In some ways he and others are mimicking what he accuses politicians of doing, fingers in the ears unwilling to consider other solutions.

  4. So, perhaps this is an obvious and foolish question. If so, forgive my ignorance. Wouldn’t it be the case that treasury bonds not held by the Fed or Treasury would, in fact, be debt that must be repaid? Or is it a hidden by-product of the system that such bonds always end up either with the Fed or the Treasury and, therefore, somehow don’t need to be repaid per se? It seems, intuitively, at least, that bonds owned by other countries or by corporations would be obligations that must be met. Or is this simply a temporary inconvenience in that once those bonds mature, they are returned to Treasury and repaid with new bonds that go through the Fed, just like any other spending required by Congress (in this case, to meet external debt obligations)?

  5. Want a SIMPLE explanation? (I’m sure economists can poke dozens of holes in this, but to novices (like me & I suspect most of us), it’s just common sense.)

    GDP is the measure of our *productive* economy. GDP is the sum of household, business and government spending (and likewise their income equals that spending, because all spending is someone else’s income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest (by way of bookkeeping entries in household bank accounts). All that’s important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends only on currency-users perception), there are no limits other than that perception.

  6. Dear Author,

    Perhaps you should read a paper written by a staffer at the NY Fed. Federal Reserve Bank of New York Staff Reports: “Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks” by Kenneth D. Garbade. Staff Report No. 684 August 2014.

    ABSTRACT: Until 1935, Federal Reserve Banks from time to time purchased short-term securities directly from the United States Treasury to facilitate Treasury cash management operations. The authority to undertake such purchases provided a robust safety net that ensured Treasury could meet its obligations even in the event of an unforeseen depletion of its cash balances. Congress prohibited direct purchases in 1935, but subsequently provided a limited wartime exemption in 1942. The exemption was renewed from time to time following the conclusion of the war but ultimately was allowed to expire in 1981.

    I would appreciate hearing your thoughts. Thanks.

    Staff Report No. 684 August 2014

  7. Graham L Paterson

    The most significant point to take out of your explanation JD is that all the money involved, ultimately, has to be spent in the private sector. Whether it is in building the hospitals, the medical equipment and right down to paying the Government employed medical staff. Every dollar will be spent in the private sector and every dollar will contribute its share of tax revenue to the Government and its share of profit to the private sector.
    Wouldn’t it be better to frame this expenditure in terms of the overall economy rather than emphasising the huge and largely incomprehensible number used as your total?
    Isn’t a nation better off if they have a healthy population where the emphasis would be as much on prevention as on cure?
    Admittedly, the question of where the money is going to come from is a major roadblock for a lot of people. Even though you have dealt with that in terms of the convoluted and relatively stupid way the current financial system works, it will still be difficult for people not greatly involved in economics and finance to grasp.
    I think your article would have been strengthened if you had also dealt with the “why” along with the “how”.

  8. Thomas Burke

    I love the simplicity of the exposition. Especially the last five or six summary paragraphs.
    I have one question. I seem to recall (I may be confused) that Mosler or others have suggested that the US could just as well stop issuing treasury bonds and/or should set the interest rate(s) to zero. I don’t recall the exact context in which I’ve encountered either of those points. Anyway, if either or both of these points is MMT-true, then how do they fit with this account of present and future dollars etc.?

  9. It’s always a hoot to me that Medicare-for-all opponents count that healthcare system as a net cost. It’s not at all controversial that single-payer is half as expensive as the health care system it would replace, and produces better results (longer life expectancy, lower infant mortality, etc.).

    So the real question is “How can we afford something that’s half as expensive as what we’re already paying?” It’s hard not to laugh at such a question, but that’s literally what the opponents are asking.

  10. Peter Janovsky

    JD has had some great explanations of MMT principles — the WW II analogy, the plumbing analogy. But if I, as a layman MMT advocate and proselytizer, can’t completely follow this one. I fear the target public will not.
    So I suggest asking Erin or Jake or even Lawrence, “how much will healthcare cost over 10 years under the current system, paying for the same things Medicare for All would pay for?” They won’t know, so you tell them twice as much (using comparisons of HC costs in European countries).
    Then ask how can we afford not to have it.

  11. TO JOHN TILLSON: I agree, it is more complicated than I would like. I would ask, however, which do you think is the bigger challenge: (1) to persuade the American people they ALREADY have a monetary system in place that enables the federal government to undertake and pay for the big-ticket items, or (2) to persuade the American people to MODIFY the existing monetary system? While it’s true there is, theoretically, no need for the Treasury to issue bonds, the fact of the matter is that is the way the present system works—and, working that way, it is perfectly capable of accomplishing what needs to be done. There is precious little time, for example, to begin planning and executing an over-arching strategy to combat and mitigate climate change. To imagine that first we must modify the existing monetary system would be suicidal.

  12. TO SUE PETERS: Please note that as the operation is described in the essay, the Fed is not purchasing treasury bonds directly from the Treasury but is purchasing them on the “open market.” The fact that the key buyers in the open market happen to be members of the Federal Reserve Banking system enables the coordinated “sleight-of-hand” trading to occur that results in the Treasury ending up with new dollars created by the Fed. If this didn’t happen, the federal government would not be able to “deficit spend”—a term which is extremely pejorative in the confused minds of fiscal conservatives.

  13. TO BRIAN M. Please note that the essay is not saying that U.S. treasury bonds don’t get redeemed, or that the interest they promise does not have to be paid to the bond-holder. What’s being said is that the redemption and the interest do NOT have to come by way of future U.S. government revenues (most of which are derived in the form of taxes). The redemption money is created by operations other than revenue collections.

  14. I’d like to butt into this conversation. Yesterday J.D. Alt posted an article, “A Modern Money Explanation”, to the neweconomicperspectives blog decrying (in 32 paragraphs) how difficult it’s proving to get MMT across to the public (& the politicians). I came back with the following response (which was quickly moderated out, but then a few hours later moderated back in).

    Want a SIMPLE explanation? (I’m sure economists can poke dozens of holes in this, but to novices (like me & I suspect most of us), it’s just common sense.)

    GDP is the measure of our *productive* economy. GDP is the sum of household, business and government spending (and likewise their income equals that spending, because all spending is someone else’s income). Our economy depends on household spending (2/3 of GDP). That spending is limited by household income (which comes only from those three sectors). Business provides that income to the extent demand (business opportunity) exists, and government provides the rest (by way of bookkeeping entries in household bank accounts). All that’s important to the economy is maintaining this flow, and with a fiat currency (whose value, by definition, depends only on currency-users perception), there are no limits other than that perception.

    Although I blurted that out off the top of my head, the more I think about it, the more rationale I see in it, and I’d like to see some critique. Makes me wonder too, what’s the meaning of “wealth” measured in perceptive tokens.

  15. TO CLINT BALLINGER: Thanks for your comment. I’m looking forward to reading your book!

  16. TO PAUL LeBOW: Thanks for the comment, but I think you’re misleading a bit: What the essay is describing is not “illegal,” but is, in fact, the legal means whereby the federal government “deficit spends.” I am not describing the Fed as buying treasury bonds from the Treasury—which is, currently, not authorized. Nor am I confusing “Reserves” with the money the rest of us use. When the Treasury spends, it spends “Reserves” that are in its account at the Federal Reserve. If it writes a check for $100 to a Medicare doctor, the check is deposited in the doctor’s bank account, and the “money” resides there in the form of “bank-dollars” which are claims on the bank’s Reserves at the central bank. When the check “clears,” Reserves are transferred from the Treasury’s Reserve account to the bank’s Reserve account—which is, in fact, the actual payment made to the doctor. I believe (from what I glean from your website) that what you are suggesting is laudable but, as I said to JOHN TILLSON above, it strikes me as being a much bigger task than “simply” persuading the American people how the money system they already have actually works–and getting on with the task of accomplishing the REAL things we need to be doing.

  17. Graham L Paterson

    Just a small correction Ed, GDP is gross domestic product and has been incorrectly related to spending. The GDP (Gross Domestic Product) was the term originally coined by Simon Kuznetz in the 1930s as an assumed way to measure a nation’s economic growth. It puts a price on a nation’s production, which the orthodox economists then erroneously translate into an assumed “wealth” figure for the individual by dividing the GDP figure by the population.
    That application is totally ludicrous.
    It appears “everyone” accepts “production” as the driver of economies when, in fact, consumption is the only means of producing the essential “profit” that is the motivation of the capitalist system. But virtually all production and consumption is dependent on debt, hence, it is misleading to treat GDP independently of consumption and the related debt.
    As an example, at the end of 2018, the GDP of the US was calculated as $20.89 trillion while the population was 327.2 million. Thus, dividing the GDP by the population assumed each person had a “worth” of $63,844.74. That figure totally ignores the fact that over 32% of the labor force make less than half of this, while 12.5% of the US population (39.7 million people) live in poverty and 552,830 people are homeless.
    Again, the issue of debt is ignored in this analysis.
    Governments and economists like to accept the completely false assumption that the higher the misleading GDP per capital figure the higher the nation’s standard of living. All that assumption does is to deliberately hide the levels of inequality within the nation.
    There is a paper published in Academia that related the GDP with the GDC (Gross Domestic Consumption) and the GDD (Gross Domestic Debt) to give a far more accurate picture of a nation’s wealth. The link is https://www.academia.edu/s/de42fefe86/gdp-and-gdc-and-gdd

  18. I think the real trap, and once fallen into, the fatal concession made in promoting MMT is to reflexively adopt, at the outset, the mainstream neoliberal language of cost, spend, budget, debt, etc.–terms which imply or connote monetary scarcity and privacy. I also fear that many of the proponents of MMT, especially narrowly-specialized economists, do not themselves get the profound philosophical thrust and stunning sociopolitical implications of what they have uncovered. The following essay, while unfortunately written in irritating Postmodernese, DOES get these things in spades. The crucial message it attempts to convey cries out to be restated in more accessible language, so that it can be grasped, by average people and economists alike, in all of its mind-blowing glory.


  19. “The dollars the Treasury spends come from two sources: (1) federal tax collections from America’s businesses and families; and (2) the issuing of U.S. treasury bonds (by the Treasury) in exchange for Reserves from the U.S. banking system.”

    I’m confused (really, not rhetorically). Doesn’t MMT teach that our dollars come from the Federal Government? That taxes are used to “destroy” dollars when their number is too great and threatens inflation? That Treasury bonds dampen spending in a potentially inflationary situation?

  20. TO NEWTON FINN: Wow. I don’t know that I’ve ever read anything quite so incomprehensible that, nevertheless, seems to be hinting at something that seems to be making sense in the larger scope of things. Thanks for the link. I agree with you—and what this piece hints at—MMT has extremely deep and, I believe, existential implications for the future direction of human society.

  21. TO NAT UERLICH: Legit question. I believe the answer lies in how the whole operation is framed. A lot of MMT explanations use the term “federal government” to refer to the combined operations of the Federal Reserve and the Treasury—as if they were a single entity that pulls three simple levers: create money, spend money, collect taxes. The argument is that, at the end of the day, the net result is the same as if this were true—so therefore, to simplify things, we can talk as if that were the case. The reality is a lot messier though, and when I realized this, I stopped describing it that way because it creates, I think, unnecessary confusion. Tax-dollars do get credited to the Treasury’s spending account (just as everybody imagines). The “federal government” doesn’t create new dollars, the Federal Reserve creates them—and only under the circumstances described in the essay above. The dollars the Treasury trades for its bonds momentarily get “removed” but are immediately reinserted when they get spent into the U.S. banking system to buy, for example, Medicare services. The inflationary pressure of this “deficit” spending is reduced by the tax-dollars that have been previously taken out.

  22. Well that is MMT heresy! 🙂
    In fact there is a straightforward process to fund progressive programs put forward in legislation by Dennis Kucinich and John Conyers in 2011/12 (HR2990). It’s radical only in the strict sense of the word as getting to the root of the problems with our money system. It is a concept promoted by leading economists (until the money system was removed from economic curricula).

  23. J.D. Alt: I rejoice that you also have the sense that MMT is so much more than a clearer, more accurate interpretation of macroeconomics. Sometimes I feel like I must be crazy, with so many in the MMT world appearing to me to be preoccupied with minutia. What the linked article wants to say, I believe, but can’t say plainly, is that MMT expands exponentially (but not infinitely, due to finite resources) the scope of human agency and possibility. It demonstrates to our heads that, yes, we can “afford” to save this precious, imperiled planet, and that the better, more beautiful society our hearts have always longed for is, indeed, within our reach.

  24. I wonder why people behave as if these amazing “revelations” have not been thoroughly addressed by economists of the mid twentieth century. How many times must we reinvent the wheel? Is this all ego driven? Read Henry Simons, Irving Fisher, Minsky WP#127,(even the dreaded Milton Friedman). They you can parse the MMT “minutia” and maybe realize that it is this minutia that is the substance of MMT – the rest is history.

  25. Very nicely put, Newton Finn. I appreciate that.