The Fiscal Summit Counter-Narrative: Part Three, Are There Spending Constraints On Governments Sovereign in Their Currencies?

By Joe Firestone

An issue at the core of all the fuss about fiscal sustainability is Government solvency. The deficit hawks and doves believe that Governments sovereign in their own currency can run out of money if they keep deficit spending, and keep borrowing to do it. They believe that if deficit/debt levels are high enough, then Government insolvency can occur, because eventually the burden of interest on the public debt will crowd out all other public spending and investments. So, they are for working towards debt/deficit reduction, “reforming” (i.e. cutting) entitlement spending, and raising taxes, though not necessarily on the rich.

The counter-narrative of Modern Monetary Theory (MMT) is that such a currency issuer can never involuntarily run out of money, though it can default voluntarily from an excess of stupidity. And because such nations can’t run out of money and can buy anything for sale in their own borders, including all labor resources, that means that their governments can spend what they need to spend to help solve the problems they encounter. They can afford job guarantees for anyone wanting full-time work at a living wage with a full package of fringe benefits, universal single-payer health insurance for all, a first class educational system, re-inventing their energy foundations, cleaning up their environments, re-creating their infrastructure, and doing anything else necessary to create good, democratic societies. For Governments sovereign in their own currencies, running out of money is never an issue. The real issues are resource constraints, political constraints, and constraints of poor decision making. But they are not fiscal in nature.

So, the critical issue of government financial solvency was a major topic in developing the counter-narrative of the Teach-In. Stephanie Kelton, Associate Professor of Economics at the University of Missouri, Kansas City gave the presentation on this topic. It was a model of clarity. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Stephanie Kelton’s Presentation On Spending Constraints

Stephanie began by point out that the name Modern Money Theory is not a name the MMT economists gave to their approach. Instead people following what they were doing “started referring to us as the Modern Money School and to our ideas as Modern Money Theory” (MMT). Stephanie also said that this is unfortunate:

“. . . because it is something of a misnomer. What we’re doing is actually not modern at all. The ideas are not theoretical, and they aren’t particularly modern. What we’re doing is simply describing, operationally, the way government finance works. It’s not a theory; we do not make assumptions, . . . . but rather . . . attempt to simply describe the way in which the institutional arrangements are set up, and the accounting identities and what happens in a balance sheet framework; when one side of the equation moves, what happens on the other side of the equation?

“What we didn’t do, I guess, a lot of this morning is really to talk about money, and what is money. And, while there were some references to accounting, and blips on a screen and button pushing and so forth, we didn’t really distinguish what we’re talking about in Modern Money Theory from what most of the textbooks describe and what our students end up getting taught in most economics programs across the globe.”

After a brief discussion of some of the historical sources of the approach in the work of Georg Friedrich Knapp, John Maynard Keynes, and Abba Lerner, Stephanie turns to accounts of the origins of money. She describes the theory that currency arose spontaneously out of a need to transcend barter as a means of exchange in markets.

“The private sector figures out that there’s a more efficient way to conduct exchange. They choose to use money. They decide what money is. And this all happens without imposition from any authority, no state, nothing like that. So the money is stateless. And, then of course, over time, money evolves (I’m still in the textbook story) from things like primitive money to gold and then to paper with gold backing. People take paper in exchange for real goods and services and the argument is – well, but at the end of the day, it’s as good as gold. So they continue to accept the paper.

“Then the story gets more difficult to explain, for this group. Sometimes we call them the Metalists because, when you have a pure fiat money system, why do people accept currency, that is intrinsically worthless, backed by nothing of value, and yet people will beg, borrow, steal, toil away the day, in order to get these otherwise worthless pieces of paper?”

So, then Stephanie counterposes the MMT theory of the origins of money, tracing “the nature and origin of money to the early authorities . . . the money does not emerge spontaneously by the will of the people, but it is imposed on them.”

”How is it imposed on them? It is dictated by the authority. It is chosen. The authority establishes that you all must pay something to me. I define the unit of account. In the United States, the unit of account is the dollar. So I say in what unit you must pay obligations to me and then I tell you what you have to do to eliminate those debts. And so, I impose a tax liability on you. I make you indebted to me. Now you need to do something to eliminate your obligation to me. And I tell you how you can do that. In the United States, you can earn dollars. You pay your tax obligation to the state in U.S. dollars. That gives value to the government’s otherwise worthless pieces of paper, and allows them to move real resources from the private to the public domain.

“So the Modern Money approach accepts that the currency derives its value from the state’s willingness to accept it in payment to the state, to eliminate obligations to the state. Now there are lots of things that obviously circulate as money things. The government’s money is not the only thing out there. And there is some ordering, or hierarchy of money things. Some are more generally accepted than others.”

And she also says: “The State’s IOU “. . . is at the top of the hierarchy . . . because it is the most generally accepted and it gains its acceptability by virtue of the state’s proclamation that we all need it in order to eliminate our tax liability.”

”So, Modern Money Theory stresses the relationship between the government’s ability to make and enforce tax laws on the one hand, and its power to create or destroy money by fiat on the other. I would define as a sovereign government, a government that retains these powers, that they are sovereign in their own currencies. Among others, examples of governments with sovereign currency, the United States, Canada, UK, Japan and Australia, all sovereign in this regard, by this definition.

“So the question then becomes, for a sovereign government, how much can it spend? Can it afford Social Security? Medicare? Tax cuts? Is the current path sustainable? Isn’t inflation going to be a problem? Will we bankrupt our children and grandchildren? What if the foreigners decide they don’t want to hold our bonds? I am only going to answer a couple of those questions in this talk because many of those are designed to be answered by other panelists later today.”

So, we have the household/ government analogy which teaches that governments have budget constraints analogous to households. Like households they can spend what they take in in revenue, plus what they can borrow, but no more.


“. . . . when it comes to buying things in the United States there’s really only one way to make final payment. When you purchase something, at the end of the day, the only way to pay for it is with the government’s money. There is no other way.

“How does that work? And so here’s an example. Suppose that you go out to dinner and you purchase your meal with your Visa card. Is that the final payment? No. You get a bill in the mail from Visa, and what do you do? You write them a check. Is that the final payment? Well, maybe the last time you see anything happen, but it’s not the final payment. At the end of the day, Visa doesn’t want your check. It doesn’t want what you’ve written down. What it wants is a credit to its bank account and that happens as that check goes through a clearing process and Visa’s bank account is credited with reserves. What are bank reserves? Government IOUs. Federal Reserve money. government money. Only the government’s money can discharge a payment as final means of payment. We are the users of the government’s currency.

“In contrast, the government is the issuer of its currency. It is not like a household. It doesn’t have to raise money by borrowing or collecting taxes in order to spend. Those of us in the private sector have to earn or borrow dollars before we can spend. The government must spend first. And we say this, and sometimes people have a hard time understanding that. How can the government spend first? How can it not spend first? How could the government collect taxes, in dollars, first? It first had to have spent those dollars into existence. The spending has to come before the payment or the collection of taxes. The government must spend first. Government spending is not (we use this term a lot) operationally constrained by revenues. It doesn’t need tax payments and bond sales in order to fund itself. It is not operationally constrained. The only relevant constraints are self-imposed constraints. We talked a little bit about this earlier, things like debt ceilings. That’s a self-imposed constraint. Rules that prevent the Treasury from running an overdraft in its account at the Fed. That’s a self-imposed constraint. It is a constraint that is imposed by Congress. Rules that prevent the Fed from buying Treasury bonds directly from the Treasury, so-called monetizing the debt, is a self-imposed constraint.”

LetsGetItDone Comment: It’s true that the constraints mentioned by Stephanie Kelton just above are self-imposed constraints, from the viewpoint of the government as a whole, since Congress is part of the Government. But there are also political/fiscal constraints imposed by one part of the Government, Congress, on another, the Executive Branch, and the Treasury Department. If these constraints were the last word, then the Executive would have limited ability to spend Congressional Appropriations beyond what the credits in the Treasury General Account (TGA) allow and further income from taxing, borrowing, fees, and asset sales.

However, that isn’t the whole story. Due to a law passed by Congress in 1996, the Executive Branch can use Proof Platinum Coin Seigniorage (PPCS) to fill the public purse to any desired amount, including an amount great enough to retire the full amount of the current debt subject to the limit and to remove the need for issuing further debt subject to the limit for the foreseeable future, except possibly for issuing very short-term debt which would be repaid immediately at the end of the short-term involved.

Stephanie goes on to explain how the Government actually spends and explains that when it spends it creates money and that when it taxes it destroys money. I won’t go into the details, but highly recommend the transcript of the presentation if one wants to understand the actual mechanics of the interaction between the government and non-Government sectors when the Government spends. She also points out that there

“. . . . is an attempt to coordinate the government’s spending with taxes and bond sales and it creates the illusion that what’s happening is that the government is taking money from us and using it to pay for the things that it purchases. But that’s not really what’s going on. As Warren likes to say, the government neither has nor does not have any money at any point in time. It is simply the scorekeeper. . . . ”

And as the scorekeeper it can never run out of “points” (i.e. dollars) to assign to entities in the government sector. So, since the Federal government doesn’t need our money to spend,why does it collect taxes at all? In doing this it’s only taking its own IOUs back, which it can issue in unlimited amounts anyway.

”So, why do it? Two reasons. One is, and this goes back to the Modern Money Theory that I began with, one is that taxes give value to the government’s money. If they were just to say, ‘We don’t need taxes in order to spend, so let’s suspend all collection of taxes’, that would undermine the value of the currency. It would take away the need that we have to acquire the government’s money. Why would we work and produce things for the government? Why would the government be able to move resources from the private sector to the public domain if it can’t get us to do that by virtue of the fact that we are willing to work and provide things to get the government’s liabilities? So, taxes maintain a demand for the government’s currency – that’s important – and the other thing they do, is they allow the government to regulate aggregate demand. Too much spending power can be inflationary, too little causes unemployment and recessions.”

LetsGetItDone Comment: There’s also a third reason. That reason is political, and only indirectly economic. It is that economic inequality has become so great in the United States that it is a threat to democracy. The accumulation of wealth over the past 40 years, in a relatively few hands, has resulted in the corruption of the presidency and Congress as representative bodies. One reason for very progressive taxation of income, wealth, and property is to help restore the more balanced inequality of the 1960s and early 1970s, which would leave a lot less free money available to the 1% to corrupt the political system.

Stephanie next goes on to explain what the function of bond sales is. Bonds are no more than a “savings account” at the Fed. The saver moves dollars out of their checking (reserve) accounts today into a ‘savings account” and receives “dollars plus interest at a future date” back in those “checking” accounts.

So looking at:

“. . . . the national debt clock, the sum total of all of the outstanding bonds that the Treasury has issued. . . . what we would argue is we shouldn’t call that the national debt clock; we should just rename it. It’s the national world dollar savings account. All it does is keep a record of the total amount that’s invested in savings as opposed to checking accounts at the Fed.”

And back again to the solvency question

”Something about the issue of solvency, the tipping point problem. Can the government run out of money? The U.S. government can’t run out of money any more than the Washington Nationals Baseball team stadium can run out of points. Every time a ball game is played at Washington National Stadium, some team scores some points and they appear on the screen and then the other team scores and some more points appear on the screen. And there’s nobody behind the screen going, ‘Hey Johnny, we’re running out of points here’, you know, right? Look in the trust fund. That’s not the way it happens. You just add the points.

“Same exact thing with the way the government operates. And this is the quote that Marshall brought up earlier and the one that Warren likes to use a lot, and I like it too. So here it is in writing so that you know we didn’t make it up. This is Ben Bernanke in an interview on Sixty Minutes just last year when Pelley asked him, “Is that tax money the Fed is spending?” And Bernanke says, “It’s not tax money. The banks have accounts at the Fed much the way that you do, have an account at a commercial bank. So when we want to lend to a bank, we simply use the computer to mark up the size of the account they have with the Fed.

“It’s exactly like putting points on the screen at the baseball game. Just mark up the balance. Can you run out of points? Can the government run out of money? No. There is no solvency issue when you are the issuer of the currency. OK, this is a quote from Alan Greenspan saying largely the same thing. “A government cannot become insolvent with respect to obligations in its own currency. A fiat money system like the ones we have today can produce such claims without limit.””

And then Stephanie addresses the question of why Europe is in the middle of a crisis, which, of course, has gotten more and more serious in the two years since the Teach-In. She explains that none of the nations of the Eurozone are currency issuers. They are all currency users like the American states, because they all gave up their own fiat currencies. From the national perspective, the Euro isn’t their fiat currency. It’s the fiat currency of the European Central Bank, “a non-convertible, stateless currency.” So, default risk, potential insolvency, are real problems for the states using the Euro, especially the fiscally weaker states in the PIIGS group, but, to a lesser degree, for all the others too.

”They must borrow or raise taxes; they must collect money before they can spend. It’s the only way they can do it. They are all users of their own currency. They are the users of their currency, much like California, Illinois, New York, New Jersey – they’re just like states in the United States. They’re in the same relationship relative to the currency as are individual states in this country.

“This is the hierarchy of money. So the entire thing in Euroland is denominated in Euros. For any particular government, look at the hierarchy of money. What is it that sits at the top of the hierarchy? It’s the Euro. What is the relationship between the currency at the top of the hierarchy and the government? In this example, the government does not control the currency that sits at the top of the hierarchy. And that turns out to be a huge problem for Greece.”

And now there are problems with all the PIIGS nations. Greece is farthest along in their crisis, but Ireland has been devastated, Portugal and Spain are in dire straits, and Italy isn’t very far from a crisis, while France and the Netherlands are seeing serious political stresses resulting from Euro-related austerity policies. Stephanie also points to Mexico in 1995, Russia in 1998, the Southeast Asian currency crisis in ’97. She points out that “Every one of these countries had fixed exchange rates. And, as a result, every one of their governments became the users rather than the issuers of their currency. “ And she says further:

”I don’t know of a single example of a currency crisis or a debt default by a sovereign government that has issued obligations in its own currency when it has flexible exchange rates in a non-convertible currency. I don’t know of one. The U.S. can control its currency and therefore, by implication, its economic destiny.

“There is a relationship between the power the state has in the monetary sphere and the power that it can exert in the political policy sphere. There is no revenue constraint for governments that control the money that sits at the top of the hierarchy. Does that mean that we should spend without limit? No. No. Emphatically no. As the economy recovers, spending will need to be regulated to prevent inflation. But I would argue, and I think what we’re all here to argue today is that it’s time to stop allowing the monetary system to limit our range of policy options. It is causing unnecessary human suffering and it’s time for us to begin to recognize the advantages of a Modern Monetary System. Thank you.”

Professor Kelton’s presentation was followed by a panel discussion and then a Q and A session. In the interests of space, I’ll telescope these as much as I can and also introduce comments of my own on the questions and answers. But before I do, I’ll provide some follow-up references on the subject of Stephanie Kelton’s solvency presentation appearing since the Fiscal Sustainability Teach-In. Here are some from Stephanie: here, here, here, here, here, and here.

And some from Randy Wray, Warren Mosler and Bill Mitchell: here, here, here, here, here, here, here, here, and here.

And finally, a few of my own: here, here, here, here, and here.

SESSION 2: “Are There Spending Constraints on Governments Sovereign in their Currency?” – Q&A

Unidentified: “I have one question, can you explain the difference between what happened in Argentina and what happened in Russia? Because Russia defaulted voluntarily on its domestic debt versus Argentina had a problem with US dollar debt.”

Warren Mosler, “So… If any of you have been to the Fed, you know you start everything off with “So.” So what happened in Russia [he laughs] was that they had a fixed exchange rate, the ruble was fixed at 645 to 1, and they were borrowing dollars in order to keep it going because people were— would rather have their dollars than a ruble. When you have a fixed exchange rate, the dynamic is, if you get paid in rubles, you have three choices: You can do nothing, you can buy ruble securities, or you can cash them in for the reserve currency, which was dollars. So with a fixed exchange rate the treasury competes with the option to convert, and you see that all the time, and so with fixed exchange rates, the interest rates are actually controlled by the market. And so what happened in Russia is as the treasury competed with the option to convert, interest rates went up and up and up, and finally they were paying 200 percent and there was no interest rate where people would rather have the rubles than the dollars and they ran out of reserves, couldn’t borrow any, and defaulted on their conversion obligation. Now, at that point in time, what most countries would do would be just to float the currency and say, Okay, look, there are no more dollars for now and the ruble’s floating and just keep the money— the central bank operational. What they did in Russia, when they ran out of dollars, they just turned out the lights and went home, shut off the computers, didn’t open for up four months later. When they did open up, they went in through the hard drives, and sure enough, the ruble balances were still there, and they were — they basically honored them. There was a little bit of restructuring, but nothing particularly serious on the interest-rate side. And so it was a fixed-exchange-rate collapse, or blowup, and they just shut everything down.

“Now in Mexico they had the same kind of blowup and they just — what was it, three to one, three and a half to one, or something like that? Was it three? Three to one back in about ’95, they were supposed to honor these tessa bono obligations, where you were able to turn these in, they were at an index to U.S. dollars, where you could turn in and get— and they were guaranteed you could get enough pesos where you could convert those instantaneously into 40 billion dollars. Well, there was no amount of pesos that could be converted into 40 billion dollars, so the whole thing collapsed, and they wound up dishonoring their promises, rolling some into Brady Bonds, and they let the currency float, they just— and so the peso went to nine to the dollar or somewhere around there. And they kept business as usual with the— as a floating exchange rate. Okay, so I don’t know if that answers your question or not, but that’s what happened.”

LetsGetItDone Comment: I think this contrast between Russia and Mexico by Warren is both instructive and compelling and shows the importance of having a non-convertible fiat currency with a floating exchange rate.

Unidentified: “I was asking about Argentina…”

Warren Mosler: “Argentina. Yeah. Argentina was fixed one-to-one to the U.S. dollar. Same type of thing: Interest rates went up because of the option to convert, they ran out of dollars, and one night in a deflationary mess that followed with after thirty-two dead in the street one night Buenos Aires they reopened with the floating exchange rate, they let the peso float. Okay, Russia, the difference was, when it blew up they just turned the lights off and went home. They could have kept it going if they wanted to, they didn’t know what buttons to push at the central bank, or they were afraid for their lives, the central bankers, and just left, okay, which is the story I’ve heard also.”

LetsGetItDone Comment: And this further underlines the point. If you don’t have a sovereign fiat currency, then your capacity to adapt to economic changes is severely crippled.

Unidentified male: “Just one corollary follow up question. Can you explain how this relates to the Rogoff Reinhart book? That is the debt in foreign currency versus in on your own currency and what these magic numbers, 90% debt-to-GDP means.”

Stephanie Kelton: “Yeah, I think the lesson to be drawn from the arguments that I made are that the debt-to-GDP ratio is largely irrelevant so long as the debts have been written in a currency that you have a monopoly over the issue of. So the U.S. Government can always meet, on time and in full, any payment that comes due in U.S. dollars, *period*. Okay? If you’re borrowing in a currency that you do not control, you cannot create, like Greece cannot create the Euro. . . So they can’t always, necessarily, serve as on-time and in-full obligations that come due; it’s not a sovereign currency.”

Warren Mosler: “Let me just add to that, if you look at Italy back in the eighties, they had one of the best economies in the world with debt-to-GDP ratios well over 100 percent and inflation rates in double digits. So the problem with inflation is not that there’s any real economic problem, it’s a political problem. People don’t like it, and you will get thrown out of office if you allow inflation. Not because it’s not good for employment and output, it’s just considered immoral. It’s the government robbing us of our savings, and hidden taxes and all these types of things. And it has to be respected, and democracy reflects the will of the people.”

Stephanie Kelton: “Keep in mind also that Japan’s debt-to-GDP ratio is roughly 200 percent, but as long as the borrowing is done in yen, it’s not a problem.”

Bill Mitchell: “If you read their book carefully, you’ll see — and you go through each case and trace the currency systems being run, the circumstances surrounding the default, you’ll only find one example of a sovereign, truly sovereign government in modern history that has defaulted, and that was Japan, and it was during the war, and the reason they defaulted was because they said they weren’t going to pay back debts to their enemies, and it had nothing at all to do with the question of solvency, it was a political decision. And so, you know, I think the book is being used very frequently now by commentators as, See, this is the definitive piece of research, and in actual fact it’s highly limited research and applies to a very small number of circumstances that we don’t find in very many countries.”

LetsGetItDone Comment: So, what can you say about Reinhart/Rogoff’s failure to distinguish nations sovereign in their currencies from nations that are not? You can’t say anything, but that their work is a great example of ideological pseudo-science incapable of making correct predictions about fiscal sustainability across the board.

Warren Mosler: “Look, I’ve had very strong conversations with David Leibowitz of Standard & Poor’s about this, separating the difference between ability to pay and willingness to pay, and the last time on that last go-around I sent you a copy of that, but they have stopped downgrading on ability to pay, I believe, they are now downgrading on willingness to pay, which is what happened with Japan. So what we’re saying is, there’s always the ability to pay; there may not be the willingness to pay. Very different things.”

Pavlina Tcherneva: “Just to add on to the Argentina story, it’s instructive for another reason. Argentina actually is a very good case study of how you launch a currency. When the state was bankrupt, the provinces were bankrupt, what they did is they actually issued their own IOUs. They issued [patacornes?? lecops?? foreign terms], the varieties of local currencies. Now, our states are prohibited from doing that, but in Argentina they could, and so you get back to Stephanie’s point, Why do you trust the currency you didn’t have before, you didn’t use before, the vast majority of people are not using, you know, there’s no trust that was built in the system, and the reason was because the states taxed the population in these LECOPs and they negotiated that you could pay your utility bills in patacones. And so, although everybody was up in arms and saying, you know, You can’t be using this system, and, granted, it didn’t last very long, you go to Argentina and you see every store says “Aceptavos patacones.” It is very effective to launch this currency. Once they floated, they had no need for them anymore.”

Warren Mosler: “In Russia, after the central bank shut down, they traded what they called arrears, which is I thought a fantastic word for what things are. So the states with the— whole corporations would trade arrears with each other.”

John Lutz: Asked Stephanie to explain Zimbabwe and Weimar Germany. She and Marshall Auerback replied by saying that Marshall would explain those cases in his afternoon Teach-In session on Inflation and HyperInflation.

LetsGetItDone Comment: To be reviewed in Part Five of this series.

Roger Erickson: “Another question about getting back to treasury bonds. We’ve all heard, most of us have heard now that we went off the gold standard under Nixon in 1971. The question that rarely gets asked is, “Why does anybody bother selling Treasury bonds anymore, at least very many of them,” and a follow-up is, “Is there any country in the world that doesn’t bother doing that to any extent?””

Roger’s question elicited comments from Marshall Auerback, Warren Mosler, Randy Wray, and Bill Mitchell in what proved to be a lengthy and illuminating exchange. The answers included that it was the law (Auerback); it’s what countries do when they become countries (Mosler); it’s a legacy of the gold standard years caused by the failure of Congress to amend laws based on gold standard thinking (Auerback); it’s an interest-bearing alternative to holding reserves (Wray); selling term securities raises interest rates (Mosler); decision makers are caught in an ideological tangle and believe that issuing debt voluntarily supports fiscal sustainability (Mitchell); and they may want to sustain higher mortgage rates (Mosler); or perhaps know what they’re doing but want to benefit bondholders.

Roger Erickson: then followed with a comment that the past 30 years seem to have de-regulated everything, but, inexplicably hyper-regulated our monetary system.

Bill Mitchell: “No, it’s not inexplicable at all, because they wanted to — the whole paradigm and the whole ideology was to create freedom, so-called freedom, for the private sector and hamper the government sector from having any freedom, ’cause you can’t trust the public sector, you can only trust the private sector, because the rhetoric is that the private sector is market-disciplined and the public sector isn’t. It’s entirely consistent.”

To which Professor L. Randall Wray adds that he thinks that financial people may well understand how things work but want to continue to create myths or frauds about how it works because they want to constrain politicians, and voters, who they don’t trust, from growing the government. It’s also about their mistrust of democracy.

LetsGetItDone Comment: I agree very much that this is about ideology and about opposition to democracy. Even more, I also think it’s about the emergence of plutocratic oligarchy. See here, and here.

After a brief question about why the US retains gold and an answer from Warren about it being another asset of the Government it holds on to, Teresa Sobenko: asked whether the euro is a scheme or whether people are just not aware of the problems with it. Marshall Auerback replied that he thinks they were aware of the problems when they formed the monetary union, but hoped that it would lead eventually to a political union. There was further discussion about the politics of the situation originally leading to a much-expanded Eurozone.

Edward Harrison: followed up on the issue of the need to issue treasury bonds, and asked whether if one prefers monetary to fiscal policy “don’t you need a constant flow of treasury securities in order to keep on the run securities constantly coming in order to keep a liquid market in that vehicle”? Warren Mosler replied that the Fed could just trade Fed funds at a particular rate and that would be enough to target interest rates. Ed replied by saying that doing “that would never fly” from “a political perspective.” Warren agreed with that and emphasized that he was just saying that as an operational matter all the Fed has to do to set interest rates is to “set the overnight rate in terms of a bid and an offer, which is what they do in Canada and Australia, . . . “ and “you don’t need treasuries for that. . . then he points out that with our present “. . . institutional structure, where the Fed has to use a repo market where they’re doing overnight loans back and forth where they’re required to use treasury securities as collateral, then you’re correct in that sense, but again, that’s a self-imposed constraint, . . . “ which after the middle of 2008 they overcame using a variety of tools, but never getting politically to the point of actually just trading in Fed funds to control the interest rates.

Next, Bill Mitchell: made what I thought was a priceless statement:

“Just two points on that. In ’90–’96 we elected in Australia a conservative government — Warren will know this story I’m about to tell I think — and for the next ten out of eleven years they ran surpluses increasing, and they sold it to the public as rail bridges started to crumble, public education started to crumble, hospital waiting lists started to increase, they sold it to the public as getting the debt monkey off their backs, and because they were now obviously retiring debt as it became due, and by 2001 the bond markets were so thin that there was a huge outcry. Now who did the outcry come from? Well, it came from the Sydney futures exchange at the beginning, and all of the other traders that were using the government debt as what I call corporate welfare, basically as a guaranteed annuity in which they could price their risk off, and this led to the government having an official inquiry —remember that Warren? — they had an official inquiry onto what the size of the bond market should be, and they were blithely running surpluses all the time, and they agreed, they caved into the pressure particularly from the Sydney futures exchange, they caved into the pressure and announced that they would continue to issue debt at an agreed amount, they came up with an agreed amount of millions per quarter, even though they were running surpluses, they continued to issue debt. I thought that was a really… Do you remember that, Warren?”

And then Warren and Bill referred to a paper they co-authored in 2002 describing:

”. . . all of the special pleading from the top end of town on why the government had to issue debt even though they were running surpluses, despite two facts. One is that at the same time the recipients of the corporate welfare were leading the charge to deregulate the welfare state for the workers and deregulate the wage system and get rid of social security, and secondly, despite the fact that the top end of town were the ones that were leading the myths about the onerous debt burdens the deficits they used to run were causing. . . . ”

LetsGetItDone Comment: which clearly makes the point that the “top end of town” is about “lemon socialism” at least, and perhaps about fascism, itself, but never really about the “free market.” That’s just for the peasants, not for entitled folks like them.

Jeff Baum: next raised the issues of inflation and its distributional consequences and pointed out these raised political questions, so he thinks that “just changes the question from: “But we can’t afford this” to “What are we going to spend it on?” and maybe there is a big question there, as Randall was saying, that once the voters figure that out it turns into a big political fight. . . . Do you have any kind of summary about how this turns into a political question, and what are the distributional consequences of that?”

L. Randall Wray then replied: “. . . I think that what the public needs to understand is if you’re saying you want the government to do this, you want the government to spend on this, that means we’re going to devote real resources to this. Do you really want the government to devote our nation’s capacity to supply you with this, and if you do, then democracy wins and we do it. But you got to realize that means less resources here, okay, so to get it out of the deficit hysteria, the affordability, and so on, it’s a real issue. Do we want to devote an ever-rising share of our nation’s output to be put to taking care of aged people? Put it that way, and let the population vote on it. They might vote yes, they might vote no . . . okay? That’s democracy.”

Marshall Auerback: then followed with: “Two points I’ll make. One is that if we get the debate along the lines that you’ve suggested, then we’ve effectively won the argument, because we’ve always said ultimately it’s a political argument. . . . And the other point I would make is that even the notion of affordability, it’s applied in a very, very selective way, as I’m sure you’ve noticed. I mean, when we declare war, we don’t sort of say, “Well, we’re running a budget surplus and can we afford to go to war?”, we just do it. Or we don’t say, “Well, we’re going to buy this aircraft carrier, so we’d better check with our bankers in China as to whether we can afford it or give them a line item and see if they want to red-line anything.” Nobody actually ever does that, but that’s the logic of their position, if you follow it through to the conclusion. But somehow when we get onto a subject like health care or Medicare or Social Security, it’s like, Oh, well, affordability becomes an issue, so I think it’s more a reflection on our skewed value system than anything else, actually.”

LetsGetItDone Comment: which reveals one of the core purposes of MMT, which is to get past the mythology of insolvency or “we can’t afford it,” and get to the real political issues, the neoliberal elites are trying to avoid. They know that if the debate becomes full time employment vs. the possibility of inflation, then they’ll lose. They know if it becomes Medicare for All or bailout of the insurance companies without the “we can’t afford it” coming up, then they’ll lose. They know that if it becomes debt jubilees for home owners and college students, then they’ll also lose, as they will if it becomes reinvented vs. crumbling infrastructure. There are so very many issues they’d lose on, and democracy would win, if “we can’t afford it” is gone.

Stephanie Kelton: “Just one point on the distributional issue, one of the things that you hear a lot about now is the growing size of the national debt and the growing interest burden, and we really need to make that a distributional topic, because it goes directly to this argument that we’re passing this on to the next generation and the generation after that, becomes a generational argument, which it absolutely is not, okay? All of the interest payments will be made by the people who are alive at the time the interest payments come due, and what we’re talking about is a shift of income from those paying taxes to those receiving payments because they’re bondholders. And so the bigger the share of the interest, relative to the size of the economy, the bigger the command of the goods and services the bondholders can wield against the rest of us. And so that becomes a discussion that we definitely would want to have.”

LetsGetItDone Comment: Especially since the austerity myths have been used to transfer wealth from poor people and the middle class to the richest people for 35 years or more now, accounting for the danger to democracy we are now seeing.


MMT ideas about the origin of money, the fiat nature and origin of money, the idea of a Government sovereign in its own currency, and the idea that such a government cannot become bankrupt involuntarily are central to MMT and are enormously important. Their importance was underlined to day in a post by J. D. Alt at the New Economic Perspectives blog, on how MMT ought to be framed to persuade people Alt says:

”The interesting thing here is that it appears the way modern money actually functions today is extraordinarily beneficial to everyone! It occurs to me that the first sovereign country that politically understands this, and is able to align its fiscal policies accordingly, will become so wealthy and prosperous it will rapidly dominate all other economies. It will be able to have the finest, most advanced medical and health services industry, the most efficient and convenient transportation system available, the most beautiful and comfortable housing imaginable, the healthiest and tastiest foods that can be grown and prepared, the most effective education and school systems, the best and most stylish shoes and apparel, the healthiest and most diverse natural ecosystems, and the most leisure time—including the most wonderful, fun, and satisfying places and ways to spend it. What politician, in her right mind, couldn’t get behind that? What voter, in his right mind, wouldn’t vote for it? And how could a platform of sour-faced austerity even begin to compete?”

Both Bill Mitchell’s (see Part Two) and Stephanie Kelton’s presentations and the accompanying panel and Q & A sessions at the Fiscal Sustainability Teach-In explained MMT foundations relevant to actual, rather than faux fiscal sustainability, and government sovereignty in its own currency that explain why J. D. Alt’s vision of open possibilities with MMT makes sense.

The sky really is the limit if we can get our economic thinking straight and stop our victimization by the austerity/deficit hawk narrative being kept alive by the Peterson Foundation, Peterson’s various other outlets, as well as his other network allies such as Bowles and Simpson, and President Obama himself, who has used the austerity rhetoric from the very beginning of his administration as much as anyone else. On the other hand, if we can’t end the dominance of that narrative, the future of the United States is likely to be very dark, since we may not be facing a lost decade, so much as a lost generation whose futures are destroyed by a false economic ideology. Frankly, I don’t know if American Democracy, already greatly weakened by the mindless reaction to 9/11, will be able to survive that outcome.

In Part Four, I’ll cover more MMT foundations from Warren Mosler’s great discussion of “The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and Government Economic Policy.” We’ll see how his version of the MMT counter-narrative strengthens and extends what we’ve already learned from the proceedings of the first two sessions of the Teach-In.

(Cross-posted from

29 responses to “The Fiscal Summit Counter-Narrative: Part Three, Are There Spending Constraints On Governments Sovereign in Their Currencies?

  1. Robert Richter

    I don’t have time to read all of this. Please provide an excutive summary.

    • Sorry. I’m not your contractor or your subordinate, nor do I care whether you read it or not, so I won’t provide you an executive summary.

      On the other hand, if you want to learn something, then you’ll read the whole thing, or you can go back to the WaPo or the New York Times and read the garbage there!

      • Clonal Antibody

        There is good news and bad news when things happen to people with short attention spans. If bad things happen, the good news is that they forget the pain quickly. When good things happen, the bad news is that they forget the elation quickly. However the bad thing in either case is that they never learn from their own experience, or the experience of others.

  2. Pingback: Job Guarentee, free education, universal health care… what more could you want? « David Petraitis

  3. Great stuff, Joe.

  4. The summary of all of this discussion is out there at bookstores:
    Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth by Marc Lavoie and Wynne Godley. The paperback edition was just released in April 2012.

  5. If this post were a book, it would be a very, very short book. Just sayin’.

  6. I recommend Rodger’s posts, but then I’d read the posts in this series, because they do present a different view from his in certain key respects.

  7. Ryan Harris

    To get a legislature or parliament to spend & tax to achieve an economic target sounds akin to herding cats. Who in government will get to predict where the happy equilibrium exists, that is where real output is maximized, unemployment is minimal and inflation meets an arbitrary target? And operationally how can you do it in a democracy with a wily bunch of politicians holding the purse strings?

    • Clonal Antibody


      Why have a society in the first place. Society means organization and working for the common good. Which implies a government. You appear to be paralyzed because of a fear of politicians.

      So you would rather leave it to a bunch of conniving kleptocratic CEOs to determine how much to spend on conniving kleptocratic politicians to determine public spending that feeds the kleprocratic habits of conniving CEOs?

      Society is about the rule of law, and preventing the accumulation of wealth and power into the hands of a few. Government spending for the “public purpose” is determined through democratic means.

      • Hey CA, While I agree very much with this as a normative statement:

        “Society is about the rule of law, and preventing the accumulation of wealth and power into the hands of a few. Government spending for the “public purpose” is determined through democratic means.”

        . I also think that Ryan’s question is very relevant since it appears that our representatives and the President don’t represent us, but only the people who have bought them.

        Democracy has a gigantic problem these days, worse in the United States, than it perhaps is in Australia, or Canada, some of the Northern European democracies, or some of Latin American democracies, and that problem is how to prevent the transition to plutocracy that we all see developing before our eyes.

        Occupy is one positive factor in our system, but it is not enough to bring effective change. It needs new institutions that will allow it to magnify its reach and power. I think the Interactive Voter Choice System (IVCS) with its bottom-up self-organizing, anti-astro-turfing emphasis can be such a key institution. That’s why I linked to one of my pieces on it above.

      • Whoa Clonal. Didn’t say government should NOT. I suggested a large body of elected politicians might not be able to meet economic targets outlined by technocrats given limitations of democracy, constitutions and diversity of voter demands. I’ve been following MMT for years and am completely on board with the ideas. I just don’t see a clear path as to how spending and tax rates can be set dynamically without usurping powers of the purse from politicians and voters. Functionally, it would become the economists who set the unemployment, gdp growth, and inflation targets. They would dictate to congress the range of what is possible.
        The ever controversial buffer stock wouldn’t be a small variable buffer like program unless taxes and spending were adjusted as well.

        • Clonal Antibody


          The outrage was aimed not so much at you, but at the current system we have. However, there are many systems that are in place, that come on automatically, for example UI — the first 26 weeks are on automatic, but after that the Congress has to vote to EXTEND the benefits, but not on the money that is disbursed. I think it was unconscionable that the Congress did not extend the UI beyond 99 weeks. That decision caused the death of more than a few people.Humphrey–Hawkins Full Employment Act already is on the books, and can be easily modified for the JG/BIG, and given a few more teeth.

          Consistent with Keynesian theory, the Act provides for measures to create temporary government jobs to reduce unemployment, as was attempted during the Great Depression.

        • Ryan: To get a legislature or parliament to spend & tax to achieve an economic target sounds akin to herding cats. Who in government will get to predict where the happy equilibrium exists, that is where real output is maximized, unemployment is minimal and inflation meets an arbitrary target? And operationally how can you do it in a democracy with a wily bunch of politicians holding the purse strings?

          I suggested a large body of elected politicians might not be able to meet economic targets outlined by technocrats given limitations of democracy, constitutions and diversity of voter demands. I’ve been following MMT for years and am completely on board with the ideas. I just don’t see a clear path as to how spending and tax rates can be set dynamically without usurping powers of the purse from politicians and voters. Functionally, it would become the economists who set the unemployment, gdp growth, and inflation targets. They would dictate to congress the range of what is possible.

          Ryan, there are some misguided assumptions embedded there.

          “Spend & tax to achieve an economic target “, ” meet economic targets outlined by technocrats” These are not the goals of MMT proposals. The #1 policy is to set unemployment at zero, through the JG. Real output & inflation? Well, that depends on that pesky real world. On how well the JG jobs are designed. On how well the government and the private sector spends.

          Why have a target? Why have technocrats? The technocrats are the problem, not the solution. The Euro, the ECB, the Eurocrats are technocrats, the most ignorant, stupid and evil people in the world, wrecking the economy of a continent, immiserating millions with their idiotic, innumerate theories.

          Functionally, it would become the economists who set the unemployment, gdp growth, and inflation targets. They would dictate to congress the range of what is possible.

          No, Congress would dictate what it wants the government to do, how it wants public money to be spent. The economists might help explain likely possibilities, likely consequences of their spending plans, whether the goals that Congress sets are realistic or not. Reality would dictate to Congress & the economists & the technocrats the range of what is possible. No matter how they spend, there will be a gap of unemployment, taken care of by the JG. Otherwise, Congress would probably be spending too much and there would be inflation.

          The ever controversial buffer stock wouldn’t be a small variable buffer like program unless taxes and spending were adjusted as well.

          No, the JG should be smaller than the buffer stock of the unemployed – independently of how taxes & spending are adjusted. Make no other changes but instituting a JG right now, and we would have a far better economy than we’ve seen in decades. And it would stay better. And there would be fewer people on the JG than are currently unemployed, and inflation would be lower, and growth would be higher. Unemployment is inflationary.

          Old Keynesianism had the problems you suggest, the difficulty of predicting “where the happy equilibrium” is, of fine-tuning, of being run over-technocratically. MMT proposes loose full employment, the JG, recognizes that getting the “happy equilibrium”, tight full employment is a million-to-one shot that could be inflationary even if you got it. Jobs should drive growth, not growth driving jobs, as Wray emphasizes in his latest blog. MMT understands the defects of the earlier postwar Keynesian full employment era & why it ended, to be replaced by something that gave far worse results, using “economics” that made far less sense. It incorporates the understanding of these defects into the proposals.

          Once the JG is in place & people understand its necessity & the absurdity of not having a JG, it will not be “ever controversial”. It will be about as controversial as having a working system of sewers in a city – people will be rightly thought out of their minds when they propose abandonment.

    • You have to do it through a really serious change in the political environment, or it won’t happen. Factors that can contribute to this change are outlined in posts:

      here; and also the first two parts in this series,

      here; and here.

      The IVCS and minting the $60T coin will deliver the political shocks to the current system that will allow it to adapt to increasingly serious accumulating problems and to begin living according to MMT-inspired economic policies.

  8. “So the Modern Money approach accepts that the currency derives its value from the state’s willingness to accept it in payment to the state, to eliminate obligations to the state. ”

    Here’s a hypothetical. Let’s say the US government spends whatever remains in its Treasury General Account at the Federal Reserve and then closes the account. From now on it will only accept taxes in the form of cigarettes. It will not accept any Federal Reserve liability whatsoever. What happens to the value of the US dollar? Given the fact that US dollar tax obligation are now set at zero, won’t the currency collapse to zero?

    • “Here’s a hypothetical. Let’s say the US government spends whatever remains in its Treasury General Account at the Federal Reserve and then closes the account. From now on it will only accept taxes in the form of cigarettes. It will not accept any Federal Reserve liability whatsoever. What happens to the value of the US dollar? Given the fact that US dollar tax obligation are now set at zero, won’t the currency collapse to zero?”

      I think the answer would be the value of the dollar drops towards zero. Not necessarily because the dollar tax obligation went away though. If you simply eliminated taxes from the picture completely, the dollar is already an established currency. The inertia of habit and custom would keep it in use for some time but it would then be vulnerable to rivals. Since taxes weren’t eliminated, just re-denominated in cigarettes, cigarettes become that rival that starts crowding out the dollar.

      People still have dollars, many people would still accept dollars but they need cigarettes* to extinguish tax obligations so cigarettes would quickly begin crowding out dollars in direct proportion to the breadth of the tax system and the size of the obligations.

      *only cigarettes with a federally issued stamp on them, of course. Can’t have people waving off the tax man by rolling their own money 🙂 Also, it would probably work in practice much like the gold standard but with tobacco.

      • Just a thought re. the “taxes-support-the-value-of-the-dollar ” hypothesis:

        Why do people pay taxes? Answer: Because the law requires it. The value of a dollar is supported, not by the taxes, but by the law that requires taxes to be paid in dollars.

        What if instead of a law requiring taxes to be paid in dollars, the law required food to be paid for in dollars? And rent to be paid for in dollars? And clothing to be paid for in dollars? And services to be paid for in dollars?

        In short, what if the law required all domestic purchases to be paid for in dollars? Where does that leave the “taxes-support-the-value-of-the-dollar ” hypothesis? Isn’t that hypothesis really saying, “The dollar has value because the law requires its use for something important“? And that “something important” doesn’t need to be taxes (which are harmful to the economy).

        Rodger Malcolm Mitchell

        • Thank you both for your answers. Money is an odd thing to wrap one’s head around.

        • Rodger: In short, what if the law required all domestic purchases to be paid for in dollars? That is the idea that legal tender laws can drive the demand for dollars. Could work in theory if under the table side deals could be prohibited. If every transaction was overseen by a legal-tender-man making sure that dollars & only dollars were being used. But how would infractions be penalized? Jail & dollar fines – making things work out to be taxation by another name.
          In practice, this doesn’t work. Legal tender laws are meaningless in practice.
          In practice, the driver of the demand for the government’s money has to be something that the government itself has or monopolizes & sells to the public. Wray ( & Nick Rowe? – who reasons wrongly ) has used water monopolist, or noted that in Britain a few hundred years ago, what ordinary people needed to support themselves was illegal, and fines for illegal activities drove the demand for currency. Taxes are just prices for Uncle Sam’s personalized Get-out-of-jail-free cards. Land taxes as proposed by Georgists or sometimes by MMTers like Mosler are just dollar-denominated rent payable to the government.

          If the demand for something is strong enough to drive the demand for money, then the leakage to the supplier is going to be just as harmful to the economy as taxation, and the supplier will have to spend as much as governments do in order to prevent this harm. The best solution that people have come up with is that a democratically controlled government should be this monopolist supplier.

          • Calgacus,

            You said, “If the demand for something is strong enough to drive the demand for money, then the leakage to the supplier is going to be just as harmful to the economy as taxation, and the supplier will have to spend as much as governments do in order to prevent this harm.”

            As a reader of Monetary Sovereignty, you know that:
            1. There are, nor can there ever be, “fair”taxes.
            2. All federal taxes are harmful to the economy, because they reduce the money supply.

            The question is, would a legal tender law be even less fair and more harmful? I’m not sure why it would be particularly unfair, and since the “leakage” you mention would not remove dollars from the economy, why would it be harmful? The one thing that hurts the economy is loss of dollars, i.e. taxes.

            On a scale of unfairness and harmfulness, taxes are at the top.

            Rodger Malcolm Mitchell

          • If “the supplier” did absolutely nothing with the money he is creating the demand for, just saved it, like dollar bills in a cash drawer, or in Treasuries, then it would be a leakage that would be just as harmful as taxation. To all intents & purposes, it would be taxation, just as if “the supplier” were part of the government. His spending or lending the money would be something different from the accumulation.

            The thing is, legal tender laws just don’t work the way governments would like them to work, and never have. I suggested that they could work – but only if their enforcement was so draconian as to just be taxation by another name.

            • Calgacus,

              “Dollars in a cash drawer” is silly. As for T-securities, they are dollars in a T-security account, identical to dollars in a savings account, dollars in a checking account, dollars in a money market account. All are part of the economy.

              Also, T-security dollars continuously accumulate interest which in themselves, are stimulative.

              In contrast, tax dollars are permanently lost to the economy.

              Rodger Malcolm Mitchell

          • Clonal Antibody


            A question for you. What is the government going to tax, in order to get acceptance for its IOU’s (in other words money?) What kind of taxation will cause a demand for Government issued money? It obviously cannot be an Income tax, because income arises only as a circulation of money. So what kind of taxation will result in a demand for the government spent IOU’s? In my view, it can only be a property or a land tax. Nothing else could possibly bootstrap a currency system. Any thoughts?

  9. Bayard Waterbury

    Having read all three of these posts, I am impressed. But, of course I have, even before reading these, become a fan of Jamie Galbraith and the other MMTers. I have spent decades studying, reading and writing on economic issues, Keynesian, Friedmanian, etc. I have little interest in micro theory, but macro has fascinated me ever since Econ 101 in my sophmore year. I was headed to law, but economics has always been a passion. I loved the concept of ceteris peribus, or the understanding that no one handed economists must exist (because most continually say “on the other hand…”). The more I read MMT ideas and see how logical and rational they are, and how applicable they are to our present situation, which the austerists will continue to prey on to create a disingenous enrichment paradigm to support the rich who pay to keep their “think tank” doors open. As was reiterated more than once during these presentations and discussions, it is quickly becoming clear to a very substantial number of important players that the austerity narrative, owing to its massive failures elsewhere, is losing most, if not all of its intellectual and political traction. If we could only find a way to get it adopted as a part of the new progressive economic vision, it would win the coming election, and leave the Ryan’s of the GOP speechless and defenseless. We must continue to press the dialogue and debate. We need to get Jamie out more, and to convince the debt owls, like Krugman and Johnson, to get on board. We need some public debates on networks (unlikely, but possible — of course never on FOX). Let’s move this forward before it’s too late. We can’t wait beyond the election, or collapse is on the agenda.

    • Krugman and Johnson aren’t “deficit owls.” They’re “doves.” That should be clear from Stephanie’s post, from my treatments of the types, and from the various disputes between Professor K and MMT people. To get the doves aboard, we’ve got to get them off the IS/LM, model and a religious belief that deficit spending unaccompanied by debt issuance is inflationary, and can quickly become hyperinflationary. Also, we’ve got to get them off the idea that deficit debt metrics are important in themselves and get them on to the idea that fiscal policy is about more rigorous analysis of a range of consequences of those policies.

      • Right, Joe,

        Federal debt issuance neither destroys nor creates dollars (other than interest payments, which do create dollars). Federal “debt” issuance is a process whereby checking accounts are debited and T-security accounts are credited. There are no inflation implications in that process. It’s like debiting your checking account and crediting your savings account.

        Ironically, if anything, federal debt issuance itself is slightly inflationary, because of interest payments.