Brad DeLong Has Me Worried

By Stephanie Kelton

Brad DeLong is worried.  And now I’m worried.  He’s worried about “unfunded tax cuts,” which, he says, are “bad juju” in the long run.  I don’t mean to pooh-pooh his juju, but what the heck is an “unfunded tax cut”?



Here’s Brad’s post:

This kind of talk worries me a lot.  It worries me because it perpetuates the myth that the U.S. government  is essentially a giant household, constrained by the availability of cash-on-hand or the risk appetites of the money lenders, who could turn off the spigot a moment’s notice, hurtling us toward a Greek-style debt crisis.  Not all of this is part of DeLong’s argument, but his fundamental point — that today’s tax cuts will have to be “paid for” with higher taxes or spending cuts in the future — suggests we’re living on borrowed time.  It helps the deficit scolds, and it hurts progressives who lack a compelling counter narrative to defend against the deafening cry for “shared sacrifice”.

Tax cuts don’t “cost” the government in the way DeLong’s post implies.  Tax cuts leave taxpayers with more money to spend, but they don’t compromise the government’s ability to spend later.  Nor is the debt ratio a binding constraint, as Scott Fullwiler has been explaining in his series this week.

Can’t we just admit that the U.S. dollar comes from the U.S. government?  That the i$$uer of the currency can never “run out” of money or be forced into bankruptcy.  That the house on the left isn’t like the house on the right.





That the US government doesn’t need one of these in order to deal with future emergencies.

And that interest rates depend more on the policy decisions of the body on the left than the investment decisions of bond traders like the guy on the right.





Until people like us help awaken the population to the way modern money works, the deficit scolds will have the upper hand and the American people will suffer needlessly as Democrats and Republicans alike continue to hide behind the time-honored  “how will we pay for it?”



46 responses to “Brad DeLong Has Me Worried

  1. “Until people like us help awaken the population to the way modern money works, the deficit scolds will have the upper hand and the American people will suffer needlessly as Democrats and Republicans alike continue to hide behind the time-honored ”how will we pay for it?””

    Y’all are not making the case very well to the aggregate low-information public thus far.

  2. Ashley Cutts

    the national debt will never be fully paid off because nobody really wants it to be paid off. All that is wanted is the debt servicing to be paid without default and in perpetuity.

  3. His fears are misplaced. Taxes today are higher for everyone than they were last week. That is the problem. The Obama tax increase is going to cause a recession.

  4. Sunflowerbio

    It’s hard to get much information out when the noise level is so high. One suggestion is that if people keep insisting that it’s like a family budget, we say yes, but it’s a special family in that funny old uncle Sam (Walton?) instructed the president of the family owned bank to honor any draft issued by the family, no matter how big. Every night Sam checks the books and if more money is needed he enters it on the computer. This is a very special family indeed.

  5. surprised to see delong talking the talk of a tea party congresscritter…what he advocates there is no different than their insistence that every new expenditure be “offset” by an equivalent amount of spending cuts in another program..

  6. NO ONE is talking about “unfunded” tax cuts, as in the govt will run out of money.

    NO ONE.

    It is a basic assumption that govt can always print (“create”) new money/reserves/supply and print their way out of any debt. EVERYONE knows that.

    The assumption is that too much of that, where the debt is too much of GDP to sustain via tax sinks, will necessitate the printing of money, thus leading to potential heavy inflation scenarios. That is the worry.

    So don’t wrongly ascribe to brad delong, what he and everyone else already knows (he’s talked endlessly over the years about printing your way out of debt).

    The point is that is BAD policy.

    • Except, foo, that there is no reason to believe that printing money rather than printing bonds will lead to a “heavy inflation scenario”, that it is a BAD policy. For as Abba Lerner drily said long ago, the difference between the two “is not likely to be very large”.

      I too find Professor De Long’s worries worrisome. They make very, very little sense. True, we can’t expect that Uncle Sam always “borrows” at negative real rates, with low inflation, though this happened for quite a long time in the postwar era, with no real worries or complaints. But we can practically ensure that Uncle Sam always “borrows” at zero real rate, by making rates arbitrarily low and spending enough to stave off deflation.

      And much more seriously, the policy aim of a low debt-GDP ratio should be very, very low priority. It is true that taking the perspective of the state rather than individuals who want to save, low debt-GDP is very, very slightly better. But perhaps the time to worry is when it breaches 3,000% – which Lerner did not worry about much even. Records in post WWII or Napoleonic wars US &UK are 250-300%. Higher debt-GDP very slightly raises inflation risks, might necessitate otherwise undesirable taxation – to discourage inflationary spending – NOT to “raise revenue”/ “pay off the debt” – the only conceivable problem. But it is a percent of a percent, margin of a margin kind of thing.

      It’s only worth mentioning because it can be better to fight something with something, rather than nothing. To realize that the DeLongian high debt/gdp worries have some kind of basis. But only to show it is not a bear attacking your tent – but an insect, that you can flick away, casting a gigantic shadow. We are several WWII’s, several lost decades, or a nucular war mutating them ants to the size of cars, away from it being something worth considering rather than laughing at. Lerner and others considered it long ago -e.g. in his “The National Debt” chapter in Economics of Employment, and noted that “the return to Sound Finance is illusory”. (IIRC)

  7. In Dove Economist -Paul Krugman Jan 2 blog “Debt in aTime of Zero” Krugman writes that Federal Government cannot just print money to pay its bills (contary to what Alan Greenspan & Ben Bernake have alread told us/Congress). Yikes! Are doves now joining the deficit hawks?

    ….First, as a legal matter the Federal government can’t just print money to pay its bills, with one peculiar exception. Instead, money has to be created by the Federal Reserve, which then puts it into circulation by buying Federal debt”

    I thought that Treasury dept. just needs an okay from Congress to keep on paying its bills…

    • I don’t think that is inconsistent with what Krugman is saying. Congress can of course change the operating rules whenever it wants. But that “OK from Congress” means a change in current law. Under present law, Treasury cannot overdraw its account at the Fed. It needs balances in its account in order to spend, balances that come either from taxes revenues or debt issuance.

      • @ Dan Kervick
        So do you disagree with Mordern Money Theory that government debt is created when Treasury pays a bill with US dollars (electronic credit in a bank acct.). But Treasury can only pay a bill when it has acquired necessary dollars through tax revenue or Treasury borrowing. And only government debt incurred is when Fed/Treasury borrow those funds. And that issuing of Treasury Bills only occurs when dollars are needed to pay US bills and not to affect daily Fed Funds Rate.

  8. There are two ways to be fooled. One is to believe what isn’t true; the other is to refuse to believe what is true.

  9. @jmarco

    Don’t we need a two-tier analysis of Paul Krugman et. al.? Scott Fullwiler cites him in the first installment of the new debt-ratio series, (I assume because of PK’s interest-rate post on Xmas eve.) PK believes that the CB can set (or rather ‘peg’) the funds rate because it “controls the money supply”, but the exact meaning of the latter assertion is fuzzy. I think he really just means that the government can emit dollars to pay its bills.

    Anyhow, it’s IS/LM again, and the idea that deficits are only non-inflationary in rare, special circumstances called liquidity traps, where the LM curve is flat at zero. Like Richard Koo, another mainstream realist, PK is now brooding ominously over how fast inflation will take off once we begin to get a real recovery. Scott Fullwiler is busy quantifying these dynamics in his series, but, for now, PK gets a lot more attention. Doesn’t our analysis of his modeling – and the story he tells about it – need to be more nuanced?

    Every time we say PK is getting something right, we’re passing on the opportunity to critique the limitations and particular blinders imposed by his mainstream framework. I’m not saying he doesn’t get a lot of things right (he certainly gets things less-wrong than his contemporaries). I’m just saying that whenever I glimpse the mainstream kernel inside the would-be Keynesian shell, I get an uneasy feeling. It is also a plain fact that PK has shown a casual willingness to distort and decontextualize MMT in ways that seem not far short of gratuitous. He has dissed Bill Mitchell and Steve Keen sort of to-their-faces. He has, more than once, blatantly misrepresented the MMT position, apparently without troubling to read up on it.

    Fellow-traveller, maybe. Reliable voice for reason, not so much. At least, I don’t think so.

    P.S. to jmarco – I think PK’s point in the statement you quote is just a technicality, both to PK himself and in reality. The consolidated govt sector can absolutely emit dollars to pay its bills. PK is worried that market forces will spike our interest rates very suddenly once we exit his “liquidity trap,” and that the Fed’s response will be to sell off all the Treasury and other government securities it bought through QE. In other words, the govt will be a little frantic to get enough of its dollars back out of the real economy to head off steep inflation. I’m not going to pretend I can explain or analyze this, but that’s what he’s on about.


    • There are two ways to be fooled. One is to believe what isn’t true; the other is to refuse to believe what is true.

      You are really just saying: the way to be fooled is to believe a lie.

      believe what isn’t true: believe a lie
      refuse to believe what is true: (i.e) believe what is false: believe a lie.

      it’s just a tautology that sounds cool but it’s just muddled thinking

  10. Dave Updegraff

    Mr/Ms ‘foo’ is quite right. When you tease the DeLong/Krugman/ croud about not understanding where money comes from, you just make them dismiss you outright. They know as well as you do. The argument is not where money comes from, or whether we can operationally always pay off any arbitrary level of debt; the argument is what the _consequences_ are. Ok, so MMT says debt/gdp level should be X, and DeLong/Krugman say Y. Neither side says its zero, unity, or infinite. MMT needs a simple & coherent argument to support why X > Y. Not all this pandering about fiat money & claiming that the other guys dont understand how modern money works.

    • Stephanie Kelton


      I wasn’t teasing him. And even if I were, I think he could take it. We had coffee together:
      He has (affectionately!) referred to me as “Kemosabe”:
      We need guys like him. He’s smart and well respected. I’m not teasing him; I’m imploring him to make the strongest case possible for sensible fiscal policy. In my opinion, he’s playing into the hands of the deficit scolds, who demand austerity to deal with the hundreds of trillions in “unfunded liabilities” (see here: Calling a tax cut “unfunded” reinforces the idea that somehow the government can’t “afford” to let us keep more of our income. How are we ever going to get fiscal policy right if we don’t stop paying homage to the deficit scolds?

      • looselyhuman


        IMO this relates to our conversation on twitter regarding inflation messaging. You didn’t address the “_consequences_”…” X > Y” portion of Dave’s comment, which I believe is the area where we need crystal clarity for the beltway/mainstream policy wonks. Without this, MMT is ambiguous where it needs to be loud and clear. Inflation and interest rates are ultimately behind (ostensibly, at least) all the debt/deficit obsession and hawkery — and that includes BDL/PK.


      • Huh ? I’m not delong if that’s what you are implying. What on earth ?

      • I have been doing some reading on MMT recently and I claim upfront that there is much that I have yet to understand. So could you please help clarify a few doubts?

        1. It is rather straight forward to understand that there is no comparison between govt budgets and household/corporate budgets. And so, some deficit is acceptable as long as that money was overspent productively. Is there some ceiling above which the effects can be negative? Can it accurately and quantitatively be identified? Or are there too many factors which may of may not behave rationally to pin it down to x% of gdp or something like that?

        2. If ‘unfunded deficits’ are not a problem, what stops the US govt from issuing tomorrow as much dollars needed to buy back all its T.bills and T.bonds issued to foreign countries like China, Japan etc? Given that interest payments due on these instruments remain as a liability for the future, which again is not a problem given that money can be created to meet those obligations, but wouldn’t such a secure revenue stream for say the Chinese, which will in turn help fund their military (which US may not like funding purely from a ‘productive’ perspective). so create the trillions that were due to them anyway as they held assets (bonds) of equal value and buy them back or retire them/redeem them in a way? (Not sure whether the legal implications require Treasury/Fed/some one else to buy back bonds, but I think the question still has merit) Why retain the liability if it can be retired today?

        3. Can such a scenario be valid for a country like India for which a majority of debt is not in its own currency but in USD? That I suppose can cause a devaluation of the currency.. and so if not, does it mean any country can issue currency so as to meet any obligation as long as the borrowing and spending is done in its own currency?

        4. In an interview with Lauren Lyster (RT) you had mentioned that the govt should spend till full employment and that spending should be done in a prioritized manner and for productive uses. But what is the solution when there will always be in all countries people who while seeking employment, are either 1. very unproductive (cost less to have him sit at home) or 2. unemployable because they lack the skills or ability to learn employable skills (not disabled people, just regular people too lazy to work but would like a paycheck anyway just to sit around) ?

        5. With increasing automation, is it possible to put the entire employable population to work? I have been doing some basic research about diary farms with the intention of setting up one for myself. However I have come to understand that even diary farms in England (herds of 300-500 cows) can’t compete with the mega diaries (5000-10,000 cows) which most assuredly do not employ 10x times (500 to 5000 cow transition) the number of people required to work the smaller diary farms. There is even a machine that milks the cows using laser sighting, and once the cow is trained to walk in by itself for milking, it reduces number of people required once again. So with the supersizing (for economies of scale) and increasing automation (which probably would make sense once the scale of operations are large enough) people expected to gain employment in the creation of physical goods, in my mind, is limited and reducing. So that leaves us with services. But really how many services does a person need. Want can be a whole different question, but need? With population increasing globally, while perhaps not in all countries, is it realistic to imagine that everybody will find employment? Would it still be productive to achieve full employment when if for the same amount of dollar spend you can get better productivity from machines and give the difference for people to sit at home? What do we do with the increasing number of people then?

        Just some random thoughts from an unfortunately unemployed guy.
        I would very much like to hear your views on the above


        • Don,

          Keep reading. I recommend and the other mandatory readings on Mosler’s site.

          1. Read up on sectoral balances. The government deficit offsets the surpluses in the private and foreign sectors. If government were to try to run a bigger deficit than that, it would be inflationary: trying to buy goods that don’t exist and cannot be produced, which only drives up prices. The trade deficit and private savings desires are not terribly consistent or predictable, so automatic stabilizers are important to keep the deficit “right-sized”. For instance, if people suddenly started spending more (saving less), the progressive income tax would take some of that extra income out of the economy, and the lower unemployment would reduce safety net expenditures. Ultimately, the thing that keeps prices under control is the excess labor buffer, which today is the unemployed, and under MMT would be the JG workforce. Not until that buffer is almost depleted would there be true inflation.

          2. This is one that I think can be tackled with basic econ 101 on which there are no disputes. Laws of supply and demand. People, largely retirement fund managers, and governments wish to hold US Treasuries as a risk-free store of value, or in the case of governments, as foreign exchange reserves. Some governments “peg” their own currency to the dollar, and others try to manipulate their own currency’s “floating” exchange rate by buying up dollars. Their demand vs. the issuance of them by the Treasury creates a market, which is controlled by the Federal Reserve, which sets the price (interest rate) by being the buyer/seller in unlimited quantity at the price they wish to set.

          If the Fed wanted to buy them ALL up, some sellers would hold out for a very high price, and a negative interest rate. If there really were a strategy to get rid of all Treasuries, it would be done by letting them mature and refusing to issue any more. It could take up to 30 years. Assuming everyone would not want to simply hold so many non-interest-bearing dollars, they would spend (some of) them on US goods, driving the trade deficit down, perhaps into surplus, raising US employment and reducing the government deficit. Or they might switch into riskier assets, driving up the price of stocks or corporate bonds. But the big deal would be that the Fed would no longer be able to control the interest rate in the economy, and that would be a threat to stability and growth. It’s probably a good thing that there are more Treasuries out there than people and governments want to hold, so that the Fed can hold some and exercise control of the interest rate. MMT says the proper interest rate is zero anyway, which makes the Treasuries exactly equal to cash. Perhaps 0.25% is close enough to zero for MMT purposes, and maintains a market for them.

          3. Countries that have debts in currencies other than their own are not truly exercising monetary sovereignty, and are limited in their policy space. Any country that is monetarily sovereign and is willing to allow its currency to float can exercise the same options as the US, and can achieve full employment. Their foreign trade will be limited by what they can export, and their currency may depreciate against others that do not pursue full employment policies. Being the world’s reserve currency requires that the US run a bigger budget deficit in order to satisfy the demand of foreign governments to hold its currency. The smaller country wouldn’t have that “problem”.

          4. There is lots written on the Job Guarantee. Some very extensive discussion here at NEP. My personal take is that training and job-seeking should be considered valid work time and paid under the JG, so that those with no skills or the “wrong” skills can become employable. Those that don’t want to work are not involuntarily unemployed, are doing what they prefer and should be left alone to enjoy their leisure time. When they want a job, JG is there for them.

          5. Automation and productivity improvement has been happening for centuries. It is what raises standards of living, and frees up people’s time for pursuit of beneficial activities that they won’t necessarily be paid for, like artistic endeavors, learning for its own sake, and invention. New industries spring up to replace the old, the work week shrinks, retirement ages can be lowered, “school” age can be raised, maybe one spouse even stays home to take care of the kids (what a radical idea!) because the other can be productive enough to support the family on one job. We are not at the point yet where there is not enough to do that everyone who wants to work could not be employed, and by making lifestyle adjustments that time can be postponed for quite a while.

          The extreme question is what will happen when robots do almost everything and a very few people working a very few hours can produce all that is required to support the entire population. Seems like a happy problem to have.

        • Don, good questions. I won’t try to answer them all. Many are addressed by NEP bloggers, just keep reading.
          As for the correct ratio of debt to GDP, Scott Fullwiler’s most recent five part post addresses this issue, although I won’t pretend to understand everything in it. Basically, as I read it, Scott says the ratio should not be the target, but full employment and asset utilization should be. Full employment of course does not mean every man and woman is working 40 hours a week, 52 weeks/year. There will always be some people seeking employment either from job dissatisfaction, technological unemployment, plant closing or bankruptcy, family relocation, etc. That might be somewhere in the 1 to 3 % range, but you would need to ask a labor economists for the figure. Keep reading and have fun. PS check out some of the small organic dairy farms as an alternative.

          • Yes, the little guy always has a tough time competing on price. You have to find a way to differentiate your product, so as to justify the higher price. I remember from my youth advertisements about “contented cows”.

  11. Brad Delong really should give up his day job as a professor of economics his logic is non-existent. On the basis of his argument that there should be pre-funding of tax-cuts ( which amounts to saying that there cannot be an expansion of money in the economy without pre-funding ) there cannot accordingly be any creation of money by private bank lending without pre-funding. As most of us know from the current recession the blowing of a house price bubble ( the excessive creation of money ) by the private banks amounted to the imposition of a tax hike by draining demand out of the economy, a form of deflation. If the private banks had had to pre-fund their bubble it’s unlikely there would have been this “Demand Tax” drain. So Brad Delong is stuck. He cannot go on to reason that the creation of money for economic growth is fine from either government or private banks provided that it is carefully monitored and controlled to prevent either inflation or deflation. As such he is illogical an attribute a society should not expect in a professor.

  12. Pingback: Thursday Morning Reads: what the new law means for taxpayers « Writings on Wall St

  13. Indeed Brad Delong’s pre-funding argument is a negation of market capitalism in the sense that any smart capitalist knows that it’s the rush to competitively invest usually by private enterprise in producing a new product or service that results in driving down the price ( that’s why capturing the “price point” is so important ) and thereby contributes to increasing the value of money. If a society, however, has to pre-fund the creation of money for investment and demand for these new goods and services they are unlikely to happen! His argument is illogical like a dog chasing its own tail. It’s a failure to understand the role of money beyond the “balance sheet accounting” of those who can’t create and issue money. A lack of imagination to put themselves in “the shoes” of those who can and the attendant moral responsibilities such individuals need to exercise.

  14. No end to deshort comings of delong
    And the rest of the brad boys club…


    Good post!

  15. like most people, they tend to make up stories so that they don’t to name the shadow capacities of people who otherwise seem like allies or their own. I remain bewildered at the kindred process even among adults to not recognize what is also an analog of Gresham’s. When there are no standards beyond self interest, self interest becomes the basis for discourse and without an exception for the academy in the marketplace of ideas. Not having had sufficient parchment, asking embarrassing questions, or a higher standard seemed be a guarantee for a quick exit. for all of the criticism from Steve Keen toward P. Krugman, I thing thee issue is more on the order sustaining a relative position, which is still a satisficing self interest. As the discourse changes trying to straddle a problem eventually the questions will change. A friend knew him though a P/K list used the metaphor of fence sitting. In a pinch they will tend to continue the posture. Tadit Anderson

  16. DeLong is obviously captured in the government long-term balanced budget paradigm – you pay for today’s tax-cut deficits with surpluses over time. Why else do they need funding?
    But the larger question raised here is whether these people understand ‘the way money works’.
    I thought the “way money works” in this country is ‘endogenously’.
    Money is created by private bankers in response to private demand for commercial lending, providing mutual profit.
    Does not MMT accept the ‘endogenous money system’ as a fact of modern monetary-economic life (being not certain that the last hundred years qualifies as ‘modern’)?
    I never thought that government, as the sole fiscal policy agent, created any money as do the private banks, and I’ve never seen any evidence that government creates money in the operational mechanics of our modern money system. (See the Fed’s publication in Modern Money Mechanics).
    When a public monetary authority actually creates the nation’s money supply, this would involve what economists call ‘exogenous’ money creation.
    Is there any evidence that the government – the Treasury as the nation’s bill-payer and ONLY public policy actor capable of funding potential demand in the economy – has ever created any money(not by issuing debt) to pay for government services, with Greenbacks excepted?
    If we want a sustainable fiscal operation capable of supporting either the JG or full-employment, or even the livable wage, as a public policy toward greater economic democracy, we would need some proof of the ability to deliver such an outcome.
    If legal, the Platinum Coin option might do.
    Given the hundred-year existence of fractional-reserve banking and privately-issued endogenous money, it seems impossible to utter that the sovereign government is the ‘monopoly-issuer’ of the currency, absent re-definition of ‘monopoly’.

    The testimony of Fed Chairmen on their reserve-expanding powers for the bankers, who sit on $Trillions of excess economic capacity waiting for what Michael Hudson correctly describes as their final moment of real wealth confiscation, is really not the same as having the government creating money – exchange media – and thus expanding the real economy, when it spends.
    The latter can of course be done in a sovereign, fiat money system.
    But we need to change a few laws to do it.
    If we were to propose the Kucinich Bill to DeLong as a vehicle for a way to achieve the needed revolution against the oligarchs, we could show exactly why those deficits need never be repaid. They wouldn’t be deficits. They would be new money.
    Because that is how the new money system works.

    • Funny here I tought we have a complete state money -system

      First government publishes what is known as monetary base, high-powered money etc. by spending more than it collects in taxes. This consist of bank reserves and cash & coins in circulation. There is no other source for monetary base than the government, can’t come from the banks for example. In spending government marks up banks reserves, and bank marks up account of the recipiant. So both bank and the depositor receive an asset.

      Then it is the business of banks to leverage this money. As Paul Grignon so eloquently explains in money as debt II: , a bank deposit is actually record of banks debt to depositor, it’s promise to pay money. When depositor comes to withdraw money from his account, bank utilises reserves it has, in other words actual money it has. Settlement of debts is done with actual money, i.e. monetary base, money that government has issued.

      • I agree that’s a little funny.
        I don’t know much about what government publishes.
        But if you’re saying that government creates any form of ‘money’, so-called base or otherwise, when it spends more than it taxes, it doesn’t. There’s the legal matter that government cannot spend more than it has in its accounts. As such, these deficit balances must be funded by proceeds from the government issuing debt. There’s no money created by deficit spending.
        As far as the source for the monetary base – which has nothing to do with deficit spending or money creation– the central bank issues the reserve balances, and also directs creation of the currency in existence, but the banks issue the currency into circulation and the Treasury mints and issues the coins into circulation.
        “In spending government marks up banks reserves, and bank marks up account of the recipient. So both bank and the depositor receive an asset.”
        The important thing is that “in spending”, the government has the money before it spends, and does not create any money. The government (Treasury) is a participant in the national payment system, and the effects of its payments being made are no different than those of any other participant in the system. Again, the reserves that show up on the depository’s bank at the Fed are primarily there to settle the payment of accounts – within the payments system. They’re not money as we call the stuff that buys goods and services in the economy.

        That’s why there’s truth to the statement that debts are settled – in the ultimate payment in that system – with reserve balances that the central bank creates. A read of the section on Reserves in Modern Money Mechanics lays it all out.

        It should be no surprise that the bank deposit is a liability of the bank. Even if the bank lent ‘real’ money, rather than create it as a balance-sheet entry when making a loan, the demand deposit created would be a liability.

        Bottom line. There is money and there are reserves.
        The CB creates/issues all the reserves. But, they’re not counted as money.
        The private banks issue all of the money (bank-credit and currency) except coins; they create all the bank-credit and the Treasury prints the currency. They count as money.
        The government creates/issues only coins that serve as money.
        Again given that money is what is used to exchange goods and services in the national economy, it is the private banks that have exclusive power over money-creation, subject to regulatory oversight and supervision, and coinage.

        But if you want to believe that right now we have a state-run money system, please do.

        • “There’s the legal matter that government cannot spend more than it has in its accounts.”

          Yes, but as I understand it, primary dealers are oblicated to participate in new issues, and create market for these securities. So Treasury, Fed and primary dealers act as a trio that ensures that government has always the money in it’s account to spend. When was the last time there was any problem?

          If reserves are not money, what are they? What are these valuable things that can be used to pay taxes and other oblications to the state? Are you saying taxes are not paid with money?

          Well, definition of ‘money’ can be argued. That’s why I said I think we have a complete state money system because it makes sense me to define money as monetary base or high-powered money, because what bank’s do as Paul Grignon explained is just mark up promises to pay in this HPM. Accounting mark-up of a promise to pay HMP is not actually HPM. I would define bank deposits as bank’s debt to the deposit holders, and therefore not money. And I would define ‘money’ as HMP a.k.a monetary base, that is bank reserves + all cash&coins in circulation, because that is the object that has been promised to pay.

          • PZ
            Thanks. Just trying to maintain the margins of our conversation here.
            I never said or meant to imply that there was a problem getting buyers for any public debt issuance – that IS the role of the primary dealers. I just said there was no provision for government spending without either taxation OR debt issuance, this being directly responsive to your statement that
            “First government publishes what is known as monetary base, high-powered money etc. by spending more than it collects in taxes.”. Any spending in excess of taxes must be covered by proceeds gained from issuing debt.
            If what the government does in “spending more than it collects in taxes”, is issuing debt, then the causation goes to that public debt “publishes(?)” – causes to be created?? – HPM. It doesn’t.
            I’ll observe out loud right now that there is no such thing as HPM. All bank-reserves have the same quality. Given $2Trillion in excess reserves, WTF are they doing with their “high-power”? Answer: Nothing. In a balance-sheet recession, HP becomes peashooter-money.
            The fractional-reserve banking system does not work in reverse. That’s why we have ‘busts’ in economic activity. Please have a read of Irving Fisher’s “The Debt-Deflation Theory of Great Depressions”.
            “If reserves are not money, what are they?”
            They are no more or less than accounting identities, balances of the central bank’s, reflecting national payment system settlement media, reserve management media, or excess.
            Please have a listen of the Bernank’s explanation about excess reserves. Were they ‘money’, then reserves could be inflationary. But as reserve balances – they just sit there.
            Jump in at 19 min and stay for 4 or 5 minutes.

            “What are these valuable things that can be used to pay taxes and other obligations to the state? Are you saying taxes are not paid with money?”
            I think that was an unintentional little three-card monte there. You start asking what reserves are, and claim that reserves are used for paying taxes and other obligations of the state. And then, without changing horses, you ask if taxes, and not reserves, are money. Go cautiously into those weeds of reserve accounting, pz.
            First, taxes – as collected from taxpayer M1 checking account – are money, in today’s parlance. (They are really bank-credit, but that’s another story.) I agree as you said below that “I would define bank deposits as bank’s debt to the deposit holders, and therefore not money”. But, again, in today’s parlance that balance held in the depositors account DOES count toward the M1 money supply and, in that sense, things that count as part of the money supply are money.
            Reserves are NEVER used by any taxpayer to pay taxes. Nor ever, by anyone, to pay any government obligation. No taxpayer has access to ‘reserves’, they strictly serve a central-bank accounting function, between the CB and depositories, in a fractional-reserve banking system. Reserves are not money.
            Finally, I’ll have another listen to Paul Grignon’s commentary and get back if needed.

            • Okay, I don’t wanna spend time arguing over this, just say that the way MMT scholars explain this is that in spending government has to simultaneously credit both sides of the bank’s balance sheet, on the asset side it credits banks reserves, on the liability side it credits banks account of the depositor, so that the assets equal liabilities and net worth of the bank does not change.

              Taxation just reverses this, so both bank deposits and bank reserves are depited.

              The other point is that, notice that how in the Paul Grignon’s explanation of the loan process money multiplier is absent. MMT agrees with Paul Grignon and says that money multiplier -theory is false, and that “loans create deposits” in a manner that Grignon describes.

  17. Pingback: Stephanie Kelton-en kezkak | Heterodoxia, ekonomiaz haratago

  18. Nice little scam then joebhed that the private banks can create money from nothing to buy interest bearing bonds that can only be created by issuing bonds to create bonds. Sounds like the kleptocracy have invented a piggy bank for themselves that magically keeps filling itself up, a sort of perpetual circular money making machine fit for vampire squids.

    • I’m always hoping for a chance to advance the discussion of what it is we’re talking about, which is the monetary system. Having said that, sorry, but I don’t know what you’re talking about.
      I made several comments here but this is not in reply to any of them.
      It would be nice if you explained what you were talking about, or thought I was talking about, when you ‘paraphrase’ somebody’s comment. That would be more helpful than me, or anyone, guessing what you mean, or what I said.
      The only thing I recognized was that banks create money. All money must be created out of nothing.
      You lose me completely, almost Professor Irwin Corey style, when you say that some bonds “can only be created by issuing bonds to create bonds”, and then it all goes off the deep end, where there’s vampire squids.
      I’d be glad to talk about anything I said.

  19. Your family’s budget is analogous to that of the U.S. government if and only if your family runs a protection racket that demands payment in money that it prints.

  20. My apologies I think I assumed too much knowledge on your part. I take the MMT view that modern understanding of money allows sovereign government to create free floating money without resorting to pre-funding save the necessity of taxation to both secure demand for the fiat currency and to make space within the economy for government spending to avoid inflation. The history of money usage would seem to suggest the predominant use of precious metal coins led to clipping by the private sector and recall by government to remint to the same denomination but with less precious metal as previous coins. We can assume the resentment towards the inflationary effects caused by this government reminting process deterred governments from fully understanding the nature of their money creation powers and to take the route of bond issuance when they were short of money particularly to fight wars.

    • “My apologies I think I assumed too much knowledge on your part.”
      No problem. I get that all the time.

      “I take the MMT view that modern understanding of money allows sovereign government to create free floating money without resorting to pre-funding…”
      OK, I think I understand your view of the modern money understanding: that the Treasury does not need to have money in its account before it pays its Bills. Please educate us on how you came to that view, keeping in mind that government financial operations and practices are not based on theory, but a couple of centuries of practice. We are not talking about what a sovereign government COULD do, as I completely agree that with passage of the Kucinich monetary reform Bill, we could do exactly as you say. But given this little Debt-Ceiling debate and the portending shutdown of government, I suggest you run over to 1500 Pennsylvania Avenue NW, or give Treasury a call at (202) 622-2000 and tell them of your view and this ‘modern money’ understanding.
      I’m sure they will appreciate the error of their ways.
      There’s no theory at play. Treasury MUST resort to pre-funding its expenses.

      The missive that it is public mistrust over the treasonous act of debasement by coin-clipping which has caused the sovereign to issue debts is hilarious. You should read the Statutes establishing the Treasury. We were $6 Million in debt before we issued our first coin capable of being clipped.
      Again, we SHOULD not need to issue public debt, but we do.
      Change some laws and we’d have a modern monetary reality.
      For the Money System Common

  21. Dave Updegraff

    Many thanks for thoughtful responses; still reading.

  22. joebhed.

    Further counterfeit for your amusement:-

  23. DeLong puzzles me, too. Not long ago he was highlighting the $1T coin idea. Now he is talking like that’s not possible. Perhaps he has been talking to Krugman or Summers, who do not take the idea seriously.

  24. Every sovereign can become a monetary sovereign in one simple step: repudiation of any debts denominated in other currencies.

    Again, the question is not whether a sovereign can create money at will, or repudiate obligations. Of course they can do that. Sovereigns often do things like that. Those are some of a sovereign’s favourite things to do.

    The question is always, “Okay, now what?”

    1. Sometimes the sovereign finds out it isn’t really a sovereign. Think of a weak country trying to repudiate foreign debts, which then suffers a foreign-sponsored coup d’etat or insurgency. Or maybe they get called a “rogue state” and get sanctioned and bombed or droned regularly. Or maybe the Marines or the Blue Helmet Boys show up in a direct intervention. History shows so many ways in which a sovereign can get punked.

    2. Inflation. On this thread I have noticed that nobody mentions the global inflation risk posed by the rampant money creation of the world reserve currency. Monetary expansion in the USA might not create a short-term or even medium term inflation risk in the USA itself. During the Bushite era, money expansion in the USA forced double-digit inflation in many countries in the developing world. Due to the trade dependency and financial interconnectedness of many countries, inflation of the world’s reserve currency is difficult for those countries to counteract.

    In other words, MMT people might boast that the USA will suffer no consequences from a dramatic arbitrary monetary expansion. But that doesn’t mean there wouldn’t be serious consequences in the world as a whole. Unfortunately, other countries can’t “punk” the USA’s sovereignty. And that gets to the bottom of the matter: how can people around the world in an interconnected economy prevent a hegemonic power from abusing its “exorbitant privilege” ?

    I know that most MMT’ers claim to dislike imperialism. But their reluctance to accept that the issuer of a reserve currency must accept some discipline nevertheless amounts to imperialism.

  25. Question for Stephanie Kelton: Is there any way you could pen a blog post that proposes a strategy for repealing/modifying legislation that was (as explained in a Joe Firestone post on NEP on Dec 14, 2012) “appropriate for a gold standard-based financial system but that were never repealed.” “They persist to this very day in our institutions, in our minds, in our economic systems, and in our politics. These included: 1) Congress dividing the financial functions of the Government between the Federal Reserve and the Treasury; 2) Congress prohibiting the Fed from directly buying Treasury-issued debt; 3) Congress’s ceiling on debt subject to the limit; 4) Congress’s prohibiting the Fed from issuing credits directly to the Treasury to implement deficit spending, forcing it to issue debt and making the terms deficit and debt close to synonymous in the public’s mind; 5) Congress’s delegating its currency power primarily to the Fed; while leaving its delegation of the power to coin money with the Treasury; and 6) Congress leaving the Fed, the Central Bank, independent of the Executive Branch and the Treasury, but, at the same time closely associated with the Banking and Wall Street interests that own the regional banks, and sit on the Federal Open Market Committee (FOMC).”

  26. We are a bunch of volunteers and starting a new scheme in our community.
    Your site offered us with useful info to work on. You’ve performed a formidable task and our whole group might be grateful to you.

  27. For most up-to-date information you have to go to
    see the web and on the web I found this web site as a finest website for latest updates.