From Central Bank Independence to Democratic Public Finance

By Dan Kervick

Effective governance in any country requires a well-designed system of public finance through which that government can achieve its various purposes and pursue the public interest.  If the system of public finance is poorly structured, the public interest will be poorly served.   So, badly designed systems of public finance must be altered or abolished. [1]

We have reached that point in the United States.  The present system of public finance in the US is inefficient and antiquated: its fusty architecture hampers the capacity of the national government to respond to economic fluctuations and crises in a timely and effective manner; its byzantine operational complexity thwarts democratic governance and generates pervasive public confusion about the full range of public policy options; and its over-reliance on government bonds means that wasteful and unearned profits flow to some of the most affluent members of US society, as they are paid service fees for intermediating what ought to be routine operations of the government.

The anchor of the existing US financial system is the Federal Reserve System: a central bank that possesses forms of operational and political dependence that have become a model for central banks around the world during the neoliberal era.   But it is this high degree of independence that is the main source of financial inefficiency.  The central bank anchor that was intended to produce stability serves instead to drag the country down when it most needs to move briskly.  Central bank independence – at least in its current form – is an idea that has failed the test of crisis, and should be discarded.

The necessary correlate of central bank independence is the self-imposed dependency of fiscal authorities.  Many modern democratic governments, despite the fact that they are the issuers of their own national currencies, have established public financial systems in which their own fiscal operations are bound by formal constraints that eschew the full benefits of a national currency.  These constraining rules require the national treasury to build up account balances through taxation and debt-issuance, and then to spend only within the limits imposed by the sizes of those balances.   The authority to issue currency, an inherent power of sovereign national governments, is then delegated to the central bank alone.  The point of this practice is presumably to prevent a democratically elected legislature from spending the country into monetary instability.  But the resulting system is authoritarian and paternalistic, an artifact of the capture of public finance by wealthy patrician elites, powerful financial institutions and anti-democratic reactionaries.  This paternalistic system is not a necessary condition for monetary stability.  It creates an artificial and burdensome institutional division between monetary and fiscal policy, and needlessly lames our democracy in the pursuit of the public interest.  It should be abolished.

To make my case for these reformist claims, I will begin with a simplified model of streamlined public finance as practiced by a hypothetical currency-issuing national government without an independent central bank.  I will then compare that simple model of financial governance to the more complex and rigidly structured system based on central bank independence.  Finally, I will conclude with some thoughts on ways of combining the more efficient and powerful public finance of the simplified model with the monetary policy discipline that is supposed to be provided by independent central banking.

To begin, imagine an extremely simple form of national government, one without a lot of separate agencies, divisions, branches and departments.  You can imagine an all-powerful czar if you like.  But for the purposes of this thought experiment, a unicameral and democratically elected legislature that is responsible for all aspects of national governance works just as well.  This government enacts laws and enforces the laws it enacts.  It taxes and it spends.  It also issues and manages the currency the public uses for transacting all domestic business.   And it issues government bonds as well: a variety of financial instruments carrying different maturities and rates of interest.  These bonds are government IOUs: promises for the payment of specific amounts of the national currency at or over pre-specified periods of time.

Nothing important hinges on how our imaginary government issues currency.  It can issue the currency by manufacturing and spending physical notes and coins; it can issue currency by crediting electronic balances to its own account and then transferring those balances to private sector accounts via the electronic payments system it supervises; or it can issue currency by crediting electronic balances directly to private sector accounts, without first crediting the balances to any government account.  The precise system used is not essential, and reflects only a decision of technological convenience.

Since the government can issue the currency whenever it wants, it doesn’t need to obtain the currency first either by taxation or by bond sales in order to spend.   So if the government doesn’t need to tax to obtain the currency, why does it tax?  It taxes for three main reasons: one is to help preserve the stability of the currency.  Since the public is constantly using the currency to buy things and sell things, there is a public interest in maintaining generally stable prices for goods and services given in exchange for the currency, to the degree at least that the real costs of producing those goods and services haven’t changed.   Stability can be managed to some degree by coordinating the interrelated operations of taxing, spending, and issuing currency.

The second reason the government taxes is to ensure a continuing demand for the currency.  If individual people, households and firms were to grow less desirous of acquiring the government-issued currency, the public would lose much of its ability to achieve public purposes by buying goods and services with that currency.   The government and its pursuit of the public interest would then become dependent on other media of exchange, and on the private enterprises or foreign governments that happen to control those alternative media.  Tax obligations assessed by the national government in the national currency ensure a continuing demand for the currency, and serve to fight off invasive competitor currencies.

A third reason for taxation is to directly influence the distribution of monetary incomes.  High marginal income tax rates, for example, might be used to limit the growth of personal income at the top of the income scale in order to preserve the integrity of government, to build social solidarity, to minimize class antagonisms or to produce other desirable social effects.  And since price stability requires a prudent ratio of spending outlays to tax revenues, taxes on the affluent can also provide the policy space for spending directed to other purposes.

Now in the same way that our imagined government issues currency, it also issues a range of interest bearing securities of various maturities and payment terms.   We can call all of these securities “bonds” for short.  But why should such a government issue any bonds at all?  Why not just issue currency?  And why swap bonds for currency or currency for bonds?   The point of these transactions is to adjust the quantities and term structures of the financial assets held by the public.   A bond is like a time release capsule.  It represents an injection of currency into the private sector, but it is an injection that takes place over time, on a pre-determined schedule.  The issuance and manipulation of government bonds by the issuing government gives that government more control over the pace and volume of public accumulation of government-issued financial assets.  It also provides secure savings vehicles that can be useful in stressed economic environments when the public lacks confidence in, or options for, private sector investment.  And it also provides a tool for the management of interest rates, particularly the rates financial institutions charge one another as they borrow and lend their currency reserves.

The fundamental point here is that in its decisions about currency issuance and bond issuance our hypothetical government follows Abba Lerner’s Second Law of Functional Finance:

LL2: The government should borrow money only if it is desirable that the public should have less money and more government bonds, for these are the effects of government borrowing.

The use of the term “borrowing” is actually quite misleading in application to a currency-issuing government.   To say the government borrows money only means that it issues bonds and exchanges the bonds for currency that the public already holds, currency that was itself issued earlier by the government.   Lerner’s point is that the government should carry out these swaps only if it sees a public policy interest in swapping interest bearing bonds for non-interest-bearing currency.   Since the government issues the national currency, it can never have the problem of being unable to redeem its IOUs, since it can always simply issue the currency it uses to redeem the bonds.

That is not to say a currency-issuing government of the kind we are imagining can’t make monetary policy mistakes in its decisions about issuing or collecting currency and bonds.  The government can destabilize the economy, or make bad situations worse, if its decisions about the issuing, spending, redeeming and taxing of government-issued financial assets are not appropriate given the current nature of private sector economic activity, and given the current desire of households and firms in the private sector to accumulate or reduce savings of those assets.  But there can never be a concern about the solvency of the government’s IOUs.

Notice that for our hypothetical currency-issuing government the decision about whether to issue bonds and swap them for currency while running a deficit is strictly a policy option.  The government doesn’t need to borrow to run a deficit, and always has the option of simply spending more currency into the private sector than it taxes out of the private sector, in effect creating and issuing currency in the process.  It doesn’t need to finance the deficit by acquiring the additional money from some external source, since the government itself is the source of the currency.  If the private sector economy is stagnating, and running below capacity with high unemployment, the option of deficit spending without further borrowing might prove best.

Now suppose our imagined government wishes to run a deficit during a given period of time, and voluntarily makes the decision to issue new debt to accumulate back from the public sector a total amount of currency equal to the gap between spending and tax revenues.  We’ll say that the government is in that circumstance operating a bond-driven deficit.  With bond-driven deficit spending the net amount of currency held by the non-governmental sector does not change.  However, the total value of government-issued financial assets held by the public does increase by an amount corresponding to the value of the bonds that are issued.   Suppose instead, however, the government carries out its deficit spending in such a way that none of the gap amount is offset by bond sales – it simply spends more into the economy than it taxes out of the economy.  In this case we will say that the government is running a currency-driven deficit.  With a currency-driven deficit, the quantity of currency held by the public increases, while total value of the bonds held by the public does not.  Obviously, our imagined government can operate deficits that fall on a spectrum between the two extremes of a bond-driven deficit and a currency-driven deficit.

Economists are in the habit of drawing a sharp theoretical distinction between monetary and fiscal policy.  But notice that for our imagined government monetary policy and fiscal policy are seamlessly integrated.  If the government runs a currency-driven deficit, for example, it is easy to see that the decision is simultaneously an act of monetary and fiscal policy.   It is an act of monetary policy because the combined impact of the spending and taxing operations affects the quantity of currency held by the public; it is an act of fiscal policy because it does involve spending and taxing.

The system described so far gives the government a great deal of flexibility in using its authority to issue currency and bonds as part of the means to achieve its purposes.   But now let us suppose our hypothetical government voluntarily adopts the following somewhat more rigid system, which we can call the bonds-first system.   For accounting purposes, it divides its spending into two categories: (i) ordinary spending and (ii) bond redemptions and repurchases.  It then resolves that the total quantity of ordinary spending during some standard fiscal accounting period must always be less than or equal to the total quantity of currency that it obtains from the public during that same period via tax receipts and bond sales.   The government subsequently redeems or repurchases the bonds it has issued, and it allows itself the choice at that time of either issuing currency to carry out these operations, or paying for operations in the same way it conducts ordinary spending.  Thus, the only way that the quantity of currency held by the public can increase is through the issuance of bonds and their subsequent redemption or repurchase.

What are the effects of this policy?  Well here is a very important one: every government deficit – that is, every excess of ordinary spending over tax receipts – leads to profits for people who hold extra currency, and who are able and willing to purchase bonds that the bonds-first system mandates must be sold to enable deficit spending.   The purchasers of the bonds will not all be wealthy, no doubt.   But in general, those with large amounts of surplus cash to invest come from the more affluent parts of the community.   The bonds-first system creates a class of wealthy investors who are, in effect, stockholders in the business of government.  The rich get richer by investing surplus cash in routine government operations.

Finally, let’s imagine the system is made even more rigid.  The financial operations of government are divided among two separate agencies, each with its own account and balance sheet, and each granted a great deal of independence over the operations it supervises.  One part of the government issues the currency, the other half issues bonds.  The part of government that issues the bonds also taxes and carries out ordinary spending.   The part that issues currency carries out bond repurchases at its discretion.  It can use also make loans to banks, and to pay interest on some other government-issued assets such as commercial bank deposits at the central bank.  In less conventional times, it can make emergency purchases of privately-issued financial assets.   Bond redemptions on the other hand are carried out by the bond-issuing part of the government, the same part of government that collects taxes and does ordinary spending within its self-imposed budget constraint.

One effect of this system is simply to solidify the bonds-first system in place, and to place full responsibility for whether or not currency will be issued in the hands of the currency-issuing branch.  But is has the further effect of guaranteeing that the government never directly redeems its bonds via currency issuance, but must either tax or issue more bonds to do these redemptions.  Currency is always injected first into the private banking and financial sector, and then impacts the ordinary budget only by being taxed back or loaned back to the government.   Aside from the fact that this process funnels possibly pointless interest income to bond purchasers, the continual financing of interest-bearing debt with interest-bearing debt can create long-term sustainability issues that require restrictions on ordinary spending that would not otherwise be in place.  It’s not that there is any issue about the government’s long term solvency.  But the piling up of interest payments may create pressures for long term price stability management, pressures that are relieved by reductions in other kinds of useful government spending.

This is the institutional setup we effectively have in the United States.  The currency issuing part of the government is the Fed.  The bond issuing part of the government is the US Treasury, whose fiscal activities are directed primarily by Congress, and the President.  In the US public financing family, the Fed wears the monetary pants.

Why in the world would any government decide to have a system like this?   I believe those who are most drawn to the present system and have endorsed central bank independence for genuinely public-spirited reasons, and not simply because they personally benefit from the present bonds-first system, base their support on the belief that central bank independence promotes monetary policy discipline.  They imagine the Congress as Odysseus, the legendary Greek warrior who decided to have his crew members tie him to the mast of his own ship as he sailed past the island of the Sirens.  The independent central bank system is supposed to work something like that.  Congress gives itself a budget.  Spending requires draining money from the private sector in the form of either tax revenues or payments for the purchase of bonds.  In this way, it is felt, the government is able to guard against the temptation to destabilize its own monetary system by injecting too much currency into the private sector through politically popular spending while failing to drain an adequate amount of currency through politically unpopular taxes.

But the social disutility of this system should now be apparent.   Experience has shown that economies can get stuck for a long time in conditions of persistently low employment and sluggish performance.  These economic circumstances call for timely, currency-financed expansions of public investment and public enterprise, or currency-financed subsidies of private household consumption and private business investment.   The government should be able to carry out these expansions without counteracting its own efforts by draining more currency from the economy through additional taxes as a result of a self-imposed budget constraint.  An effective currency-issuing government should therefore reserve for itself the option of spending newly-issued currency directly into the accounts of households and businesses without boosting taxes and without the requirement that it makes additional and irrelevant injections into the financial sector bond market at the same time.  Since monetary stability and price stability depend on managing the total volume of government-issued financial assets held by the public, every dollar injected into the financial sector eliminates some of the space for direct injections into the real economy, where the spending is most needed.

Again, the problem isn’t that the additional bond liabilities can’t be paid off.  The problem is that these additional debt liabilities lead to an inefficient, wasteful misallocation of government financial resources.  If the government needs to purchase a collection of bridges, which represents both a valuable public investment in the future and a needed immediate-term injection of purchasing power for businesses and households, then it is illogical for the government to follow a policy rule that compels it to pump additional interest payments into the bond market in order to carry out the fiscal expansion.  It should not do this absent some additional, compelling public policy reason for supplying more dollars to the financial sector.  Even if the government does not collect a single cent in additional taxes, and rolls the bond debt over indefinitely, the result is a perpetual cash flow to financial institutions and private investors whose activities are completely irrelevant to the building of bridges and consumption by households.  This simply makes no sense.

An additional problem with or current public financial system is that its distribution of responsibilities and its complex institutional architecture – along with some antiquated nomenclature and quaint traditions of communicating through pious obscurities – leads to a great deal of public confusion about what is really going on in our own financial system, and to tragic ignorance about the full range of available policy options.  We see this tragedy playing out right now, as citizens across the country are being guided by partisan rhetoric and elite propaganda to contract the government deficit at a time when the economy very much needs large healthy deficits, all in a misguided wave of hysteria about federal government debt.  It would be much better to have a cleaner, simpler system in place, one in which currency driven deficit spending and debt service are carried out in a straightforward and integrated manner by a single arm of the government, so that the role of monetary policy in federal deficit spending is apparent.

Here, then, are my proposals:

1.  Move the supervision of the commercial banking system and the national payments system, and the authority to issue currency – that is, all of the current obligations of the Fed – to the Treasury Department.  The central bank should operate as a division of the Treasury subject to the direct oversight from Congress with frequent room for timely policy adjustments, legislative deliberation and lively democratic input.  Like other aspects of national economic policy such as budgeting, taxes, appropriations and public investment, monetary policy and financial system regulation should be determined by hands-on, publicly accountable, warts-and-all democratic governance.

2.  Consolidate the Fed and Treasury accounts into a single sovereign US Treasury account, consisting of a currency sub-account and a securities sub-account, through which the ultimate monetary authority of the United States is exercised under the direction of Congress and the President.   The initial dollar balance credited to the currency account is of no matter.  All that is important is that we are able to track the total deficit or surplus during any given period of time.   Expenditures are best seen as dollar creation and may be recorded as “liabilities” of the Treasury, and tax receipts are best seen as dollar destruction and may be recorded as financial “assets” of the Treasury.  But it should be born in mind that the very concepts of financial assets, liabilities and equity are only loosely applicable to a sovereign government that is itself the issuer of the ultimate means of payment for all financial assets and liabilities denominated in the government’s unit of account.  If the government owns a helicopter, it is in possession of a real asset.  But it hardly makes sense to think that the government has meaningfully acquired an asset when it receives a dollar, not when it issues dollars in whatever quantity it wants at virtually no cost.

 3.  The currency account, used for spending and tax receipts, should be permitted to carry a negative balance without formal limit as to quantity or time.  We can think of this as an “overdraft” system.  But an account overdraft in the private sector is a debt of the account holder to the financial institution that provides the account.  In the case of a monetarily sovereign government, the account holder and account provider are the same entity, and so whether the account is seen as being “overdrawn” or not is only a bookkeeping convention made relative to an arbitrary starting balance which the government itself determines.  The negative balance does not represent any kind of government debt to itself that must be repaid, nor is there any kind of penalty the government exacts on itself for having this negative balance.  It is rather more like a below-zero temperature on a temperature scale: a means of keeping track of changes in temperature relative to an arbitrary temperature designated as the zero point on the scale.

 4.  The Treasury would possess the authority to continue to issue securities as a public saving utility, and as a tool for managing the shape of the government deficit over time, and the pattern over time of private sector financial asset accumulation.   But there should be no requirement that deficit spending – an excess of expenditures over tax receipts – is always to be matched by a corresponding quantity of bond sales.

These are institutional changes that should be adopted to give the United States a more flexible, nimble and high-powered system of public finance.  But we can also ask what novel techniques could be employed for achieving public purposes within the framework of the new institutions.  How do we adapt our public financing practices so that, in addition to carrying out its routine fiscal responsibilities, our government is also able to respond quickly and efficiently to cyclical crises and novel emergencies calling for prompt action, and to deliver price stability, full employment, and the greatest achievable level of economic progress and well-being?

One thing to bear in mind is that, as a plain matter of accounting, the deficits or surpluses of the government sector, the external sector and the domestic private sector must sum to zero.   So if the government is running a surplus, the domestic private sector and external sector must be in a combined deficit.  And in order for the non-government sector to run a surplus, the government must necessarily run a deficit.  Furthermore, in a system in which financial assets and liabilities exist in a hierarchy, and are all ultimately grounded in the financial assets emitted by the government, a steadily growing private economy must be supplied with a steadily growing stock of government-issued financial assets just to maintain financial health and stability.

Note also that income that is saved is not spent.  So during periods of extraordinarily high private saving – which includes periods of high private sector debt service – the government must increase its deficit just to maintain total non-government spending at previous levels.  Increased government deficits can also help to liberate “animal spirits” that are suppressed by low levels of consumer and investor confidence, and help the private sector escape from prisoners’ dilemma situations in which firms have settled into a low-employment equilibrium.  Rather than thinking of a government deficit as an accumulation of burdensome debt that must be paid off in good times to counterbalance its being run up in tough times, it is better to recognize that the government should probably run a deficit at more or less all times, to accommodate or stimulate the continuous growth in the economy by the continuous provision of additional monetary assets.  Michael Hoexter makes the very compelling point that “deficit” is a very misleading term to use for an excess of spending over tax receipts by a currency issuing government, since that term connotes a lack or deficiency of some kind.   It would be better to describe this phenomenon as the government’s net contribution to the financial position of the non-government sector.

What is important, then, in thinking about new fiscal policy techniques is that by the adoption of these techniques the government be empowered to act quickly and effectively to expand its net contribution when needed, and in the ways that are needed, and is in a position to contract the net contribution just as quickly if a buildup of undesired inflationary pressures in a strong economy calls for a contraction.  There are a variety of tools we should think of adding to the fiscal policy kit that might serve us well here.  These are a few:

5. Flexible taxation – Rather than approving completely precise, fixed tax rates for specific groups of tax payers, Congress could pre-approve a set of tax ranges, and delegate adjustments within those ranges to the fiscal managers in the Treasury Department.   For example, a taxpayer with a current top marginal rate of 35% might instead have a top marginal tax range of 33%-37%.  If they are currently paying 35%, and the Treasurer determines that the government should expand its net contribution to the non-government sector, then the Treasurer could drop that rate to anywhere between 33% and 35%, without the need for additional Congressional action.  Paycheck effects would take place immediately.  All other rates would be adjusted accordingly, if Congress has decided on a policy of universal rate modification.  If the Treasurer decides there is a need to tighten up the net contribution, the rate could be increased to anywhere between 35% and 37%.  If more dramatic rate changes are needed, of course, Congress would then need to pass additional legislation.  And Congress would, as always, reserve the right to step in at any time to change the policies it had pre-approved.

6. Flexible spending – In addition to approving and appropriating the funds for specific kinds of government spending during a given fiscal period, Congress can pre-approve large packages of infrastructure spending, education spending, direct payments, subsidies and other varieties of useful public spending to be carried out over 5 or 10 year periods.  The Treasurer would then have the discretion to manage this spending over a longer period of time than a single fiscal year, and accelerate it or decelerate it as macroeconomic conditions warranted.  As before, Congress would always reserve the option to repeal its previous legislation, and step in with new initiatives.

7.  Negative interest bonds – The Treasurer could be given the authority to issue negative interest bonds and swap them for dollars held by large financial institutions or other designated parties.  Why would anyone voluntarily purchase a negative interest bond?  They wouldn’t.  Negative interest bond transactions would be mandatory.  A negative interest bond is just a type of tax.  Rather than imposing a one-directional tax that may or may not be offset later by some type of spending, a negative interest bond amounts to an immediate tax with a partial tax refund later.  This type of imposition might be useful in cases where the Treasurer determines it would be beneficial to reallocate exiting financial asset holdings rather than create more currency or other financial assets immediately, but believes it would be best if the new financial assets are then supplied gradually over time.

8. Negative interest lending – Either working through the banking sector or working directly with firms and households, the fiscal authorities could offer negative interest loans – in effect, partial subsidies for particular types of consumption and investment spending prioritized by Congress.  These subsidies would dovetail with other forms of direct spending on public investment to encourage mutually supporting economic activity in areas that the public, working through its representatives Congress, has deemed important.  As before, the decisions could be pre-approved and “banked”, to be carried out over periods of 5 years, 10 years or longer, and then put into action when economic conditions warrant an expanded government contribution.

Accustomed as most of us have become to the system of independent central banking and self-imposed government budget constraints, some will find these proposals radical, at least initially.  Skeptics have always argued that monetary policy and the currency system are too dangerous or too temperamental to be left to direct, hands-on legislative control, and that monetary policy must therefore be insulated from democracy.  Realism and historical experience tells us that the motivation of many of these putative skeptics is not to protect monetary policy and the national interest from the unruly and misguided mob; but to protect privately held money and those who have the most of it from the claims and obligations imposed by the public interest.   But some of the skeptics are honest and well-intentioned.   Regardless of the skeptics’ motives, the same skeptical claims were made in the past about the suitability of democratic legislatures for directing spending policies, or for setting tax policies, or for governing the military, or for determining the qualifications for offices, or for making the laws that keep the civil peace.   And yet now, after a few hundred years of expanded democratic control over all of these areas, carried out by some of the most successful governments in the history of the world, delivering broad and previously unimagined levels of prosperity to swelling masses of humanity, I think we can see that those earlier skeptics were wrong.  They will be proven wrong again on the score of democratic direction of monetary policy.

Democracies can do this; they can guide and direct their monetary affairs in a pro-active way toward the effective achievement of public purposes.  Obviously they will make many mistakes, as they do in all other areas.  But the benefit, as it always is with democracy, is that the mistakes and foibles of democratic government are more than offset by the good that comes from limitations on the corruption attending private concentrated power; by checks on the avarice and self-serving of elites; by reductions in the exploitation of the labors of the many for the benefits of the few; by the introduction of multifaceted legislative deliberation representing a large number of concerns and interests, and by the elimination of some of the social dysfunctions caused by secrecy and disinformation.   Democratic governments can run their own monetary policies without handing the country’s inherent monetary power over to an authoritative “dad” who keeps them in line, keeps his own counsel, makes most policies in secret with a limited number of peers, and grandly guides public expectations though cryptic and portentous pronouncements.    It’s time to end the era of the aloof, magisterial and serenely independent wizard banker, and hand monetary policy over to the grubby but marvelously effective public deliberations of wrangling democratic legislatures.


[1] Most of the ideas in this essay have been inspired by, or directly taken from, my great teachers in the area of economics and economic policy – L. Randall Wray, Stephanie Kelton, Scott Fullwiler, Bill Mitchell, Pavlina Tcherneva  and Warren Mosler, as well as from many other bloggers and frequent commentators on the blogs that hold the MMT community together.  Most of what I know about the issues I discuss here has been learned from these inspiring thinkers and scholars.  Unfortunately I can not entirely avoid mixing my amateur mistakes and confusion in with their sound and experienced judgment.  And I doubt any of them would fully concur with the policy recommendations I make in this essay.  So the reader is advised to go directly to those sources before attributing to them any of the outrageous flaws they might detect in my own writing.  More can be learned about MMT by further exploring this blog, New Economic Perspectives, as well as Mosler’s The Center of the Universe, Mitchell’s billyblog and Wray’s contributions at Econoblog.  These sites will direct you to the other major blogs in the MMT universe.  There are also a number of excellent MMT-related papers by the above-named economists to be found at the online publications repository at the Levy Economics Institute of Bard College.

121 responses to “From Central Bank Independence to Democratic Public Finance

  1. Stanley Mulaik

    While I agree that most of your recommendations of change are reasonable, I rather suspect that getting them implemented is going to be much more difficult than minor tweakings of our current system, which I think works fairly well and can work even better if we get the Fed to simply admit that it is not owed for the securities it purchases for the United States as an agent of the United States.
    In considering why there is no national debt at the Fed, I have come to a fuller understanding of some of the desirable features of a bond-based system. Treasury has a deficit to finance and it borrows by issuing securities (IOU’s) and these are auctioned off to banks, who buy them, send the Treasury its money and then worry about the diminishment of their reserves, while getting the bond (securities) from the Treasury. They will take the bonds back to the auction and put them up for sale. And this time the Fed will buy them, and it can never be outbid because of its power to create unlimited amounts of money. To do this it creates the money out of thin air and credits the reserves of the banks in question.
    At this point while there existed a debt between the United States and the banks with respect to the bonds, the Fed has redeemed that debt and the question is, has the debt now shifted to be paid to the Fed? Hence the national debt at the Fed as the accumulated value of all the securities the Fed has purchased and holds. I have said this in the Emperor’s New Clothes. Everyone has been persuaded that the Treasury or the taxpayers owe the Fed for the securities. I don’t know how exactly this so-called “debt” arose, but it is a myth. The Fed is an agent of the government. The FAQ’s at the Fed say so. So what is this buying of the bonds with money created out of thin air? Is this fractional reserve banking? Usually that involves lending with an expectation of getting it back, in this case from the banks, not the taxpayers. No, the Fed’s money created out of thin air is a credit to the banks in return for the securities. And this exercises a power of government to create (coin) money, as granted in the Constitution to Congress, which must somehow (where in the law?) delegate this to the Fed as its agent for money issuance. So, an agent of the government (the Fed) has bought the securities from the banks with government’s money created out of thin air. Does that look like the Fed can claim to be paid for the securities it has bought for the government with government money? The claim looks like the invalid claim a bank clerk would have to be paid for the value of a security, he/she has bought from a bank customer for the bank with bank money. The United States’ owns these securities, not the Fed. And the United States does not owe itself for the value of the securities, which right now owe nothing to anyone, until a new party buys them. The United States through the Fed has redeemed the original debt to the banks and taken repossession of the securities.
    But there are other consequences. We realize that the banks got new money credited to their reserves. But the Treasury’s money it got from the banks is now debt-free. They don’t owe the banks anymore. That debt has been repaid by the United States via the Fed with new money it created.
    The Fed is owed, however, a transactional fee of 6% of the interest on each security it bought. Dan is correct that the Treasury has been rolling-over the securities by buying the old with newly borrowed money from the banks using newly issued securities, but the Fed also buys those too. So, the Fed gets a new transaction fee on the purchase of the new securities. And this goes on and on as long as the Treasury mistakenly believes it owes the Fed for the securities/bonds. And as deficit spending grows each year, the number of securities involved increases and the Fed gets transaction fees each time these are rolled over with new securities. The President should simply stop rolling over the securities, but continue to pay the transaction fee just once on a newly purchased security. That would get the Fed’s attention and maybe get an admission that Treasury and taxpayers don’t owe the Fed for the securities. There is no national debt at the Fed. (At least it has already been redeemed or will be easily redeemed with money created out of thin air–I’m thinking of all those T bonds the Chinese bought with their dollars from imports–if needed.
    So, another thing MMTers need to see here is that this current system is, as Prof. Wray points out, equivalent in many ways to one in which the Treasury is the money issuer. Even though the Treasury starts out borrowing money, its money ends up debt free when the Fed uses United States’ money to buy/redeem the bonds from the banks. Furthermore there is now new money in the banking system, which, because money is fungible, could be thought of as if it is Treasury’s while what the banks have is ‘old’ money. So, the result is the same as if the Treasury had simply spent new money into the economy debt-free. But there is one difference: the bonds/securities that mediate the connection between the Fed and the Treasury, which is not really a direct connection.
    The Fed has acquired a big pile of securities over the years. It needs these to serve another mandate on it, to fight inflation. It uses immature securities to sell to banks to drain money from the banks and circulation. Those who would have used the tera-coins ($1 Trillion, $10 Trillion) to buy back all the securities would have left the system less equipped to fight inflation. The Treasury system would exclusively depend on Congress to monitor inflation and control its spending (especially deficit spending) to avoid inflation, which is a risk of fiat money. Perhaps it would be disciplined enough to have the CBO (Congressional Budget Office) to determine if spending would contribute to inflation in the case of any set of bills. But is Congress all that disciplined? The current system at the Fed has the Fed buying securities to inject new money into circulation and selling them to drain money out of the system. It works fairly well.
    So, while Dan’s has some really good ideas, and having the Treasury issue money might be more elegant, it would still need to have institutions and mechanisms for fighting inflation that would function independently of Congress. The Fed does that now. Let’s just tweak the system by getting the Fed to admit there is no debt of Treasury or the United States or the taxpayers to the Fed for the bonds/securities. The Fed issues debt-free money (of taxpayers to the Fed). Then we have a system consistent with MMT.

  2. During extensive consulting for many eastern US muni govs during the muni-gov financial crises mini-era the 80’s and 90’s , it was blatantly obvious that most muni govs don’t account for asset depreciation. Several muni gov finance directors even questioned that practice in governmental accounting since “We don’t pay taxes on assets.” In fact, most of those muni govs didn’t even employ any modern asset accounting or finncial reporting systems – so they didn’t even know what assets they held and allegedly administered in trust on behalf of their taxpayers. And broaching the subject of infrastructure repair and replacement schedules with some of those finance directors evoked mostly wide-eyed Homer Simpson -ish reactions. This might explain – in part – the national epidemic of dilapidated physical infrastructure. I could point to parallels in federal asset treatment, and then segue to the new-normal of TBTF Bailouts. But the principle at bar in all these cases is fairly simple: Employing best standards and practices or – in all these cases which have led us to the precipice of systemic financial and economic failure – ubiquitus *failures* to employ those standards and practices. That applies to everything from governmental acounting and financial reporting, to acceptable (and unacceptable) uses for taxpayer monies.

  3. It uses immature securities to sell to banks to drain money from the banks and circulation. Those who would have used the tera-coins ($1 Trillion, $10 Trillion) to buy back all the securities would have left the system less equipped to fight inflation. The Treasury system would exclusively depend on Congress to monitor inflation and control its spending (especially deficit spending) to avoid inflation, which is a risk of fiat money.

    I think the MMTs would tell you that your assumption that such Fed operations control inflation is incorrect. The TDC or treasury issuance in themselves have no particular inflationary tendency. There is also no inherent reason why Congress would behave differently under the other setup. Unless, of course, the myth of the national debt is necessary to cow the Congress into self-restraint. Until fairly recently people believed that only fear of Hell kept people from throwing off all social restraint as well. Also, if the irrational fear of public debt were removed, would the CBO have any reason to exist?

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  5. Michael Hudson

    David Kinley’s study on the US Treasury, written for the National Monetary Commission after the 1907 crisis, showed that what people think of as the Fed’s area of activities today were all performed quite well by the Treasury and its 12 sub-treasuries.
    All the Fed did was take these functions OUT of the Treasury and put them in the hands of private bankers. Kinley’s book should be reprinted with a new intro explaining all this. (I had planned 40 years ago to do this for AM Kelley, but no longer can find my ms. Perhaps a good graduate student would like to follow this up.)

    • Thanks Michael. I found some of your earlier pieces yesterday in which you said the Fed’s responsibilities could all be carried out at a single desk in the Treasury Department.

      • Dan, I loved this manifesto. I hope you get this posted all over the place. What a broadside! And I’m just thinkin about Ann Pettifore when she pointed out how illogical it is to pretend that private financial markets, “free markets”, should be allowed to effectively create the money, out of thin air, without interference from governments, for the banks’ own profit and schemes without regard for public purpose or vision. We need to stop with the nonsense about the moral discipline of independent banksters.

    • Dr. Hudson … the book you refer to doesn’t happen to bethis one, does it? Apologies if I missed.

  6. Ben Johannson

    @Stanley Mulaik

    So, while Dan’s has some really good ideas, and having the Treasury issue money might be more elegant, it would still need to have institutions and mechanisms for fighting inflation that would function independently of Congress./i>

    Automatic stabilizers already play this role. When spending pushes demand beyond capacity government takes in additional revenues and reduces welfare payments, acting counter-cyclically. Establishing a Jobs Guarantee would also create an inflationary buffer for price stability.

  7. Interest Free Loans issued by a publicly owned Central Bank for productive purposes is the best and simple effective form of financing.
    It’s self regulatory, money supply remain constant =Nil Inflation

    • It’s not actually a good idea for the money supply to remain constant. I think there are some mistaken old Chicago School ideas floating about that financial instability is a function of the money supply.

      • “It’s not actually a good idea for the money supply to remain constant”.


        We could still have a publicly owned Central Bank issuing interest free loans thought, right?

      • Sure, Malmo. But, I don’t think the major issue is public vs. private. The issue is how effectively the system is regulated. The point of a financial system should be to finance worthwhile projects at the lowest realistic cost, and correctly assess and manage the risk, without building destabilizing towers of leverage. The point is not to generate big bucks for financiers. Whether this is best done with a public system, or a well-regulated and competitive private system, is a debate worth having.

        Some loans could be interest-free under either system, depending on how it is governed and regulated. But some would still be positive-interest. One role of interest is to give the borrower the incentive to put in the greatest possible effort on the project that is financed, and to prevent fraud and scams.

  8. “Flexible taxation”

    Steve Waldman has an interest post on this, though he refers to it as “negative transfers”.

  9. Good piece Dan. A couple of things on inflation. I think you should be more explicit with point 1 (preserve stability of the currency) on why governments tax. Most inflation is caused by creating too many financial claims on real resources. Specifically, given finite resources, the greater the desire for government programs, the greater the need to transfer claims on resources from the private sector to the public sector. I think this would make the debate about public spending more clear as well.

    My second point is related to the first, and also your idea about “tax bands.” I know you only gave an example for the top tax rate, but I think that a more practical idea for managing inflation would be to use a band at income levels that would have a greater impact on the demand for consumption goods, especially if you agree that inflation is caused by too many financial claims on scarce resources. I think the recent use of the payroll tax is an example of how this would be done. Regarding the automatic stabilizers, yes they automatically restrain and expand demand, but they are still not sufficient to adequately manage inflation and unemployment. You need to increase the ability to manage revenues and expenditures to adequately control the economy.
    Finally, while this is a fun exercise, it doesn’t resolve the issue that government has been captured by private interests….

    • Thanks TSchmidt. I think the suggestions in your second paragraph make sense, and are worth thinking about. Yes, some adjustable taxes might be on different kinds of consumption. On the other hand, my personal feeling is that while we want fiscal managers in the executive branch to be able to respond rapidly to changes in macroeconomic circumstances by doing fiscal expansion and contraction, we don’t want to empower them to start making independent social policy decisions independent of Congress. For example, we don’t want a President coming along and suddenly deciding to boost the taxes on birth control devices, for example, but not other things. Making those kinds of social policy choices is Congress’s job. So if there are pre-approved tax bands on consumption, I think they should be applied to broad areas, so that the executive branch fiscal policy managers only have the option of dialing up or dialing down the rates in whole categories.

      I couldn’t really follow the point you were making in your first paragraph. Could you explain it differently?

      • A national sales tax? A diminishing prebate on a band of presumed nominal consumption per year per person, paid monthly to everyone? (Like 100% prebate on $6K per year per person, 0% prebate on the upper-end of the band which is adjustable.)

      • Re the first paragraph. One of the main criticisms of MMT has been the inflation issue, which I think is why SKelton now emphasizes the real resource constraint on government spending. It answers the question, “why tax at all?” Inflation is mainly caused by too many claims on the given level of resources, so if we are at a situation near FE, then government can’t simply spend without inflationary consequences. If we want government to have more real resource claims, that can only come at the expense of fewer claims on resources from the private sector, again assuming close to FE (most people accept the government can spend without consequence when resources are slack). Your point about preserving stability of the currency is related to government taxes as a way to transfer claims on real resources from the private sector to the public sector. Again, near FE, if the government wants/needs more resources (as in war time), then they must reduce the claims by the private sector, otherwise the result is inflation.
        The implication for budget decisions I think is straightforward. What should be the proper size of government in relation to claims on real resources (real GDP)? E.g. 20%? If so, then maybe we would allocate 15% of public $s to the social safety net (SS and Health); 2% to defense and security; and 3% to all other programs. If we the people wanted the government to provide a greater social safety net, then that could only happen if 1) we reallocate from existing public spending; or 2) we reduce the claims from the private sector (e.g. raise G to 22% of gdp). Hope this clears it up?

        • OK, I see where you are going TSchmidt. Just a couple of thoughts off the top of my head:

          Moving claims on resources from the private sector to the dollar sector does not in itself have an influence on inflationary pressures. It all depends on whether the government does more spending or not. It is probably best not to think of taxation as “moving” spending ability to the government. It extinguishes some private sector spending ability, but it doesn’t add anything to the government’s ability to spend. The government can always buy whatever is for sale in the private sector, and doesn’t need to accumulate dollars from the private sector first.

          Whether or not we want to extinguish resource claims in the private sector during some period for each additional amount of federal spending during that period can’t be answered in a definitive way. It depends. In some circumstances we will want to stimulate overall spending by simply having the government spend more more dollars into the private sector without removing any private sector dollars at all. This should not cause undesirable levels of inflation if the economy has not been performing up to capacity.

          Also, it is slightly misleading to think of dollars as “claims” on real goods and services and resources. Dollars are not formally redeemable into goods and services. You have to find someone who is willing to to voluntarily exchange goods and services for the dollars you have. Why people are willing to do this is an interesting question. The chartalist view is that at least part of the answer is that the government creates a constant demand for dollars by requiring people to surrender dollars to the government to discharge tax obligations.

          • Dan,
            I guess I still haven’t been clear enough. As I said, I think most people agree that government can spend without inflationary consequences when resources are slack, and they can do so without acquiring funds first. The real issue wrt inflation and MMT is when we approach full employment. I agree, it’s probably better to describe taxes as reducing private sector claims so that government can maintain or increase its claims on resources.

            Re your second paragraph, again, government spending when resources are slack is not the big issue for MMT. The main issue is to explain why G spending “without financing” is not inflationary as we approach FE. As we approach FE, which implies that some sectors are driving increased spending on output, inflationary pressures will need to be reduced by either reducing G or raising taxes (or a combination). This is why I think having a flexible income tax rate that hits the majority of consumers (like the payroll tax) might be a better policy lever than a flexible tax rate on the top income earners (despite the fact that it goes against my political sensibilities) because it would have a greater impact on demand.

            Re your last point, what I meant by “dollar claims” is more in line with Minsky’s view on inflation, that it’s caused by increases in the private sector’s financed demand on the flow of output. As you finance more demands on the flow of output, you increase inflationary pressures near full employment. Government then has to regulate the increased “claims” on output via cuts in spending or higher taxes.

  10. You’re advocating a massive reform without providing an historical example or any form of justifying data. Why would we take this leap of faith? The default scenario has at least one difficult strong justification… we’re currently using it, we have been for centuries, and we seem to be doing ok. Why don’t you do some empirical work showing which modern country approaches your ideal, and how this has caused it to outperform countries who stick to the same old dish day after day?

    • We haven’t been using the current scenario for centuries, JP Koning. The Fed was only created in 1913. After WWII, it was made subordinate to the Treasury. It’s regained legal independence of the Treasury in 1951, but the solidification of its political independence and the tremendous deference it is granted by politicians is a result of the Volcker era. The eighties were the era when the idea of extreme central bank independence really took off as part of the neoliberal movement and the Washington Consensus.

      I doubt I can find countries that approach my ideal, since I believe what I am advocating is fairly innovative, incorporating a lot of ideas from MMT and functional finance.

      I don’t know how to respond to the idea that “we seem to be doing OK”. It seems to me we are doing rather terribly: extreme inequality, persistent mass unemployment, economic stagnation, declining quality of life.

      • Even when the Fed was subordinate to the Treasury beginning in the 1930s and up to 1951, gold convertibility was still in effect. All I’m saying is that data and examples will help convince skeptics. Some examples I can think of off the top of my head in which a government, and not a central bank, issued inconvertible money were greenbacks, assignats, and John Law’s system.

  11. Very good piece.

    Institutionalizing the PCS idea might be an equally effective short-cut. (Low-value, like one coin per fiscal year.)

    • I think the use of platinum coin seigniorage as a tactic would be to serve as a political shock to the system that might help people transition psychologically to something like the system I outline in this piece. I don’t think anyone would argue that institutionalized platinum coin seigniorage is any kind of long-term plan, because once you have done it the first time, it immediately becomes apparent that the functional effect it achieves has nothing essentially to do with the minting of platinum coins. If Congress can inadvertently provide a coin-minting loophole that effectively allows the Treasury to unilaterally credit a balance of arbitrary size to its account at the Fed, and if the public accepts this procedure if it is used, then they will pretty swiftlty figure out that they can have Congress deliberatelycredit that balance to Treasury’s account without going through the business of stamping out numbers on pieces of platinum. And after that, they will figure out that the absolute size of the Treasury balance makes no real difference.

      • Sure, Dan, that’s kind of what I meant by “institutionalizing.” Once it is accepted practice, it can be stamped on paper or on nothing. Still, one coin per year wouldn’t be too bad of a deal, say, as an object to admire in some living museum of public finance (run “independently” by the Fed). Hey, if and when the budget is in surplus, we still strike a coin with a negative face value. Why not? Well, anyway, I hope it’s okay with you that I am having fun and being silly a bit…

        More seriously, an extension of this “institutionalized PCS” idea might be to totally switch the “issuing” roles the Tsy and the Fed. Make the Tsy the sole issuer of currency, and the Fed the sole issuer of bonds and other securities (still with the backing of the full faith and credit of the USA, the annual total capped by the fiscal deficit perhaps). All other functions remain in place with these two. The Fed sets the price of money, interest rates, etc., and the Tsy is still the taxing authority (both under the thumb of the Congress of course). The thing is, if the Fed is the private-sector devil that some make it out to be, then it represents the interests of private sector entities that must be most worried about inflation as they presumably have most to lose from it. So, the Fed should still have all the reasons in the world to do it right. And if it doesn’t, as in causing injection of too much interest income into the economy, the Tsy can tax that injection away.

        • And I should’e added: The Congress, while making the nation’s budget, can then stop worrying about monetary beans, and focus on real stuff.

        • Yes, switching those institutional roles makes sense to me Nihat.

          One thing we have to keep in mind though is that nothing really changes simply because more dollars get credited to the treasury account. The Treasury could issue a $100 trillion dollar coin every year for ten years, but nothing would change in the US economy if Congress didn’t approve additional spending. You would just get the buildup of a meaningless account balance.

  12. Where does private (bank) money creation fit into this set of ideas? There is a paragraph in there that talks about it a little, but there needs to be more. The ’08 crisis was a crisis of private money creation that was, and continues to be, alleviated through public money creation. Private money creation isn’t about to disappear. There’s too much money in it for any Congress to effectively outlaw it.

    • I disagree that the ’08 crisis was a crisis of private money creation, reserveporto. It’s not about “money” – it’s about credit and the regulation of credit. I think its a mistake to fixate on this issue of the “money supply”. You can have increasingly unstable systems of leverage with a modest growth in the money supply, and stable systems of credit with significant growth in the money supply. The idea that you can effectively regulate credit by having some guys in Washington attempt to fine-tune the money supply seems similar to me to attempts to restrict the growth in unwanted pregnancies by regulating the testosterone supply.

      The financial collapse in 2008 was caused, it seems to me, by the growth of a Ponzi market of poorly priced and fraudulently sold derivative assets. There was no run on commercial banks – the FDIC worked. But there was a “run” in the highest levels of the financial world, among the assets issued by major institutions, and held by major institutions – many of them poorly regulated players in the shadow banking industry. If you can put together a super-expensive and sophisticated financial asset and sell it to a greedy and corrupt purchaser, who can pawn it off on some other big institutional purchaser, it doesn’t matter what is going on down on Main street with commercial bank loans.

      • I think you two might be talking past each other. The endogenous money that reserveporto refers to is the result of poorly regulated credit issuance by banks, enabled by Fed low-interest rate policies. I think the “money supply” that reserveporto means includes more than just base money, which is what Dan seems to take it to mean.

        Obviously, it was easy credit in the housing market that led to massive price inflation in that sector. Credit is the “private money” referred to and it is poor regulation of credit that allowed this private money to be created. The Fed then turned this into “public money,” i.e. base money, post hoc through it’s rescue of the banking system and it’s continuing QE policies.

        You might just be saying the same thing in two different ways…

        • Thank you for the clarification in terms.

        • No, I’m not just talking about base money, Josh. I just don’t think the best way of achieving prosperity plus financial stability is to eliminate endogenous money. better regulation of banks and lending practices, yes. But getting rid of endogenous money and moving to 100% reserve banking or the Chicago system seems like overkill to me. I think there is good reason to continue to want the broad money aggregates to be able to expand right down there where the rubber meets the road on Main Street, as entrepreneurial projects encounter lending agencies.

          • Oh, agreed for sure. I don’t support 100% reserves or anything like that. I’d be fine going to the Canadian zero-reserve system, actually. Endogenous money isn’t bad, per se, but in the wrong hands it can lead to all sorts of problems and obviously should be tightly regulated.

            Do we agree that better regulation of banks and lending practices will necessarily lead to less endogenous money in the system? I think it would, and that would be a good thing. Not because I’m worried about inflation Austrian-style, but because I think the people that are allowed to create endogenous money have been greatly abusing that priviledge.

      • Your second paragraph is definitely a more precise description than I’d put forward. But where does the money come from to pay for these mispriced assets? What’s on the other side of the balance sheet when these derivative assets are created? What’s on the other side for the purchaser and seller when these assets are exchanged?

        • People pay for credit with credit, IOUs for IOUs. The particular IOU’s we call money are just one component of a much larger universe of credit instruments. The monetarist account of all this is that somehow the monetary base is the essential matrix from which all this grows, and so if you can control the monetary base, you can control the dangerous expansion of credit and the proliferation of speculative and Ponzi investment. But I’m just not convinced that’s true.

          Making a promise is one of the easiest things in the world. And accepting a shaky promise in the greedy pursuit of riches is the second easiest thing. If you don’t regulate the activities of promise-making and promise-accepting across the board, eager promise-makers and promise-takers will find some way of getting together to build a big entangled world of shaky promises.

          • The monetarist position is obviously untrue. Data from the actual world (gasp!) show this conclusively. There are, however, other critiques of the role of endogenous money that are not at all monetarist and focus on the unregulated credit side of the equation. Steve Keen’s, for instance.

            The term “money,” is always a confusing one. What does this particular person mean when they use the word? FWIW, I’m usually thinking of M2, not M0, which makes a big difference for the discussion we’re having now since I consider checkbook money, i.e. bank credit, to be money as well. So, controlling the issuance of bank credit necessarily entails controlling the broad supply of money as well. Of course, controlling M2 isn’t the goal: making sure real resources are being used responsibly is, and as you point out, that has to do with regulating credit issuance, not worrying about the nominal size of the money supply.

        • It depends on who is buying them. If they are traded in the open market, there is always a bid/ask price. If they are overpriced, then someone has to take a loss. But if the Federal Reserve is picking them up, they could be at face value rather than mark to market. The Federal Reserve could be propping up the market in this way.

      • The problem of endogenous bank money creation is showing in pressure on the FED to play on interest rate.
        The low interst rate came about by low marginal tax rate trough decades of such policy. Increased savings forced interest rates down for the need for consistent Agregate Demand. It is from inflation/unemployment policy played trough interest rate. Interest rate always tend to be above real income growth.
        By having flat real income growth and the need to have growing AD, by lowering marginal tax rate it enlarges savings which pushes interest rates down trough Taylor rule.

        Growing income push interest rates and inflation up which was happening before 1970 under high marginal tax rate. By lowering marginal tax rate it switched to flat income which slowly pushed real interest rate to 0%. Zero lower bound, liquidity trap, savings glut, whatever you want to call it. It is that marginal tax rate determines income growth which determines interest rate, all played trough bank money creation and FEDs unemployment policy.
        High marginal tax can control and prevent such policy failure, can affect bank’s money creation.

  13. Dan, just thinking about the temperature analogy a little, what if we had a “scale” with an absolute zero as starting point, a Kelvin (or Hoexter-Kervick) scale for net contribution. Zero would be the total government contribution in 1776. Any deficit spending since 1776 would be a positive addition to the cumulative government contribution. Any surplus collected would reduce cumulative contribution for a given period, but the the total could never go below zero and deficits would always be positive. Just a suggestion.

    • Sunflowerbio, I wasn’t thinking of the scale as the net contribution number, but as an account balance from which the net contribution can be computed.

      For example, suppose the Treasury had an account balance at the beginning of some particular fiscal year of $10 trillion, and at the end of the year, after all tax receipts and outlays have made booked, the account balance was $9 trillion. Then the net contribution (deficit) during that year is $1 trillion.

      Now suppose the Treasury has a starting account balance of $10 quadrillion dollars, and at the end of the year has a balance of $9,999,000,000,000,000. Again the net contribution during that year was $1 trillion.

      Now suppose the starting balance is negative $10 trillion, and at the end of the year it is negative $11 trillion. Then again the net contribution is $1 trillion.

      The moral is that it really doesn’t matter how much the treasury “has”. All that matters is what goes into the private sector and what goes out. Since the government is the issuer of the dollar, its spending is not constrained by any particular measure of the number of dollars it has.

      • I understand your point, a degree difference is a degree difference whether it’s -14 degrees F or +75 d. F. I was suggesting switching to a scale where every temperature (expenditure) is a positive number as is every temperature on the Kelvin scale.

      • This gets to my one suggestion, which Sunflowerbio beat me too.

        I think we should stop using the words debt, deficit, overdraft, etc. when referring to Gov’t accounts. Those words have very deep-seated negative connotations. As you probably know, the same word is used for both “debt” and “sin” in many languages. Apart from that, all of these words are familiar to us from our day-to-day micro interactions which, as anyone here already knows, are different in kind from the macro realities faced by a currency-issuing government.

        I think that we would be better to have a joint Treasury/Fed simply “create money” whenever it spends and “destroy money” whenever it taxes or borrows. Since, as you point out, the net addittion to the private economy is what matters, that is what should be reported. And that number will almost always be positive (unless the Austerians really take over), which is a lot better, PR wise, than talking about deficits.

        I’m pretty sure I saw/heard Kelton or Wray (or someone from UMKC) suggest changing the name from “budget deficit” to “private savings fund” or some such thing. I think it’s a wise idea, rhetorically.

        • Josh, thanks for the support. Remember, a given year’s contribution can be negative, as it was under late Clinton, but the cumulative contribution (sum= temperature) will remain positive. The economy would completely collapse before the cumulative contribution would ever reach zero.

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  15. Correction, expenditures could be positive or negative, but the resulting “temperature” would always be positive.

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  17. Dan, good piece. Lots of “next step” thinking.

    I would like to ask you how you feel about HR 2990. A lot of the points you propose have already been framed in that proposed congressional bill:

    How would you describe the differences in your proposal vs. HR 2990?

    • It’s not all that different Jack. My proposal is also about moving monetary policy responsibility to the Treasury. However, Kucinich wants to eliminate fractional-reserve banking altogether in favor of direct treasury issue. I just want to supplement it with direct Treasury issue, give the Treasury more control over monetary policy, allow for the expansion of deficits without necessarily adding to federal debt, and adopt techniques that enable a closer integration of fiscal and monetary policy.

      I am also not convinced it is either necessary or desirable to fully retire the federal debt. Whether the debt is a good or bad thing for the public depends on who holds the debt, and how the debt is serviced.

      The fractional reserve banking issue seems to be a really big point for a lot of people – both the Kucinich folks and the Ron Paul folks. But I don’t really see what the enormous fuss is about. Some people seem to argue that fractional-reserve banking means that banks are allowed to “create money” and that is therefore some kind of offense against the sacred rights of the US government and public. But of course, we ourselves have given banks this operational authority. It is equally the case that the right to collect taxes belongs to the federal government. That doesn’t mean we can’t hire out private companies as we see fit to assist in the job. The question is just one of utility: what works best. I am definitely interested in arguments for converting private banking into public banking. But the idea that all the money has to be issued in Washington, with banks restricted only to re-lending what already exists, seems possibly too restrictive to me.

      • “But the idea that all the money has to be issued in Washington, with banks restricted only to re-lending what already exists, seems possibly too restrictive to me.”

        I’d agree with this statement. If local banks couldn’t create dollars to finance local economic activity, they’d create some other local currency to satisfy that local demand. I saw a news report of such activity going on today in Brazil’s favelas. Creating local currencies would be very inefficient for allowing trade beyond those local economies and investing into and out of those communities.

      • Why should any private institution have the right to create a country’s money out of thin air ? This is a right that belongs to the people according to the Constitution.

        I have no objection to banks lending money to individuals or corporations that they receive as interest bearing deposits from other individuals, companies or the US Treasury. The banks should not be in the business of money creation. That is the function of government in my view. They should, however, be allowed to be in the business of borrowing and lending money at interest rates the market can bear, but capped at 8%. In other words they would act as retailers for the US Treasury, who would supply them with money, which bears interest. In this way the country would be saved enormous sums due in interest and the principal would accrue to the US government, instead of disappearing into the maws of the banks. Remember, it is not only the interest people pay on banker created money, they also have to fork over the principal, which was created out of nowhere.

        • Frank, it seems to me that we should employ whatever system works best, and that there is no violation of the people’s rights here. For example, the federal government has the right to regulate interstate commerce. Does that mean we can’t hire private firms to run inspections or print the tax forms?

          Also, this idea of the banks “creating” money is a bit of an illusion. A bank can emit an IOU, just like you and I can. The fact that those IOUs are generally accepted as money is due to the fact that they are reliable. If you have $1000 in a deposit account at a bank, that balance represents the fact that the bank owes you $1000.

          These IOU’s are IOU’s for the money that is already emitted by the government – that is, they are IOU’s for US currency and for the dollars held as reserve balances. Claims on those balances of government-issued dollars are made routinely when you use your bank’s IOUs to make a payment. When the bank creates a deposit account for you, they have therefore incurred a liability, a claim against their assets. They haven’t just “created” money.

          • Dan,

            You say “we should employ whatever system works best.”

            I would ask “for whom ?”

            Fractional reserve banking works extremely well for the banking industry, but not so well for the rest of humanity. Creating money out of nowhere by private entities strikes me as fraud. We the People should be the sole beneficiaries of money creation, if money is to be our servant and not our master.

            You are being disingenuous when you suggest that deposits at a bank are the same thing as money creation.

          • Yikes! This gets into the Krugman-Keen argument about money creation with Dan taking the Krugman position. Banks don’t “create money” in the deposit example you use, but they do create money when they make loans, a new “liability” (money) is created associated with the loan asset. The Fed historically attempted to control the banks’ money creation ability through reserve requirements, but bank innovations essentially made RR almost useless; hence the movement toward capital controls. Then of course banks created off-balance sheet vehicles which circumvent those. It’s a never-ending game that allows banks to “create money out of thin air.”
            Btw, a great article on this related topic in the new Atlantic issue:

      • Dan thanks for the insight. I was thinking pretty much the same thing. I like the idea of the fed being brought under the treasury (thereby making it officially part of the govt, as opposed to quasi part).
        – I like the idea of direct issue of deficit spending. I too have questions on whether or not it is necessary to pay off all the debt. I like the idea of no debt, but not sure how to evaluate all the ramificiations.
        – I would think in order to do that, the govt would need to provide some sort of vehicle to allow people to safely park their cash, but i don’t know if the govt should be required to pay interest or not….or if so, maybe just token interest.
        – The point about no fractional reserve lending was also a concern as you mentioned if it restricted lending ability too much. but i think there was something in the bill that banks could borrow from the treasury if they needed money to fund qualified loans. In essence they would still have a source (the treasury) to fund loans.
        – One of the more progressive pieces to the bill was capping all interest at 8%. I like this idea alot, but again don’t know what the ramifications would be.
        – I was just shocked that something so progressive had already been presented in a bill (although it went know where of course). Even though it expired, i assume they will try to get a version reintroduced.

        I’m really glad to see these ideas being given so much thought, consideration, and discussion by the wise minds that hang out here! whether through a bill or PCS, we need to get the govt off debt based deficit spending, reduce or eliminate the total dollar amount paid by the govt in interest, and put our unused production capacity to use for public purpose.

        Keep the great ideas coming! regards.

  18. Dan,

    Thank you for a most thoughtful and detailed contribution. I have a few comments about your initial assumptions.

    1) Your assertion that taxation is necessary to create demand for the currency, I feel is erroneous, since people need money anyway in order to buy things they need and pay service bills. Outlawing all other currencies would in fact negate the need for any taxation. The only function of taxation would then be to control the rate of currency inflation and redistribution of income. This could be done by monitoring inflation by collecting a wide range of prices on a continuous basis, using a moving average to smooth the data. It could also be done by having a rule that no more than a certain percentage increase in the money supply per year would be allowable. This assumes, of course, that the practice of money creation by banks out of thin air is made illegal, as in the Kucinich Bill HR 2990

    2) I do not see that it is at all necessary for the government to be involved in borrowing money from the private sector, when the government is the sole issuer of debt free currency. The US Treasury would save the huge cost of current interest payments. Getting the US government out of the business of borrowing money would tend to route savings to productive enterprises. Isn’t that what capitalism is all about ?

    3) The US Treasury could, however, be in the business of lending money to the private sector at interest, acting as a wholesaler to retail banks, who provide loans to homeowners and small businesses. This could be done at the state level with a limit on the amount of government money loaned, proportional to the bank’s capital. Large corporations should not be in the business of either borrowing or lending government money, since they have the stock and corporate bond markets to raise capital. The advantage of this system is that there are no US Treasury deficits nor surpluses, since any money received from taxation would be destroyed if necessary.

    • Frank,

      On number 1, I think the phenomenon that needs explaining is why a country like the United States has a single, dominant, unified currency system in which one particular form of money is used in almost all monetary transactions, everywhere in the country. People certainly do need and want a monetary medium of exchange, and would rapidly create one . And some people sometimes create new local forms of IOUs, or innovations like bitcoins etc. People could even use currencies of other countries, or IOU’s written on reserve stocks of those currencies held by large financial institutions. And yet the US dollar continues its overwhelming monopoly on monetary exchange in the US, year after year after year. The chartalist explanation of this phenomenon is that the US government imposes tax obligations on people – almost $3 trillion total last year, almost 1/5th of GDP. And the government will only accept dollars in payment. So that creates a constant need and demand for dollars.

      On 2, yes I agree that the US government has no need to borrow. So there is a question about whether that borrowing serves any useful public purpose. I have no fixed opinion on this, but here is one possibility worth considering: As Warren Mosler always emphasizes, government bonds are really just like interest-bearing savings accounts. When someone with a lot of dollars buys treasuries, they are in effect just moving their money from a checking account to savings accounts. If the nominal interest rate is low, then this provides them with some inflation protection without giving them the opportunity to make a real profit. And offering this protection might help support the willingness of people here and abroad to hold dollars, and thus do business in the dollar economy. I’m not sure this kind of savings utility is really unnecessary, but its worth considering.

      Also, interest payments might be a cost to the Treasury, but they are an asset to the people who receive them. So the issue here, its seems to me, is what kinds distribution patterns are in place. Suppose for example, every single American had bond holdings of exactly the same amount, and all of the debt service were done out of tax revenues. And suppose the tax system were very progressive. Then all of that debt “burden” on the public would also be a creditor’s benefit to the public, and the result would be progressive redistribution of income.

      On 3, it sounds like you are just talking about moving the Fed’s discount window to the Treasury. I’m not sure though what you mean by saying corporations should not be in the business of borrowing or lending government money, since they have the bond and stock markets. Are you just saying that we should cut out the middle layer of primary dealers and the bond market, and go to a pure discount window system? Then I agree with you. That is one of Warren Mosler’s suggestions.


    Problem solved. I just heard Tom Donohue of the U.S. Chamber telling Ali Velshi on CNN that the budget deficit “entitlements” solution is simple. One word.


    I’m not making that up.

    You can all stand down now. Everything Is Just Fine.

  20. Alex Seferian

    Dan – Very interesting. Thank you. Some clarifications:

    “One effect of this system is simply to solidify the bonds-first system in place, and to place full responsibility for whether or not currency will be issued in the hands of the currency-issuing branch. But it has the further effect of guaranteeing that the government never directly redeems its bonds via currency issuance, but must either tax or issue more bonds to do these redemptions.”

    When the time comes (at original maturity or when refinancing ceases) the Fed automatically replaces the Treasury bonds on the books of the private sector with reserves, and in the process it creates money out of thin air. I am not an MMT expert, but it would seem that your statement that the government never directly redeems its bonds via currency issuance is not consistent with MMT given that the Fed is a government agent. Please comment.

    “Thus, the only way that the quantity of currency held by the public can increase is through the issuance of bonds and their subsequent redemption or repurchase.”

    What about when private banks create loans, generating deposits in the process, and obtaining the needed reserves later? Is this not money creation and therefore is it not an increase in the “quantity of currency held by the public” that is unrelated to “bonds and their subsequent redemption or repurchase”?

    • Alex, re: your second point about bank loans, yes, that is money creation, too, but it is not money (or currency) to be held, it is to be returned to the lender (1+i)*100%. In the aggregate, funds to pay our taxes out of or to save for future expenditures come from net government spending.

  21. ”It’s not actually a good idea for the money supply to remain constant. I think there are some mistaken old Chicago School ideas floating about that financial instability is a function of the money supply”
    This chap loves uncontrolled Money supply and uncontrolled inflation.Bury your head in the sand

  22. “When the time comes (at original maturity or when refinancing ceases) the Fed automatically replaces the Treasury bonds on the books of the private sector with reserves, and in the process it creates money out of thin air.”

    Alex, the Fed doesn’t redeem bonds, right? In some cases, to the degree it sees fit in the pursuit of its monetary policy, it purchases the bonds before maturity, and that’s the way additional money gets into the system under current operational rules. But only the Treasury can redeem Treasury bonds, or pay the interest on those bonds.

    What about when private banks create loans, generating deposits in the process, and obtaining the needed reserves later?

    That’s a good point. I was thinking here only of the money that the government issues in one form or another. In our present system, commercial bank deposit balances are IOUs. They are redeemable into the kind of money that is directly issued by government, which consists entirely of physical currency and reserve balances held by banks at the Fed. That redemption occurs routinely when payments are made with bank balances, which triggers a transfer of reserves, or when those balances are exchanged for physical currency. Both forms of money are currently issued by the Fed and the Fed alone (unless the Treasury does the coin gambit).

    • Alex Seferian

      Thank you.

      • You bet. Hope I’m right.

        • Alex Seferian

          By the way, on the redemption point I understand now… Its not the Fed that redeems, but what about this quote from the 7 deadly inncodent frauds:

          “And what happens when the Treasury securities come due,
          and that “debt” has to be paid back? Yes, you guessed it, the
          Fed merely shifts the dollar balances from the savings accounts
          (Treasury securities) at the Fed to the appropriate checking
          accounts at the Fed (reserve accounts). Nor is this anything new.
          It’s been done exactly like this for a very long time, and no
          one seems to understand how simple it is and that it never
          will be a problem.”

          • That’s Warren Mosler’s government-as-Treasury-Fed-bundle doing it 🙂 The thing is, the T-securities are the Treasury’s liability. The said shift of dollar balances from savings to checking account at maturity is the Fed’s payment facility at work. When that happens (or when the Fed does QE and buys T-securities from the market), the Fed is holding a whole bunch of T-securities, for which the Treasury is technically still on the hook. That’s where heavy fog sets in, or equivalently, I couldn’t find anyone to explain, to my satisfaction, what happens between the Fed and the Treasury at that stage. It’s almost like there is a deliberate opaqueness there. My guess is, some of those Treasury liabilities sometimes evaporate, fall through the cracks between the Fed and the Treasury (*). And that would be when the damn money is “printed” at long last, by way of shaking off the debt attached to it at the time of issuance.

            (*) Actually, I was told that that was the case by a fellow who I find knowledgeable and trustworthy, but just “told,” no explanations; hence my running hunch for “deliberate opaqueness there.” Alternatively, I guess, a strictly endogenous money system is still possible to imagine, where the Treasury is never off the hook for any part of the debt, but forever rolls over maturing principle onto new securities.

            • Nihat: The said shift of dollar balances from savings to checking account at maturity is the Fed’s payment facility at work. When that happens (or when the Fed does QE and buys T-securities from the market), the Fed is holding a whole bunch of T-securities, for which the Treasury is technically still on the hook.

              Those are two quite different cases. (And see Dan’s reply to Alex above) In the first, the Fed isn’t really doing anything. And it does not end with the Fed holding a whole bunch of T-securities. That happens with the second, QE case, which I drop.

              In the first case, reserves are added to the bondholders accounts at the Fed, in return for the disappearance, the maturation of the bonds, the savings account. And the Treasury’s account at the Fed is debited the same amount. The idea is that the disappearance of the Treasury bond liability is paid for by the Treasury moving money/currency/reserves from its account to the bondholder’s account, with the Fed doing the button-pushing.

              The first operation, the reserve credit /disappearance of bond asset to the bondholder is something real. The second operation, the debit to the Treasury, is nonsense, which is made to look like something real, and that is all that happens between the Fed and the Treasury. It’s just smoke and mirrors (Mosler) with no function but to confuse. The Treasury’s account could debited half the amount, or even be added to then, and it wouldn’t mean anything, except an enormously beneficial psychological effect. If the Fed allowed the Treasury overdrafts, as it has in the past, it could debit the Treasury account for twice as much as the maturing bond’s value. If you had a shoe store, every time you sold a shoe, you could write yourself a check for twice as much as the shoe’s price, and fees and annoyance of your banker(s) aside, with similar meaningfulness.

              The “debiting the equal amount from the Treasury account” is just the smoke and mirror arrangement that makes the legerdemain work best, because in the normal course of things, those reserves that left the Treasury account are just going to want to drain themselves into interest bearing bonds the next day and reappear in the TGA. (Or from the Treasury’s perspective, the bond debt is going to be rolled over, the Treasury’s checking account is going to be replenished by its own spending from it.) It wouldn’t mean anything if the Treasury’s account balance at the Fed were positive or negative Trillion dollars, but it might look bad for the bankster-magicians running things, and debiting that amount is the best way for their show to not get chased out of the casino.

              A debt which is different from the unit of money itself is not “attached to” any money, any currency at time of issuance, so it never needs to be or can be “shaken off”. The specific bonds and the specific units of currency that the Fed & the Treasury & the banks & the public trade in are different, unattached things. But currency is debt, just like bonds are. Bonds are just currency where the ink isn’t dry yet. Monetary operations, like QE or Treasury bond auctions just fiddle with the exchange rates between wet-ink currency (bonds) and dry-ink currency (reserves), called interest rates.

              • Calgacus, thanks for your detailed reply. I really appreciate it; and as a token of my appreciation, I’ll spare you from a hair-splitting exercise about functional vs technical details. 🙂

                I must have missed Mosler’s smoke-and-mirrors characterization of the Fed-Tsy interface. Hence my attempts at describing it by terms like fog and opaqueness.

                I still wish the talk about money and debt wasn’t as philosophically expansive as it manifestly is. The fact that “debts that can’t be paid won’t be paid” isn’t a principle to run anything on.

  23. Paul Boisvert

    Great exposition, Dan. As a huge MMT supporter, I’m hoping you can clarify re inflation, fear of which is the biggest obstacle to public acceptance of MMT. Why is price stability so valuable? Claims that G spending at FE will lead to inflation are accepted by MMT proponents as undesirable. But why don’t MMT proponents say, yes, it will lead to inflation, but so what? If more claims (money and credit) are chasing the same output, prices will rise, but note the premise: there are more claims in the hands of the chasers with which to pay those higher prices, so it’s a wash, for society as a whole. If I play poker with 20 chips worth a nickel or 10 chips worth a dime, it makes no difference what the nominal value of a single chip is.

    Standard explanations by mainstream economists are obviously straw men, so why does MMT buy into it? These include “routine inflation leads to hyperinflation”, not historically true. Hyperinflation should be renamed “currency collapse” and the vast historical record showing it does not result from routine inflation, but instead always involves exogenous, catastrophic factors, highlighted.

    “It’s inefficient, menus and prices have to be changed every day”. No big deal–note that grocery store prices change constantly, particularly downward (for sales.) For any level of routine (not hyper-) inflation, we can live with that with no problem. “Fixed income (poor, ununionized) people will suffer”–so index SS, give a Basic Income Supplement or tax credit for the poor proportional to Inflation, give unions card-check rights so they can bargain wages keeping up with it, index the MMT JG wage to inflation, etc. Problem largely solved, but regardless, it’s a distributional problem, not a problem with inflation per se.

    Most importantly for realpolitik considerations, the above (minor, soluble) problems are counteracted to a great extent by the fact that inflation is a BOON for debtors (largely unwealthy), not creditors (largely wealthy), as paying back fixed debt in inflated dollars transfers real wealth from creditors (richer) to debtors (poorer). Thus Republican obsession with keeping inflation low–why isn’t that a dead giveaway that inflation is GOOD for the 99%, and, hence, why would MMT agree with the fearmongers? Why wouldn’t MMT say “Wall Street opposes inflation, so what does that tell you?” And if some inflated claims leak to the foreign sector, prices will rise there, relative prices of US goods will fall, the dollar weakens, exports expand, hence so does the economy, demand for labor goes up, real wages rise, etc. All good! [I know MMT says imports are good, but that ignores distributional effects–increased wages help poorer and middle class more than the rich.]

    I honestly have not seen a single cogent argument from mainstream economists, let alone MMT (in which I read widely), as to why (routine) inflation is any (real, or not easily addressed) problem at all, even if it were to occur.

    I think MMT needs to address far more thoroughly and explicitly, with the same vast level of detail that you address accounting identities and Fed/Treasury credits and debits and keystrokes and interbank loan settlements,
    why routine inflation ISN’T a real problem at all, even at FE, and hence why mainstream economist (Baker, Krugman) objections that down the road MMT will lead to inflation, carry no weight. Note the instant benefit: that is the ONLY argument against MMT by the mainstream Keynsians. By refusing to accept their framework, you cut off at the knees any objection to MMT!

    I also note that the MMT claim that (demand-pull, not supply-push) inflation can only happen at FE seems obviously false to the public: we haven’t had anything close to full employment for 15 years, yet have had (modest, but real) inflation all the while. Is this all supply-push? If so, where is the detailed explication in MMT sources? If not, what’s the deal? But if that inflation isn’t really bad, it’s moot, and again, a seeming inconsistency in MMT vanishes.

    If all my points above are wrong, I would be extremely happy to have that demonstrated–but I see nothing remotely cogent addressing them in definitional, explicit detail on the MMT side. All I see is “inflation isn’t a problem except at FE and then we’ll address the admitted horror of it by stopping the money printing or taxing it away.” That message is guaranteed not to resonate with a public drenched in irrational fears of both inflation and taxes, and as I see it really hampers much greater acceptance of MMT.

    I address this to you, Dan, because you seem to be the single clearest expositor of MMT–you do a fantastic job! I’m really hoping you could discuss these issues with the MMT gurus you acknowledge and get the issue front and center from now on–again, as I see it, obfuscation about inflation is the single greatest impediment to MMT acceptance!

    Regardless, keep up the great work!

    • Do not waste your time with Dan.Money Supply has to remain constat,it’s not a Chicago school of thought,but common sense and historical evidence too

      • What is your definition of “the money supply”?

        • ”Interest Free Loans for productive capacity, issued by a publicly owned Central Bank.”
          Money supply constant = Nil Inflation

          • So there is currently no money in existence, according to your definition.

            • Dear old boy I am proposing.At present if you wish to know; money created out of NOTHING as a compound interest bearing DEBT.
              No Debt = No Money

          • Money,

            I completely agree that all money should be created debt free by the US Treasury, of which a proportion could be used to fund government programs. But there is no need to lend to private companies or individuals at zero interest. The interest rate should be a function of market forces in a capitalist economy, capped at 8% to avoid usury. In any case who gets to decide who receives the interest free loans that you are suggesting ?

            • My proposal is Universal,loans to all productive capacity against a well documented cost benefit analysis programmes.All projects will cost HALF or less.
              A private body can execute the projects viz Green Energy projects, Small and Medium size business, student loans, schools hospitals the list is endless.
              Such as student loans,benefits are long terms
              Not for luxury yachts or executive jets or palaces etc.
              The elected representatives can make those decisions based on the cost benifit analysis., over looked by the people if necessary.

              • Money,

                You might want to bear in mind that the US Congress is a pork dispensary 😉

                • There are friends of mine who have been working hard to change all that and history is on their side.A financial tsunami is sweeping across the world.
                  Derivative obligations are U$1.5Quadrillion, the Global GDP is only$60trillions any amount of QE(printing money) is not going to slave it.New thinking is required a Paradigm shift is occurring, so do not loose heart

                  • ML,
                    $1.5Q in derivative obligations……..that’s friggin scary. Can you elaborate what that includeds? is that a MBS scenerio x 100 or something?

                  • These are financial instruments created to hood wink investers, such as CDOs,CDSs etc, viz Credid Debt Obligations, Credit Debt Swaps etc,seqestered with other obligations given AAA rating by fradualant rating agencies for a fat fee and sold all over the world.A total of U$1.5Quadrillions
                    BoA has U$70/oddTrillion of these,JPMorgan a similar sum if one of them went belly up the US economy and some others will go down

                  • In a poker game without limits, millions, billions, trillions, even quadrillions can be bet before the cards are shown. It’s when the bets are called in that you find out who has only the hat and who has the cattle. In this case, there aren’t enough cattle to settle even a fraction of the bets. Only sovereign issued fiat currency could do that. QE-4 anyone?

                  • Ml,

                    There are two sides to any trade. In any futures market, the buyers are always matched with a seller, so that they cancel each other out. Long = Shorts. The day of reckoning comes on the delivery date, when the loser has to pay up.

                    It is much the same with money being a zero sum game. No debts = no money.

                    It is interesting that the US Federal reserve bank is now buying $40 billion per month of corporate bonds. Why is that I wonder ?

                  • The financial system is based on compound interest bearing debt.For you to have U$1dollar in you pocket, some one else has to go into debt for a U$1dollar.The latter U$1dollar is created out of nothing,but not the interest on that sum.So when you repay your debt, you have to find the intrest on it some how or other.So it’s not a zero sum game as you think.
                    The Fed is doing everthing possible to delay the day of reconing.

                  • ML, how can somebody write insurance contracts for that much, when they can’t pay it should it come due. Isn’t that the same crap that did AIG in? Have they not learned a lesson yet? Can the regulators not see the problem there? ughhhh

                  • Jack
                    I tried to sent the same message as to Frank,but was rejected. So please refer to it

                  • Moneylender

                    I think that you are right, it is a negative sum game, since the debts cannot be paid. Will the fractional reserve banking implode ? It is like musical chairs, when a chair gets removed when the music stops. What happens when there are no chairs left to sit on ?

                  • Frank
                    As a committed pacifist and a non animal eater (thou shall not kill) the only way to stop illegal illicit wars is to stop funding them.
                    We are spending Trillions of dollars on them, no shortage of money there, to abolish world poverty it requires U$17billion.
                    What concerns me is that the elite may start a war to solve the problem, (as they have dug a too big a hole,either by design or accident() where a few can get filthy rich whilst millions are annihilated part of the population control programme.
                    We are facing democratic,,economic and ecological deficits.Food water, medicine are all being poisoned.
                    The moment a child is conceived it’s in debt, so it’s control from cradle to grave.
                    I work with people who provide the essential services, such as street cleaners, dustmen, firefighters hospital staff etc etc with out whom our urban life will grind to a halt.
                    If the push comes to the chuff we can all survive on barter,but not with out the essential services.
                    They understand how compound interest affects their well being and the rest of us, discussing fractional reserve etc is a non starter.
                    I have seen some contributors to this page, full of jargon’s etc, etc a nebulous exercise.
                    Keep the message simple IFL by a publicly owned central bank for productive capacity.
                    This will ensure that there is NO money for war.
                    Secondly there is transparency through out the dispensation of funds, no fraud could occur, no room for corrupt politicians or businessmen.
                    In 2001 at a public meeting at the remembrance of a fellow pacifist I predicted the impending crisis.Couldn’t put a date nor was I aware of the derivatives time bomb,I based it on the exponential growth in debt, compound interest and it has reached a tipping point.
                    As it was at the height of Regan/Thatcher/Greenspan/Chicago school and the mantra was TINA, I thought the penny may not drop but a lot of people came to me after the meeting and agreed with me though not bold enough to say it at the meeting.
                    So with no disrespect to any of you zoom in on IFL as your core message, the rest can be done later.
                    Same messagt o Jack too

    • Paul Boisvert

      Well, there is a resource constraint, real natural resource beside labor constraint.

      In increasing inflation, looking long term inflation is on a trend, all resources are getting increasingly sought after while destroying profits/capital accumulation/savings neccesary for technological developement. Inflation makes everyone rush as under adrenaline trying to adjust to new rates constantly, forgeting about longer term developement and needs. In rising inflation the Real interest rate is getting squezed causing realy big projects to be left aside. It is a dynamic system of ever growing inflation trend or ever lowering inflation trend. Loans with inflation adjusted terms (real interest rate) would cancel that, but we know that that is not a majority of loans, only lately due to deregulation.

      Read more about the my explanation in my comment about Nominal Surplus Circulation bellow.

      • I feel that your worry about resource scarcity is misplaced. Materials are always available, albeit at a higher price if there is increased demand, but they never actually run out, since consumers switch to other similar resources. The higher price acts to reduce consumption. For example, people are now switching from heating oil to natural gas, since it is more abundant and hence cheaper.

        With regard to more complex industrial output, there is usually a time lag involved to bring increased production on line if there is more demand, but producers will respond to higher prices by increasing production until supply is balanced or exceeds demand. This is the beauty of capitalism compared with a command economy such as the USSR had.

        It seems that inflation of the currency is a necessary requirement if an economy is to grow, but if it gets out of hand it just serves to drive up prices. This is fine if wages rise in tandem, but in recent years they have not for the vast majority of consumers.

  24. In my reasoning i find Marginal Tax Rate (MTR) highest on the scale of importance then any other policy and then Job Guarantee as suffrage cushion.
    I use theory of Nominal Surplus Circulation as essential thinking on economy.
    NSC is theory of money distributed upward by consuming while any surplus is spent by someone else. When savings from rich folks is distributed down trough lending, poor people get to use real values and consume. NSC can be kept ongoing by income growth or by credit growth with credit being serviced with more credit.
    Both have limits on managing aspects, income growth have high inflation limit from resource constraints and credit growth has debt limit from Zero lower bound of interest rate used trough Taylor Rule.

    From 100 year charts we can see that income grew positively with interest rates and inflation going up under high marginal tax rate of 90% untill around 1972 and then switched to opposite trend with lowering tax rate which left real income growth flat and consumption kept Agregate Demand trough growing debt untill 2008. Lowering high MTR increased savings which pushed IR down trough Taylor Rule and reduced inflation. Government debt first absorbed savings but then increased savings which sped up real IR down to 0% and inflation with it.

    So there are two inflection points that require MTR policy switch: high inflation and low inflation. High inflation leeds to reduced savings which can be fixed by reducing high MTR and low inflation leeds to high savings/indebtness which can be fixed by debt jubilee or money printing and then raising HMTR which will turn the trends.
    Job Guarantee should be used to reduce suffering while turning trends of inflation/IR in order to keep Nominal Surplus Circulation.

    Instead of policy change being forced by the market, i would recomend markers as signals to switch policies. Markers should be 3% inflation/IR on the downward trend and 10% inflation/IR on upward trend and major cycle policy should be on Marginal tax rate while everything else is at present rules.
    With present system, that cycle would be about 40 years but Job Guarantee would extend it further. Resource constraint could reduce that cycle much more but that could speed up technological and cultural change. MTR can be also adjusted between 95% and 20% to extend the cycle.
    I find that 10% reserve requierment is esential to enable technological advance by bankrupting ineficient and bad businesses and encouraging better ones. 100% reserves would stifle that inovation and developement.
    Money printing should be allowed only in periods of switching policies and trends for purpose of reducing turbulency.

    Inflation and interest rates should not be allowed to go from 0 to 20% and then back every 80 years and to inflict such pain and turbulence even World Wars when it could be proactively controled and allow movement only between 3% and 10%. Inflection points can be predicted and switched by smart and automatized policy changes but Nominal Surplus Circulation is essential to understanding such long term trends.

    • Jordan,

      You make some very good points about inflation and interest rates. I have long held the suspicion that the average interest rate on all loans (not the interbank rate) is equal to the rate of inflation of the currency. This probably because under the system of fractional reserve banking more money must constantly be created (as debt) in order to pay the interest.

      I was appalled when Volcker increased the interbank rate to 15%, since I knew that this would crash the economy, which was in fact already slowing down due to the increased costs of commodities the public was having to bear. However, I did very well out of it by selling all my inventory for cash and placing the cash on deposit at 15% for a year.

      • Frank
        “This probably because under the system of fractional reserve banking more money must constantly be created (as debt) in order to pay the interest. ”

        That’s in falling inflation trend, servicing the debt is done by income growth in raising inflation trend.

  25. Paul, I’m on the way out the door so I only have time to look at one of you interesting questions:

    “Why is price stability so valuable?”

    As you note, price stability is not intrinsically valuable. But price predictability is. For example, suppose that for some reason the price level in our society rose by 1/1000th of a percent every day, and that this price level increase was completely rigid and 100% predictable. Assume also that wages adjust, by law, on a daily basis to the daily change in the price level. Then there wouldn’t be much of a problem. Everyone would just include an inflation premium in every price they negotiated. If I sold you a refrigerator with a spot price $1000 (the price I would accept if you pay me today) and you promised to pay me 30 days from today, then we would both agree that you should pay me $1030.44 at that time. This is assuming that I don’t charge you anything just for making me wait, and that all I care about is taking account of the fact that due to the daily inflation, $1000 today will be equivalent to $1030. 44 thirty days from now. If you agreed to pay me one year from now, then the amount we would agree you have to give me is $1440.25.

    It’s not that the daily inflation has no cost to society. All of that working out prices on calculators takes a little bit of extra time. But it isn’t that important. So an utterly stable daily rate of inflation is not significantly different than stable prices. What matters is predictability.

    Note that in this hypothetical world, debtors would receive no benefit from the 1/1000th of a percent daily rate of inflation. Suppose that instead of buying a refrigerator, you were taking a loan from me. Then in addition to whatever base (non-inflation-related) interest rate we agreed upon, there would also an inflation surcharge built in. But that would have been calculated and priced in right at the beginning when you took the loan.

    Debtors only benefit from increases increases in the price level when those increases were unpredictable. So, suppose we all expected, with a 100% degree of confidence, that the rate of inflation would be 1/1000th of a percent, and you therefore made the agreement to pay me $1030.44 thirty days from now. But suppose something weird and unexpected happens, and the day after we make the deal, the daily inflation rate shoots up to 5/1000ths of a percent. You will no doubt benefit from this event. You wages will rise faster, but the contract we made for the refrigerator stays in place.

    Now suppose that the price level changes in very wild and unpredictable ways over time. Then in the attempt to price in expected changes in prices over time, an element of risk is involved. The guy selling you the refrigerator doesn’t really know how much to charge you. There is possibility he will gain and the possibility he will lose from various kinds of prices. This, I would think, is bad for society and tends to inhibit commerce. Risk aversion kicks in, and people with refrigerators will have an increased desire to hold onto them, rather than to gamble them in the unpredictable casino of the market for money. People with the stuff from which refrigerators are made will similarly tend more toward holding onto that stuff rather than venture them in the risky game of refrigerator production.

    So policies that create rapid one-time, previously unanticipated inflations for might be temporarily beneficial for debtors, but they could also cause longer-term harm if market participants can no longer predict prices, and as a result become more risk averse and less willing to make contracts.

    • Dan,

      There is no such thing as price predictability. Prices are arrived at by supply and demand. Sometimes there is profit and sometimes there is a loss. No one dictates prices or profit margins in a capitalist economy.

      I think that you are confusing prices with cost. All costs are ultimately labor costs and are therefore much more easily determined than prices. Bear in mind that currency exchange rates will also influence costs.

      • That’s not what I’m talking about Frank. I was talking about the predictability of inflation not prices. In my example of the refrigerator, I assumed the $1000 spot price is set by the market, maybe even by bargaining in the store. The question then is how would people behave in an economy in which there is a very predictable rate of inflation in cases in which payment is demanded not on the spot, but over varying lengths of time.

        In our society right now, the average growth in consumer prices has been highly stable for many years

        • Ah so, I thought to were talking about price stability 😉

          With regard to the rate of inflation, my postulate is that the rate of inflation is roughly equal to the average interest rate on all loans outstanding. The higher the interest rate, then the higher the inflation rate, since more money must be created as debt in order to cover the interest. However, there is definitely an upper bound to this relationship, since there will likely be more defaults if the interest rate climbs too high (as in adjustable rate mortgages ) and money would be destroyed causing some deflation. It needs a mathematician to derive an algorithm to take this into account and then back test it on past data to see if it works out, in order to make some predictions about future rates. Any volunteers ?

    • Hi, Dan,
      Thanks for the detailed and, as usual, very clearly explicated response, I really appreciate it. Point taken on predictability being the real issue re inflation. Your example of refrigerators does seem to slightly confuse two issues–benefits to producers/sellers vs. benefits to financiers. By making the refrigerator producer also an offerer of credit to the customer, it masks the opposed interests. Producers per se love sudden upticks in (demand-pull) inflation, right? They can sell at higher prices while having previously paid for inputs at the pre-uptick, lower prices. It’s only offerers of credit, and then only of fixed-rate credit, who take the risk of real losses. And, of course, vice versa–producers and debtors hate sudden downticks in inflation, though debtors at least have relatively lower costs for immediate basics, while creditors should love such downticks.

      But variable-rate, inflation-indexed credit makes all the above irrelevant, right? (In whatever form, including ability to sell at a discount fungible fixed-rate bonds or securitizations of other fixed-rate debt.) Making all debt inflation-indexed-rate debt (along, of course, with indexing wages and SS) seems like a simple solution to remove all inflation risk.

      Which brings me to the real point of my original comment: your very detailed response explicitly addresses the fact that it is only policies leading to “wild and unpredictable” swings in inflation that have any negative effects. And even those can be ameliorated by using inflation-indexed credit and wages, as well as many other MMT polices. So the point of my original post is that inflation issues, whether my take on them is right, or yours is, or Wray’s or Kelton’s is, are VERY CONFUSED AND CONFLATED in the layman’s mind. [Forgive the caps, not shouting at you personally.] I think they are also confused in Krugman’s and Baker’s minds–at least, they never give the sort of detailed explication of them that you did in your reply to me. I’m sure they roughly agree with your take on predictability, but explicating it in detail then raises the chance that people will see that their explication begs the question of why we can’t simply ameliorate such inflation worries with simple fixes, whether indexing or others in MMT.

      And they never give any explanation for why they think MMT would lead to “wild, unpredictable” swings in inflation. They mention “inflation” as though it is intrinsically horribly evil in every way, but rarely distinguish between various types of inflation, give definitions of it, talk about unpredictable vs. steady, etc. Krugman does occasionally note that if the Fed (suddenly) committed to raise inflation it would help debtors, but here he seems to NOT feel that it would dampen in a harmful way the spirits of risk-averse creditors–so, again, a logical thinker might wonder why he fears inflation at all. But mention MMT, and he immediately just chants “inflation at FE, inflation at FE”, and expects his readers and colleagues to automatically understand that to mean “pure Satanic evil, pure Satanic evil”. I think he is, unfortunately, correct in that expectation, and I think MMT would be better off saying that the correct translation is “no real problem, no real problem”!

      Of course, you can also point out that IF it was a problem, you could tax or reduce spending–but agreeing with PK that it’s automatically an evil problem in the first place, requiring fixes of taxing or cutting, weakens the overall confidence laypeople have in MMT. This is especially true since of the two fixes, one is taxing, which people hate even more than inflation, and the other is cutting spending, which politicians are already chanting is the only solution anyway, hence why do we need MMT to do it?

      So why not call the mainstream Keynsians on the inflation issue? But it has to be done with a thorough, consistent, coordinated approach from all of MMT–I’m simply nominating you to lead the charge… 🙂 The implicit but by far most crucial, indeed as I see it the only really important, meme in both layman’s and mainstream Keynsian’s rejection of MMT is, roughly, “any inflation is bad, and leads to (un-ameliorable) wilder and more unpredictable inflation, which leads to hyperinflation. MMT admits all this, but claims they can handle all the evil inflation, but what if they’re wrong? Then it’s Weimar…then Hitler…maybe Hiroshima…” Both the premise and both causal implications re inflation are false–so a triply bad argument, but, for that reason, a triply strong impediment to gaining further acceptance for MMT in either mainstream Keynsian or the layman’s mind. By not challenging them to fully defend in detail why there is any chance of truly bad (rather than routine, unimportant, and/or easily ameliorable) inflation effects, EVEN AT FE, MMT, as I see it, misses the most important way to get (very confused) laymen, and (only slightly less confused) mainstream economists, to buy into it.

      Sorry to go on at such length–but the above take is what instantly runs through my mind whenever I see any discussion of MMT and inflation in the blogosphere. It is very clear to me from comments (of interested, but confused readers) that they have vastly conflated understanding of issues and terminology regarding inflation. And I read a lot of it, so it’s constantly on my mind! But again, thanks Dan for all your own extremely effective efforts supporting MMT, and keep up the great work!

      • The word inflation is much misused these days. Inflation of the currency occurs when more money enters the economy than is needed to buy the goods on offer. If more money chases the same number of goods and services there will be a general increase in prices. If the money supply contracts, then prices will on average fall.

        Prices of goods are also influenced by supply and demand. If demand increases for a particular commodity, the price will increase, but if the money supply remains constant it is not inflationary, because consumers will have less money to pay for it or switch to another similar commodity. The cost of living is therefore influenced by both currency inflation and price changes due to supply and demand.

        Currency exchange rates will also influence costs, but since almost all commodities are traded internationally in US$ this is not of much concern to US consumers.

    • That is a good description of short term effects of inflation and price calculation. Where inflation has shown benefits is in 30 year mortgages with fixed rate. Since it is almost impossible to predict interest rate 20 years into future, interest rate surcharge on 30 year mortgage is undervalued in upward interest rate trend and it is overvalued in downward trend but since that overvalue causes unemployment, FED reduces interest rates which push house prices up and saves borrowers.
      House debt has much much more inflation benefits then short term debt. Longer debt term means more inflation benefits due to long inflation trends which i explained in previous comment above.

      Thanks to fractional reserve banking, banks can survive this undervaluing of inflation surcharge on long term debt.

      • Whether inflation of the currency is good or bad depends on the financial position you are in.

        If you are on a fixed income then you lose out. If your income rises faster then the rate of inflation, then you are ahead of the game. Unfortunately many people’s income has stagnated or declined, especially those on minimum wage.

      • I think that fractional reserve banking was a great wheeze foisted on the public. The banks create money out of nowhere and then demand that you pay it back to them together with interest from your hard earned money, when by comparison the banks did nothing except make a book entry on their computer.

        The banks’ problems come in the form of loan defaults. If they make loans to people who lose their jobs, then both parties are in a fix. This could be solved by taking out the appropriate insurance.

        The banks cannot create money in order to pay their overhead. They have to pay it from income derived from borrowers or their reserves. If their reserves fall below the legal limit, they are in big trouble and get closed down by bank regulators and/or taken over by a bigger bank.

        • What I forgot to mention is that these days the banks do not make most of their profits by lending to customers. That is just too boring and pedestrian. Since the repeal of the Glass – Steagall Act, banks have changed their emphasis to trading stocks, bonds, commodities and currencies. They not only trade, but they take huge leveraged positions long or short, which can be highly profitable when they get it right, but can be disastrous when the position goes against them. Some of their hot shot traders have no clue about risk management and hang on to their losing trades, hoping that they will turn around. Nick Leeson of Barings Bank comes to mind.

          Jamie Dimon probably had the same kind of problem when JP Morgan lost $6 billion.

          • Frank,
            “they take huge leveraged positions long or short, which can be highly profitable when they get it right, but can be disastrous when the position goes against them”.
            – That’s why banks figured out it’s great when privatize the profits and socialize the losses!….:-)
            As for JPM’s $6B loss, they probably figured out a way to go buy some treasuries that pay 3% with money borrowed from the fed at .25% to make up for the loss.

            • Dimon should have been fired.

              • Agreed!
                However, I was thinking on your comment some more. I never thought Glass-steagal should have been repealed and can’t believe they just didn’t fully re-institute it after 2008.
                The fact you have the banks with so much low interest money available and not enough qualified borrowers, I do believe they are using that cheap money and high leverage to game the commodities markets. Because commodidities are things that have to be bought regardless of the unemployment rate.

                Enron is a prime example that started immediately after repeal. Everyone seems to forget how California was “running out of electricity” and that was why their energy rates went to the moon. meanwhile, you had enron guys paying off plant workers to shut it down in the middle of the day!
                And since the day after Enron imploded, CA has had plenty of electricity!

                Now, GS and JPM own all the alluminum warehouses in the country and have been playing funny games on that front. Then there’s the new Seaway pipeline able to siphon off major capacity from Cushing Oklahoma, i fully expect oil to go back to $110+ for no other reason than manipulation.

                So, yes, the banksters will have to wait a while before they can pillage the mortgage market again. In the mean time, they are trolling for their next exploitation with tons of easy cash and high leverage in their pockets and what better place than commodities. Scarry stuff

            • Nick Leeson went to prison.

              Bernie Madoff should have been executed.

  26. It’s about time someone came up with a summary for this topic. Wonderful!
    “Congress can pre-approve large packages of infrastructure spending, education spending, direct payments, subsidies and other varieties of useful public spending to be carried out over 5 or 10 year periods.”

    I would just like to unpack ‘subsidies and other varieties of useful public spending’ so it may be clear what our purpose is here.
    When dreaming, there are no barriers. MMT is being driven out for many reasons but this is one of the most important: to free the average household of much of the burdensome costs of daily living. Those burdens are now completely drowning the typical family of four with less than $48,000/yr. I would place that as the official poverty level but helping out those on the bottom end would also benefit the rest of the households as well.
    1. Meaningful health care reform-one plank of this reform would be to place those at the new poverty level (between two and two and a half times the current poverty level-in US 2012 dollars that’s the $48,000/yr) on state funded Medicaid. The eligibility might taper off to as much as $65,000/ yr. For those not eligible, other forms of assistance in other areas-housing, transportation and food, would make health insurance affordable. Other plans should be looked at as well to perhaps move the vast majority of the population to Medicaid type plans run at the state level. A successful reform of the delivery of health care would result in huge savings and lowering the costs. Medicaid plans could be funded by the states because the major burden that every state faces-costs of secondary and post secondary education-would be totally lifted from the states’ treasuries.
    2. All education systems would be funded by a national system funded by the national treasury. The only cost would be an application fee to cover the cost of processing an application. Tuition and books would be covered for all students; books would be provided on a loan process from the library in print or electronic media. Schools, colleges and universities would, if they meed accreditation standards be allowed to propose plans for their schools without being tethered to over-burdened tax payers.
    3. A national transportation system would be funded at %100 from the national treasury with local administration, much as now. This would further lift financial burdens from the states and municipalities who would be able to lower taxes.
    4. Food subsidies could be eventually eliminated as we learn to farm our lands in a more productive and healthy manner. This would result lowering the cost of food, yet resulting in a more robust environment that would at the same time be free of the noisome pollution our current industrialized farming produces. Much in the way of cost savings would accrue to individual households here as well.
    4. Housing would be built on not for-profit-basis, once the cost of building a structure is paid (assistance in this could be available to everyone), an administrative assistant would collect costs for maintenance, lighting, water and taxes and the landlord could be disappeared off the map.
    5. The costs now incurred by users of Scholarly research, artistic endeavors, song writing, publishing and dissemination of all cultural artifacts would be covered by a system of grants. The details of this would need to be worked out but certainly the examples of artistic production in Russia and Europe need to be looked at closely. Again, I’m dreaming so I can’t see the details. When I wake up I’ll write those down.

    • I wanted this to be part of the statement above:
      Farmers, growers, and all workers in the agricultural sector would be paid as employees of a National Agricultural Association. Pay would be commensurate with experience and training. This National Agricultural Association would replace the FDA and the Department of Agriculture. It would work with the state governments to disseminate best practices on farming and horticulture. Most of all, prices would be driven subsidized at the market place if need be, not at the point of production.

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  28. Barclays wants to suck you into debt.

    More debt = more money (for some)

    • They can carry on regardless knowing that the taxpayer will bail them out again

      • There was absolutely no need for the US taxpayer to bail out any bank. The Federal Reserve bank could have stepped in, created money out of nowhere to buy bank bonds or shares to prop them up. Instead what happened is that the Federal Reserve loaned the bailout money to the US Treasury and then the US Treasury forked over the same money to the banks.

        It was grand theft Treasury. Hank Paulson should be in jail for fraud and grand larceny. He knew exactly what he was doing to defraud Congress with a crisis that was fraudulent.

        • You are right and to the tune of U$29trillion, The Fed Chair refused to disclose the names of the banks bailed out to the congress at the hearing.

          • The Federal reserve did in fact have to step in after the US bank bailout by the US Treasury. The $29 trillion is the worldwide figure, which was issued as loans to banks in order to stop a global bank collapse.

            By comparison the total value of the stock traded on US stock exchanges is around $20 trillion.

            Something is out of whack.

            • Yes, U$29Tri is a global rescue fund, the tax payers of the world is held to ransom.As Kissinger pointed out that if you control the Money Supply you control the world.
              ”We will conquer the world either by consent or by conquest”Paul Warburg
              ”None is more enslaved than those who hopelessly believe that they are free”

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