The silliest substantiation for ‘taxes don’t fund spending’ ever

How Does The Federal Government Actually Spend

How Does The Federal Government Actually Spend?Professor L. Randall Wray, on with Steve Grumbine of Real Progressives, explaining what actually happens when the Treasury spends. Wray goes through a simplified version that leaves out some intermediate steps, but these intermediate steps all cancel out of the final process, and the end result is exactly what he describes. (Sort of like how if I gave something to you to give to your cousin for me, the net result is that I gave something to your cousin).When the Treasury goes to spend, it tells its bank, the Federal Reserve, to credit (turn a number into a larger number) the reserve account of a bank (banks all keep "reserve accounts" with the Federal Reserve, which they use to settle payments), and then the bank credits the checking account of whomever is receiving the payment. So, the Fed credits a bank's reserves and a bank credits a customer's account.The reverse happens when the Treasury receives a tax payment. The Federal Reserve debits (turns a number into a smaller number) the reserve account of a bank, and the bank debits the checking account of whomever sent the payment. The net result here is that federal government spending adds to the quantity of reserves and deposits, while taxing decreases from it (as do bond sales, aka government "borrowing"), and it all happens via keystrokes. Or in short, the government does all of its spending by simply crediting bank accounts. It is not "spending tax dollars," it is changing numbers on spreadsheets. There is no possibility of it being unable to make a payment, no possibility of it being forced into bankruptcy or default, no possibility of interest rates being forced up because of government deficits (on a floating exchange rate), and no purely financial limit on government spending, only real resource limits.If you want to know more details about the exact procedure, all of the steps, as well as citations to back it up, check out these links:The Greatest Myth Propagated About The Fed: Central Bank Independence (Part 2): http://neweconomicperspectives.org/2014/01/greatest-myth-propagated-fed-central-bank-independence-part-2.htmlTreasury And Central Bank Interactions: http://neweconomicperspectives.org/2016/02/money-banking-part-6.htmlTreasury Debt Operations: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1825303And see how this incorporates into a broader heterodox worldview on the nature of money, as contrasted with the establishment orthodox views: http://neweconomicperspectives.org/2013/12/essays-monetary-theory-policy-nature-money.html—Watch the whole video here: https://www.youtube.com/watch?v=OCNXfNTAez0Follow Deficit Owls on Facebook and Twitter:https://www.facebook.com/DeficitOwls/https://twitter.com/DeficitOwlsAnd follow our sister page, Modern Money Memes:https://www.facebook.com/ModernMoneyMeme/https://twitter.com/ModernMoneyMeme

Posted by Deficit Owls on Wednesday, August 2, 2017

 

If you hear an MMTer (proponent of Modern Monetary Theory) say ‘taxes don’t fund spending’, assume either the speaker is simplistic, or the speaker thinks the audience being spoken to is simplistic.

 

How do we know that what Professor L. Randall Wray says here is being ‘simplistic’? Here you go, right from the horse’s mouth, the very first line in the video: “It’s complicated, but it can be simplified”…”and so I’m going to simplify it but the way I’m simplifying it is not at all misleading.”…”What I’m saying is a simplification but it is not dishonest at all”…”it’s not misleading you.” (When someone says something like ‘no bullshit’, 3x in a row, right before saying something, take a wild guess what’s coming next).

 

“If you go back to the colonies, every time, say the Colony of Virginia, they would pass a law authorizing the colonial gov’t to print money (paper Treasury notes), they also would pass a law to impose taxes…and the tax they imposed was equal to, would generate the amount of revenue, equal to the amount of (paper Treasury) notes they were going to issue”…”Do you know what they did with the paper notes they got back in tax collection?”…”They burned them.”…”That makes it very clear how it worked.”…”Did the Colony of Virginia need the tax revenue to make their payments?”…”Clearly not.” (Bullshit…What happened in Virginia was ‘clearly’ the exact opposite of that. In 1755, not only did taxes have to fund spending in Virginia, they had to start funding spending in England for the Seven Years War (a lot of more spending). British pound sterling, personal bills of exchange, promissory notes, Spanish silver coins, other gold coin specie, and even tobacco, beaver skins or wampum, were all accepted for payment in the colonies, were all considered ‘real money’, ‘hard money’, or ‘commodity money’ (what all combined then we today call ‘legal tender’). So what would happen if money in the colonies was put on a boat and sent to England to fund spending in Europe instead of funding spending in the colonies? Any ‘drain’ like that can create destructive deflationary forces. The solution would be to introduce another form of legal tender money of an equal amount of these lost tax revenues to reflate the money supply. Which is exactly what other colonies had done while paying military expenses for England’s other military expeditions before, and is exactly what Virginia did for this one in 1755).

 

“They needed the taxes to get the money back to burn it, to remove the notes from circulation, to prevent inflation, it was not to allow them to spend the revenue, they didn’t spend it, they burned it”…”Taxes clearly didn’t fund spending in Virginia in 1755.” (Bullshit…Taxes in hard money funded Virginia local spending plus taxes in hard money were sent to England to fund European military spending, while taxes in paper Treasury notes were burned to prevent price inflation. Another way of saying that, they were burned to prevent depreciation of outstanding paper Treasury notes. How this worked: When any Virginia tax was paid in hard money like British pound notes or tobacco, which was 20% of taxes paid during the Seven Years War, most of that hard currency would be sent to England to fund spending. So to resupply that lost money, new paper notes would be printed and spent into the economy to maintain the stability of prices. If any Virginia tax was paid with the paper Treasury notes, which was 80% of taxes paid during the Seven Years War, because those paper Treasury notes were only legal tender in Virginia, only spendable in Virginia, those paper Treasury notes wouldn’t be leaving Virginia. A payment of Virginia taxes in paper Treasury notes meant no ‘drain’ of hard money from Virginia, no hard money voyage by ship, meaning an unchanged local ‘money supply’ of hard money. Therefore, a payment of Virginia taxes in paper Treasury notes meant no new paper notes were needed to be printed and spent into the economy to re-supply anything lost. So since those notes were no longer needed, they were burned, a.k.a ‘redeemed’. What was really happening here, the actual teachable moment, was that this was the prototype of 20th century Fed open market operations that maintains price stability. Depending on whether the Virginian taxpayer made a payment in hard currency or not, the issuing and burning, the adding and draining, the easing and tightening of colonial Treasury notes, of money, to maintain price stability in 1755 was the precursor to the Fed buying and selling modern day Treasury notes from the secondary bond market for the same reason).

 

“It was NOT to allow them to spend the revenue, because they never spent the tax revenue”…”They burned all the tax revenue.” (Bullshit…Professor Wray leaves out an inconvenient fact that doesn’t fit the ‘taxes don’t fund spending’ narrative, which is that they ONLY burned the paper Treasury notes, and NOT the tax payments made in British pound notes or tobacco bales that was also collected. They didn’t burn the personal bills of exchange or promissory notes that was also used to pay Virginia taxes, nor did they ‘destroy’ the Spanish silver coins plus other gold coin specie, those hard money payments of TAXES, WHICH FUNDED SPENDING in both Virginia and England starting in 1755).

 

“The Fed was created in 1913, we were an unusual country, we didn’t have a central bank, we got by without one.” (Bullshit……The Fed was the fourth attempt. Sure, there was not a central bank in 1913, but what about those three other central banks we had earlier? Alexander Hamilton, first Treasury Secretary, created the first central bank, assumed all the Revolutionary War debt, and started collecting excise TAXES, WHICH FUNDED SPENDING.From.Day.One).

 

“The Fed was created to be the Treasury’s bank, so instead of the Treasury just printing up notes in order to spend, and then receive them back and burn them, what the Treasury will do is have the Fed make their payments for them, so the Fed, since 1913 makes all the Treasury payments”…”If you’re a contractor selling something to the gov’t, the Treasury, they tell the Fed ‘please make a payment to this guy’s bank account’, the Fed credits you, the Fed credits your bank’s reserves, that’s how the Treasury spends”…”Now when you on April 15th pay your taxes, you write a check to the Treasury, the Treasury then tells the Fed to ‘please debit this guy’s bank account’, the Fed debits you, the Fed debits your bank’s reserves”…”So the Treasury spends by the Fed crediting bank reserves and the Treasury receives tax payments by debiting bank reserves, it’s functionally equivalent to burning the paper notes, so nothing I just told you is misleading.” (Bullshit…When you pay your taxes to the Treasury, before your tax dollars are ‘burned’ from your commercial bank, the Treasury tells the Fed to credit, to FUND, the Treasury reserves account at the Fed in the exact amount, to the penny, of your tax payment. It is a misrepresentation at best, or you sound like a fool at worst, telling people that their federal tax dollars just go *poof* and don’t trigger credits to other accounts. The MMT pillar is that since the federal gov’t is no longer spending gold backed dollars, and now spending fiat dollars, those taxes ARE NOT NEEDED to fund spending…not that they don’t. The paradigm difference is that in the post-gold standard, modern monetary system, for any issuer of fiat dollars, revenues as a financing operation takes the backseat).

 

The last line in the video: “That was beautifully simple…” (AGREED…It was beautifully simplistic).

 

Thanks for reading,

eddiedelz@gmail.com

 

P.S. Don’t get me wrong, Professor L. Randall Wray is one of the great ones; however, even the great ones do swing and miss sometimes, and saying ‘taxes don’t fund spending’ is a miss. Please know that I understand when any MMTer says it, that they mean well. There is no doubt in my mind that all MMTers understand that description of “the workings of the monetary system, what’s gone wrong and how gold standard rhetoric has been carried over to a nonconvertible currency with a floating exchange rate and is undermining national prosperity” (Mosler 7DIF). Warren Mosler, the father of MMT, has explained many times before why saying ‘taxes do not fund spending’, is wrong because the MMT pillar is ‘taxes ARE NOT NEEDED to fund spending’ (not that they don’t). Warren Mosler doesn’t say ‘taxes don’t fund spending’ because in his words, “it’s ambiguous.” In other words, saying ‘taxes don’t fund spending’ shows a lack of banking experience and a confusion with simple financial concepts like ‘funding’ (which gets ironically weird if MMTers say ‘taxes don’t fund spending’ while lecturing other people on banking and finance). Saying ‘taxes don’t fund spending’ also shows a lack of understanding that even though we left the gold standard, and we are now a monetary sovereign, some remnants, several old processes, many accounting constructs, of the past monetary system ARE STILL IN PLACE, and we need to recognize these complexities. If we want to make the MMT case to experts in the field, oversimplifications are not good enough for them. Whatever politics someone has, whatever spending on public purpose anyone wants, for the common good, for the country, is fine by me. I’m just trying to help the MMT cause by pointing out how ridiculous any MMTer sounds when saying ‘taxes don’t fund spending’, no matter how simplistic the choir (and how silly that choir looks when not challenging anyone sounding ridiculous).

The ‘Debt Clock’ Strikes…Again

It doesn’t surprise me that about 97% of the folks out there get seriously worried about out-of-control federal government deficit spending every time they see this ‘debt clock’. This is why it also doesn’t surprise me that about 3% of the folks out there have as much wealth, if not much more, than those other 97% combined.

 

Fake news is not just confined to politics, this ‘debt clock’ is the monetary version of fake news, and just like any fake news, this ‘debt clock’ is pushing a narrative. Fake news is not a recent thing, it is everywhere, about everything, so the trick is to stand back from the picture, tune out the noise, and do your own research, do your own journalism, just like the real news used to do (Not a newsflash: the real news waved bye bye to journalistic integrity decades ago).

 

I noticed a recent posting on the popular Intro To Modern Monetary Theory (MMT) website on Facebook, with yet another worrisome query regarding the ‘debt clock’. What concerned this person (questioning the validity of MMT), was outstanding ‘total societal debt’. In particular, was the clock reading of ‘money’ (‘M2 Money Supply’) being outnumbered by ‘debt’ (‘US Total Debt’) by a factor of 5. “That would suggest that we,” the post said, “as a society, operate from a position of insolvency.”

 

Cue: “BONG” (The ‘debt clock’ strikes…again).

 

Let’s take a closer look at the ‘debt clock’. The first number that meets the eye is the ‘US NATIONAL DEBT’ of $19.9T on the top left. It’s wrong. Since 1971 (since the switch from gold backed dollars to pure fiat dollars was completed and made official) there is no ‘US National Debt’. There was a federal gov’t debt before the switch (because the federal gov’t could not issue gold-backed dollars out of thin air) but there is no debt after the switch (because the federal gov’t can now issue fiat dollars out of thin air). Today, in the post gold standard, modern monetary system, there is no such thing as the issuer of a pure fiat currency (any monetary sovereign nation using a non-convertible, free-floating currency) ever being in debt of that currency. The federal gov’t, the issuer of dollars, doesn’t need to ‘borrow’ its own dollars. Selling federal ‘debt’ is no longer needed as a financing operation. Rather than being needed to fund spending using gold-backed dollars, US federal gov’t Treasury bond sales, now denominated in fiat dollars, perform other vital fiat-currency functions (such as upholding demand for the currency, fulfilling savings desires, maintaining price stability, and defending the overnight interest rate target). So either the ‘US National Debt’ figure is wrong (s/b $0.00), OR, the word ‘debt’ s/b changed. Why? The federal gov’t is the sole issuer of fiat dollars. Those US Treasury bonds that make up the ‘US National Debt’ are obligations, yes (they are backed by the full faith and credit of the federal gov’t); they are liabilities, sure (the federal gov’t promises to pay semi-annual interest and pay back the principal at maturity); but a “debt”, no. For example, IBM has liabilities to pay dividends on all outstanding shares of IBM stock, yes; IBM has an obligation to honor the equity ownership to those IBM shareholders, sure; but those IBM shares are not a “debt” to IBM, the sole issuer of IBM stock. Ask any accountant and they will confirm that all debts are liabilities / obligations but not all liabilities / obligations are debts. The way to look at federal gov’t “debt”, the reality, is that those Treasury bonds, just like IBM shares, are investment holdings, they are savings, of the private sector. So on the ‘debt clock’, the ‘US National Debt’ figure is wrong, or the wording is wrong (s/b US National Savings).

 

The ‘US TOTAL DEBT’ figure ($67.5T) shown on the ‘debt clock’ is deceiving (domestic financial debt of $16T plus domestic non financial debt of $48T plus plus foreign financial debt of $3.5T). The ‘debt clock’ should not include ‘domestic financial debt’ ($16T) in this ‘total’ figure. Why? Domestic financial debt is double-counting the debt because domestic financial institutions borrow solely to re-lend, so it should not be included. Furthermore, the ‘US Total Debt’ figure in the ‘debt clock’ includes foreign financial debt ($3.5T) which is obvious why it also shouldn’t be included in a ‘US Total Debt’ figure.

 

Moreover, the ‘M2 MONEY SUPPLY’ figure ($13.5T) on the ‘debt clock’ needs to be changed. The federal gov’t breaks down ‘money’ into several classifications (monetary base, M1, M2, etc.) for the same reason that they break down employment numbers (U1, U2, U3, etc.). The federal gov’t does this because only one of these headline figures of ‘money’ or ‘employment’ has a significant effect on movements in the economy (economic indicators), so they just need to be watched more closely (NOT that the others are NOT ‘money’ or NOT ‘employment’). For a better read on the money supply figure on the ‘debt clock’, better to add back in all the money, including those US Treasury bonds. Warren Mosler, the father of MMT, argues (correctly) that US Treasury securities ‘held by the public’ ($16T) should be included as part of the money supply because like dollars in our checking, savings, and retirement accounts held at banks (the ‘M2 Money Supply’ figure on the ‘debt clock’), those bonds are also our savings at the Treasury via the Federal Reserve Bank.

 

Finally, the most eye-popping ‘red ink’ on the ‘debt clock’, that ‘US UNFUNDED LIABILITIES’ ($106T), is another deception. ‘Unfunded’ is not as sinister as it is intended to look. ‘Unfunded’ only means that these liabilities are ‘pending’, that they haven’t been funded because they simply haven’t come due yet (not that they are ‘unfunded’ because the federal gov’t will be ‘unable’ to pay them). For example, a young worker’s past withholdings to Social Security (off-budget) is not ‘saved’ in a ‘lockbox’ for the future. The federal gov’t automatically credits each contribution amount towards today’s federal gov’t (on-budget) expenditures. The way the federal gov’t records both that after-the-fact ledger entry and to also counter-post a future Social Security check that worker will receive at retirement age is called ‘unfunded liabilities’. ‘Unfunded liabilities’, a.k.a. ‘Intra-gov’t debt’, is merely the double-entry accounting construct on the consolidated balance sheets of the United States federal gov’t that reconciles today’s receipts vs. tomorrow’s payments. There is nothing at all to worry about because those ‘unfunded liabilities’ are denominated in dollars, and there is absolutely no problem for the federal gov’t to pay any amount of ‘unfunded liabilities’ in dollars. The federal gov’t, the issuer of dollars, the sole monopoly supplier of dollars, will not run out of dollars! Today, the federal gov’t will happily issue more fiat dollars and hand them over to you in exchange for your labor (your blood, sweat & tears) provisioning the federal gov’t. You, however, will run out of time on earth (finite resource) swapping it for those dollars (infinite resource) and why the federal gov’t will gladly do this trade all.day.long.

 

The key to making fake news believable, to give the scripted narrative some legs, is to make sure that you mix in enough real news, at least 40% (“I have the feeling about 60% of what you say is crap.” David Letterman to Bill O’Reilly 01/04/06). Aside from the figures I mentioned above, the rest of the figures in the ‘debt clock’, like ‘STATE DEBT’ and ‘LOCAL DEBT’, are legit. For example, because they are in the same boat as you & I, all US local & state gov’t debt is real debt (unlike the federal gov’t, the rest of us are all users of dollars, not issuers of dollars). Again, despite those figures adding up ominously on the ‘debt clock’, there is nothing to worry about. For all that debt of the 50 US state governments combined, the median debt-to-GDP ratio is an easily-serviceable 2.4%.

 

Takeaway:

 

The USA is the #1 economy…

 

Local & state gov’t debt is under control…

 

There is no federal gov’t debt to worry about, and…

 

US National Household Assets are over $100T in Q1 2017…

 

(Keep this in mind the next time you hear the alarm from that ‘debt clock’).

 

Thanks for reading,

Eddie D  <eddiedelz@gmail.com>

Quantitative Redemption

In a May ’17 speech (05/23/17) at the Bank of Japan (BOJ) entitled “Some Reflections On Japanese Monetary Policy”, former chairman of the Federal Reserve Bank Ben S. Bernanke suggested that Japan’s fiscal and monetary policymakers ‘coordinate’ their programs to improve the Japanese economy. What he was saying was that it would be great if somehow Japan could maximize fiscal spending while at the same time (with a ‘team effort’), minimize federal borrowing. If so it “could make fiscal policymakers more willing to act and increase the impact of their actions.”
On June 27, 2011, about a month before S&P downgraded U.S. federal gov’t debt (Treasury bonds) from AAA to AA+, former Republican (TX) congressman and then-presidential candidate Ron Paul was discussing Greece’s fiscal trouble with Iowa radio host Jan Mickelson. He offered a solution to the debt ceiling impasse which appeared five days later in a post on the New Republic website entitled “Ron Paul’s Surprisingly Lucid Solution to the Debt Ceiling Impasse” by Dean Baker, a Ph.D. in economics and co-director of the Center for Economic Policy Research in Washington DC. He wrote that during the radio show Ron Paul had suggested an idea that might give some reassurance to the markets and could make investors gain confidence. “If the U.S. were to wipe out (write-off) the debt (the Treasury bonds) that the Fed was holding on their balance sheet (bought during Quantitative Easing), they (the fiscal policymakers in Congress) will all say ‘Hey, they’ve just reduced the deficit by over a trillion dollars, now they can handle it, and they can go back to meeting their other obligations’.
Whoa…
What a fantastic idea…
Let’s call it ‘Quantitative Redemption’…
In a QR, the Fed would announce that the $2.4T in Treasury bonds presently on their balance sheet are, effective immediately, redeemed (‘called’ before maturity date). We are only redeeming the Treasury bonds (20yr< maturity) and Treasury notes (10yr – 20yr maturity) on their balance sheet, not the other $1.8T in Agency bonds and Mortgage Backed Securities (MBS) the Fed also bought and are also on their balance sheet.
The Fed’s holdings (the Fed’s ‘balance sheet’) of these Treasury bonds are in the System Open Market Account (SOMA), with an approximate combined 120 month average maturity (‘duration’). The duration of the Fed’s US Treasury bond portfolio hasn’t changed much since the Large Scale Asset Purchases (LSAP) program ended, because to this day when any of those Treasury or MBS bonds mature, the Fed automatically reinvests (‘rolls over’) the proceeds in new securities of the same type and the same maturity. Of the $2.4T of the SOMA Treasury bond holdings, approx 92% have a 10-year maturity or more.
Effective June 15, 2017, the Rate on Required Reserves / Rate on Excess Reserves (IORR / IOER) is 1.25%. The amount of reserves sitting at the Fed is approx $2.3T, meaning that to target the Fed’s desired level of overnight rates (‘Federal Funds Rate’), the Fed is paying out 1.25% interest costs on that $2.3T of reserves. The average weighted coupon of the Fed’s Treasury bond portfolio on its balance sheet is approx 1.75%, meaning the Fed, which is a part of the federal gov’t (‘independent within the federal gov’t’), is getting ‘paid’ from the federal gov’t about 1.75% interest income on that $2.4T of Treasury bond holdings. Two more quarter-point rate hikes by the Fed, which could happen within a year, and that so-called profit from that difference (‘spread’) disappears so it is no coincidence that the Fed is now jawboning about unloading (‘unwinding’) these bonds (selling them back to the secondary market) starting at the end of the year. Furthermore, redeeming the Fed’s Treasury bond portfolio and losing this annual interest income the Fed earns, would not cause a liquidity (‘negative equity’) problem. QR is not redeeming any of the Agency bonds. The Fed would still have $1.8T of MBSs throwing off approx $54 billion/yr, and that’s using a conservative 3% rate, so if they did QR there would be plenty of cash (‘fiscal space’) and no problem at all for the Fed to keep paying IOER.
How this QR works is ridiculously easy. There is nothing to actually do, except announce that instead of continuing to keep these Treasury bonds ‘impounded’ (held on the Fed’s balance sheet), the Federal Open Market Committee (FOMC) has declared all these Treasury bonds redeemed, and no longer exist. (The FOMC may decide to do this piecemeal, whatever). This QR wouldn’t be anything new. Redeeming bonds is not an exotic concept, it’s done all the time by everyone, the only difference being that this would be the first time the federal gov’t is doing it with Treasury bonds. For example, other bond issuers like businesses that issue debt (‘corporate bonds’) and municipalities that issue debt (‘muni bonds’) have called their bonds before maturity date. This happened a lot since the credit crisis (since the LSAP program) because prevailing interest rates fell way below the rates being paid out to bondholders, so these issuers exercised what is known as an embedded call option (bonds without this option are called ‘bullet’ bonds, meaning that they cannot be called). If bonds are called by the bond issuer, the bondholder has no say in the matter. Bondholders are simply notified that their bonds are being redeemed and the bondholders then receive a cash payment in full for the entire bond principal (their ‘par value’) plus any remaining accrued interest at the financial institution where the bonds are held (‘registered’). This is exactly what the Fed did during LSAP. Another example of a bond call, if a homeowner decides to pay off a mortgage before the term (‘prepayment’), same thing, the homeowner called the ‘bond’ (the debt owed) from the issuer (the lender). What Ben Bernanke did during LSAP was also not much different from a company purchasing its own shares (‘buyback’), which if not retired, are held on the company’s balance sheet (‘Treasury stock’). The beauty of this QR idea is that this buyback step is already done. There is literally nothing the Fed has to do. All of the $2.4T in Treasury bonds were already called, all of the bondholders were already paid, and all of the markets already had their ‘temper tantrum’.
If the Fed did a QR this year, it’s actually not a redemption of the Treasury bonds this year, it’s only making it official that there was a redemption of Treasury bonds during the LSAP years. On December 29, 2008 the Fed began QE1, and after a combined total $2.4T of Treasury bond buybacks, the Fed ended QE3 on September 24, 2014. Now let’s step back from the picture and take another look at what happened. Prior to the 2008 credit crisis, one arm of the federal gov’t (the Treasury department) sold $2.4T in Treasury bonds, and then after the crisis another arm (the Federal Reserve Bank) bought them back. Except unlike any regular Joe Blow who buys back his own IOUs, instead of ripping them up, the federal gov’t didn’t rip them up. The federal gov’t put those IOUs, their own IOUs, in their own pocket. Then the federal gov’t started making semi-annual interest payments to itself, from itself, on all $2.4T of these Treasury bonds, on its own IOUs (and still does to this day). The point is, that all those Treasury bonds could have been declared ‘paid off’ the day Ben Bernanke created dollars (‘reserves’) and credited the sellers of those bonds long ago, but the Fed didn’t do that.
The difference between Chairman Ben Bernanke and Joe Blow was that Ben did not have the authority from Congress to pay those bonds off. The Fed is only a ‘swap’ desk. The Fed can only create or destroy reserves in a swap of assets which is not a net increase of dollars in the banking system (not an addition of net financial assets). The Congress is the ‘outright’ desk. Only Congress can authorize deficit spending which is a net increase of dollars in the banking system (an addition of net financial assets). Only Congress can allow any action that would outright change the cumulative count of previously authorized deficit spending (the ‘national debt’). The Fed cannot usurp the ‘power of the purse’ from Congress, hence impounding the bonds during LSAP on the Fed’s balance sheet for a future unwinding (another swap that is ‘printing’ bonds back into the secondary market and simultaneously ‘unprinting’ reserves). So in reality a QR would just be the Fed going through the formality of getting permission to formally declare that the bonds were already redeemed.
If QR was done and the Fed redeems (debits) the Treasury bonds, there must be an equal and opposite ledger entry (credit) to replace them. In other words, something must replace these Fed assets (‘balance sheet repair’). Congress could authorize the Treasury to mint a $2.4T coin to be transferred to the Fed. Again, this would not be anything exotic nor unprecedented (The Gold Reserve Act of 1934 authorized the Fed to transfer all of its gold to the Treasury in exchange for gold certificates denominated in dollars). This would effectively replace the Treasury bonds (dollars with a coupon and a specific maturity date) with a coin (dollars without a coupon and a perpetual maturity date) without needing to create and enter reserves into the banking system (it was already done).
Here’s the best part. This QR, this redemption, this removal of $2.4T of previous ‘Debt Held By The Public’ will mark down the national debt from approx $20T to $18T, a TWELVE PERCENT DECREASE, not a bad day’s work. Furthermore, this partial removal of federal debt at the same time removes that financial specter which would give more fiscal policymakers the latitude to spend (and give more Americans the confidence to spend). Just the initial news leaks of this QR even being considered would encourage fiscal policy makers to quickly enact productive, counter-cyclical measures to boost the economy and get back to ‘serving the common good’ for a change (QR is a fiscal policyMAKER stimulus).
QR helps the Fed speed up the process of returning the Fed to business as usual (‘normalization’). After QR the Fed’s balance sheet no longer has all these Treasury bonds that were put there as a result of the credit crisis. This would be a dramatic signal that the US central bank is closer to being back to pre-crisis conditions, an important optic that helps assuage consumer concerns. As Ben Bernanke suggested in his BOJ speech, this QR, this ‘coordination’, between Congress and the Fed, would compliment future rate hikes and continued jawboning from Fed Chair Janet Yellen as per her March 15, 2017 statement that “the simple message is that the economy is doing well.”
Another point, that Treasury General Funds Account (GFA), where all federal spending is drawn (debited) from, that becomes overdrawn if federal gov’t spending exceeds taxes, which must be replenished (credited) with Treasury bond sales (which increases the national ‘debt’), that’s yet another bonus of doing a QR. Deficit spending was about $0.5T in FY16, so that means if you redeem $2.4T of the so-called national ‘debt’ in a QR anytime soon, that’s at least another four years of not hearing about the (nonsensical) ‘debt ceiling.’
QR is an idea that could be done quickly. As quickly as the Fed bailed out those banks in 2008. As quickly as the Fed facilitated AIG so they could honor their outstanding trades to Goldman Sachs. As quickly as AIG was made whole so they could send their Financial Products Desk executives on junkets to celebrate still getting bonuses. As quickly as those credit crisis measures back then that helped make some problems of the few go away, policymakers could right now make other problems of the many go away.
If the US did this, perhaps Japan, a country with a national debt of over ONE QUADRILLION yen, might follow suit. In a single day, the BOJ could announce a quantitative redemption amounting to approx 425 trillion yen of Japanese Government Bonds (JGBs) presently held on their balance sheet as of May 20, 2017. That would be an overnight reduction of their national debt of 43%…
Which would get people around the world thinking that the big bad national ‘debt’ problem might not be such a big bad problem after all…
(What MMTers have been saying all along)
Thanks for reading,
Eddie Delzio
eddiedelz@gmail.com
h/t CHRIS BROWN ‘bonds & battleships’ graph

What The Great Recession, The Great Depression, and the Previous Depressions in US History All Had In Common

When it comes to US federal government spending, we are constantly told how ‘unsustainable’ federal gov’t deficit spending is, yet the opposite is true. History has shown, time and again, that only US private sector deficit spending can ever reach a point of being ‘unsustainable’…

 

The reason is simple. It is because the federal gov’t is the issuer of dollars, and the rest of us are not. We are users of dollars, we all have to ‘get’ dollars from somebody, from somewhere, while the federal gov’t, the issuer of dollars, the sole monopoly ‘supplier’ of dollars, does not…

 

The one thing that the 2008 Great Recession, the 1929 Great Depression, plus the five previous depressions in US history (the ‘Panics’ of 1893, 1873, 1857, 1837, & 1819) all had in common, was that each of them were preceded (started) by sustained US private sector deficit spending. In addition, there was also that one thing in common that ended the Great Recession and those six other depressions. Each of them were followed (ended) by sustained federal gov’t deficit spending…

 

For the US private sector to avoid being forced to consistently deficit spend (forced to deplete savings which leads to US private sector deficit spending), the US private sector depends on the deficit spending of the US federal gov’t to consistently ‘supply’ newly-created US dollars, known as a ‘dollar add’ that finance newly-created federal gov’t demand (that finance ‘demand-side’ economic policies like new spending in conjunction with ‘supply-side’ policies like tax cuts). However, what we learned from the 2008 Great Recession was, just because the federal gov’t is deficit spending, just because federal gov’t deficit spending is supplying newly-created dollars entering into the banking system that increases non federal gov’t net financial assets (federal gov’t deficit = non federal gov’t surplus), that still doesn’t necessarily mean we in the US private sector are good to go…

 

The non federal gov’t is divided into two sectors, the Non federal gov’t / domestic and the Non federal gov’t / international. If in any given year the US trade deficit is as much as, or even larger than, the US budget deficit, that means all those newly-created federal gov’t deficit spending dollars that year, that ‘dollar add’, skipped right over the US private sector and went straight into the US bank accounts of overseas interests. Those dollars were promptly converted to foreign currency to pay overseas workers, factories, shipping, plus any other expenses and profits generated from that product sold in America (Note: US dollars never ‘leave’ the US banking system, however, the damage is already done because the entire production of said goods took place overseas, instead of here in the US, causing what is known as a US aggregate ‘demand leakage’). Those ‘dollar adds’ all going to the non federal gov’t / international sector, that’s the same difference, that’s just as bad, for the non federal gov’t / domestic (US private sector) as if the federal gov’t ran a surplus, meaning no newly-created federal gov’t deficit spending dollars, no ‘dollar-adds’ for the US private sector in that case either. This is EXACTLY what happened for thirteen straight years in a row from 1996 (cough *nafta* cough) to 2008…

 

Let’s check out exactly how those dollars from the federal gov’t to the non federal gov’t for the first of those thirteen years got divvied up. In 1996 the US budget deficit (total federal gov’t deficit spending funded by newly-created dollars which were a net increase of dollars entering into the banking system) was $107B. Meaning there was a $107B addition of net financial assets, a ‘dollar add’ to the non federal gov’t (the domestic US private sector and the international sector combined). So far so good for both non federal gov’t sectors in 1996, but the US trade deficit in 1996 was $170B. The US trade deficit in 1996 was larger than the US budget deficit in 1996. Meaning that the domestic US private sector paid $170B for imported goods that they bought from the international sector over and above the amount they were paid for goods that they sold to the international sector. That means that every penny of that $107B ‘dollar add’ from the federal gov’t all went to the non federal gov’t / international sector, and that news got worse for the US private sector in 1996. The difference (170 – 107 = 63), was a transfer of dollars, a ‘dollar drain’, that also went to pay the remaining balance, of $63B, for those imports, in 1996, from the non federal gov’t / domestic (US private sector) to the non federal gov’t / international (overseas sector). In other words, because the non federal gov’t / domestic (US private sector) had a ‘dollar drain’ of $63B in 1996, the effect on the US private sector was the same as if the US federal gov’t had run a $63B surplus in 1996. After 1996 comes the fatal blow to the non federal gov’t / domestic (US private sector). Those US private sector ‘dollar drains’, those US private sector deficits, continued (they were sustained), for thirteen straight more years. When looking at these sustained US private sector deficit figures below, these final fiscal year results, keep in mind that all six depressions in US history were preceded by sustained federal gov’t surpluses (same as saying that all six depressions in US history were preceded by sustained US private sector deficits):

$107B ‘dollar add’ from the federal gov’t in 1996:

$170B surplus to the non federal gov’t / International

(-$63B) deficit from the non federal gov’t / Domestic

_____________

$22B ‘dollar add’ from the federal gov’t in 1997:

$181B surplus to the non federal gov’t / International

(-$159B) deficit from the non federal gov’t / Domestic

_____________

(-$70B) ‘dollar drain’ to the federal gov’t in 1998:

$230B surplus to the non federal gov’t / International

(-$300B) deficit from the non federal gov’t / Domestic

______________

(-$126B) ‘dollar drain’ to the federal gov’t in 1999:

$329B surplus to the non federal gov’t / International

(-$455B) deficit from the non federal gov’t / Domestic

______________

(-$235B) ‘dollar drain’ to the federal gov’t in 2000:

$439B surplus to the non federal gov’t / International

(-$674B) deficit from the non federal gov’t / Domestic

_______________

(-$128B) ‘dollar drain’ to the federal gov’t in 2001:

$539B surplus to the non federal gov’t / International

(-$411B) deficit from the non federal gov’t / Domestic

______________

$157B ‘dollar add’ from the federal gov’t in 2002:

$532B surplus to non federal gov’t / International

(-$375B) deficit from the non federal gov’t / Domestic

______________

$378B ‘dollar add’ from the federal gov’t in 2003:

$532B surplus to non federal gov’t / International

(-$154B) deficit from the non federal gov’t / Domestic

______________

$412B ‘dollar add’ from the federal gov’t in 2004:

+$655B surplus to non federal gov’t / International

(-$243B) deficit from the non federal gov’t / Domestic

______________

$318B ‘dollar add’ from the federal gov’t in 2005:

$772B surplus to non federal gov’t / International

(-$454B) deficit from the non federal gov’t / Domestic

______________

$248B ‘dollar add’ from the federal gov’t in 2006:

$647B surplus to non federal gov’t / International

(-$399B) deficit from the non federal gov’t / Domestic

_______________

 

$161B ‘dollar add’ from the federal gov’t in 2007:

+$931B surplus to the non federal gov’t / International

(-$770B) deficit from the non federal gov’t / Domestic

_______________

 

$458B ‘dollar add’ from the federal gov’t in 2008:

+$817B surplus to the non federal gov’t / International

(-$359B) deficit from the non federal gov’t / Domestic

 

(H/T Chris Brown ‘Sectoral Balances info-graph of US Private Sector Dollar Drains & Dollar Adds Since 1992′)

We all remember what happened in 2008. Policymakers quickly ended those significant amounts of sustained non federal gov’t / domestic (US private sector) deficits, and ended the Great Recession with even more significant amounts of sustained US federal gov’t deficits (sustained US private sector surpluses), the same that was done to halt the previous six depressions:

$1.413T ‘dollar add’ from the federal gov’t in 2009:

$544B surplus to the non federal gov’t / International

$869B surplus to non federal gov’t / Domestic

_____________

$1.294T ‘dollar add’ from the federal gov’t in 2010:

$636B surplus to the non federal gov’t / International

$658B surplus to non federal gov’t / Domestic

______________

$1.300T ‘dollar add’ from the federal gov’t in 2011:

$726B surplus to the non federal gov’t / International

$574B surplus to the non federal gov’t / Domestic

_______________

$1.087T ‘dollar add’ from the federal gov’t in 2012:

$730B surplus to the non federal gov’t / International

$357B surplus to the non federal gov’t / Domestic

_______________

2013 to present: The non federal gov’t /domestic (US private sector) deficits have returned again, but the accumulated amount of US private sector surpluses since 2009 until 2013 (+$1.770T) is still safely far away from the level of accumulated US private sector deficits prior to the 2001 recession (-$1.787T) and the critical level of accumulated US private sector deficits prior to the 2008 Great Recession (-$2.754T)…

 

Keep in mind that US trade deficits are not to blame. US trade deficits are good. It is better that the US leads the innovation of new goods & services, while most of the factory floor work is delegated elsewhere. It is better that the US depends less on export-led growth and that the US depends more on organic, consumer-led growth (which inoculates you better from economic downturns). However, like the saying goes, ‘It’s not what you make, it’s what you keep’, and the same goes regarding US trade deficits. It’s not what the federal gov’t makes (how many ‘dollar adds’ they are creating into banking system existence), it’s how much the non federal gov’t / domestic (US private sector) keeps…

 

From 1996 to 2008, the US private sector kept nothing, and even worse, sustained deficit spending by the US private sector kept up. In the post-gold standard, post-nafta, modern monetary system, policymakers need to understand that the federal gov’t must overcompensate for those US private sector deficits that larger US trade deficits cause. Policymakers with outdated gold standard mentality fear those US trade and US budget ‘twin’ deficits, and they believe that they should bring them both down, but that is out-of-paradigm thinking. Policymakers need to ‘use’ the positive effects of US budget deficits to control the negative effects of US trade deficits. What really happened prior to the 2008 global financial credit crisis was that, in order to continue lifestyles that they had grown accustomed to, the non federal gov’t / domestic (the US private sector) had no choice but to keep deficit spending year after year (first borrowing against their dot com stocks and then against their home equity) in lieu of no ‘dollar adds’ from the federal gov’t. UNLIKE the deficit spending of the federal gov’t (the issuer of dollars), the deficit spending of the non federal gov’t / domestic US private sector (the users of dollars) does have a real and attached actual debt. Counter-intuitive to mainstream thought, THAT is the deficit spending which is unsustainable…

 

P.S. That was the not-too-distant past. In the not-too-distant future, policymakers may enact a ‘US Federal Balanced Budget Amendment’. Meaning if policymakers actually do this, then they think the federal gov’t (the issuer of dollars) which only needs to balance their economy, should instead be treated the same way as a household (the users of dollars), which only needs to balance their budget. A US federal balanced budget amendment, if passed, would legislate, or in other words, would guarantee, sustained US private sector deficits (and now you know what THAT could mean).  

 

Thanx for reading,
eddiedelz@gmail.com

The Hypothetical US National Debt v. The Actual US National Debt

 

The Hypothetical US National Debt: The FEDERAL GOV’T is hypothetically in debt of $19T, but it is actually zero because all those outstanding US Treasury bonds are denominated in fiat (no longer backed by gold) dollars. The federal gov’t is the sole issuer of dollars. Those US Treasury bonds are obligations, yes (they are backed by the full faith and credit of the federal gov’t); they are liabilities, sure (the federal gov’t promises to pay semi-annual interest and pay back the principal at maturity); but a ‘debt’, no. For example, IBM has liabilities to pay dividends on all of the outstanding shares of IBM stock; however IBM, the issuer of IBM stock, is not in actual debt of IBM stock. Ask any accountant and they will confirm that all debts are liabilities but not all liabilities are debts, nor does IBM have a ‘budget’ (any constraint whatsoever) of how many shares of IBM it can issue.

 

The Actual US National Debt: The NON FEDERAL GOV’T is actually in debt of about $30T, and that’s a real debt because the non federal gov’t (you, me, all households, all businesses, all local and state gov’t) are not issuers of dollars. We are users of dollars, meaning that unlike the issuer of dollars, when we borrow dollars to deficit spend, there is a real debt attached. The reason being, because we are only users of dollars, the attached debt we take on when deficit spending is denominated in a currency that we cannot issue, and why unlike the federal gov’t, the issuer of dollars, we are going into actual debt. For example, if IBM, a user of dollars, sold bonds for dollars, that is IBM going into actual debt; however, if IBM, the issuer of IBM stock, sold IBM shares for dollars, that is not IBM going into debt, it is a different paradigm.

 

Furthermore, when any US local gov’t, a user of dollars, or any US state gov’t, also a user of dollars, sells bonds denominated in dollars to deficit spend, they are going into actual debt because they are not the issuer of dollars; unlike the US federal gov’t, when they sell bonds denominated in dollars to deficit spend, they are not going into actual debt because they are the issuer of dollars. Groupthink does not see this difference. Mainstream thought still sees the federal gov’t, the issuer of dollars, as being the same as a household, a user of dollars. The Modern Monetary Theory (MMT) enlightenment is the realization and understanding of these two separate paradigms.

 

Here’s a breakdown of the Actual US National Debt:

$12.7T of US household debt (most of that, $8.6T is mortgage debt, plus $1.3T in student loans, $1.1T in auto loans, and the balance is in credit card or other consumer debt).

$12.8T of US business debt (outstanding non-financial corporate bond market).

$3.7T of US local & state gov’t debt (outstanding municipal securities bond market).

 

Takeaway: There is no federal gov’t debt to worry about, and for all of the 50 US state governments combined, the median debt-to-GDP ratio is an easily-serviceable 2.4%.

 

P.S. The Actual US National Household Assets (gross worth) was approx $100T in Q4 2015 (adding that household debt back to $86T of US household net worth). Factor in household, business, plus local, state & federal gov’t assets and you’re looking at Actual US National Assets in the quadrillions.

That’s a lot of Benjamins.
Happy Spring,

 

 

eddiedelz@gmail.com

Modern Monetary Theory (MMT) Will Be On The Right Side of History

Perhaps a bit of the 2016 election was some of the 1896 election history repeating itself:

 

In The Wonderful Wizard of Oz, (the American children’s novel, not the movie), the ‘cowardly lion’ character was based on William Jennings Bryan. The entire story, published in 1900, and written by author L. Frank Baum, was a political allegory. Officially, any similarities of the book and actual events was a ‘coincidence’ (Just like all episodes of South Park open with the tongue-in-cheek disclaimer that “All characters and events in this show – even those based on real people – are entirely fictional”). While writing the book in 1896, Baum had been a political activist and wrote on behalf of William McKinley, the Republican candidate for president in that year’s election. McKinley ran on a platform calling for prosperity for everyone through industrial growth, high tariffs on imports, and the continuation of the gold standard…

 

McKinley’s opponent was William Jennings Bryan, the Democratic candidate for president, who campaigned for the average working man against the rich, and he blamed the rich for impoverishing America, by intentionally limiting the money supply (by keeping just gold as the only metal backing of the dollar). Bryan and his followers, called ‘Silverites’, wanted a bimetallic-standard redux (a return of silver) with it tied to gold at a 16:1 conversion rate. Bryan argued that restoring silver, which was in ample supply, if once again coined into money, would restore prosperity while undermining the illicit power of the ‘big-city business owners’ and the ‘money trust’. Bryan’s moralistic rhetoric included his crusade for ‘reflation’ (a slight and intentional, federal-gov’t orchestrated inflation, generated by an increase in money supply by including silver with gold). Bryan convinced many that the ‘Free Silver’ movement was the best solution that would get more purchasing power into the hands of consumers and ending frequent depressions caused by the deflationary shortage of dollars due to the monetary constraint of the gold standard. Silver, or the ‘people’s money’ as it was referred to in his politically-charged speeches, became increasingly associated with populism, unions, and the fight of ordinary Americans…

 

Fast forward to today, MMTers (enthusiasts of Modern Monetary Theory) are certainly not calling for currency to be backed by metals, but the main themes of William Jennings Bryan’s presidential campaign do rhyme with the MMT movement (actually it is more like an ‘enlightenment’ than a movement). Which is that we need to pull the curtain back and expose the facade that the federal gov’t is monetarily ‘constrained’ (federal taxes are not actually needed for spending); that there is nothing to worry about if inflation is ‘slight’ (is contained to < 2% / yr); that policymakers could easily get desperately-needed purchasing power into the hands of consumers; and finally, that despite the group-think narrative otherwise, we have the financial means already at our disposal to solve many of the country’s (perhaps most of the entire world’s) problems…

 

To be fair, in 1896, the Republican Party steadfastly opposed Democrats and their silver movement, arguing that the best road to national prosperity was ‘sound money’, backed only by gold, which they felt was crucial to continued success in international trade. Republicans pleaded that by adding silver, that just meant guaranteed higher prices for everyone, not just for farmers and the steel workers who needed the extra cash. Republicans criticised William Jennings Bryan by arguing that the real net gains of his plan to spur the economy would chiefly go the silver interests (who Republicans claimed Bryan was cowardly shilling for)…

 

Despite William Jennings Bryan’s inspired campaign effort and his impassioned ‘Cross of Gold’ speech (“We will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold”), the ‘Silverites’ lost to William McKinley in the 1896 election. By 1900, the silver market had completely collapsed. The gold dollar was declared the standard unit of account and a gold reserve for government issued paper notes (existing legal-tender greenbacks) was established…

 

However, in a nod to William Jennings Bryan (in a nod to his voters and to see if maybe he was right), silver dollar coins went back to being legal tender. Also included as legal tender were silver certificates (paper bills that on demand could be redeemable to silver dollar coins). Some silver standard countries began to peg their silver coin units to the gold standards of the United Kingdom and the United States, but both Bryan’s ultimate goals to become US president and to garner national / worldwide support for the continued acceptance of silver failed miserably. In short, throughout American history, in the trials of remaining as an additional backing of currency, silver had its fits and starts and simply came up short. A centuries-long era of silver as a world currency was ending. Bryan also lost to McKinley a second time, in the 1900 US presidential election (McKinley was assassinated six months into his second term and succeeded by Vice President Theodore Roosevelt), and Bryan again lost the 1908 US presidential election to William Howard Taft. Meanwhile, other countries moved away from silver and began adopting only a gold standard. By 1910, only China and Hong Kong remained on any kind of silver standard…

 

Getting back to the book The Wonderful Wizard of Oz, why was William Jennings Bryan portrayed as the ‘Lion’? Most likely it’s because he roared tirelessly like a lion. At the age of 36, Bryan became (and still remains) the youngest presidential nominee of a major party in American history. In just 100 days in the 1896 campaign, Bryan gave over 500 speeches to several million people. His record was 36 speeches in one day in St. Louis. Why a ‘Cowardly Lion’? Politics makes strange bedfellows and Bryan often found himself in alliance with the same folks he roared against. For example, while supported by William Randolph Hearst, plus other powerful figures in the silver mining industry, Bryan also associated with industrialist Andrew Carnegie, as well as others who had fought against silver, and for that, the press mocked Bryan as an indecisive coward…

 

Other metaphors in the book include ‘Dorothy’, who was the naïve, young and simple person. She was all of us, the American people at that time, led astray and seeking a way back home…

 

The ‘Scarecrow’ was the wheat and cotton farmers and the ‘Tin man’ was the blue collar industrial worker, especially those of the American steel industry. Both were overworked and both were poor debtors needing relief…

 

The four of them set off on the yellow brick road (the gold standard) towards OZ (the abbreviation for ounce as in a troy oz. of gold) in the hopes of adding silver to the gold standard, at a conversion rate of 16:1. This rate is represented by the four of them skipping twice to the left and twice to the right on the yellow brick road, meaning a total of sixteen (silver) steps equals one (gold) step forward…

 

The ‘Good Witch of the North’ represented pure kindness, an extremely gentle character, who stood against the oppression and subjugation of people. In the book, she deposed her predecessor, the Wicked Witch of the North, and because she was good, it renders her, the new Good Witch of the North less powerful, yet loved by her own subjects and others in Oz…

 

The ‘Wicked Witch of the East’ was the eastern moneyed class, mainly the banks. The banks (underwriters of bonds plus any outright bondholders) feared William Jennings Bryan’s plan because the effects of inflation would hurt them. In the book, the Wicked Witch of the East wears silver slippers unlike the movie that used ruby slippers (the movie is intentionally apolitical). After Dorothy deposes the Wicked Witch of the East (killed by Dorothy’s house landing on her), the dead witch’s silver shoes transfer to Dorothy and the Good Witch of the North tells Dorothy that “there is some charm connected with them.”…

 

The ‘Wicked Witch of the West’ was the mountain-states robber-barons, mainly the railroad monopolists and the gold-mining interests out west. Like banks in the east, the railroad monopolists were also creditors and feared any plan that would devalue the dollar, making their investments, denominated in greenbacks less valuable. In addition, gold mine owners feared any plan that would put silver mines back in business (more competition). In the book, the witches carry umbrellas, not brooms, and the witches are not sisters, they are not related at all, only that the witches are both leagued together to stop any plan that would mean a loss of their powers…

 

The ‘Flying Monkeys’ were Native American Indians that the Wicked Witch of the West used to harass anyone on her turf posing a threat. Why author L. Frank Baum would call them ‘monkeys’ in his book could be because Baum had a dark side as a hard-core, blood-thirsty racist. In several editorials for his local newspaper, the Saturday Pioneer, Baum recommended the total genocidal slaughter of all remaining indigenous peoples in America. “The Whites,” Baum wrote in 1890, “by law of conquest, by justice of civilization, are masters of the American continent, and the best safety of the frontier settlements will be secured by the total annihilation of the few remaining Indians, so why not annihilation?”

 

The ‘Wonderful Wizard of Oz’ was the scheming politician of green ‘Emerald City’ (greenback dollars). The Wizard uses publicity devices and tricks to fool everyone into believing he is benevolent, wise, and powerful when in reality he is a selfish, evil humbug. When Dorothy arrives, the Wizard can’t be bothered to see her (to consider adding silver), so to get rid of her, he tells her that he would help her if she killed the Wicked Witch of the West. The Wizard can’t do this himself because as he admits to Dorothy, “I’m a very bad Wizard”…

 

Dorothy does kill the witch, by melting her with plain water (the long held belief amongst major religions is that water is effective for purifying the soul and combating evil). When Dorothy returns, the Wizard isn’t pleased to see them again. He continues his scripted narrative, projected on a screen, until Toto pulls aside the curtain…

 

After Toto’s reveal, The Wizard is abashed and apologetic, and offers help to Dorothy and her friends. When the day comes to help Dorothy return back home, there is a mishap, and all seemed lost, until the Good Witch of the North appears. The Good Witch reassures Dorothy that she always had the power (“You had the power all along to return home to Kansas”) by simply clicking her heels together (meaning the country had the silver all along, and it could solve many of everyone’s needs, by simply jingling the silver coins).

 

The messenger, William Jennings Bryan (Bernie Sanders) fell on the wrong side of history…

…however…

Pulling back the curtain and revealing the macroeconomic reality (the MMT enlightenment), so that our federal gov’t can fully serve public purpose without constraint, will be on the right side of history.  

 

 

Thanks for reading,

eddiedelz@gmail.com

Q) Federal Taxes Don’t Fund Spending, right? A) Wrong.

Local taxes fund spending.

 

State taxes fund spending.

 

Federal taxes fund spending…however…* (see below)

 

The oft-abused phrase “Federal Taxes Do Not Fund Spending” is not entirely accurate. I don’t question anyone’s motive saying it, to be clear, I am 100% positive that each time it is said by an MMTer (Modern Monetary Theory enthusiast), no question it is to promote MMT. Federal gov’t DEFICIT spending (the spending that is not funded by taxes) was only 15% of total spending last year. Besides not being entirely accurate, saying ‘Federal taxes do not fund spending’ veers off course from that first of Seven Deadly Innocent Frauds, which states that it is incorrect to think that federal taxes “must raise funds through taxation”, and that it is incorrect to think that federal “gov’t spending is limited by its ability to tax” (7DIF pg 13). I interpret that as saying that because the federal gov’t is now spending fiat dollars, there is no longer any constraint on federal spending, nor any solvency risk. I don’t interpret that as saying that federal ‘taxes do not fund spending’, but as meaning that the federal gov’t, while it is taking in tax revenues, while it is indeed spending those funds, because it is the issuer of fiat dollars (instead of a user of gold backed dollars), those revenues, those federal taxes are NOT NEEDED to fund spending anymore, a big difference. ’Federal taxes do not fund spending’ is a deadly innocent misinterpretation of this MMT pillar…

 

‘Federal taxes do not fund spending’ is also a misinterpretation of the accounting construct on the consolidated balance sheets of the federal gov’t. When taxes are paid, yes, those dollars are ‘destroyed’, it’s a simple bank entry, a bank debit, a ‘dollar drain’, debited from the taxpayer’s account, but that’s only half of it, only one side of the seesaw. Rather than thinking that ‘dollar drain’ is a simple change of numbers on a spreadsheet, you should be thinking where are those dollars draining to; and more importantly, other than a taxpayer’s bank account balance, that federal taxation just ‘destroyed’ net financial assets (dollars in the banking system). Thanks to the consolidated balance sheets of the federal gov’t however, that debit of taxes creates an equal and opposite entry, a ledger posting, a credit (funded by taxes), to the federal gov’t, which in turn is immediately debited back, to someone else, a.k.a. ‘surplus spending’, the spending funded by dollars that DO NOT add net financial assets (that is not a net increase in the amount of dollars in the banking system). So rather than only seeing taxes as a ‘destruction’ (debit) of dollars out from the money supply, you need to also see it as an equal and opposite creation (credit) to the federal gov’t of previously-existing, or more significantly, as previously-Congressional-approved dollars; which are then subsequently ‘refunded’ back into the money supply (without Congressional approval), and instantly making whole those net financial assets, those dollars in the banking system being ‘destroyed’ by federal taxation…

 

In a post titled “Modern Monetary Theory (MMT) Critique”, Cullen Roche, founder of Orcam Financial Group, cites five MMT ‘flaws’, or in his words, the five ‘myths’ of MMT. As per John Biesterfeldt, creator of the popular Facebook website ‘Intro to MMT’, Cullen and others in his camp like economist Jan Hatzius of Goldman Sachs are smart guys and considered ‘MMT compliant’ (meaning they know what they are talking about and are seldom wrong). In his very first ‘myth’, Cullen takes aim at ‘taxpayers don’t fund anything’. By the third ‘myth’, Cullen makes this damning indictment: “(MMT) even goes so far as to create their own alternative reality wherein they consolidate the Fed into the Treasury to make their fantasy accounting world appear more accurate. They literally create a fictional world in order to make the flawed accounting look correct.” Cullen has a point there. MMTers that say ‘taxes don’t fund spending’ have simply waved bye bye to bookkeeping, to basic accounting reality. For example, when debating a so-called ‘Deficit Owl’, I was told, and I quote, “There’s no such actual tangible or concrete thing as surplus spending or deficit spending” unquote (why offline that person is now referred to as The Owl That Lost His Glasses). John Biesterfeldt, in response to another misguided statement that ‘US Treasury bond sales do not fund spending’, replied that “Treasury bond sales fill Treasury’s (General Funds) account at the Fed, and that (deficit) spending comes from that account”, the perfect answer, simply because it’s true. Tax revenues are also posted to this same General Funds Account, which is Treasury’s checking account at the central bank (which is just like your checking account at your bank that you use to fund your spending). Don’t take John’s word for it, go see for yourself, go to the website of the US Department of the Treasury, where it says that the “United States Treasury oversees the disbursement of payments to the public,” meaning the ‘United States Treasury’ is paying for the spending. Every year, on April 15th, when you pay your federal taxes due, you must make your check or money order payable to the ‘United States Treasury’, meaning your taxes fund that (surplus) spending. Sure, your taxes, your dollars, are ‘destroyed’, those dollars are debited, out from the banking system, and then ‘different’ dollars are issued (by the issuer of dollars) to pay for that spending, but that doesn’t mean your dollars were not credited to the Treasury, not credited towards surplus spending. At the very same time that your taxes are ‘destroyed’ on one ledger, your tax dollars also ‘destroy’, to the penny, an equal amount of federal gov’t deficit spending on another ledger. Your taxes reduce the amount of deficit spending. As MINETHIS1, another pure MMTer, has said repeatedly, without federal tax revenues, deficit spending would have been $3.8T in 2016 (20% of GDP), but deficit spending was only $0.5T in 2016 (3% of GDP) because taxes ‘destroyed’ the rest. The pure MMT thinking is that federal revenues like Treasury bond sales and taxes ARE NOT NEEDED to fund spending, not the nonsensical notion that they don’t at all. Another pearl from Cullen Roche: “The thing that gives you credit is primarily your assets and income. The same is true of a (federal) gov’t. A gov’t needs to finance their spending to prove to the private sector that they have credit. The fact that a central bank can issue money in perpetuity does not mean they don’t need income sources to finance their spending….The fact that they (The Bank of Zimbabwe) can’t run out of money doesn’t mean they never needed a revenue source.” Some MMTers that say ‘taxes don’t fund spending’ need to understand that IF they are interested in understanding pure MMT. Some won’t however, because these folks have co-opted MMT to advance their causes, to push a special interest, or to shill for a political movement. They aren’t promoting MMT. They are only promoting themselves (under the guise of promoting MMT). ‘Ober Meister’, commenting on a Facebook thread, explains why the ‘taxes don’t fund spending’ crowd says it that way: “Most people don’t use accounting identities, mathematics or even logic while reasoning. They use praxeology (metaphorical thinking and moral ‘framing’ like Orwellian gimmickry) to argue economic policy, using morality and ethics to derive conclusions instead of mathematics.” In other words, when saying ‘taxes don’t fund spending’, these MMTers mean well, but unfortunately they are not advancing MMT (they have no idea how ridiculous they sound to a non MMTer)…

 

All MMTers say that the federal gov’t deficit equals our surplus, which is true. They say that federal gov’t deficit spending funds our savings, which is absolutely correct. Federal gov’t deficits equal our surplus, agreed; federal gov’t deficits fund our savings to the penny, absolutely; and federal gov’t deficits fund our spending on things like paying our federal taxes or buying Treasury bonds, most certainly; but why do some MMTers have trouble saying that the other way around? In FY99, the US federal gov’t spent $1.704 trillion dollars and federal tax revenues were $1.827 trillion dollars, meaning that on top of federal taxes funding ALL federal spending in 1999, there was also a federal gov’t profit, a federal gov’t surplus, a federal gov’t ‘savings’ of $123B. So in that case, why do some MMTers hide their ‘sectoral balances’ chart and say that our deficits, that our federal taxes, didn’t fund those surpluses, didn’t fund those federal gov’t savings? Let’s take a closer look at the process using actual amounts from last year. In FY16, (Oct 1, ‘15 – Sept 30,‘16), the US federal gov’t spent $3.854 trillion (100%). Federal gov’t tax revenues (federal income tax, social security & medicare withholdings) was $3.267 trillion (85%), and the difference, $587 billion (15%), was deficit spending. Plug those percentages into the sectoral balances chart and it looks like this:

[G – T] (federal gov’t sector) = [S – I] + [M – X] (non federal gov’t domestic sector + non federal gov’t international sector)

At the beginning of the fiscal period, before any federal gov’t spending (G) or federal gov’t taxes (T), before any non federal gov’t domestic sector a.k.a. private sector savings (S) or investment (I), or any non federal gov’t international sector imports (M) or exports (X):

[Gov’t spending – Taxes] = 0

[(S)avings – (I)nvestment] + [iMports – eXports] = 0

(federal gov’t) 0 = 0 (non federal gov’t)

Then we have total federal gov’t spending of $100 (100%) before including any federal gov’t tax revenues (based on actual 2016 figures):

G – T = 100 – 0

If [G – T], the federal gov’t, equals 100 – 0, then by accounting identity it also equals [S – I] + [M – X], the non federal gov’t domestic plus the non federal gov’t international:

S – I  +  M – X = 100

(federal gov’t deficit spending) 100 = 100 (non federal gov’t surplus savings)…

Then we factor in total federal gov’t tax revenues of 85 (85%) with that total spending (based on actual 2016 amounts):

G – T = 100-85

S – I  +  M – X = 15

(federal gov’t deficit spending) 15 = 15 (non federal gov’t surplus savings)…

MMTers that say ‘taxes don’t fund spending’ get hung up on ‘the deficit spending is the beginning’, they insist that ‘federal gov’t spending comes first, BEFORE taxes are paid’ as shown above. Sure, this is true, no argument there, but that’s not the only perspective. Another way to look at it, step one, is that taxes defunds net financial assets; then step two, surplus spending refunds that decrease of dollars in the banking system; and step three, deficit spending funds increases of net financial assets. If you want to say number three comes first, like shown above, FINE, go ahead, but it really doesn’t matter, because once you step back from the picture, you will see that all three are part of huge cycle, an ebb and flow, a perpetual motion, a man-made economic ecology, inside our very own US dollar dominion. John Biesterfeldt: “I’m not crazy about the ‘govt must spend the currency into existence first’ argument,” adding, “It’s misleading…and I don’t think it squares with our history.” I agree, there is no ‘beginning’ or ‘end’ on this, just like on any other circle. Here’s the exact same circle again, except this time we show the total federal gov’t revenues being paid first:

G – T = 0-85

S – I  +  M – X  =  (-85)

Federal gov’t deficit spending of negative 85 (a.k.a. federal gov’t surplus of positive 85) = non federal gov’t surplus savings of negative 85 (non federal gov’t ‘dissavings’ of positive 85). In other words, a non federal gov’t ‘defunding’, an actual clawback, of net financial assets out from the non federal gov’t (the ‘destruction’ of dollars out from the banking system)…

As usual (as per the accounting construct of the Consolidated Balance Sheets of the US federal gov’t), any federal gov’t surpluses no matter the source (on-budget or off-budget), are immediately spent on-budget (credited towards day-to-day operations):

G – T = 85 – 0

S – I  +  M – X  =  85

The running balance is (federal gov’t deficit spending) 0 = 0 (non federal gov’t surplus savings). In other words, there was a non federal gov’t ‘refunding’ of net financial assets, that makes whole the previous claw-back, which reverts the running balances back to the same amount at the start of the fiscal period (the so-called federal gov’t ‘balanced’ budget)…

 

Finally, additional federal gov’t spending of $15 (15%), the remainder of total annual federal gov’t spending (based on actual 2016 figures):

G – T = 15 – 0

S – I  +  M – X  =  15

(federal gov’t deficit spending) 15 = 15 (non federal gov’t surplus savings). In other words, that 15% of total federal gov’t spending in 2016 (that deficit spending) is a ‘funding’ of the non federal gov’t as a result of an actual addition of net financial assets. Unlike surplus spending, deficit spending, and only deficit spending, adds dollars (funds additional dollars) to the banking system because to pay for deficit spending there is an issuance of new dollars PLUS there is an additional issuance, in the exact same amount, of new savings accounts denominated in dollars (a.k.a. Treasury bonds) handed over to the non federal gov’t …

     NOTE: As for the international sector, depending on the difference of iMports minus eXports (the US trade balance), the addition of net financial assets from the federal gov’t to the non federal gov’t gets whacked up within the non federal gov’t (between the non federal gov’t / domestic and the non federal gov’t / international). Of the 552B of dollars added to the banking system from federal gov’t deficit spending in 2016, the non federal gov’t / domestic (a.k.a. the US private sector) got a measly $49B and the non federal gov’t / international got a whopping $503B (more on this worrisome imbalance in greater detail below)…

     Same goes for the double-entry, ledger-book accounting system that all MMTers stand firmly behind. All MMTers agree that for every federal gov’t deficit, there is, by accounting identity, to the penny, a non federal gov’t surplus. This is absolutely correct. However, when talking about federal taxation, that DEBIT entry posted against the non federal gov’t, some MMTers then conveniently ignore the double-entry reality, saying that those dollars were ‘destroyed’, period. These MMTers don’t see federal taxation as a swap (a simple redistribution of assets). They are only looking at the reserve ledger, they only see that DEBIT, that ‘destruction’, that dollar ‘drain’ (taxes getting paid), but they don’t see that simultaneous, equal and opposite CREDIT entry posted to another federal gov’t ledger, which in turn is immediately debited (returned right back to the non federal gov’t, via surplus spending). As long as the federal gov’t is running annual budget deficits (as long as there is deficit spending once taxes have stopped funding surplus spending), federal taxes, at the end of the day, go right back from whence they came.

 

Stanley Mulaik, retired Professor Emeritus of Quantitative Psychology at Georgia Tech, who was on the fence about MMT claims that ‘revenues don’t finance spending’, wrote a letter to the Fed and asked about the specifics of Treasury bond sales funding deficit spending. James A. Clouse, Deputy Director, Division of Monetary Affairs at the Board of Governors Of The Federal Reserve System in Washington, D.C. wrote back. “Dear Mr. Mulaik,” the letter began, “Chair Yellen asked me to respond to your recent letter in which you raised questions related to federal deficits, the mechanics of Treasury debt auctions, and a set of ideas that has been popularized as ‘Modern Monetary Theory.’ On the question of the mechanics of Treasury debt auctions, there are a number of inaccuracies in the description of the process that you passed along based on the MMT website discussion.” Regarding funding federal gov’t deficit spending via Treasury bond sales: “When the Treasury has expenditures that exceed receipts, it typically must borrow in the public debt markets to cover the shortfall. The Federal Reserve, acting as fiscal agent for the Treasury, processes the instructions that result in payments flowing to the U.S. Treasury associated with new debt issues. The Federal Reserve debits the reserve accounts of the correspondent banks of the investors that have purchased new securities, AND THERE IS A CORRESPONDENT CREDIT TO THE RESERVE ACCOUNT OF THE U.S. TREASURY AT THE FEDERAL RESERVE (italics mine). The correspondent banks that have received a debit to their reserve account at the Federal Reserve then pass a corresponding debit to the deposit accounts of their customers that have purchased new Treasury securities. Finally, the Treasury effectively pays down the temporarily elevated balance in its reserve account at the Federal Reserve to cover the excess of expenditures over receipts. At the end of this process, reserves held by the banking system are unchanged and the Treasury has issued more debt to the general public to finance the deficit.” OK, as MMTers, we can argue that the Treasury doesn’t ‘borrow’ its own dollars. We can also argue that those Treasury bonds, because they are denominated in the same currency that the Treasury issues, are not actual ‘debt’ like during the gold standard era when those dollars were backed by gold, but don’t ever say ‘bond sales don’t fund spending’. Please go ahead and say ‘bond sales ARE NOT NEEDED to finance deficit spending’, yes; and that ‘bond sales ARE NOT NEEDED as a financing operation’, absolutely; but not that they don’t at all. This letter from the Fed goes for all federal gov’t revenues, not just dollars received from Treasury bond sales, but for dollars received from federal taxation as well. When talking about what happens to dollars that the federal gov’t receives from Treasury bond sales, that letter from James Clouse at the Fed also applies to dollars received from federal taxes: “The Federal Reserve, acting as fiscal agent for the Treasury, processes the instructions that result in payments flowing to the U.S. Treasury…” (When the federal gov’t receives any tax revenues), “…the Federal Reserve debits the reserve accounts of the correspondent banks who then pass a corresponding debit to the deposit accounts of their customers…” (those tax dollars are ‘destroyed’), “…and there is a correspondent credit to the reserve account of the U.S. Treasury at the Federal Reserve” (and there is an equal and opposite ‘creation’). “Finally, the Treasury effectively pays down the temporarily elevated balance in its reserve account at the Federal Reserve” (those taxes are then debited right out to fund surplus spending). “At the end of this process, reserves held by the banking system are unchanged” (same as when revenues from bond sales fund deficit spending). The important distinction between surplus spending and deficit spending is that the former does not add net financial assets and the latter is an increase of dollars in the banking system. When surplus spending (spending funded by taxes), the Treasury has NOT issued more ‘debt’ (assets) to the general public (spending funded by taxes is just a swap – no increase in dollars to the banking system – no addition of net financial assets – why no Congressional approval needed); and when deficit spending (spending not funded by taxes), the Treasury, in addition to the newly-created dollars (assets) issued to fund that deficit spending (actual ‘HPM’), has in addition, ALSO issued more ‘debt’ (assets) to the general public (an outright increase in dollars to the banking system – addition of net financial assets – Congressional approval needed). See 7DIF (FRAUD #3 PG 41). So to those MMTers that say ‘taxes don’t fund spending’, those federal tax dollars, when paid, are ‘destroyed’, sure; those taxes ARE NOT NEEDED to finance surplus spending, of course; and those taxes ARE NOT NEEDED as a financing operation, absolutely; but not that they don’t. If you say ‘taxes don’t fund spending’, you are not describing the monetary system nor MMT. Instead, what a pure MMTer says, because the federal gov’t is the issuer of dollars, bond sales and taxes, those revenues, ARE NOT NEEDED to fund spending. *Your* dollars (you are the user of dollars) are not needed to fund federal gov’t spending, because it’s *their* dollars (they are the issuer of dollars) funding spending. The MMT pillar is that *your* taxes (your dollars) are not needed to fund spending (not that they don’t). Here, Stanley Mulaik sums up why saying ‘taxes don’t fund spending’ is wrong, but also includes a consolation to some of those MMTers (who say it incorrectly, have no idea how foolish they sound, but are still on the right track): “Whether tax dollars no longer exist because they have left M1, were exchanged for reserve-settlement dollars, exist as central bank reserve-settlement dollars deposited in Treasury’s general fund account at the Federal Reserve bank…and then immediately exchanged at a correspondent bank back into other bank dollars to be spent back into the economy…does not change the rest of your (MMT’s) positions on fiat money and the values of humane treatment of your fellow man that allows.”

 

Let’s take an even closer look at our federal government’s central bank, the Federal Reserve. The Fed is part of the federal gov’t, or as they define it, ‘independent within the federal government’. That said, there are some characteristics of the Fed that lead many folks to believe (incorrectly) that the Fed is ‘private’. For example, even though it is part of the federal gov’t, the Fed is not capitalized by the federal gov’t. The way the Fed gets its equity capital is by private sector US banks being required to buy and hold non-voting shares in the Fed. Furthermore, some spending by the Fed (part of the federal gov’t) is not funded by the federal gov’t. Show me someone who thinks that we in the private sector do not fund federal gov’t spending at all, and I’ll show you someone who does not know (or does not like to mention the fact) that the Fed’s spending IS NOT funded through the congressional budgetary process. The Fed gets most of its revenues from the bonds it holds. Meaning the Fed pays for some its spending from the interest income of mortgage bonds held at the Fed, like for example, at the time of this writing, the $2T of mortgage-backed securities (MBS) that the Fed purchased during the Large Scale Asset Program (LSAP) and presently held on the Fed’s balance sheet. So to this day every time some folks in the private sector make a mortgage payment, a mortgage payment that includes interest expense servicing that mortgage, that interest, those hard-earned dollars, goes to where the mortgage is held, which right now has a one in six chance of being at the Fed. The Fed pays for its own spending with that interest income from the private sector (payments from the private sector to the Fed *literally* funded gov’t spending in 2016). Furthermore, any profits after funding the Fed’s expenses are handed over to the Treasury. Last year the Fed sent a record $97.7 billion in profits to the U.S. Treasury. Same as the private sector paying federal taxes due to the Treasury, but this time it’s the private sector paying mortgage interest due that also winds up at the Treasury, when the Fed paid that $97.7 billion, it was debited (‘destroyed’) on one side of the federal gov’t accounting seesaw. That triggered a credit (‘creation’) on the other side of the federal gov’t accounting seesaw, and was immediately debited right back to the private sector for on-budget expenditure (federal gov’t surplus spending). In other words, exactly the same as when you paid federal taxes last year, that $97.7 billion of Fed payments sent to the US Treasury (the same place you always make out your check to whenever paying US federal taxes) were ‘destroyed’ and simultaneously, to the penny, reduced the amount of federal gov’t deficit spending.

 

The paradigm difference between the gold standard era and the post-gold standard era is that federal gov’t revenues became obsolete as a federal gov’t financing operation. The federal gov’t, or any issuer of a non-convertible, free-floating (pure fiat) currency no longer needs revenues solely to fund spending in fiat currency like they used to in a bygone era when they were spending with a gold-backed dollar or any kind of pegged currency. In addition to funding spending, the federal gov’t now takes in tax revenues for much more important, modern priorities of a fiat monetary system. In a brilliant 1946 article “Taxes For Revenue Are Obsolete”, former Chairman of the Federal Reserve Bank of New York, Beardsley Ruml, wrote that the federal gov’t is “free of money worries and NEED NO LONGER (emphasis mine) levy taxes for the purpose of providing itself with revenue”. Note: Beardsley Ruml said they ‘need’ no longer (not that they ‘didn’t’ no longer). This article, so prophetic for its day, was the realization of the profound change in motion as a result of the federal gov’t transitioning from spending in gold-backed dollars to spending in pure fiat currency. This was the groundbreaking observation that the primary purpose of federal taxes was no longer to finance spending (not that they didn’t); that the financing function of taxation took a backseat to much more important functions, yet even to this day, over 70 years later, some MMTers still deadly and innocently misinterpret ‘taxes for revenue are obsolete’. In April 2010 (04/17/10) Dr. Bill Mitchell ‘billy-blogged’ about this article, arguing (titling the post) “Taxpayers Do Not Fund Anything”. I respectfully disagree, and my guess former Fed Chair Ruml would as well. Fact: Of total federal gov’t spending ($3.854T in FY16) federal taxes funded 85% ($3.267T). The key words in that prophetic 1946 Beardsley Ruml piece is ‘need no longer’ (the basis for today’s MMT pillar that ‘taxes are no longer needed to fund spending’). The point of saying ‘taxes for revenue are obsolete’ was for us to understand that federal taxes in 1946, and to this day, for any monetary sovereign, need no longer constrain spending for that common good (not that they don’t fund that spending). Fed Chair Ruml (rolling in his grave every time someone says it wrong) meant the notion that taxes are only needed to fund spending is obsolete because federal taxes are now more importantly needed “1) To stabilize the purchasing power of the dollar; 2) To express public policy in wealth redistribution with progressive income taxes; 3) To subsidize or penalize various industries; 4) To assess the costs of national benefits such as highways and social security.” (Read #4 again, does that sound like Ruml meant that Taxpayers Do Not Fund Anything?) Since 2010 however, Dr. Bill Mitchell has changed his ‘Taxpayers Do Not Fund Anything’ tune a little. In October 2014 (10/14/14) he wrote, “A consequence of this (when President Nixon abandoned gold convertibility in 1971 and ended the system of fixed exchange rates) is that governments that issue their own currencies no longer have to ‘fund’ their spending, they never need to ‘finance’ their spending through taxes or selling debt to the private sector.” Did he say the federal gov’t DOESN’T issue their currency to fund their spending ? No, he said they NO LONGER have to, that’s a big difference. Did he say the federal gov’t DOESN’T finance their spending through taxes? No, he said they never NEED to, another big difference. In other words, for any non-convertible free-floating (pure fiat) currency-issuing governments such as Australia, Britain, Japan and the United States, federal taxation, as a financing operation, took a back seat (not that it ended). In a July 2017 Real Progressives broadcast, when prompted to talk about “his blog post about taxes not funding anything”, Dr. Bill Mitchell passed. My guess why, is what Dr. Mitchell, the Chair in Economics and Director of the Centre of Full Employment and Equity (CofFEE), an official research center at the University of Newcastle, had said earlier in the show. Which was that he, like Dr. L. Randall Wray and Dr. Stephanie Kelton (professors of Economics at the University of Missouri–Kansas City) “has an ‘academic’ background in MMT, while Warren Mosler, doing his thing in the financial markets, has a ‘commercial’ background in MMT.” Dr. Mitchell says that is what he calls “the missing link” that brought Warren Mosler and the three economics PHDs together in alliance as proponents of MMT. Why have MMT academics like Dr. Mitchell, Dr. Wray and Dr. Kelton said “Taxes Do Not Fund Anything”, but why does Warren Mosler, the one without the Ph.D in economics, NEVER say “Taxes Do Not Fund Anything”? Perhaps it is because what Dr. Mitchell also said in that same RP broadcast. He said that Warren Mosler (with ‘only’ a B.A. degree in economics), has actual “commercial knowledge of the inner workings of banking, the interactions between the banks, and the central banks, while those with only a mainstream economics background neglects all of those.” Warren Mosler wisely never says “Taxes Do Not Fund Anything” because it neglects some of those inner workings and interactions that anyone else with actual ‘commercial’ (read: more than just classroom) experience fully understands.

 

In a 02/20/17 YouTube video, Mike Norman says ‘federal taxes do not fund spending’, using the Monopoly board game analogy, saying that “it’s the same in real life.” His rationale is that The Player (private sector) taxes do not fund The Bank (federal gov’t) spending because “basically you are just giving back money that was already distributed by the game.” True, Player taxes did not fund that original spend (the $1500 in Monopoly Money that The Bank gives The Player at the start of the game), but that was Bank deficit spending. Taxes don’t fund deficit spending, taxes fund surplus spending. Deficit spending adds money (net financial assets) that is an increase of the amount of Monopoly money in the game (an increase of dollars into the banking system). So yes, Player taxes didn’t fund the initial Bank deficit spending; however, Player taxes fund subsequent Bank surplus spending. For example, if a Player then rolls the dice and lands on ‘Chance’ and has to pay a $200 tax, that Player tax payment (debit entry on one spreadsheet) is an equal and opposite Bank receipt (credit entry on another spreadsheet). That Player tax of $200, that ‘destruction’ of net financial assets, is only the half of it; it is also a simultaneous $200 credit, a ‘creation’, at the Bank. If the next Player lands on ‘GO: Collect $200’ the Bank does not need to deficit spend (add net financial assets), the Bank immediately recycles and spends that $200 (federal gov’t surplus spending). The Bank is not adding net financial assets when it surplus spends (because it is funded by Player taxes). Bank surplus spending of that $200 makes whole the previous $200 reduction of Player net financial assets when the tax was paid. The Player taxes fund The Bank surplus spending but the more important point, the MMT pillar, is that The Player taxes are NOT NEEDED to fund spending. Collecting taxes in Monopoly money to fund surplus spending in Monopoly money is no longer the highest priority for The Bank (for any modern monetary sovereign in the post gold standard era). The Bank (the issuer of Monopoly money) can never go broke and the game never ends because The Bank runs out of Monopoly money (fiat dollars). The game ends because Players run out of money. As per Monopoly rules, “…if The Bank runs out of money it may issue as much more as may be needed by merely writing on any ordinary paper” (same as the federal gov’t keyboarding in more money via deficit spending after getting Congressional approval). Meaning that The Bank, once it has run out of tax revenues that fund surplus spending, can deficit spend and add Monopoly money (net financial assets) to the game (add dollars into the banking system) without constraint (no such thing as the federal gov’t being in debt of their own fiat currency). The game ends when all but one of the Players runs out of Monopoly money, which is inevitable because the Players (user of Monopoly money) do have a constraint when they deficit spend (Players are adding on actual debt). The message that federal taxes are NOT NEEDED to fund spending is that Players (user of dollars), unlike The Bank (issuer of dollars), have a corresponding debt burden attached to their deficit spending. Counter-intuitive to mainstream thought, it is Player (non federal gov’t) deficit spending, not Bank (federal gov’t) deficit spending that is actually unsustainable, and ‘it’s the same in real life’.

 

In September ‘17 (09/17/17) when the ‘taxes don’t fund spending’ issue started boiling over across the MMT websites and chat rooms (when a MINETHIS1 website got burned down and Real Progressives started getting booted from chat rooms), Mike Norman posted another YouTube video called “The Proof That Taxes Don’t Fund Spending.” In this video he says, “Regarding the argument, this nonstop debate everywhere about federal taxes, I’m an MMT guy, and I say that, it’s not that I just say it, the reality is, that taxes do not fund federal gov’t spending. Here is a very simple explanation, a thought exercise that I want everybody who disagrees with me, my factual claim that taxes do not fund spending. I want you to think about this very hard and very deeply. It is very logical, it is not hard, you don’t need a college education, ok, here we go. You can’t drain a swimming pool, until you fill it up first. You can’t pay your taxes until the gov’t spends them into existence first. For those of you who think taxes fund spending, that would be like you thinking that the water in my swimming pool is what keeps my lawn green but you gotta fill up the pool with water first! Where did the water in the pool come from? You gotta fill up the pool first before you water the lawn. The water in my pool is what keeps my yard green…C’MON IT’S VERY SIMPLE PEOPLE”. Before I retort to that, full disclosure, I personally like Mike Norman. As I wrote in my book ‘The National Debit’, it was a Mike Norman YouTube video where I first got wind of MMT, so for that alone, I will always be grateful to him. In addition, I took Mike’s FX trading course (not the ‘MMT Trader’ course) which I thought was superb, and I would highly recommend to anyone (however I wouldn’t advise anyone to touch his ‘MMT Trader’, a glorified double-down system, even with a ten-foot pole). After seeing this ‘Proof That Taxes Don’t Fund Spending’ YouTube video, I commented, quote, Mike, there are two ways the pool gets water or the lawn gets water: 1) From a faucet and 2) excess water evaporates and comes back down a.k.a. ‘rain’. Saying ‘taxes don’t fund spending’ isn’t MMT, it is like saying rain doesn’t land in pools, or that rain doesn’t water the lawn (and completely ignores the accounting constructs from the old system, albeit unnecessary, yet still in place). Saying taxes ARE NOT NEEDED to fund spending (to fill the pool or to water the lawn) is MMT, unquote. I didn’t finish there. Knowing that Mike Norman prides himself on being a Daily Treasury Statement ‘expert’, I threw in this last line: “Don’t take my word for it Mike, see the Daily Treasury Statement under Federal Tax Deposits (the ‘rain’) in addition to the bond sales (the ‘faucet’) that go into the Treasury’s account at the Fed, the same account where all federal spending is drawn from.”

 

While a Ph.D. candidate in 1998, Stephanie Bell wrote a paper entitled ‘Can Taxes and Bonds Finance Gov’t Spending?’ In this paper, she describes federal financing on the reserve accounting level (the banks and the Treasury department), not on the policy level (everybody else). As per Stephanie Bell (now Dr. Stephanie Kelton) “Modern federal governments finance all of their spending through the direct creation of new ‘High Powered Money’.” I agree that all spending is ‘newly created money’ but I respectfully disagree that all spending is ‘high powered money.’ As per Beckoning Frontiers, written by Marriner Eccles, Chair of the Federal Reserve from 1934 – 1948, who coined the term High Powered Money (HPM), prior to The 1951 Fed-Treasury Accord, the Treasury, who then also didn’t quite fully understand the difference between ‘HPM’ and ‘newly-created money’, sold its bonds either to non-bank investors paid for with previuosly ‘existing money’ (meaning newly created prior to the destruction of already-existing private sector money) that decreased net financial assets from the banking system; OR directly to the Fed, paid for with newly-created money that added net financial assets to the banking system. Modern federal governments finance all of their spending through the direct creation of new money (because taxes ‘destroy’ dollars), but all of these newly-created monies funding total federal gov’t spending are not HPM. What she’s missing there is whether the newly-created money funding federal gov’t spending IS a net increase of dollars in the banking system (what I consider actual HPM), or is not an addition of net financial assets (is not HPM). To be fair, another quote in this 1998 paper is that taxes “mask a more pragmatic operation”. That’s perfect. The key word there is “mask”. My takeaway from that line is that Stephanie Bell correctly concludes that it is just a formality that taxes and bonds are a financing of spending operation only; that federal gov’t revenues are also a maintaining of price stability and a maintaining of currency demand operation (which most can’t understand because that financing operation, that ‘mask’, is all they see). Stephanie Bell is an MMT champion calling for policymakers to stop seeing “taxation and bond sales as financing operations”, but Stephanie Kelton also like to say ‘taxes don’t fund spending’, which slightly veers off course from that. Even worse, this ‘taxes don’t fund spending’ line confuses some MMTers even more who believe that she means that ‘taxes and spending are totally separate operations’, yet another MMT misinterpretation, this time of Stephanie Kelton herself. In her paper, Stephanie Bell makes no such claim, in fact the opposite, she wrote about “the coordination of taxation and bond sales”, and far from being separate functions, she adds, “Treasury CHOOSES (emphasis by Stephanie Bell) to coordinate its operations, transferring funds from T&L accounts (Treasury accounts created at commercial banks to accept electronic tax and bond collection payments which is also eventually where the Treasury makes all federal spending payments), draining reserves AS IT SPENDS (emphasis by Stephanie Bell) from its account at the Fed.” An inconvenient fact that doesn’t fit the ‘taxes don’t fund spending’ narrative is that it is US law that the Treasury must be funded (reserves must be ‘increased’) in order for the Treasury to spend (so that reserves can be ‘decreased’). The Treasury account at the central bank, the Federal Reserve bank, is called the Treasury General Account (TGA) where federal revenues go after collection from one commercial bank before going right back to another commercial bank to make federal spending payments. In other words, after getting ‘destroyed’ (debited) from your bank account, the same exact amount is ‘created’ (credited) to the same exact Fed account where ALL federal spending comes from. She concludes that “This interdependence is not de facto evidence of a ‘financing’ role of taxes and bonds.” In other words, taxes and bonds sales (revenues) are obsolete, that they actually are not needed to finance spending. That doesn’t mean they don’t. It means that taxes and bond sales (revenues) are presently financing surplus & deficit spending but they don’t have to, period. If Dr. Stephanie Kelton or any MMTer today says ‘taxes don’t fund spending, they are jumping ahead. If you say ‘taxes don’t fund anything’ before MMT has taken hold, before being accepted by the mainstream, before that sorely-needed renovation of the monetary system that removes all remnants of the old system, until then, until policymakers no longer sees those Treasury bonds as ‘debt’, you still need to include those crucial words, ‘taxes ARE NOT NEEDED to fund spending’. If you say otherwise, anyone outside the MMT circle will assume that you do not understand the federal gov’t accounting construct that, even though we left the gold standard era, there are still old processes in place. Such as, when federal tax revenues end (when taxes are no longer funding surplus spending), that is the changeover from surplus spending to deficit spending. From spending that doesn’t need congressional approval (spending that doesn’t raise the ‘debt ceiling’), to spending that does. Most people understand that. If you say ‘taxes don’t fund spending’, most people will assume you don’t understand that, and they won’t pay much attention to whatever else you have to say. For example, in 2016, when Dr. Stephanie Kelton, chief economist for the Democrats on the Senate Budget Committee in Washington, said ‘taxes don’t fund spending” to presidential candidate Sen. Bernie Sanders, he was like ‘WTF?’ That’s why we didn’t hear anything about MMT from Bernie during the 2016 election campaign. That’s why it wasn’t Bernie, but another candidate, eventual winner Donald J. Trump (the politician without the MMT economist) that actually got the closest to starting an MMT discussion with the now-famous words, “This is the United States gov’t…First of all, you never have to default because you print the money, I hate to tell you, OK?” And that’s why Bernie, even to this day (the politician with the MMT economist), still thinks and routinely says that “the federal gov’t must first raise tax revenue to pay for policy.” (Those will be trick questions in future versions of Trivial Pursuit). To be fair, on 07/19/17 President Trump said “But single-payer will bankrupt our country, because it’s more than we take in for just health care…so single-payer is never going to work, but that’s what they’d like to do” (but I’m talking about during the 2016 campaign, not after). As per Logan Mohtashami, senior loan officer in his family-run mortgage company, AMC Lending Group, “One of the reasons why MMT is not popular is because MMTers can’t speak to people in general…It’s difficult to get people to understand that deficits are not bad, but if you’re trying to scare them into it (with a negative drumbeat of ‘recession theory’ / accusing them of being ‘murderers by proxy’ / badgering them with ‘taxes don’t fund spending’), it’s not going to work…Sure, that works for the group of people you’re talking to, because they are using their ideology to push an economic agenda, using fear to put views through, but that’s not the way macroeconomics works…The left wing people who listen to MMT people need to convince the masses that deficit spending is not a bad thing, and then talk about it from strength.” Logan Mohtashami is absolutely right. Bernie or any other candidate in the future with an MMT economist advising them should hammer away at their opponent’s ignorance of how a monetary sovereign works and then drive home a positive, ‘rates are low, we can deficit spend’, pro-growth message. Another suggestion, as per ‘Ober Meister’, “Argue to the general public that government needs to spend so that we do not fall behind China scientifically, technologically…play on their feelings of fear, greed, pride… that they would understand.” Don’t get me wrong, Dr. Stephanie Kelton is one of the great ones. I think that if there is ever an MMT Mount Rushmore National Memorial, Dr. Stephanie Kelton should be chiseled in right next to Warren Mosler, who I consider the greatest economic mind walking the planet right now. That said however, even the great ones do swing and miss sometimes, and I believe ‘taxes don’t fund spending’ is a miss. Surplus spending does not need congressional approval because taxpayers are funding surplus spending. The surplus spending distinction is that it has a deflationary bias (emphasis on ‘bias’ – this is not a rule – just one of many moving pieces in the economy that may or may not result in actual deflation), which is why fiscal policymakers of any federal gov’t (any issuers of currency) should not run surpluses (the ‘Clinton’ surplus triggered the ‘Bush’ recession and all six depressions were preceded by sustained federal gov’t surpluses). Federal taxes, that ‘dollar drain’ of dollars from the banking system, that ‘destruction’ (‘defunding’ of net financial assets), functions in tandem with spending, and this function is what determines the end of the line for surplus spending which makes whole the previous destruction (‘refunding’ of net financial assets). That is the point where the deflationary bias of surplus spending ends and the deficit spending (‘funding’ of net financial assets) begins. That is the line in the ledger book where the surplus spending stops being offset (stops being funded), by tax dollars that do not need congressional approval (because they already were approved before). That is the changeover to deficit spending funded by ‘borrowed’ dollars (an outdated facade from the bygone gold-standard era), but the big difference is, unlike taxes that fund surplus spending, where taxpayers receive nothing in return for paying taxes, buyers of federal ‘debt’ get something for their dollars (a US Treasury bond), so this part of the ‘financing’ process is a swap of assets in the banking system. Meaning that unlike surplus spending, those newly-created federal gov’t dollars that fund deficit spending PLUS the simultaneous addition of newly-created Treasury bonds result in a ‘dollar add’ into the banking system, an increase in net financial assets. Another distinction, the net addition of ‘newly-created’ dollars funding deficit spending, unlike the ‘already-existing’, ‘already-Congressional-approved’ dollars funding surplus spending, has an inflationary bias. This is why Fed Chair Eccles called deficit spending monies ‘high powered money’, why he feared HPM, and why he had a huge public spat with the Treasury and the White House over HPM (which he won, which the Fed gained independence in the ‘51 Accord, but it cost Eccles his job). To emphasize, deficit spending has an inflationary ‘bias’ (not automatic) because, as we saw, in the eight years after the credit crisis, even though the ‘debt’ was doubled (a lot of federal gov’t deficit spending), there wasn’t much inflation, because the inflationary bias of those deficit-spending dollars vaporized on impact. Regarding the Stephanie Bell paper, Intro to MMT website founder John Biesterfeldt concludes, “The whole thing is this: Reserves are destroyed upon receipt by the Fed, and newly created upon spending. That is the thrust of the paper, and I’m not disagreeing with that. It’s just an accounting thing; reserves don’t ‘exist’ in the interim between receipt and spending, so the reserves used to pay taxes cannot be used to spend. It’s an esoteric point, because the numbers do show up as an addition to Treasury’s account. I think that it’s important to understand what ‘taxes don’t fund spending’ really means, and I think the discussion should have been a useful exercise – but people are getting up in arms about it, instead of learning.” I agree, and fellow Intro to MMT member Chris McArdle also puts it well: “Federal taxes, as a matter of policy, not operations, can be properly understood to be funding spending when, as a matter of policy, they have been connected.” He adds, “That’s not a prescription, it is a description, and it is not at odds with the operational fundamentals, it illuminates how things actually function (or, at least, attempts to).”

 

The ‘taxes don’t fund spending’ line is a complete distraction from a larger issue, which is whether or not any net financial assets (federal gov’t deficit spending ‘dollar-adds’) going into the banking system are reaching the non federal gov’t / domestic, a.k.a. private sector. In 16 of the past 20 years, those dollars did not. In most of the recent years, the US private sector was forced to deplete savings +/or deficit spend while the non federal gov’t / international sector saved. In an October 2015 Seminar Series at the International and Comparative Law Center (ICLC), titled ‘Modern Money Theory: Intellectual Origins and Policy Implications’, Professor L. Randall Wray states that “Logically, the gov’t spends so you can pay taxes.” He adds that “the spending has to come first…what that means is taxes actually don’t ‘finance’ gov’t spending.” He is talking about DEFICIT spending, yes, taxes don’t fund DEFICIT spending, but what about subsequent SURPLUS spending (excuse me professor, why is it called SURPLUS spending)? With all due respect to Professor Wray, he too belongs on that MMT Mount Rushmore, but here he also veers off course from that MMT pillar that taxes actually ARE NOT NEEDED to ‘finance’ gov’t spending. Instead he groups both deficit and surplus spending as being the same, he says that ‘taxes aren’t funding spending’ and that’s where Randy Wray, another great one, also swings & misses because there are those major distinctions between federal gov’t surplus spending and federal gov’t deficit spending. Instead of confusing his listeners by saying “You can’t pay your dollar tax unless the gov’t provided some dollars” (excuse me professor, what if I borrowed the dollars from a bank to pay the tax?), perhaps Professor Wray, regarding gov’t spending, should say this: Just because the federal gov’t is deficit spending, just because federal gov’t deficit spending is supplying newly-created dollars entering into the banking system that increases non federal gov’t net financial assets (federal gov’t deficit = non federal gov’t surplus), that still doesn’t necessarily mean we in the US private sector are good to go, because the non federal gov’t is divided into two sectors, the Non federal gov’t / domestic and the Non federal gov’t / international. If in any given year the US trade deficit is as much as, or even larger than, the US budget deficit, that means all those newly-created federal gov’t deficit spending dollars that year, that ‘dollar add’, skipped right over the US private sector and went straight into the US bank accounts of overseas interests. Those dollars were promptly converted to foreign currency to pay overseas workers, factories, shipping, plus any other expenses and profits generated from that product sold in America (Note: US dollars never ‘leave’ the US banking system, however, the damage is already done because the entire production of said goods took place overseas, instead of here in the US, causing what is known as a US aggregate ‘demand leakage’). Those ‘dollar adds’ all going to the non federal gov’t / international sector, that’s the same difference, that’s just as bad, for the non federal gov’t / domestic (US private sector) as if the federal gov’t ran a surplus, meaning no newly-created federal gov’t deficit spending dollars, no ‘dollar-adds’ for the US private sector in that case either. This is EXACTLY what happened for thirteen straight years in a row from 1996 (cough *nafta* cough) to 2008. Let’s check out exactly how those dollars from the federal gov’t to the non federal gov’t for the first of those thirteen years got divvied up. In 1996 the US budget deficit (total federal gov’t deficit spending funded by newly-created dollars which were a net increase of dollars entering into the banking system) was $107B. Meaning there was a $107B addition of net financial assets, a ‘dollar add’ to the non federal gov’t (the domestic US private sector and the international sector combined). So far so good for both non federal gov’t sectors in 1996, but the US trade deficit in 1996 was $170B. The US trade deficit in 1996 was larger than the US budget deficit in 1996. Meaning that the domestic US private sector paid $170B for imported goods that they bought from the international sector over and above the amount they were paid for goods that they sold to the international sector. That means that every penny of that $107B ‘dollar add’ from the federal gov’t all went to the non federal gov’t / international sector, and that news got worse for the US private sector in 1996. The difference (170 – 107 = 63), was a transfer of dollars, a ‘dollar drain’, that also went to pay the remaining balance, of $63B, for those imports, in 1996, from the non federal gov’t / domestic (US private sector) to the non federal gov’t / international (overseas sector). In other words, because the non federal gov’t / domestic (US private sector) had a ‘dollar drain’ of $63B in 1996, the effect on the US private sector was the same as if the US federal gov’t had run a $63B surplus in 1996. After 1996 comes the fatal blow to the non federal gov’t / domestic (US private sector). Those US private sector ‘dollar drains’, those US private sector deficits, continued (they were sustained), for thirteen straight more years. When looking at these sustained US private sector deficit figures below, these final fiscal year results, keep in mind that all six depressions in US history were preceded by sustained federal gov’t surpluses (same as saying that all six depressions in US history were preceded by sustained US private sector deficits):

$107B ‘dollar add’ from the federal gov’t in 1996:

$170B surplus to the non federal gov’t / International

(-$63B) deficit from the non federal gov’t / Domestic

_____________

$22B ‘dollar add’ from the federal gov’t in 1997:

$181B surplus to the non federal gov’t / International

(-$159B) deficit from the non federal gov’t / Domestic

_____________

(-$70B) ‘dollar drain’ to the federal gov’t in 1998:

$230B surplus to the non federal gov’t / International

(-$300B) deficit from the non federal gov’t / Domestic

______________

(-$126B) ‘dollar drain’ to the federal gov’t in 1999:

$329B surplus to the non federal gov’t / International

(-$455B) deficit from the non federal gov’t / Domestic

______________

(-$235B) ‘dollar drain’ to the federal gov’t in 2000:

$439B surplus to the non federal gov’t / International

(-$674B) deficit from the non federal gov’t / Domestic

_______________

(-$128B) ‘dollar drain’ to the federal gov’t in 2001:

$539B surplus to the non federal gov’t / International

(-$411B) deficit from the non federal gov’t / Domestic

______________

$157B ‘dollar add’ from the federal gov’t in 2002:

$532B surplus to non federal gov’t / International

(-$375B) deficit from the non federal gov’t / Domestic

______________

$378B ‘dollar add’ from the federal gov’t in 2003:

$532B surplus to non federal gov’t / International

(-$154B) deficit from the non federal gov’t / Domestic

______________

$412B ‘dollar add’ from the federal gov’t in 2004:

+$655B surplus to non federal gov’t / International

(-$243B) deficit from the non federal gov’t / Domestic

______________

$318B ‘dollar add’ from the federal gov’t in 2005:

$772B surplus to non federal gov’t / International

(-$454B) deficit from the non federal gov’t / Domestic

______________

$248B ‘dollar add’ from the federal gov’t in 2006:

$647B surplus to non federal gov’t / International

(-$399B) deficit from the non federal gov’t / Domestic

_______________

 

$161B ‘dollar add’ from the federal gov’t in 2007:

+$931B surplus to the non federal gov’t / International

(-$770B) deficit from the non federal gov’t / Domestic

_______________

 

$458B ‘dollar add’ from the federal gov’t in 2008:

+$817B surplus to the non federal gov’t / International

(-$359B) deficit from the non federal gov’t / Domestic

 

(H/T Chris Brown ‘Sectoral Balances info-graph of US Private Sector Dollar Drains & Dollar Adds Since 1992′)

We all remember what happened in 2008. Policymakers quickly ended those significant amounts of sustained non federal gov’t / domestic (US private sector) deficits, and ended the Great Recession with even more significant amounts of sustained US federal gov’t deficits (sustained US private sector surpluses), the same that was done to halt the previous six depressions:

$1.413T ‘dollar add’ from the federal gov’t in 2009:

$544B surplus to the non federal gov’t / International

$869B surplus to non federal gov’t / Domestic

_____________

$1.294T ‘dollar add’ from the federal gov’t in 2010:

$636B surplus to the non federal gov’t / International

$658B surplus to non federal gov’t / Domestic

______________

$1.300T ‘dollar add’ from the federal gov’t in 2011:

$726B surplus to the non federal gov’t / International

$574B surplus to the non federal gov’t / Domestic

_______________

$1.087T ‘dollar add’ from the federal gov’t in 2012:

$730B surplus to the non federal gov’t / International

$357B surplus to the non federal gov’t / Domestic

     The real point, the ‘logical’ point, professor, isn’t whether or not private sector taxes are financing federal gov’t spending; it’s whether or not federal gov’t spending is financing the private sector…Class dismissed.

 

My biggest problem with ‘taxes don’t fund spending’ is the tone of it. Saying that dollars today are just like points on a scoreboard is an excellent analogy, but don’t take the analogies too literally. Dr. Kelton, yes, ok, the tickets (taxes) are ‘destroyed’ at the turnstile (the reserve ledger) but that doesn’t mean THEY AREN’T COUNTED. The stadium (federal gov’t) is ‘destroying’ (debiting) the taxes, but of course that 70,000 seat stadium is counting (crediting) them, counting the people (dollars), making sure they don’t let in too many (inflation). How does an MMTer say ‘taxes are only to control inflation’ but then also says taxes aren’t counted (aren’t funding surplus spending) with a straight face? Saying that taxes are simply ‘destroyed’ and do not fund spending is like saying that the gas (taxes) you put in your car doesn’t make the car go, only the wheels make the car go, and the gas doesn’t ‘fund’ acceleration because the gas is ‘destroyed’ in the engine. Saying that your taxes do not fund spending because they are ‘only points on a scoreboard’ is like saying to the football player that his touchdown didn’t put the seven points up. If some MMT academic pointing to her blackboard tries to tell that running back that he doesn’t understand how it works, that the points on the scoreboard change ‘via crediting accounts’ and that ‘they don’t come from anywhere’, that sweating, bleeding and exhausted player (someone who is interested in learning about MMT) who knows exactly who funded those seven points is not going to agree. (If that same MMT academic, realizing that existing processes of the old monetary system still exist, and instead chose not to lead with ‘taxes don’t fund spending’ but say something like ‘Look, the stadium no longer has any spending constraints, so no need to worry about the team running out of money, nor our scoreboard running out of points, so go ‘em Tiger!’, that player would approve). This schoolroom notion that federal gov’t spending is just dollars being ‘keyboarded in’, that it’s only just a ‘1’ and a ‘0’, and nothing more, oversimplifies what is happening in the real world. In a June 2017 Real Progressives broadcast, Warren Mosler said “if you were to pay your taxes with a bunch of old twenty dollar bills, the gov’t would take your money, give you a receipt, say ‘Thank You’ very much FOR FUNDING the last airstrike in Syria or whatever THEY DID WITH THE MONEY, and that money goes out the back door, into a shredder.” Mosler’s point there was not ‘taxes don’t fund spending’, it was that the users of dollars (you and I) are different from the issuer of dollars (the federal gov’t). When you or I receive dollars (a $20 bill), we USE those same dollars (that same $20 bill) for spending, whereas the federal gov’t does not, because the federal gov’t ISSUES new dollars for spending. Total federal gov’t spending in 2016 was $3.854T. Taxes ‘destroyed’ dollars in the banking system and new dollars were issued to fund all that total spending, but not all that total spending of $3.854T was deficit spending. Not all that total spending was a net addition of dollars in the banking system. In 2016 only $0.587T was deficit spending. What reduced the amount of total federal gov’t spending, funded by newly-created dollars, from $3.854T in 2016 to only $0.587T of deficit spending? The answer, surplus spending, funded by taxes, is obvious to most, including Mr. Mosler (except the MMT ‘academics’ that say ‘taxes don’t fund spending’). Taxes ‘destroy’ dollars, yes, so all federal spending is newly-created dollars, sure, but what these academics don’t see is a very important distinction, which is that ALL federal spending IS NOT adding net financial assets (IS NOT increasing dollars in the banking system). Only deficit spending (15% of total spending in 2016) adds net financial assets (actual “HPM”), and the newly-created dollars of surplus spending DOES NOT. Surplus spending doesn’t add net financial assets because surplus spending is funded by taxes (makes whole a previous ‘destruction’ of net financial assets). Only deficit spending adds net financial assets. Every fiscal year, the amount of federal gov’t deficit spending is reduced, is offset, is funded by taxes. Another important distinction, unlike deficit spending, surplus spending (85% of total spending in 2016) DOES NOT need Congressional approval, because it is funded by taxes. Furthermore, all federal spending isn’t the same, like a helicopter drop, those dollars aren’t keyboarded in to just anyone. Anyone getting federal gov’t spending dollars performed a service, provided some goods, they ‘provisioned’ the federal gov’t, which carries forward, in a non-stop, circular, trade-off, inside a man-made ecology of labor for dollars. If you say ‘taxes don’t fund spending’ to a non MMTer, then you are saying to that person, who just finishing a double shift, that their labor, 33% of it needed to get those tax dollars, that their payments to the gov’t from withholding, and that their checks written out on April 15th to the gov’t, doesn’t fund the gov’t, doesn’t fund spending, because their tax dollars are destroyed, because those dollars just go ‘poof’, they will tune you out. If however, you say it correctly, if you instead say that their ‘taxes ARE NOT NEEDED to fund spending’, they will be intrigued. Regarding those tickets collected in the analogy, before being ‘destroyed’ (on one side of the seesaw), those tickets were counted, and those tickets offset deficit spending by funding the stadium’s surplus spending (the other side of the seesaw). Any non federal gov’t debit entry (payment of taxes) triggers an automatic, equal and opposite, federal gov’t credit entry (receipt of funding), and like any revenue, is immediately debited out (surplus spending) against on-budget federal spending. The same goes for federal revenues from Treasury bond sales as well. Semantics aside, the more important point is that unlike over at ‘Local Gov’t Stadium’ and unlike over at ‘State Gov’t Stadium’ where those tickets (taxes and bond sales) are needed to fund their spending, at ‘Federal Gov’t Stadium’, those tickets ARE NOT NEEDED to fund spending (that’s not saying they don’t at all). To be clear, ‘Federal Gov’t Stadium’ is still getting funded like the other stadiums, but unlike the other stadiums, as a monetary sovereign, ‘Federal Gov’t Stadium’ doesn’t actually need that funding for spending, or more specifically, its spending is no longer by constrained by ticket sales. That’s why there are so many more arguments with the accountants about expenses at ‘Federal Gov’t Stadium’.

 

J.D. Alt, author of ‘The Millennials’ Money’, has a video that perfectly visualizes how our monetary system works using a ‘bathtub’ analogy, with both an ‘old’ diagram (using gold standard mentality) and a ‘new’ diagram (using post-gold standard mentality). The video is perfect…because….J.D. Alt doesn’t veer away from that MMT pillar, he says it correctly, that taxes are NOT NEEDED to fund spending. In his video he says “The federal gov’t DOESN’T NEED the cancelled iou in order to issue and spend new fiat dollars” and “The sovereign federal gov’t HAS NO NEED to harvest what it can create on its own anytime it needs to.” Furthermore, J.D. Alt offers a brilliant full-blown MMT vision. He sees the mainstream calling federal gov’t deficit spending “Net Spending Achievement” instead, and everybody also calling the national debt “The National Savings” instead. I give J.D. Alt a lot of credit, this is great video, especially because he is very careful to include those two crucial words ‘not needed’ in his statements, because, as he also says in that video, “We need to make sure we use the right terminology.” My only suggestion, I would add another diagram, because J.D. Alt’s second diagram is the MMT end game, a hopefully not-too-distant future (the ‘theory’ in the Modern Monetary ‘Theory’). In addition to J.D. Alt’s ‘before’ diagram (federal gov’t spending in gold-backed dollars) and his ‘after’ diagram (federal gov’t spending in fiat dollars), I would add another diagram, a third bathtub. A third bathtub that also depicts where we are right now (the ‘reality’ in our Modern Monetary ‘Reality’). We left the gold standard era (Diagram 1); however, even though we are now a ‘modern’ monetary sovereign, we still have NOT totally transitioned to full-scale MMT mode (Diagram 2). Diagram 2 is showing how it will work AFTER MMT has gone mainstream, AFTER we start calling deficit spending something like “Net Spending Achievement”, AFTER we call the national debt something like “The National Savings”, AFTER there is no such thing as a nonsensical ‘debt ceiling’, AFTER the economics books have been rewritten; and AFTER the ratings agencies stop rating Treasury bonds because instead of calling them ‘debt’, which implies solvency risk, we call those Treasury bonds something like guaranteed “Term Deposits”, etc., etc. For example, Diagram 2 is after MMT has gone mainstream and we don’t call federal spending beyond revenues ‘deficits’ anymore. Instead of saying how much of a deficit there was in any given fiscal year, the federal gov’t simply announces how many additional dollars they supplies to the banking system, period. Conversely, if revenues exceed spending, rather than calling that a ‘surplus’, the federal gov’t simply announces how many dollars they relieved from the banking system, end of story. That is the MMT endgame, that is Diagram 2, after our monetary system has become ‘pure’ MMT. Until those idiosyncratic US laws and those outdated federal gov’t accounting processes have been repealed and replaced with full-blown, ‘pure’, unadulterated MMT as shown in Diagram 2, I suggest another diagram, a ‘now’ diagram, to reflect today’s system, our modern monetary reality as it is now. A ‘now’ diagram should be included with the ‘before’ and ‘after’ diagrams. A ‘now’ diagram shows where we presently are, warts and all, which came after we left Diagram 1, after we ended the gold standard era, which ended when we left domestic convertibility in 1934. A ‘now’ diagram notes that some old processes, some idiosyncratic accounting constructs from Diagram 1, albeit completely unnecessary, still clumsily exist. The ‘now’ diagram acknowledges that we have left the gold standard era; however, even though we also left international dollar convertibility in 1971, we recognize that there are accounting constructs, there are old processes, from the old system, from Diagram 1, that are still there, right now. If we want to make the MMT case to professionals in the field, like experts in US law, and accounting professionals, and policymakers, and constituents etc., etc. (who we need to get the monetary system to Diagram 2), oversimplifications are not good enough for them. We need a ‘now’ diagram that gets into this nitty gritty and enunciates the distinctions still present in current existence, because if you are saying ‘taxes don’t fund anything’ (Diagram 2), if you say it now, you are jumping the gun. Remember, MMT is still the heterodox, so MMTers cannot afford to make mistakes like leading with ‘taxes don’t fund spending’. So what do I mean, what would the ‘bathtub’ look like today? Let’s start with the shape of the bathtub. The ‘bathtub’ (the economy) today is not evenly shaped like the cozy-looking thing in the J.D. Alt diagrams. The bathtub today is quite uneven. Picture a graph of US wealth distribution, with a very small part of it being very deep with plenty of water and most of the other not-as-liquid parts. Picture a very shaggedy thing, completely unequal, and wildly uneven, that’s your actual bathtub shape. Next is the bathtub ‘faucet’ (spending). In 2016, $4T total spending came out of the ‘faucet’ and $3.5T in taxes went down the ‘drain’, and the difference, $0.5T (deficit spending) was added to the bathtub (dollars added to the banking system / increase in net financial assets). That’s too much of an oversimplification for today’s reality, because that depiction makes it looks like all total spending is the same, which is not the case (it’s the MMT goal, but it’s still not yet the case). In a third diagram, the bathtub would show the complexities, the huge differences found in total spending. For example, some of the spending coming out of that faucet in 2016 was surplus spending, which was funded by taxes (didn’t need Congressional approval), meaning it had a deflationary bias; while some of it was deficit spending, which did need Congressional approval and does have an inflationary bias. So to better show this difference, the bathtub ‘faucet’ in the third diagram is only turned open by Congress. Only deficit spending comes out of the faucet, and only after Congress turns the faucet knob (authorizes it). This would more clearly differentiate deficit spending from surplus spending, which are as different as hot and cold water. This would also more clearly show that only the faucet can add water (dollars) to the tub (to the banking system), that only the faucet adds net financial assets. As per former Fed Chair Eccles, only deficit spending is High Powered Money (HPM), so it is only this spending coming out of the faucet that you need to keep your eye on so as to prevent overflowing the bathtub (inflation). Finally, to represent surplus spending, the third diagram would show it in a similar way that J.D. Alt shows Treasury bond purchases, meaning that the water is not leaving the bathtub (only a swap of assets). Connected to the ‘drain’ which is located at the deep ends (the savings gluts) of the bathtub, is the ‘shower head’. The taxes from the deep ends ‘drain’ back up into the ‘shower head’, spraying them back out, to the other shallow ends of the bathtub. To show that the shower head (surplus spending) does not need Congressional approval, only a simple percentage of drainage, a simple (tax rate) setting is made every decade or so, and the shower head just works automatically. That’s it, that’s the third ‘now’ bathtub diagram that goes in between J.D. Alt’s other two. If any MMTer has a problem with this ‘now’ diagram because they cannot accept that tax dollars are being ‘reused’, back into the bathtub, then let this quote from Intro to MMT administrator John Biesterfeldt wash over you. “About this ‘taxes don’t fund spending’ stuff, you can look at the same balance sheet and explain it in a number of different, legitimate ways: Taxes are ‘destroyed,’ taxed dollars are ‘reused’ – same thing.”

 

In July ‘14 (07/07/14), Dr. Steven Hail, Adjunct Lecturer in Economics at Adelaide University School of Economics, gave a presentation (a video is posted on YouTube), entitled ‘Exposing The Myth of a Commonwealth Budget Emergency.’ In this lecture he says that there is ‘no such thing’ as federal gov’t deficits, and ‘no such thing’ as surpluses. As per Dr. Hail, “Currency-issuing sovereign governments don’t really run ‘deficits’ at all, they cause injections of demand and injections of net financial assets; currency-issuing sovereign governments don’t really run ‘surpluses’ either, they withdraw demand and weaken private sector balance sheets.” Dr. Hail fails to mention here that he is talking about that next phase still to come, that ‘pure’ MMT in the J.D. Alt ‘after’ Diagram 2. Only until policymakers have repealed and replaced those old, idiosyncratic processes that still clumsily coexist, the accounting construct, that reality, remains. Depending on the amount of federal taxes and bond sales, we still have ‘deficits’ and ‘surpluses’. One complaint I hear often from the ‘taxes don’t fund spending’ crowd is that I’m “dwelling in the antiquated accounting and economics schools of thought.” To that criticism I say, That’s Exactly My Point, I’m dwelling in the ‘now’ (diagram). MMTers must not ignore that it is the ‘modern’ monetary system itself that is dwelling in actual remnants of the ‘antiquated accounting and economics schools of thought.’ MMT illuminates however, that operationally, it doesn’t have to be that way. By simply changing a few laws and accounting constructs (when that day comes), monetary sovereigns won’t have ‘deficits’ or ‘surpluses’ (not that they don’t right now). In the meantime, the same accounting and the same laws of a bygone era are still in place, and they do matter. In the United States, the IRS procedural manual states that federal tax receipts and Treasury bond sales are processed into keystrokes and credited to the Treasury. Outside of that, only when the Fed sends yearly profits to the Treasury, nobody else is putting any numbers into this Treasury account where ALL federal spending comes from. Nobody could explain how or why this Treasury account grows without abandoning their ‘taxes don’t fund spending’ mantra; nor should anyone saying ‘there’s no such thing as surpluses’ ignore that this Treasury account will swell when taxes exceed spending. Take the Clinton years. You can’t just blurt out something like “Currency-issuing sovereign governments don’t really run surpluses”; because, Doctor, outside your classroom, an expert in the industry might ask ‘What about all those extra reserves in the Treasury General FUNDS account in FY 1999, what did you call that?’ What Dr. Hail is leaving out when he says “Currency-issuing sovereign governments don’t really run ‘deficits’ at all; they cause injections of demand and injections of net financial assets” is that it goes both ways. Sure, federal gov’t deficit spending means an ‘injection’ to the non federal gov’t (‘funding’ of net financial assets into the non federal govt); however, as per the sectoral balances equation, federal gov’t surpluses are ‘injections’ as well (‘defunding’ of net financial assets out from the non federal gov’t sector to the federal gov’t sector). Surplus spending (the amount of federal taxes collected above the amount of spending during a fiscal period) ALSO cause ‘injections’ (accumulating credits to the Treasury account). These accumulating credits (reserves) are immediately either ‘spent’ (debited) towards on-budget federal expenditure (‘refunding’ the net financial assets that federal taxes ‘destroy’); or even worse (for the economy), they are permanently removed and debited against the outstanding balance of federal bonds to ‘pay down’ the national ‘debt’ (which only MMTers know is foolish because that is counter-cyclical to economic growth). For an MMTer to even hint that it is a bad thing to pay down the national debt is mind-blowing to the mainstream, so MMTers must be careful when using gimmicky catchphrases. Don’t forget, MMT is the unorthodox, MMTers cannot afford mistakes, or sound trite, especially when talking to experts in the field (outside of lecture halls). Speaking of the field, to use a baseball analogy, saying ‘there’s no such thing as a surplus’ without carefully qualifying you are talking about the ‘after’ Diagram 2 (‘pure’ MMT), is taking too big of a lead off base and you will easily get picked off. To be fair however, on another pitch, Dr. Steven Hail does hit it out of the ballpark. In his video, at the 28:22 mark he says, “The important point is, the gov’t DOES NOT NEED to tax you to ‘pay for’ its spending.”

 

The next time someone regurgitates a silly catchphrase like ‘The subway tokens don’t fund the subway, because the tokens, just like tax dollars, are destroyed’, ask that MMT ‘academic’ this: “Does the person putting the subway token in the turnstile get ‘destroyed’ too?” Lecturers don’t like getting lectured to, they hate when their ‘students’ question the ‘teacher’ (especially the delicate-genius ‘scholars’), so most likely they won’t take that bait. If, however, they want to hear you out (if they want to know why regurgitating that meme is so dopey), and answers “no” then you would next say something like this: Of course the person putting the token in the turnstile doesn’t get ‘destroyed,’ because the person then steps into the subway car. In other words, the token is debited (from the person) and then the subway car is credited (with the person), which is similar to the tax dollar being electronically debited (‘destroyed’) which triggers an equal and opposite credit (‘creation’) called reserves into the Treasury General FUNDS Account (subway car). The person (the reserve) in the subway car (GFA) then rides underneath the money supply in an electronic ‘tube’ (the monetary base). At the end of that ride, the person (the reserve) leaves the subway car (the GFA is debited). The person (the reserve) then re-enters (is then re-spent) back into the city (the money supply) once again, back to whence they came (the reserve is debited from the Treasury General FUNDS Account and the money supply is credited with dollars). Whether the MMT ‘academic’ agrees with that or not (you can already take a wild guess which), try again to talk some sense into them by reminding them that the MMT pillar (7DIF Fraud #1) is that the tokens (federal taxes and Treasury bond sales) ARE NOT NEEDED to fund spending (not that they don’t at all). The MMT teachable moment of the ‘subway’ and the ‘stadium’ analogies is that because the federal gov’t is now the issuer of ‘tokens’ and ‘tickets,’ there is no solvency risk anymore, nor any constraint on federal spending. The takeaway of these analogies is not ‘taxes don’t fund spending’ at all; the takeaway is that the order of collection v. spending, switched, and that the priority of taxes as ‘financing’ stepped aside for other, more important functions. Warren Mosler says that “taxes…are not revenue PER SE” (he doesn’t say taxes are not revenue AT ALL). The only conclusion MMTers should make with the subway token analogy is that since the federal gov’t switched from having to first collect gold-backed dollars (and then spending gold-backed dollars), to now first spending fiat dollars (and then collecting fiat dollars afterwards), fiat dollar taxes ARE NOT NEEDED to fund spending in fiat dollars (not that they don’t). Furthermore, it is important to note, there are two routes that the added reserves in the Treasury GFA (that the ‘destruction’ of federal taxes create) can take. The first is to be immediately debited towards federal on-budget expenditures as mentioned above. The other is to be debited towards the outstanding amount of Treasury bonds (paying off some of the national ‘debt’). If an MMT ‘academic’ says ‘taxes don’t fund spending’ outside of their classrooms, they are unwittingly admitting that they don’t understand the US laws and these accounting constructs that (albeit unnecessary) are still in place.

 

The MMT ‘enlightenment’ is that all federal gov’t spending, both surplus spending and deficit spending, is simply cash-financed with federal gov’t fiat dollars, under a narrative, a charade, a bygone idiosyncratic formality, that spending is still ‘tax-financed’ and ‘bond-financed’ with someone else’s gold-backed dollars. That’s not saying that those federal gov’t revenues ARE NOT funding federal gov’t spending, that’s only saying that those revenues ARE NOT NEEDED to fund spending; not anymore, not since the federal gov’t stopped spending gold-backed dollars and started spending with fiat dollars. If you are an MMT professor (lecturing to other MMTers in a classroom), or an MMT ‘academic’ (commenting to other MMTers online), then fine, go ahead, say ‘taxes don’t fund spending’, but if you say that to anyone else, you sound like someone who never drove but got a degree memorizing a Ford Fiesta manual and now you are explaining braking distance to Mario Andretti. If you say ‘taxes don’t fund spending’, you are saying that EACH day 8,950,684,931 dollars and 51 cents (actual average 2016 tax revenue per day) was ‘destroyed’ (and went poof), yet miraculously, 8,950,684,931 dollars and 51 cents was also ‘created’, every day, by total coincidence, into the Treasury’s General Fund Account (TGA), the reserve account of the Treasury at the Federal Reserve, where all federal gov’t spending is paid from. Sure, whatever, say that, but please know how dopey you sound. If you keep saying that ‘taxes comes first’, that the federal gov’t must first spend money into existence for you to pay taxes, you aren’t getting it; you are thinking that the Monopoly Bank has to deficit spend $1500 dollars to each Player, into existence, not only at the beginning of the game, but at EVERY roll of the dice (which isn’t the case). If you say ‘taxes don’t fund spending’, not only don’t you fully understand accounting, you don’t fully understand political optics. Even though federal taxes are not needed to fund spending, WHAT exactly the federal gov’t spends on is just as important as those taxes doing what they’re actually needed for (maintaining price stability, etc). For example, some citizens, who are pro-life may be bothered if an Obamacare mandate is funding birth control. Some citizens, who scrimp and save to make ends meet may not think it’s fair that the military is paying for gender reassignment surgeries at $130,000 a pop. They may even understand macroeconomic concepts as well as you (that the only problem with deficit spending is potential inflation rather than worrying about how we are going to pay for it), but if you try to blow off their concerns by saying that their ‘taxes don’t fund spending’ (on things that trigger them), they will (correctly) think you are clueless. HOWEVER, if you say it right, if you say their federal taxes ‘ARE NOT NEEDED to fund spending’, you may pique your listener’s intellectual curiosity. Perhaps, they will follow up with a question like ‘If my taxes are not needed to fund spending, then what are they needed for?’ THAT’S a MUCH better way to start the MMT conversation.

 

The answer to ‘then what are revenues needed for?’ is that federal revenues are needed as a federal gov’t fiscal and monetary policy function, not a federal gov’t financing function. Meaning that the purpose of federal gov’t taxes and federal gov’t bond sales today, are actually maintaining price levels and regulating the economy, behind a facade of ‘financing’ the economy. Revenues are only needed to ‘finance’ users of currency, like households and businesses, in their quest to balance budgets; however, in the post gold standard, modern monetary system, revenues to any monetary sovereign, perform more important functions for the issuer of currency, to balance their economies. US Treasury securities sales (short-term bills, medium-term notes, long-term bonds) provide users of US dollars a safe, risk-free place to park their dollars, to fulfill their savings desires. Treasury securities are actively traded in a liquid global bond market which serves as a safe harbor for dollars taking a flight to quality away from risky assets, into risk-free assets, like Treasury bonds, during worldwide market turbulence (which further solidifies the US dollar’s stature as a world-class reserve currency). Treasury securities are tools used in monetary policy to set the price, or interest rate of dollars; and in fiscal policy to increase aggregate demand to stimulate the economy with more deficit spending (Treasury bond issuance acts as a dollar drain that neutralizes the inflationary bias of that net financial add, that increase to the money supply, of that deficit spending). Rather than financing the federal gov’t, federal revenues today are mostly needed for two things. In his prophetic 1946 article, NY fed chair Ruml writes that federal taxes are obsolete when it comes to financing the federal gov’t because for any monetary sovereign using a pure, fiat currency, federal taxes are only really needed to control inflation and serve public purpose. MMTers expand on this, that federal taxes are also needed to create the initial velocity and continuous demand for the currency by requiring that federal tax must be paid in the currency issued by the federal gov’t. Furthermore, federal taxes are also needed to balance the economy by redistributing wealth to widen prosperity. Finally, federal taxes are also needed to ‘create’ unemployment. The federal gov’t does this in the exact same way that a parent starts making their child pay for stuff they want. In order for the now ‘unemployed’ child to make those payments, the child must start doing chores and earn an allowance. The parent does this to make the child help provision the household. Afterwards, when the child, spending the earned allowance, pays the household, in exchange for wanted privileges, the child is indeed ‘funding’ or ‘financing’ the household; but ‘funding’ the household (paying into the off-budget ‘allowance trust fund’) and / or ‘financing’ the household (paying into the on-budget household spending), is not the primary function of collecting the child’s allowance. The child’s allowance IS NOT NEEDED to ‘fund’ the household, and certainly is not needed to ‘finance’ household spending (not that it doesn’t).

 

A recent comment by Brandon Verdier put it succinctly, “…the presence of federal tax is what allows us to spend more without experiencing more inflation than we are comfortable with.” Another good quote, from Geoff Coventry (although like most MMT ‘academics’, still struggles with the difference between the ‘funding’ and ‘financing’ aspects in commercial banking), sees the big picture very clearly and puts it very nicely, saying, “The primary purpose of federal taxation is to maintain stable demand for government currency and offset the economic effects of its issuance.” In my opinion that’s a much better tact to take rather than an MMT ‘academic’ saying to someone that ‘taxes don’t fund spending’. I suggest that when doing the good deed of spreading the MMT gospel, these MMTers should lose the ‘taxes don’t fund spending’ catchphrase. Unless of course, they think whomever they are speaking to is simplistic. While explaining why many MMTers frequently regurgitate the ‘taxes don’t fund spending’ line, Warren Mosler commented that they like to say that because “Creating sellers is generally not considered a funding operation.” The key word there is ‘generally’. Mr. Mosler wisely doesn’t say creating sellers (federal taxation) IS NOT considered a funding operation. Why? He DOESN’T say that those taxes, that creating those sellers, is not a funding operation because it’s too simplistic to say that. Creating sellers (federal taxation) is one of many important operations that taxes are ‘generally considered’ to perform. The less important operation that federal taxes are ‘generally not considered’ to perform is financing spending (since the federal gov’t now spends with fiat dollars instead of spending with gold-backed dollars). So if you hear ‘taxes don’t fund spending’, assume that either the speaker thinks you are simplistic, or that the speaker is simplistic. If someone is preaching to their faithful, and says ‘taxes don’t fund spending’, they’ll get a Hallelujah, no one will challenge them, members of cults never do. However, if that same person tells people outside their simplistic choir that your federal taxes, your hard-earned cash, confiscated from your earning, that you are painfully watching come out of your paychecks, YOUR THREE AND A QUARTER TRILLION $$$ ‘don’t fund spending’, you can assume (correctly) that they are simplistic.

 

During an online discussion, fellow MMTer Mike Morris wrote, “I see the MMT position as the endgame, wholeheartedly supporting it, once we have a Congress capable of enforcing it, and an electorate educated enough to back said Congress. Takes time.” That is well said and that, is the crux of this discussion. When that endgame happens, after the electorate has become educated, and after said Congress has reconfigured their thinking about our monetary system, which will take time, that’s the day we can say ‘taxes don’t fund spending.’ If you say it before then, you are jumping the gun, and you sound like a complete boob. If however, you say ‘taxes are not needed to fund spending’, then good for you, because then you are helping the MMT cause, then you are helping getting us closer to the endgame. Another MMTer, Ellis Winningham, who appears often on Real Progressives broadcasts, weighed in on the issue with this take on his Facebook page in September 2017 (which coincidently was the same day of the ‘First International Conference on MMT, Economics for a New Progressive Era’, University of Missouri-Kansas City): “MMT is quite extensive. It is not as simple as ‘Hey, federal taxes don’t fund federal spending’. It does not matter if this is the key point that political people are missing. There is much, much more to be digested than this simple statement. So, to the activist I will say that if you only discuss this singular point endlessly, you are leaving a huge hole for people to drive a truck through with talk (as if) this is all there is to MMT…you are creating your own headaches. This is one reason why it is important to defer to those who understand MMT completely. And to those who’ve heard ‘federal taxes don’t fund federal spending’ from activists that say little else, and then afterwards, choose to go around claiming that this is all there is to MMT…I will tell you point blank that you simply do not understand MMT whatsoever, in whole or in part; and that your feelings and thoughts expressed in your comments are conclusive evidence to those who actually teach MMT that you do not know what you are talking about.”

 

The ‘taxes don’t fund spending’ debate began in February 2017 when I posted a suggestion on the Intro To MMT webpage, advising fellow MMTers not to say it. That post quickly escalated into a major battle across several fronts, and I have three good reasons why. First, the initial argument against me was that during the gold standard era, taxes funded spending, so since we have left the gold standard era, now ‘taxes don’t fund spending’, period. Folks arguing against me were saying that if I disagreed with ‘taxes don’t fund spending’, then it’s because I’m still stuck in gold standard mentality. My counterargument was that it isn’t as black and white like that because there’s a grey area here, a ‘now’ phase that we are still in, that a ‘taxes don’t fund spending’ catchphrase doesn’t quite capture. I explained to them that even though we left the gold standard era and we are now a monetary sovereign, some remnants, several old processes, many accounting constructs, of the past monetary system ARE STILL IN PLACE, so whether we like it or not, we need to recognize these complexities; especially if we want to make the MMT case to experts in the field, because oversimplifications are not good enough for them. Second, when MINETHIS1 (Nick), Vernon Etzel and I started the Pure MMT for the 100% website with our original post that pointed out that Warren Mosler does not say ‘taxes don’t fund spending’ (which Mr. Mosler himself ‘shared’ on his own Center of The Universe website), it struck a nerve. It soon occurred to me that this was becoming more than just a debate over semantics, it was exposing the pretenders from the contenders in the MMT community. Unable to defend ‘taxes don’t fund spending’ too well on their own, it soon became quite obvious that what made this debate so polarizing was because it alienated the MMTers that were only regurgitating MMT (who didn’t like the ‘taxes don’t fund spending’ discussion at all); from those that were truly comprehending MMT (who liked the teachable moment that the discussion presented). The debate shined a needed light on the difference between the Modern Monetary THEORY (the ‘after’ diagram’) and the Modern Monetary REALITY (the ‘now’ diagram); and let’s just say many MMTers became quite ‘uncomfortable’ with the realization that they were not as up to speed on MMT as they thought. Finally, and to be fair to the ‘Taxes don’t fund spending!’ element out there, here’s another reason why they insist on saying that: If they cede the fact that taxes do fund surplus spending, they fear they will get outflanked by the ‘How are we going to pay for that?’ element; and the country will never get free healthcare, free college, free whatever. I get that. In my opinion, they should cede that ground, take the higher road, take the hint, and just say it right, say ‘taxes are not needed to fund spending’ to win over more converts to MMT (who may be suspicious of MMTer intentions so we must be careful what we say). On that day on 05/30/17 when MINETHIS1, Vernon Etzel and I launched our new site, Warren Mosler commented that he “never made the statement ‘federal taxes don’t fund spending’ and if perchance I did it was carefully qualified”. My reply to Mr. Mosler was yes, I knew he was saying it right, that he has been saying it right all along (7DIF), just that getting all other MMTers to also say it right was my only interest. Rather than trying to be argumentative with MMTers, I explained to Mr. Mosler that I was simply offering a suggestion that I believe would help the MMT cause. “Whatever politics an MMTer has, whatever spending on public purpose they want for the common good, is fine by me,” I added (and I was also very happy to see that he ‘liked’ that comment).

 

The ‘taxes don’t fund spending’ narrative takes Warren Mosler’s ‘stadium tickets get ripped up at the turnstile’ analogy too literally. Mr. Mosler’s point (in his 7DIF Fraud #1) was to change our thinking how we look at the order of funding operations from once upon a time vs. now. Back then, federal taxes paid with gold-backed dollars were needed to be collected by the federal gov’t from us first, and then spent back to us. Meaning that the amount of federal spending was constrained, and that the federal gov’t faced a solvency risk if tax collections (revenues) were low. Now, the order is flipped, it’s a new paradigm, a new currency. Now, similar to a stadium, the federal gov’t issues and ‘supplies’ the fiat dollars (‘stadium tickets’) to us first; and then the stadium collects them back. In other words, back then, we first funded ‘Federal Gov’t Stadium’ with a limited amount of already-existing, gold-backed dollars, and then they funded us back; now, ‘Federal Gov’t Stadium’ funds you first with newly-issued fiat dollars, and then you fund them back. Now, the potential for ‘ticket sales’ at ‘Federal Gov’t Stadium’ is unlimited; and because the stadium is the sole monopoly issuer of those fiat dollar ‘tickets’, there is no solvency risk. Mr. Mosler’s stadium ticket analogy is just to get us to rethink the order of funding operations, to realize that taxes ARE NOT NEEDED to fund spending like they were before (not that they don’t at all, not yet, that accounting construct from back then still exists). Mr. Mosler also wants you to rethink what funding means.

 

To help us rethink what funding means, in closing, I submit to the court, the enclosed video, as Evidence A, @ 5:52 the question is posed from Steven D. Grumbine, Real Progressives webcast host to his guest, Warren Mosler: “Federal taxes do not fund spending, right?” and the answer is, “…I don’t actually say it that way… You don’t need to say it that way…To use an ambiguous word like fund…because to fund something means different things to different people”. Meaning that folks, playing financial experts, saying ‘taxes don’t fund spending’, have no idea they sound financially illiterate because they are confusing ‘funding’ with ‘financing’. Federal taxes paid in fiat dollars are not needed for ‘financing’ surplus spending because the federal gov’t is the issuer of fiat currency, that’s one thing. ‘Funding’ the federal gov’t is another. ‘Funding’ means different things to different people, especially to people with real world commercial banking experience like Mr. Mosler (read: outside the MMT ‘academia’). When you leave a bank with less money than you had before walking in, unless there was a holdup, you just ‘funded’ that bank. The question is did that funding also ‘finance’ that bank. For example, if you deposited your paycheck into your savings account, that’s called ‘retail funding’. ‘Funding’ simply means ‘supplying’. The bank doesn’t make money from your deposit, that funding does not ‘finance’ the bank; however, if you paid the bank an interest income payment on your mortgage loan, that’s how the bank makes money, that ‘financed’ the bank, that ‘funding’ finances their surplus spending. So just like when you hand over your dollars to make a deposit to the bank, when you hand over your dollars to make a tax payment to the federal gov’t, you are indeed funding them both.

 

It’s a new order of funding operations. Unlike during the gold standard era, when the federal gov’t needed to first collect gold backed dollars from the non federal gov’t, or the federal gov’t needed to first assume debt denominated in gold backed dollars before spending; the federal gov’t now spends fiat dollars at will. As per Warren Mosler, “Operationally, the Fed just credits the appropriate accounts.” Taxes as a ‘financing’ operation (which involves running balances of surplus spending financed by taxes) took the back seat; and taxes as a ‘funding’ operation (which involves movements of dollars and reserves that maintains price stability) is now in the front seat.

 

It’s a rethinking of funding. The federal gov’t funds (supplies) us when they spend, and then we fund (supply) them back when we pay taxes, and back & forth, again & again. Hopefully the amount the gov’t is funding us is bigger than the amount we are funding them, price stability is being maintained, and the economy is in balance.

 

Mr. Mosler’s answer to that question was not ‘Yes, that’s right, that’s correct, and whoever disagrees or posts otherwise doesn’t understand MMT’; that answer was Q) Federal taxes do not fund spending, right? A) Wrong. Interpret that as him wavering on ‘federal taxes do not fund spending’, why he never says it, and for a very good reason (because it ain’t MMT). Warren Mosler, the father of MMT, doesn’t say it that way because it’s ambiguous, it’s not entirely accurate, and it shows a lack of actual banking experience and a confusion with simple financial concepts like ‘funding’. Which gets ironically weird if you are going around telling people that they don’t know how banking and finance really works.

 

Please note, I am only insinuating that Warren Mosler meant ‘taxes don’t fund spending’ is wrong. To be fair, even though Warren Mosler does say “I don’t actually say it that way”, he doesn’t say it’s “wrong” to say it that way. Actually he is neutral. Many other MMTers, including myself and my friends at the ‘Pure MMT for the 100%’ website also share the same opinion that neither side of this debate is “wrong”. Our position is that saying “Taxes Don’t Fund Spending” is ok to say to the MMT beginners, to the politically left-leaning ‘Real Progressives’, to those that only dwell in the MMT academic echo-chambers (easier to grasp, a fantastic head-turner, and why MMT ‘scholars’ love to say it); but to understand pure MMT, to really comprehend it, we should, as Doug Hughes advises, “advance beyond the oversimplifications at the introductory level of MMT and acknowledge the real-world complexities so as to better communicate with experts in the industry.” While some accounting constructs of the old monetary system are still in place, I’m only suggesting that we use better verbiage to introduce MMT to the uninitiated outside our choirs (who may be slightly suspect of our intentions). The reason, as Doug Hughes adds, is that “convincing them is severely important and unless one understands the finer points of how the system operates they will be laughed at.”

 

What Warren Mosler has also said many times is that “tax liabilities are….Not revenue per se.” There is a subtle, yet significant difference between saying ‘taxes are…Not revenue PER SE’ vs. saying ‘taxes are…Not revenue’ (AT ALL). To understand what that difference is, just look up the definition of ‘per se’. ‘Per se’, is a Latin phrase meaning ‘by itself’ or ‘in itself’. So what ‘taxes are not revenue per se’ is saying is that taxes ‘by itself’, or that taxes themselves, are not ‘intrinsically’ a revenue, that taxes are not fully, ‘solely’ a revenue. It’s only saying that taxes are not just a revenue anymore (not that taxes aren’t a revenue at all). In other words, saying ‘taxes aren’t a revenue per se’ is a succinct way of updating the perspective of the role of revenue. It is simply pointing out that regarding the federal gov’t, the meaning of revenue has altered, that it’s not exactly the same as it used to be. That the bygone (gold-backed dollar) revenue operation of taxation has taken a back seat to the modern (fiat dollar) revenue functions of maintaining price stability, maintaining demand for the dollar, etc etc. It’s the same as gesturing air quotes whenever talking about something. For example, when talking about the national “debt”, better to say that any federal gov’t “debt” denominated in the fiat currency of any monetary sovereign, the issuer of that same currency, is not the same as real, ACTUAL, household DEBT. Don’t just blurt out something like ‘there is no national debt’ and call it a day if you are truly promoting MMT.

 

If you want to convince people that you are still on the MMT bunny slope over at ‘academic’ hill, then say ‘taxes don’t fund spending.’ If you are a proponent of completely ignoring federal taxes altogether because you think taxes paid go ‘poof’, then say ‘taxes don’t fund spending.’ If you are pushing some product or promoting yourself (under the guise of promoting MMT), then say ‘taxes don’t fund spending’. If you are speaking to a simplistic flock of lost souls and lonely hearts that ‘like’ you, ‘share’ you, and ‘heart’ you, (will vote for you) because you’ve sold them on the notion that their bad lot in life is someone else’s fault and that you are going to get them free stuff (oldest trick in the political book), then say ‘taxes don’t fund spending’ (it works brilliantly for that cause). If, however, you are truly speaking for the MMT cause, then trust Warren Mosler and for everyone’s sake (mainly yours), don’t say it. I hope you now know why.

 

About a month later, during another webcast, Steven asked Iain Dooley, Economics Adviser, of the Australian Workers Party:

Q) “Taxes don’t fund spending right?”

A) “ I think that’s the most contentious statement that MMT makes.”

I rest my case.

 

Local taxes are needed to fund spending…

State taxes are needed to fund spending…

* Federal taxes ARE NOT NEEDED to fund spending.

 

 

Thanks for reading,

 

 

eddie d

eddiedelz@gmail.com

 

 

The Japan That Can Say No More

080816 The Japan That Can Say No More (2)

A lot has changed in Tokyo since the year 1989 when the book ‘The Japan That Can Say No‘ came out. In the late eighties, Japan’s economy, still the world’s second largest, was growing between 4% and 7% annually. Japanese corporations were on a buying spree, snapping up U.S. trophy properties like Rockefeller Center and Pebble Beach. In 1989, Akihito, the current Emperor of Japan, acceded the Chrysanthemum Throne, and the property value of the Imperial Palace in central Tokyo, measuring approximately one square mile, was assessed higher than the entire state of California. While stock and property markets soared, Japanese consumers splurged. High-end restaurants were offering sushi wrapped with gold leaf instead of seaweed, or upon request, they routinely served sake and green tea sprinkled with gold dust (I’m not making this up, I was living in Tokyo, a 15-year run, brokering US Treasury bonds). Golf course memberships, a huge status symbol in Japan, were changing hands for millions of dollars. On December 29th, the last trading day of 1989, the Nikkei stock average closed at what still remains to this day, its all-time high of 38,915…

As it turned out, there was as much hot air in that book as there was in those asset prices, and it was Japan’s markets, that instead, said ‘No’. The bubble burst, the country fell into recession, what became a long, slow, economic slog, what we all now know as Japan’s ‘Lost Decade(s)’…

Prior to 1989, there are multiple reasons that explain the past economic ‘miracle’ of Japan, but for this post, I would like to concentrate on the biggest, which was the aggressive fiscal stimulus (increased deficit spending) by the Japanese government. On the other hand, there are also multiple reasons that explain the current economic ‘lost decades’ of Japan, and that biggest, is the over-reliance on ‘monetary stimulus’ (increased ‘quantitative easing’ so-called ‘QE’) by the Japanese central bank, which they pioneered in March 2001 (‘QE’ was coined by Richard Andreas Werner, a German economist working as the chief economist of Jardine Fleming Securities Asia Ltd. in Tokyo at the time, and used this expression during presentations to institutional investors in Tokyo). To counter weak economic growth, the Japanese government has continued with more experimental ‘monetary stimulus’ and less proven fiscal stimulus (because they believed then and still believe today that it problematically adds to Japan’s ‘debt’)…

The Japanese economy, same as the economy of any monetary sovereign, only does exactly what it has been instructed to do by the fiscal policymakers in its government and the monetary policymakers in its central bank. Any economy of a monetary sovereign, using a pure, fiat currency, like Japan, goes in whatever direction the knobs have been turned by these policymakers. If policymakers in Japan want to intentionally slow the economy, then they should raise national consumption sales taxes (drain yen from consumers), introduce negative rates (drain yen from savers), expand central bank asset purchases (further distort markets), and provide an inadequate amount of fiscal spending (add an insignificant amount of public sector demand that doesn’t increase inflation). These measures, if all combined, and continued over time, will also have a powerful and exponentially compounding effect (‘paradox of thrift’), that keeps adding a poisonous uncertainty (decreased consumption), more flight to risk-free assets (stronger yen), which then hurts manufactures (lowers capital expenditures), hurts their employees (lower paychecks), and makes imports more expensive (drains even more yen from consumers). The Japanese economy has done exactly what it was told to do by its policymakers, so no one should be surprised at the country’s economic performance. People should be surprised, however, if in the distant future, economic historians did not compare the prolonged ‘monetary stimulus’ policies deployed in Japan in our lifetimes as the financial equivalent of medieval bloodletting.

It’s easy to see what the problem is. The chief economic surgeons in Japan call monetary stimulus an ‘arrow’. That’s the problem right there, they aren’t familiar with the post-gold standard, modern operating room. They see monetary stimulus as being one of the so-called ‘3 Arrows’ of Abenomics, but monetary stimulus, the lowering of interest rates, is not an ‘arrow’ (is not a scalpel). Only those other two arrows of Abenomics (more fiscal stimulus and more pro-growth reforms), are actual arrows (are actual scalpels). ‘Monetary stimulus’ isn’t a scalpel, it’s only a monetary accommodation, an economic sedative. ‘Monetary stimulus’ is just the anesthesia, that is used by the anesthesiologists (monetary policymakers) while the surgeons (fiscal policymakers) are busy employing more fiscal stimulus (repairing body parts), enacting those reforms (removing tumors), and the anesthesia should only be temporarily administered to the patient (if you know what you’re doing).  Furthermore, fiscal policymakers in Japan, as well as in the U.S., have bought into that ‘federal-gov’t-is-the-same-as-a-household’ delusion. Same as in the U.S. regarding Treasury bonds, fiscal policymakers in Japan are absolutely convinced that more federal deficit spending, which increases Japan’s so-called national ‘debt’ due to more issuance of Japanese government bonds (JGBs), would be a bigger problem than a chronically weak economy. By even thinking that JGBs are ‘debt’, by even believing that Japan itself is in ‘debt’, the real problem is that policymakers in Japan, just as in the U.S., are using outdated, gold-standard mentality, which is still taught to all of us by economists using textbooks referring to that bygone era….

JGBs are no longer ‘debt’. The Japanese national government, the issuer of yen, yen that is now a pure, fiat currency, does not have ‘debt’ because all those Japanese federal gov’t bonds, those JGBs, are denominated in yen. If those JGBs, that are issued by Japan, were denominated in U.S. dollars, or fixed to U.S. dollars at a certain foreign exchange rate, or pegged to any other foreign currency that Japan did not issue, THEN YES, THAT WOULD BE DEBT, but the Japanese yen isn’t any of these. Since 1971, when President Nixon dismantled the Bretton Woods system (fixed-exchange rate), the Japanese yen, just like the US dollar, is a pure, fiat currency meaning that it freely floats and it is not convertible to gold or anything. To be clear, JGBs are ‘obligations’ (JGBs are legal tender obligations of Japan to any holders of those securities), and JGBs are ‘liabilities’ (the outstanding JGBs and the interest payable are liabilities of Japan on a national consolidated balance sheet), but ask any accountant, not all obligations and liabilities are debts. Japan, like any other monetary sovereign that issues it’s own pure, fiat currency (not convertible to anything and freely floats), is never in ‘debt’ of anything denominated in that same currency.

The government of Japan, the issuer of yen, is not the same as a household, a user of yen. When the Japanese gov’t (issuer of yen) deficit spends, it is a different paradigm from when a Japanese citizen (user of yen) deficit spends. A user of yen must borrow yen to finance deficit spending, and when they do, that means that user of yen incurs an actual debt, whether it is in the form of a monthly credit card balance (same as a bond), an outstanding student loan (same as a bond), or a mortgage amount (same as a bond). Conversely, every single Japanese gov’t bond (JGB) in existence is issued by the gov’t of Japan, sold by its banking agent, the Bank of Japan (BOJ), and it is denominated in Japanese yen, a currency that the Japanese gov’t has sole monopoly power to issue. Rather than being ‘debt’, those JGBs are just a time deposit, a safekeeping service, for anyone with a desire to save yen. Just like a certificate of deposit (CD) at any bank, JGBs are a place to park yen, risk-free. It’s just like buying a CD at any other bank, except a CD from the BOJ is called a JGB…

Unlike a user of yen, the Japanese goverment, the issuer of yen, doesn’t need to ‘borrow’ yen. The Japanese gov’t, the issuer of yen, doesn’t need to sell JGBs to ‘finance’ deficit spending in yen. The Japanese gov’t, the monopoly ‘supplier’ of yen, is simply adding newly-created yen, to the economy, and the Japanese people, the Japanese financial institutions, or anyone else, when buying JGBs, are putting some of it back. A 250% JGB to GDP just means that the Japanese are incredibly good savers, that’s all. That is not Japan going into ‘debt’. That is yin and yang, ebb and flow, tidal gravity, like fallen rain and natural evaporation, and it’s all happening inside Japan’s very own economic ecology of yen, Japan’s post-gold standard, modern monetary masterpiece. The gov’t of Japan, their policymakers, have as much to worry about having to ‘pay back’ that ‘debt’, those JGBs, as much as they have to worry about ‘putting back’ all the rain that has ever fallen, or ‘paying back’ all the oxygen ever breathed. Japanese JGBs are as much a ‘debt’ to the country of Japan as are shares of Nissan stock ever issued and sold by Nissan being a ‘debt’ to the corporation of Nissan.

Thankfully though, Japanese government policymakers seem to have recently begun to rethink ‘monetary stimulus’. The latest fiscal stimulus announced by Japanese gov’t policymakers last month did NOT increase the asset purchase sizes of QE, nor did the BOJ push negative rates even deeper. Earlier this year, the Japanese gov’t also decided NOT to raise across-the-board sales taxes (Japan National Consumption Tax) any higher, again, to 10%, like they did, to 8%, in April 2014. All these are very good signs that regarding ‘monetary stimulus’, maybe, just maybe, Japanese gov’t policymakers are possibly thinking ‘No More’.

Imagine the monetary policymakers at the Bank of Japan, following Emperor Akihito’s lead, speaking directly to the Japanese people, leveling with them, admitting to them, that it is not your ‘deflationary mindset’ that is holding the country back, but the government’s own policies. Federal policymakers should announce that they will start acting like the issuer of yen…not like users of yen…so…unlike users of yen that need to get their budgets in balance…that instead…that they…the issuer of yen…with a wobbly economy caused by a lack of aggregate demand…by a lack of consumer purchasing power…will increase that demand, by increasing spending, that keeps increasing ‘deficits’ coming FROM the issuer (meaning larger injections of ‘surpluses’ going TO the users), and will not let up that fiscal stimulus until the issuer gets their economy in balance. So that a fair and proper worldwide economic expansion could finally begin, perhaps the rest of the world’s policymakers would also decide to step down from their ‘monetary stimulus’ throne.

Yonde kurete arigato,

eddiedelz@gmail.com

 

 

 

Budgets Are For Users

     Once upon a time, you could pop open the front hood of a car, and looking inside was not so intimidating. If you were lucky enough to have a muscle car, you even knew how to adjust the choke, to increase the amount of gasoline going into that gas / air mix, to get that beast started when it got really cold outside…
     The economy works with a similar principle. During an economic cold snap, the federal gov’t needs to add more gasoline, more potency, to that combustible mixture of public sector demand / private sector demand, to get that engine to turn over and started again…
     Our economy has been in a winter freeze for too long. Our fiscal policymakers could offer a hand by simply adjusting the choke to add more federal gov’t spending (more federal gov’t demand) to that mix (total aggregate demand). Instead, we only have our monetary policymakers just giving the car more gas, trying over and over again to start the engine, and the more they try, the more gas they give it, so rather than starting the engine, they have flooded it. The pistons are not in sync because the policymakers are not in sync.
     Perhaps this is because of ideological differences, but my guess is that our fiscal policymakers are out of sync with our monetary policymakers because when most fiscal policymakers open that federal gov’t hood and look inside, they’re afraid to admit that they really don’t understand how the modern model works.
     First the ideological differences: Some of your policymakers today are ‘Keynesian’ deficit doves and some are ‘Austrian’ deficit hawks. The Keynesian says that we shouldn’t worry about federal gov’t deficit spending because ‘printing money’ will not cause inflation, and the Austrian says that we should worry about federal gov’t deficit spending because ‘printing money’ will cause hyperinflation.
     Both are mistaken. In 1971, President Nixon unilaterally cancelled the direct international convertibility of the US dollar to gold, meaning from that day on, our US dollar was a pure, fiat currency, and the US officially entered the post-gold standard, modern monetary system. Since then, the US economy has never had a year on record without inflation, so the Keynesian is wrong about the ‘printing money doesn’t cause inflation’ thing. In fact, a 1971 dollar today is worth about 18 cents, but that decrease in purchasing power is the secret sauce. Newly-printed dollars are the engine lubricant that keeps the economic moving parts running smoothly, and a big advantage is that since 1971, the federal gov’t uses it’s own motor oil instead of borrowed motor oil. Since 1971, the federal gov’t is the sole issuer, the monopoly supplier, of the fiat brand of motor oil that the post-gold-standard era engine takes. Just like motor oil for any engine, more newly-issued dollars needs to be routinely added to our economy. Constant additions of newly-issued dollars, like motor oil, keeps our economy from seizing up and going into depressions (which the economy did six times before 1971 and also has never happened since). Furthermore, no monetary sovereign, in all of history, deficit spending with its own, pure, fiat currency, that is not convertible to anything, nor pegged to anything, and freely floats on a global foreign exchange market has never, ever, had hyperinflation, so the Austrian is wrong about the ‘printing money will cause hyperinflation’ thing as well. That said, both the Keynesian and the Austrian don’t need to fight an endless ideological battle between each other, because today, in this modern monetary system, both are needed very much at crucial times by the issuer of dollars and the users of dollars. So instead, the Keynesian (with a fear of deflation) and the Austrian (with a fear of inflation) should compromise, get it sync, and work together with each other.
     Let’s get back to what is really happening under that hood. During the gold standard era, the federal gov’t could not just ‘print’ gold out of thin air. Federal gov’t deficit spending was being financed by borrowing gold-backed dollars. For whatever amount of debt that was incurred, it meant that the federal gov’t was on the hook in gold-backed dollars. Back then, Step 1 was for the federal gov’t to get authorization from Congress to deficit spend. Step 2 was to issue bonds to borrow the gold-backed dollars. Step 3 was to pay the vendors. After officially replacing gold-backed dollars with pure-fiat dollars, federal gov’t deficit spending became a different paradigm. Now, the federal gov’t, the issuer of fiat dollars, can just issue fiat dollars out of thin air. Post-gold standard, Step 1 is still the same, the federal gov’t gets authorization to deficit spend. Step 2 is the federal gov’t prints new fiat dollars by clicking on a computer keyboard. Step 3 is to ‘credit’ the vendor’s bank account with that computer keyboard. Step 4 is to issue bonds in the same exact amount that was newly-printed, however, not to borrow that amount, but only as an accounting entry, a ledger posting, a ‘debit’, of that same amount of fiat dollars, to consolidate the federal gov’t balance sheet. So before, federal gov’t deficit spending added to an actual outstanding debt of gold-backed dollars (similar to a household borrowing more and causing indebtedness); now federal gov’t deficit spending subtracts from the purchasing power of all outstanding fiat dollars (similar to a company issuing more stock and causing dilution). A gold-standard era credit card that ‘monetized debts’ with gold-backed dollars was cut in half and replaced by a post-gold-standard-era debit card that ‘monetizes deficits’ with fiat dollars. What causes the puzzled look on most fiscal policymakers whenever looking under the hood these days is understandable, because the US Treasury and the central bank are still using an outdated, gold-standard-era driver’s manual. Those bygone instructions, that were taught to all of us long ago and still told to us today, stick to the narrative that the federal gov’t, the issuer of fiat dollars, needs to ‘borrow’ fiat dollars, however, what is actually going on under that hood is quite different. In the post-gold standard, modern monetary system, federal gov’t deficit spending has been ‘money’ (debit) financed for decades, yet still to this day, takes place behind what is only an archaic facade of being ‘bond’ (debt) financed. The national debt, what was once an actual debt of gold-backed dollars before 1971, is now nothing more than a national debit of fiat dollars.
     For the non-federal gov’t, nothing much changed in 1971. You, me, all households, all businesses, state & local gov’t, we are not issuers of dollars, we are still just users of dollars. For the non-federal gov’t, the users of dollars, it’s simple: We can deficit spend more if our personal debts are low, and we shouldn’t deficit spend more if our personal debts are high. For the non-federal gov’t, the users of dollars, the dashboard indicator is the same one that we have always used, and is easy to understand:
Scenario #1)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt—————————Too Much Debt

                                ^ 

This is the best scenario. The needle is balanced perfectly between ‘No debt’ and ‘Too Much Debt’. Servicing your debt is manageable, and the amount of your deficit spending is not too high, nor not too low:

= FINANCIAL SITUATION IS WELL UNDER CONTROL (No need to be a deficit hawk or a deficit dove, nor take any counter-measures, because the budget is in balance)...

 

 

Scenario #2)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt—————————Too Much Debt

         ^ 

You have no debt, no deficit spending, so the needle is all the way left. Not a bad problem to have, but not really a preferable scenario either:

= NEED TO TAKE ON MORE RISK…ADD INVESTMENTS USING LEVERAGE (Here is the time to be a deficit dove, because if the budget of any user of dollars is in balance, if not under any threat whatsoever of ‘running out of dollars’, users of dollars should take that opportunity to increase spending on investments to widen prosperity).

Scenario #3)

    USER OF DOLLARS dashboard ‘indicator’:

    No Debt—————————Too Much Debt

                                                                 ^ 

This is the worse scenario because it is the hardest to resolve. The needle has gone all the way to the right, meaning that the amount of your deficit spending has made servicing your debts unmanageable:

= NEED TO DELEVERAGE…BALANCE YOUR BUDGET (Here is the time to be a deficit hawk, because if deficits of any user of dollars gets too high, they may ‘run out of dollars’, so any user of dollars must reduce spending in order to get their budget in balance).  
062316 Budgets Are For Users
     The issuer of dollars is a completely separate paradigm from the user of dollars. The federal gov’t, the issuer of dollars, should use a different dashboard indicator, but sadly, because too many fiscal policymakers suffer from a federal-gov’t-is-the-same-as-a-household delusion, they don’t use it, despite also being very easy to understand:
Scenario #1)
ISSUER OF DOLLARS dashboard ‘indicator’:
——————0%——————2%——————
                                                ^
This is the best scenario, where the newly-created dollars that finance federal gov’t deficit spending & entering the money supply is closely matched by the newly-created goods & services entering the expanding economy. Those newly-created dollars are neither causing more than 2% inflation (dangerously subtracting too much purchasing power from all dollars) nor any deflation (dangerously adding too much purchasing power to all dollars). In this optimum economic environment, the decrease of purchasing power of all dollars is contained to a desired level of inflation, just under 2%, the perfect margin of safety away from 0%:
= STRONG GROWTH SUSTAINED, MONETARY POLICYMAKER MANDATE OF PRICE STABILITY ACHIEVED…No need for the deficit hawks nor the deficit doves to prod their fiscal policymakers to take any counter-measures, because the economy is balanced. However, fiscal policymakers could still strive to correct remaining social imbalances, by addressing wealth inequality, and creating opportunities for all those that are not benefiting from the growing economy, like the underemployed, the unemployed, or the non-participating (Collateral damage from that ugly, yet just-as-important, other blade side on the sword of capitalism).
Scenario 2)
ISSUER OF DOLLARS dashboard ‘indicator’:
——————0%——————2%——————
                                                                     ^
Not a good scenario, but an easy problem for both monetary & fiscal policymakers to solve. In this scenario, newly-created dollars that finance federal gov’t deficit spending & entering the money supply is overpowering the newly-created goods & services entering the economy. Too many dollars chasing too few goods has resulted in inflation over 2%:
= INFLATION WARNING: MONETARY POLICYMAKERS SHOULD REDUCE ACCOMMODATING MEASURES (RAISE INTEREST RATES), WHILE FISCAL POLICYMAKERS SHOULD REDUCE STIMULUS MEASURES (LESS FEDERAL SPENDING AND/OR RAISE FEDERAL TAX RATES) TO GET THE ECONOMY BACK IN BALANCE…(Here is the time for the deficit hawks, taking the cue from their monetary policymakers, to prod their fiscal policymakers to act, but note, it’s a separate paradigm, the issuer of dollars is reducing spending to get the economy that is running too hot in balance, NOT to get the budget in balance).
Scenario 3)
ISSUER OF DOLLARS dashboard ‘indicator’:
——————0%——————2%——————
                        ^
In this scenario, the newly-created dollars that finance federal gov’t deficit spending & entering the money supply is getting overpowered by the newly-created goods & services entering the economy. Too many goods and services chasing too few dollars has resulted in disinflation to levels near zero which is threatening to worsen into a full-blown deflationary spiral. This is the worst scenario, the situation that many countries are stuck in today, and not an easy problem to solve, especially if fiscal policymakers fail to act because they think like users of dollars:
= DEFLATION WARNING: MONETARY POLICYMAKERS SHOULD INITIATE ACCOMMODATING MEASURES (LOWER INTEREST RATES), WHILE FISCAL POLICYMAKERS SHOULD INITIATE STIMULUS MEASURES (MORE FEDERAL SPENDING AND/OR LOWER FEDERAL TAX RATES) TO GET THE ECONOMY BACK IN BALANCE…(Here is the time for the deficit doves, taking the cue from their monetary policymakers, to prod their fiscal policymakers to act, but again note, it’s a separate paradigm, the issuer of dollars is increasing spending to get the economy that is running too slow in balance).
     In conclusion, unlike the users of dollars, the dashboard indicator for the issuer of dollars is the current rate of inflation, not the current amount of debt. The perfect inflation rate, one that provides a margin of safety, is just under 2% per year. This 2% annual decrease in the purchasing power of all outstanding dollars, this slight level of inflation, is much more preferable to the alternative, which would be dangerously low inflation, or worse, outright destructive deflation. What determines how much the federal gov’t, the issuer of dollars, should deficit spend, is ALWAYS to keep inflation balanced, to keep the economy in balance, and NEVER to keep a budget balanced.
     The questions that fiscal policymakers need to ask themselves while looking under the hood: Is that newly-created demand entering the economy from that federal govt deficit spending increasing aggregate demand (?) Are the newly-created dollars entering the economy from that federal govt deficit spending stoking inflation (?)
     OR, is the stimulative effect of that newly-created demand and the inflationary bias of those newly-created dollars vaporizing on impact (?)
     If so, then please give your monetary policymakers a hand, and adjust that choke.
Happy driving,
Eddie D  <eddiedelz@gmail.com>
P.S. SPECIAL THANX TO  @netbacker  FOR HIS SUGGESTIONS THAT INSPIRED THIS POST…(Follow @netbacker on Twitter for more about the economy).

Almost All Swiss Gov’t Bonds Have Negative Yield

Almost all Swiss federal bonds issued by the Swiss federal gov’t have a negative yield, so do the Swiss people still think of those bonds as the federal gov’t ‘borrowing’ (?)

061716 From 1 Month to 33 Years, Almost the Entire Yield Curve for Swiss Bonds is Negative

Do Swiss ‘deficit hawks’ think that further Swiss gov’t bond issuance that increases federal debt (that *literally* makes money for the Swiss gov’t)…is…’unsustainable’ (?)

Take a look at a bill from inside your wallet. You are staring at a zero-coupon perpetual bond issued by your federal gov’t. Do you consider that as your federal gov’t being in ‘debt’ (?)

Take a close look at this WSJ graph above…

Which one of the four countries is NOT like the other?

If you said ‘Germany’, no need to read any further, see you at the luau buffet at sunset.

For the rest, may I explain, of the 4 countries above, Germany is NOT a monetary sovereign…

Germany is a sovereign, yes, but not a monetary sovereign like Japan, the United States, or Switzerland…

Germany is like a U.S. state, sharing a currency with other sovereigns, within one federal monetary sovereign…

So for a non-monetary sovereign like Germany (a currency user),

to be included in the same graph with Japan, the US, or Switzerland (a currency issuer),

…is like comparing apples to oranges at best; or at worst it doesn’t give the credit that a Eurozone ‘member state’ actually being in the same ballpark as a monetary sovereign, is due. In fact, in the article, the WSJ narrative is that Germany was “outdone” by Switzerland. Here’s a reality check on that WSJ narrative: In 2015, Germany, a member state of the Eurozone, had the US dollar equivalent of $1T in government revenues, which worldwide, was ranked third, only behind China ($2T), and the United States ($3T), while Switzerland was way down that list at $175 billion.

The German federal government, a member state of the Eurozone, just like any US ‘member’ state or US state gov’t, just like any user of currency, needs to ‘get’ currency from someone else to finance deficit spending in that currency. Switzerland, however, an issuer of currency, unlike Germany, doesn’t need to ‘get’ that currency to finance deficit spending. The Japanese federal gov’t, the issuer of currency, unlike Germany, doesn’t have to ‘borrow’ currency to deficit spend in that same currency. The United States federal gov’t, the issuer of currency, unlike a US state gov’t, unlike Germany, unlike any users of currency, doesn’t have to ‘borrow’ that currency, from anyone, not anymore, not since become a monetary sovereign issuing a pure fiat currency.

Those German gov’t bonds are actual ‘debt’ (because they are denominated in a currency that, as a non-monetary sovereign, Germany cannot issue). Those Japan, US, and Switzerland federal gov’t bonds are not actual ‘debts’ (because they are denominated in a currency that, as monetary sovereigns, they can issue). Those Japan, US, and Switzerland federal gov’t bonds are nothing more than accounting entries, ledger postings, ‘debits’, that consolidate a balance sheet to simply keep record of the newly-created fiat currency that was added, that was ‘credited’, to the non federal gov’t. To help remove the specter of ‘debt’, so that policymakers can enact productive, desperately-needed, counter-cyclical fiscal measures that would stimulate their economies, perhaps Japan, the US, and Switzerland’s ‘debts’ should be called ‘debits’ (?)

Those German gov’t bonds are actually part of what is called the ‘credit markets’ because like the bonds of any other non-monetary sovereign, business, or household, those bonds could default, there is credit risk. As users of currency, any non-monetary sovereign, business, or household could become insolvent, it could ‘run out of currency’. However, the federal gov’t bonds of Japan, the US, and Switzerland will not default, unless intentionally by nihilistic politicians, so there is practically no credit risk. Any monetary sovereign, as issuers of a currency that is not convertible and free-floating, could never become insolvent, they will never ‘run out of currency’. So that the people could stop seeing their federal gov’t less as ‘borrowing’ currency, and more as offering a service of ‘safekeeping’ currency, as a seller of term deposits, more like fully-insured central bank CDs, perhaps the marketplace for Japanese federal gov’t bonds, US federal gov’t Treasury bonds, and Switzerland federal gov’t bonds should just be called the ‘debit’ markets (?)

(So that people like central bankers, politicians, and WSJ reporters don’t confuse them.)

 

 

 

Eddie D   <eddiedelz@gmail.com>

Source: http://blogs.wsj.com/moneybeat/2016/06/16/from-1-month-to-33-years-almost-the-entire-yield-curve-for-swiss-bonds-is-negative/